The review and analysis of the literature on the topic show that the bulk of the studies concerning the prognostication of increases in tariffs of natural monopolies is based on the works published in the 1960s and 1970s, which focused on the research of sectoral price dynamics. A major outcome of these studies, first of all Nordhaus (1970) (see also Arrow (1964) Stigler, Kindahl (1970))6, was the delimitation of the long and short term factors determining the price behavior of enterprises, as well as specification of price equations and demonstration of differences in price behavior of enterprises of monopoly, oligopoly, and competition types. The main idea used in these studies was the construction of a price model basing on the classical microeconomic model including the prerequisites concerning the type of production function. In the course of price modeling with the use of price equations with specifics basing on the hypotheses proceed from the microeconomic analysis, it is usually assumed that final prices are determined as the sum of costs and a certain margin. Therefore, it may be assumed that the margin depends on the indicators characterizing demand. Accordingly, the factors of price determination used in the course of modeling may be classified in two groups: cost variables and demand variables. The first group includes the costs of labor and materials – expenses for supplies and capital costs. Variables reflecting the influence of demand on behavior of firms belong to the second group of factors. These variables include the rate of utilization of production capacities, the ratio between the levels of stocks and sales, the ratio between new or uncompleted orders and sales, etc.
(for econometric evaluations of equations see, for instance, Eckstein, Wyss, (1972), Straszheim, Straszheim, (1976)7).
The studies published in the last years (see, for instance, Hope, Singh (1995)) use similar equations for the evaluation of the impact of increases in tariffs on energy resources on economic growth and inflation.
The general result of these studies is an evidence indicating that increases in tariffs have an impact on inflation. As concerns the impact of an increase in tariffs, there shall be noted studies by Wolak (2001), This article summarizes in brief the results of the IET study concerning the assessment of the impact of changes in tariffs of natural monopolies and prices of energy resources on prices and volumes of output in the RF economy.
Nordhaus W. D., (1970), “The Econometrics of Price Determination: Recent Development in Price Dynamics” // Cowles Foundation Paper 377, Oct. 1970, Arrow K. J., (1964), “The Role of Securities in the Optimal Allocation of Risk-Bearing” // The Review of Economic Studies, Apr. 1964, Stigler, G.J., Kindahl J., (1970), “The Behavior of Industrial Prices”, NY: NBER, 1970.
Eckstein, O., Wyss D., (1972), “The Econometrics of Price Determination”, Washington D.C., Board of Governors of Federal Reserve System and Social Science Research Council, 1972; Straszheim, D. H., Straszheim, M.
R., (1976), “An Econometric Analysis of the Determination of Prices in Manufacturing Industries" // The Review of Economics and Statistics, May 1976, 58(2).
Wolak, Patrick (2001)8, which discuss the price elasticity of demand for electric power and note that the assumption about the non-elasticity of demand not always proves true – for instance, in the case there are introduced different tariffs for households depending on the time of the day, demand shifts to the hours when tariffs are lower.
Econometric modeling of the consumer price index. In order to correctly specify a model of inflation (rates of increase in consumer prices), it is necessary to take into account a number of other factors alongside with tariffs, such as inflationary expectations (inflation with respective lags), rates of increase in money supply, nominal exchange rate (as an indicator reflecting changes in the cost of imported goods and yields of forex denominated savings). Accordingly, taking into account the results of test for stationarity, there were evaluated the model of relationship between inflation rates and rates of increase in indicators mentioned above and rates of increase in producers’ prices in power engineering, natural gas industry, tariffs on freight and producers’ prices of gasoline. The model was evaluated for the period from 1995/01 to 2001/07 and subperiods from 1995/01 to 1998/07 and 1999/01 to 2001/12. For the purpose of evaluation there were used RF Goskomstat and RF Central Bank data. The econometric evaluations of the rates of increase in the producer price index demonstrate that the impact of tariffs on electric power is statistically significant (at about 10 % of the significance level) in the first sub-period and in the whole period under observation. The elasticity of influence of tariffs on electric power on consumer price index makes 0.05 to 0.08. The major factors affecting the dynamics of inflation are rates of increase in nominal USD exchange rate and values of inflation and the rate of increase in money supply taken with a lag.
Econometric modeling of prices of housing and public utility services. In the course of modeling prices of housing and public utilities (HPU) services it is necessary to take into account the fact that regional prices of HPU services directly include tariffs on electric power and natural gas supply. Besides, costs related to these factors are taken into account in other HPU components, provision of which requires consumption of electric power and natural gas. At the same time, HPU prices may be affected by tariffs on rail freight (Ministry of Railroads), since the heating of residential housing and industrial facilities as a rule requires coal and fuel oil transported by railroads. Similarly, costs of garbage disposal and provision of utilities include costs of gasoline, therefore in the course of comparison of the impact of prices of energy resources on prices of HPU services this indicator should be included in the respective equation. In contradistinction to consumer price index (CPI), the tariffs on HPU services are determined by local authorities and municipalities (not including tariffs on electric power, which should be approved by Regional Energy Commissions). Therefore, prices of HPU services less depend on inflationary expectations, dynamics of money supply, and dynamics of exchange rate due to the specifics of services costs of which is taken into account in the course of calculation of prices of such services. However, in the case a rise in prices is significant, it may be expected that prices of HPU services would be indexed more, therefore, beside the evaluation of the model in terms of the increase in the prices of HPU services there was also carried out evaluations of similar models as concerns excess of rates of increase in indexes under observation over the rates of increase in the CPI.
On the whole, the results of evaluations demonstrated that tariffs on electric power, gas supply, and rail freight had statistically significant impact on prices of HPU services. It shall be noted that tariffs on electric power had the most profound influence on the HPU services price dynamics: the elasticity of respective relationship makes 0.24. The elasticity of tariffs on natural gas supply and rail freight made 0.046 and 0.respectively.
In the course of evaluation of the period from January of 1995 to July of 1998, there were obtained similar results: tariffs on electric power, rail freight, and prices of gasoline has a statistically significant positive impact on the dynamics of prices of HPU services. The most significant influence exert tariffs on electric power: a 1 % increase in tariffs results in about 0.58 % increase in prices of HPU services, while for tariffs on rail freight and gasoline prices the elasticity makes 0.16 and 0.5 respectively. In the second period (January of 1999 to December of 2001) a statistically significant impact on prices of HPU services was detected only as concerns tariffs on electric power: a 1 % increase in electric power tariffs results in an increase in prices of HPU services by 0.55 %. Proceeding from the obtained evaluations, it may be Wolak F., (2001), “Identification and Estimation of Cost Functions Using Observed Bid Data: An Application to Electricity Markets”, NBER, Working Paper 8191; Wolak, F.A., Patrick, R.H., (2001), “The Impact of Market Rules And Market Structure On Price Determination Process In The England And Wales Electricity.
concluded that the influence of electric power tariffs on prices of HPU services remain relatively stable over the period under observation.
Evaluations of models concerning the relationship between the rates of outpacing increase in HPU services prices with regard to the rates of increase in CPI and the respective excess of rates of increase in tariffs over consumer and producers’ prices demonstrated that the 1 p.p. excess of the rates of increase in tariffs on electric power, natural gas, and rail freight (Ministry of Railroads) over the rate of increase in CPI determines the excess of the rate of increase in prices of HPU services over the rates of increase in CPI by 0.72, 0.03, and 0.07 respectively. The results of evaluations concerning the relationship between of the excess of tariffs over producers’ prices in the industry on the average showed that only the excess of electric power tariffs over average producers’ prices has a statistically significant impact on the excess of the rates of increase in prices of HPU services over the rates of increase in CPI. The elasticity of this relationship makes about 0.795. The results of evaluation of these models carried out for the sub-periods demonstrate that the elasticity of the dependence of HPU services prices on electric power tariffs in the model (as concerns the excess over the general increase in prices) makes about 0.26 to 0.34 for the first sub-period and 0.55 to 0.for the second sub-period (depending on the model), i.e. in the framework of the model of relative increase in the prices of HPU services in relation to the relative increase in tariffs there is observed an increase in elasticity of HPU services prices with regard to tariffs on electric power.
Econometric modeling of producers’ prices across industries. In addition to the evaluation of the impact of tariffs on consumer prices and prices of HPU services, there were also made evaluations of the influence of tariffs on producers’ prices and output volumes across major industries. Electric power is a key factor of production in industry, especially in such energy-intensive branches as ferrous and non-ferrous metallurgy. Respectively, the share of electric power costs in these industries is especially high. In the course of analysis of the relationship between the factors of production and branch-specific producers’ prices, it shall be taken into account that certain factors of production may be substituted by others. However, taking into account the fact that a considerable share of Russia’s enterprises are equipped with obsolete machinery and limited as concerns investment resources necessary to introduce modern energy-saving technologies, it may be assumed that demand for electric power is low-elastic, i.e. that changes in tariffs only insignificantly affect consumption of electricity. As tariffs increase, there occurs an increase in costs of enterprises, what results in increases in prices. Similarly to costs of electric power supply, costs of enterprises may also include costs of other energy resources, for instance, costs of natural gas, fuel oil, and costs relating to freight of goods – rail freight, gasoline, and other oil products. Besides, we assume that increases in the prices of these resources results in immediate or somewhat lagged increases in producers’ prices.
At the same time, producers’ prices may be affected by other factors. Among such factors, there shall be noted exchange rate characterizing the competitive capacity of import-substituting and profitability of export-oriented industries, as well as world prices of products of export-oriented industries, an increase in which may result in an increase in domestic prices due to the price leveling in the course of increase in the share of exported products. Taking into account these considerations and the results of tests for stationarity, the evaluation of increases in tariffs on electric power, natural gas, and rail freight, as well as prices of gasoline were carried out in terms of rates of increase and respective variables for individual industries were included in the equation.
Evaluations related to fuel industry are in favor of a positive impact of the rates of increase in electric power tariffs on the rates of increase in producers’ prices in this industry, the respective coefficient makes about 0.17 for the whole period (a 1 % increase in tariffs on electric power results in a 0.17 % increase in producers’ prices in fuel industry), as concerns the sub-periods (1995/01-1998/07 and 1999/01-2001/12), it makes 0.26 % to 0.28 %. Besides, there is observed a stable positive relationship to prices of natural gas and gasoline (coefficients for the whole period of evaluations make 0.10 and 0.21 respectively). It is necessary to note that the results of evaluations indicate the presence of a stable relationship of internal producers’ prices in fuel industry and external factors, primarily, world oil prices (UK Brent) and the nominal USD exchange rate. In the period under observation, the rates of increase in these indicators were statistically significant and positively affected the rates of increase in producers’ prices in fuel industry.
The modeling of the rates of increase in producers’ prices in ferrous metallurgy demonstrated that a significant positive relationship exists only as concerns rates of increase in prices of rail freight (the coefficient makes 0.03), and rates of increase in prices of gasoline (the coefficient is 0.02). The respective coefficients for the sub-periods (1995/01-1998/07 and 1999/01-2001/12) are insignificant, what indicates low level of their influence and significant variance of analyzed variables preventing the detection of a statistically significant relationship.