Pricing Principles
26. The Commission is of the view that the outcomes achieved by competitive markets (where there is workable or effective competition) are a general benchmark against which to compare the outcomes in other types of markets, although additional issues have to be considered. In this regard, the Commission has developed pricing principles that provide a framework within which it can evaluate whether efficient outcomes and normal returns are being achieved.
27. The Commission considers that the following general pricing principles are appropriate for determining efficient prices and evaluating performance:
- Prices should be as close as possible to their allocatively efficient level over the medium term. This requires that:
- Prices are commensurate with the level of service quality demanded (subject to minimum legal safety standards).
- Prices are based on appropriate costs (productively, and dynamically, efficient costs).
- Prices encourage efficient use of a supplier's facilities and avoid cross-subsidisation.
- Prices should allow for a normal return to be earned by suppliers over the medium term. This requires that:
- Normal returns are calculated on an appropriately determined asset base and rate of return, and cover efficient operating costs, and no more.
- Returns that are greater, or lesser, than the normal rate should reflect superior, or inferior, performance respectively.
- Prices should be dynamically efficient over the medium term. This requires that over- or under-investment be avoided, and that appropriate price signals be sent for investment (or divestment).
28. A full discussion of pricing principles can be found in Chapter 4.
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