In order to recover the respective shares of the costs allocated to a Service from the three tariffs, each tariff must be set at around the shared cost per tariff unit (new connections, connections or units of annual traffic, for the connection, rental and usage tariffs, respectively). In order to apply tariff feedback to demand, STEM calculates tariffs before demand and costs, so the level of cost must be estimated from the previous year. A Feedback Cost is calculated as the allocated cost divided by the number of tariff units. Then a cost-dependent tariff is calculated as this Feedback Cost from the previous year, multiplied by the Charge Multiplier. For example, a Charge Multiplier of 1.1 represents a margin of 10% over and above cost.
A cost-dependent tariff in year n, CDTn, is calculated as:
where
mn
= the Charge Multiplier in year n
cn–1
= the share of cost allocated to the particular tariff in year n–1
dn–1
= the appropriate measure of demand in year n–1.
Note: Rental and usage revenues are calculated from the average number of Connections over a year if the input Use Average Connections = Yes (the default).
The actual tariff levied is a composite tariff, calculated as a weighted average of the cost-independent and cost-dependent tariffs, according to the Independence Weighting. This weighting is a time series, so the extent to which a tariff depends on cost can change over the model run.
A composite tariff, T, is calculated as:
where
CIT
= the Cost Independent Tariff, as specified by the user
CDT
= the Cost Dependent Tariff, calculated from the Feedback Cost
w = the Independence Weighting.
Example
Consider a new Service, whose initial investment costs take some years to fall to a level which can be realistically recovered from its customers. In the long run you would like to charge a tariff at costs plus 40%, but prefer to set an attractive initial tariff, which falls at a competitive rate.
If the initial cost per connection is around 180, set the Cost Independent Tariff as an Exponential Growth, with Base =
200
and Multiplier = 0.95, representing an annual reduction of
5%. Set a Charge Multiplier at 1.4, for the
40%
margin. If you set the Independence Weighting to 0.5, the actual tariff will be the exact average of the two tariffs, as shown below.
Cost Independent and Cost Dependent Tariffs compared
The Independence Weighting is a time-series input, which you can define as an Exponential Growth, say, with Base =
1
and Multiplier = 0.9, so reducing the weighting and allowing the tariff to shift to being totally cost-dependent as the Service becomes established.