Price-cap method Sample Clauses

Price-cap method. 4245. Under the price-cap method, a tariff formula is set for a given period (such as four or five years) taking into account future inflation and future efficiency gains expected from the facility. Tariffs are allowed to fluctuate within the limits set by the formula. In some countries, the formula is a weighted average of various indices, in others it is a consumer price index minus a productivity factor. Where substantial new investments are required, the formula may include an additional component to cover these extra costs. The formula can apply to all services of the company or to selected groups of services only, and different formulas may be used for different groups. The periodic readjustment of the formula is, however, based on the rate-of-return type of calculations, requiring the same type of detailed information as indicated above, though on a less frequent basis. 4346. The implementation of the price-cap method may be less complex than the rate-of-return method. The price-cap method has been found to provide greater incentives for public service providers, since the private partner concessionaire retains the benefits of lower than expected costs until the next adjustment period. At the same time, however, public service providers are typically exposed to more risk under the price-cap method than under the rate-of-return method. In particular, the private partner concessionaire faces the risk of loss when the costs turn out to be higher than expected, since the private partner concessionaire cannot raise the tariffs until the next tariff adjustment. The greater risk exposure increases the costs of capital. If the project company’s returns are not allowed to rise, there may be difficulties in attracting new investment. Also, the company may be tempted to lower the quality of the service in order to reduce costs.