Tariff regulation in the waste sector: An unavoidable future

Abstract

Waste management and other services of general economic interest are normally out of market. Therefore, regulation may be required to provide sustainable services with the desired quality of service at affordable and fair prices. Some countries have created regulatory authorities to supervise service levels and tariffs. However, the implementation of such entities is still a novelty being relevant to open the discussion about the explicit regulation of the waste sector. This study addresses the waste sector in Portugal and the regulator’s role in setting prices and providing proper incentives to ensure efficiency and added value. In this context, regulation was proposed to implement a tariff setting mechanism based on a productivity-related X factor linked to revenue caps. This innovative application (in the waste sector) calculates the X factor through a catch-up factor (static efficiency determined by Data Envelopment Analysis) and a production technology change or frontier shift (dynamic efficiency calculated by a Törnqvist index). Besides targeting the financial sustainability of waste utilities, there is also a focus to achieve reasonable environmental and quality of service standards. This study argues that economic regulation is required for this sector since it can be prone to the quiet life and inefficiency due to market failures and lack of incentives. Thus, a tariff setting system may be important and, perhaps, unavoidable to prevent these misbehaviors. The results highlight several predicaments and opportunities related to the application of this innovative performance-based approach.