Policy Brief
Automatic Tariff Adjustment: A Necessary but Insufficient Condition
Automatic tariff adjustment offers a dynamic pricing mechanism to ensure that prices in the utility sector reflect the short-run social marginal costs (SMC). However, there are challenges associated with it.
Regarding the choice of inputs and technology, automatic tariff adjustment can create distortions and inefficiencies. Suboptimal planning, operation, and management of electric utilities make prices inefficiently high and create concerns over the need to adjust prices in the short-run to reflect changes in exchange rate, inflation and prices of inputs. Also, political economy concerns emanate when, against political appeal and opposition but on sound economics, ATA results in high utility prices. Despite these challenges, ATA is commonly used. This may be due to the difficulties associated with the implementation of alternative measures like options and computational forecasting.
