Tiered Pricing and Cost Functions: Are Equity, Cost Recovery and Economic Efficiency Compatible Goals?

Suppliers of water and energy are frequently natural monopolies, with their pricing regulated by governmental agencies. Pricing schemes are evaluated by the efficiency of the resource allocation they lead to, the capacity of the utilities to capture their costs and the distributional effects of the policies, in particular, impacts on the poor. One pricing approach has been average cost pricing, which guarantees cost recovery and allows utilities to provide their product at relatively low prices. However, average cost pricing leads to economically inefficient consumption levels, when sources of water and energy are limited and increasing the supply is costly. An alternative approach is increasing block rates (hereafter, IBR or tiered pricing), where individuals pay a low rate for an initial consumption block and a higher rate as they increase use beyond that block. An example of IBR is shown in Figure 1 (on next page), which shows a rate structure for residential water use. With the rates in Figure 1, a household would be charged $0.46 and $0.71 per hundred gallons for consumption below and above 21,000 gallons per month, respectively.

Measuring the Performance of Cooperative Equity Redemption Plans

Cooperatives differ from other businesses in that they are owned by their patrons and net margins are distributed to patrons on the basis of use instead of capital investment. For financing, cooperatives often rely on allocated equities from retained patronage refunds. Retained patronage refunds are noncash allocations of net margins reinvested in a cooperative by patrons. Under an ideal program of equity formation, equity is held by patrons in proportion to patronage. Each patron’s share of financing the cooperative is equal to the share of benefits received. Equities of former patrons are retired as active patrons take on more of the responsibility of financing the organization.