A Study On Price Regulation In Urban Water Industry Of China

Contents:This paper analyses domestic water industry development practice through inviting experiences of water industry price regulation in developed countries under the guide of economic theory. Author discusses how to choose the appropriate pattern of price regulation in water industry that is sort of natural monopoly utilities, in order to assure fairness and efficiency for consumers enjoying water service, stimulate water companies to reduce their cost and promote their efficiency, and achieve the water industry sustainable developing. It is expected that this paper could do some contribution to the reform of development of regulation system including price regulation in domestic water industry.Exception for the preface, this thesis consists of five chapters.Chapter One analyses the character of natural monopoly industries and compares several price regulation patterns, such as marginal cost pricing, average cost pricing, Ramsey pricing, investment return rate regulation model and price limit(or cap) regulation model. The last two patterns are universally adopted in developed countries. Author also makes a comparison between them.Chapter Two describes the character of water industry in relation to natural monopoly and analyses its necessity to be regulated. Specially, author points out that its price level should be set to recover the full cost of water service supply, and it should be regulated to balance the benefits among customers, water companies and environment.Chapter Three provides an international comparison of water industry regulation experience among the UK, the U.S. and France. Price Limit regulation model is adopted in the England and Welsh water industry based on its privatization reform since 1989. Much systematical and specific study has been done about its regulation system practice, especially the price limit regulation model. Author shows the mechanism achievement, problems and comments of the price limit regulation system in the 15 years development.Water industry in the U.S. are most municipally owned and operated. Its advantage lies in financing through issuing low-cost and tax-free municipal bonds and not pursing profit as its principle. As a result, consumers can enjoy low-price water services supplied by municipal water utilities compared with those privatized water companies.The property ownership of water industry in France is also controlled by government. However, the privatized water groups keep the operating rights in the form of concession in a dated period lasting for ten to thirty years.Chapter Four reviews the development of water industry and price regulation institutions in China. The poor performance of domestic water industry can be mainly due to two factors, which are the state-owned property ownership and the temporary unreasonable price regulation institution that has the character of investment return rate regulation model. The latter has two disadvantages; firstly, the return to investors is designed basing on its net assets value, which equals to the equity value, rather than the total asset value; secondly, nominal return rate is fixed since 1998, which can't reflect the macro economic environmental changes or the advance in technical and productive efficiency changes in water industry. It leads to many problems which could be concluded as that the private or commercial investors are apt to relying equity financing and local governments usually set higher and fixed real rate of return in order to attract social investor's or foreign investors'investment in water industry. Empirical studies support the prediction.In Chapter Five, author suggests that government should assure to achieve the full cost recovery. Price limit regulation should be adopted. An uniform, independent, transparent and accountable regulatory committee should be established, and Industry Investment Fund could be introduced to solve the financing problem in domestic water industry.ContributionThe thesis presents an international regulation comparison in water industry, especially their price regulation experiences. Price regulation practice in England and Welsh is further studied due to the availability of materials. The two disadvantages of the current price regulation institution in China are analyzed. Author pointed out that return shouldn't be based on net asset and rate of return should reflect the changes of macro economic environment and changes of technical and productive efficiencies in water industry. The negative influences of the mechanism designing have been proved by our empirical studies.