CAP PRICES OR CAP REVENUES? THE IMPLICATIONS OF ALTERNATIVE ELECTRICITY PRICING SCHEMES IN JAMAICA

摘要

In this paper, I calculate electricity prices for a regulated monopoly that is governed by either a price cap constraint or a revenue cap constraint. Additionally, I compare the welfare effects originating from each scheme with the current pricing structure. In using the sole distributor of electricity in Jamaica as a case study, two important findings emerge from this analysis. First, the models introduced in this paper confirmed that in contrast to a price cap plan, a revenue cap scheme delivers prices that depart from the Ramsey pricing rule. This inefficiency will require electricity prices to more than double from existing levels for the least inelastic residential customer segment, and prices to fall below marginal cost for the more inelastic commercial and industrial customer segments. With a customer base of over 0.6 million, consumer net benefits decline by approximately ğ‘ˆğ‘†$153 per customer per year under a revenue cap while ğ‘ˆğ‘†$68 would be lost under a price cap that is based on Ramsey weights. The regulated firm’s surplus under a price cap would be six times greater than that available under a revenue cap scheme. The evidence confirms that consumers and the utility provider would be worse off under a revenue cap scheme.A second important finding revealed by the analysis is the potential for price cap regulation to converge to a Ramsey pricing structure. This convergence requires that the price cap constraint be adjusted appropriately by using weights based on the previous period’s quantities. Moreover, prices adjust more quickly towards the Ramsey structure when complemented by adequate measures of input price movements and x-factor efficiency. Though the study is limited to a static model, it does confirm the price cap regime as a superior model to revenue cap regulation.