Price and Profit Regulation in Developing and Transition Economies: A Survey of the Regulators

Rate of return or cost of service regulation was the traditional means by which governments, especially in the USA, regulated profitability and prices in privately-owned public utility businesses. However, rate of return regulation was associated with efficiency disincentives. Hence, in 1983 a price cap was proposed to regulate British Telecom when it was privatized. Price caps were later introduced for other privatized utilities in the UK. Similarly, other countries that privatized their utility sectors in the 1980s and 1990s often introduced price cap regimes. This article reports the results of a questionnaire survey of the methods used to regulate profits and prices in privatized utility sectors in a sample of developing and transition economies. In addition to providing an insight into the different methods used in these economies, the article explains the difficulties that their regulators have in operating profit and price regulation regimes.