Cost Efficiency in Periodic Tariff Reviews : The Reference Utility Approach and the Role of Interest Groups ♣

This paper uses efficiency estimates obtained from both a parametric and a non-parametric benchmarking model to examine the application of the Model Company approach in periodic tariff reviews and check for potential determinants of firms’ bargaining power in the rate setting process. The investigation indicates a role for political pressures in driving regulatory decisions, points to a possible inaccuracy of the cost parameters employed in the engineering Model Company method and reveals that the regulator’s objectives might not have been welfare maximizing in some situations. The results reveal the influence of more affluent consumers during the rate setting and show that firms which operate in more densely populated areas received substantially lower prices than the economic benchmarking methods would recommend. On the other hand, the findings indicate that significantly higher prices might have been given to companies with the opposite characteristics, to concessionaries which make part of a specific economic group and to firms initially submitted to the review process.