Question

HOW DO YOU EXPLAIN THE FULL COST RECOVERY TARIFF SYSTEM

SIMPLY DEFINE TWO MAIN PRINCIPLES WHICH A TARIFF SYSTEM SHOULD POSSESS

Answer 1

A full cost recovery tariff system, in very simple terms, is a system, where the complete cost associated with the delivery of a service is recovered. This was introduced for Water delivery in Central Asia.

The tariff for water delivery does not only include the running costs of the water system like electricity, maintenance, staff salary, etc. It also includes depreciation and amortization and is calculated through funds saved at the bank. The excess funds are usually used to repay initial loans, expand the system, replace heavy equipment, etc. Over a period of time, the cost of maintenance goes up while the loan repayment goes down and thus the cost is balanced out.

So all expenses or costs are fully recovered from the users. This is known as a Full Cost Recovery Tariff System.

2 main principles of a Tariff System should be

1) A tariff system should be a long term system to provide and indicate stability to the market system and to the consumers.

2) Developing a plan to reduce cross-subsidies over the long run to ensure that subsidized consumers slowly pay the full price and one group of customers do not subsidize the other for a long period.

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