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Price Control


Provisions relating to price control can be found in legislation specific to certain sectors of the economy, including the fields of telecommunications, energy, transportation etc.

The general law concerning price control is the Control of Goods and Services Act, 1996 (the "Law"). The Law establishes that applying control of a product's prices can be implemented in each of the following circumstances:

  • products or services that are provided by a monopoly which exploits its power to generate profits through higher prices when compared to the price which would be set in a competitive market;
  • products supported via governmental subsidies;
  • essential products;
  • products suffering shortage; or
  • in order to offset inflation. 

 

In accordance with the provisions of the Law, the Government Minister who has the authority regarding a product or service that the Law applies to (hereinafter - the relevant Minister) will appoint a representative from his/her office to supervise the price control. The relevant ministry's General Director together with the General Director of the Ministry of Finance appoints members of the Price Committee, headed by a representative of the Ministry of Finance, one of whom is the Supervisor of Prices. The Law defines the division of powers between the Supervisor of Prices and Price Committee, and provides three levels of Price Controls:

1. Determination of prices: 
the tightest supervision level, which prohibits any change in prices without a permit;

2. A request to raise prices
the supervised entity files an application to change the price, and if the Supervisor of Prices does not reject the request within the stipulated timeframe, the price the entity requested will be charged; and

3. Report on profitability:
the supervisedentitymanagesits pricingpolicy while reportingto the Supervisor of Pricesonits profits and prices. This isthe lowestlevel of supervision.

 

According to the Law, the Minister of Finance and the relevant Minister jointly determine the level of supervision to be applied to a product or service that the Law applies to.

Alongside implementation of the Law, the Suari Commission to examine the profitability of companies which are under price control has published its report. The report outlines the formula under which the controlled price is being determined. The reports' key point is that the price should reflect a normative return on the capital invested in the regulated activities.
The report also regulates various mechanisms for updating the determined prices:

1. Regular update:
used in accordance with changes in the supervised company's inputs. This includes components used to manufacture the regulated product and is determined by the Supervisor of Prices through an accountant on its behalf and with the approval of the Price Committee.

2. BasicUpdate:
in this mechanism the profitability of the company from sales of the supervised products is calculated as a percentage of the assets of the company's capital which are used for the same activity. This rate is tested against the normative rates of return. If the company's rate of return exceeds the normative rates of return range, a correction will be made to the price.

 

The Trachtenberg Committee report of 2011 raised substantial doubts about the relevance of the Suari formula and called for an update. In addition, the report pointed out that the Suari formula may lead to bias of the investments of the regulated companies, in order to maximize the price they can charge.

 


 

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Price Control


Provisions relating to price control can be found in legislation specific to certain sectors of the economy, including the fields of telecommunications, energy, transportation etc.

The general law concerning price control is the Control of Goods and Services Act, 1996 (the "Law"). The Law establishes that applying control of a product's prices can be implemented in each of the following circumstances:

  • products or services that are provided by a monopoly which exploits its power to generate profits through higher prices when compared to the price which would be set in a competitive market;
  • products supported via governmental subsidies;
  • essential products;
  • products suffering shortage; or
  • in order to offset inflation. 

 

In accordance with the provisions of the Law, the Government Minister who has the authority regarding a product or service that the Law applies to (hereinafter - the relevant Minister) will appoint a representative from his/her office to supervise the price control. The relevant ministry's General Director together with the General Director of the Ministry of Finance appoints members of the Price Committee, headed by a representative of the Ministry of Finance, one of whom is the Supervisor of Prices. The Law defines the division of powers between the Supervisor of Prices and Price Committee, and provides three levels of Price Controls:

1. Determination of prices: 
the tightest supervision level, which prohibits any change in prices without a permit;

2. A request to raise prices
the supervised entity files an application to change the price, and if the Supervisor of Prices does not reject the request within the stipulated timeframe, the price the entity requested will be charged; and

3. Report on profitability:
the supervisedentitymanagesits pricingpolicy while reportingto the Supervisor of Pricesonits profits and prices. This isthe lowestlevel of supervision.

 

According to the Law, the Minister of Finance and the relevant Minister jointly determine the level of supervision to be applied to a product or service that the Law applies to.

Alongside implementation of the Law, the Suari Commission to examine the profitability of companies which are under price control has published its report. The report outlines the formula under which the controlled price is being determined. The reports' key point is that the price should reflect a normative return on the capital invested in the regulated activities.
The report also regulates various mechanisms for updating the determined prices:

1. Regular update:
used in accordance with changes in the supervised company's inputs. This includes components used to manufacture the regulated product and is determined by the Supervisor of Prices through an accountant on its behalf and with the approval of the Price Committee.

2. BasicUpdate:
in this mechanism the profitability of the company from sales of the supervised products is calculated as a percentage of the assets of the company's capital which are used for the same activity. This rate is tested against the normative rates of return. If the company's rate of return exceeds the normative rates of return range, a correction will be made to the price.

 

The Trachtenberg Committee report of 2011 raised substantial doubts about the relevance of the Suari formula and called for an update. In addition, the report pointed out that the Suari formula may lead to bias of the investments of the regulated companies, in order to maximize the price they can charge.

 


 
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