The Distributional and Fiscal Implications of Public Utility Pricing

The setting of public utility prices involves balancing various competing government policy objectives, from equity concerns to ensuring the financial sustainability of providers and balancing public finances. In practice, public utility pricing often departs significantly from government objectives and tends to be characterized by unnecessarily complex price schedules, below cost-recovery tariff rates, and sectoral inefficiencies that contribute to large fiscal costs. Countries commonly embark on utility pricing reform in response to these heavy fiscal pressures. The paper discusses various reform options available to governments, with a focus on residential pricing schedules, highlighting their fiscal, financial, redistributive, and efficiency implications.