4 Colo. Code Regs. § 723-2-2461

Current through Register Vol. 47, No. 20, October 25, 2024

Section 4 CCR 723-2-2461 - Definitions

The following definitions apply only in the context of rules 2460 through 2499.

(a) "Average cost pricing" means the practice of setting the price of a product equal to the average total cost of that product. Such a result can be achieved by adding a mark-up to the average variable cost of the product.

(b) "Average fixed cost" means the sum of the relevant fixed costs of producing a given quantity of output, divided by the total number of units produced.

(c) "Average service long-run incremental cost" means the total service long-run incremental cost divided by the total number of units of the service.

(d) "Average total cost" means the total cost of producing a given quantity of output, divided by the total number of units produced. Average total cost equals the sum of average variable cost and average fixed cost.

(e) "Average variable cost" means the sum of all variable costs of producing a given quantity of output, divided by the total number of units produced.

(f) "Bundling" means a situation in which the rate elements and tariff provisions for a service are aggregated such that customers are unable to buy some features and functions included within the aggregation without buying them all.

(g) "Cost accounting standards" means the assignment of costs to products, services, or customer classes using the following five criteria:

(I) Cost causation. Costs are assigned to the revenue-producing products or services that cause those costs to be incurred;

(II) Traceability. Costs are assigned using the cost attribute that permits the resources represented by the costs to be identified in their entirety with a revenue-producing activity;

(III) Variability. Costs that vary in total with variations in some measure of the volume of activity that is associated with the revenue-producing product or service but that are not traceable to a revenue-producing product or service, are assigned to the revenue-producing product or service based upon the estimated rate of variability;

(IV) Capacity required. Costs of capacity are assigned according to whether they are necessary for the performance of the service; and

(V) Beneficiality. Costs are assigned to various services based upon the degree of benefit derived by each service.

(h) "Direct cost" means a cost specifically identifiable with the production of an individual service. These costs would not be incurred if the service was not offered.

(i) "Economies of scale" exist if the average cost of producing any group of services increases less than proportionately to an increase in quantity of those services.

(j) "Economies of scope" exist if the cost of producing any group of services by one firm is less than the sum of the costs of producing the same group and quantities of those services by two or more firms providing mutually exclusive subsets of those services.

(k) "Elasticity of demand" means the percentage change in the quantity demanded of a service, divided by the percentage change in the price of the service.

(l) "Elasticity of supply" means the percentage change in the quantity supplied of a service, divided by the percentage change in the price of the service.

(m) "Fixed cost" means a cost that does not vary with respect to the volume of output within the specified planning horizon. Such a cost must be paid regardless of how many units the firm produces, or whether it produces at all, as long as the firm does not withdraw entirely from the relevant market.

(n) "Fully distributed costs" (FDC) means the costs derived by assigning the total historical costs of the firm to individual products or services using cost accounting, engineering, and economic standards. FDCs include not only all justifiable costs related to the provision of service but also the return on investment.

(o) "Functional component" means a cost element or group of cost elements representing the smallest feasible level of unbundling capable of being in a tariff and offered as a service.

(p) "Historical costs" are the investments or expenses incurred at the time an input or resource is purchased. Such costs are not necessarily equal to the current cost of replacing the input or resource and are directly obtainable from accounting records of the provider.

(q) "Imputation" means the practice of including the tariff price of a Part II or fully regulated Part III service in the price floor for the service in question, where:

(I) Part II or fully regulated Part III services are bundled with other services; or

(II) Part II or fully regulated Part III services are used as inputs to provide either a final or intermediate service.

(r) "Incremental service incremental cost" means the change in total cost resulting from increasing (or decreasing) the quantity of output of a service by a small number of units, divided by that small number of units. If total cost changes in a continuous fashion as output changes and the increment is sufficiently small, incremental service incremental cost approximates marginal cost.

(s) "Joint cost" means a cost that occurs when the production process involves intermediate or final outputs that maintains fixed proportions with respect to two or more services.

(t) "Long-run costs" means the costs incurred by a firm within a specified planning horizon where all elements of the production process can be varied, including the size and type of facilities and other used resources.

(u) "Marginal cost" means a theoretical change in total cost resulting from an extremely small change in output. In mathematical terms, marginal cost is the first derivative of the total cost function with respect to output.

(v) "Marginal cost pricing" means the theoretical practice of establishing the price of a product equal to the marginal cost of the last unit of output of the product.

(w) "Market power" means any power exerted by a firm in a market where the competitive process cannot produce the theoretical outcomes and benefits of perfect competition. The degree of market power is determined by a consideration of the following factors:

(I) The relevant market, as determined by service and geographic substitutability on both the demand and supply sides of the market.

(II) The market share of the particular service held by the regulated provider in the relevant market.

(III) The supply responsiveness (or elasticity) of competitors in the relevant market, as determined by an assessment of entry and expansion conditions of competitors.

(IV) The market demand characteristics in the relevant market. (For example, the more elastic the total market demand the more customers view other services as substitutes or alternatives for the provider's service.)

(x) "Monopoly", in the strictest sense, means a situation in which the sole supplier of a service for which there are no substitutes has many buyers of that service. The simple economic analysis of monopoly relaxes the assumption of no substitutes, but assumes that the monopolist faces a relatively stable and predictable downward-sloping market demand curve.

(y) "Natural monopoly" exists if a single firm produces its set of outputs at less cost than could be achieved by dividing that set among two or more firms.

(z) "Overhead costs" means shared costs related to the production of all services offered by a firm.

(aa) "Perfect competition":

(I) A market structure is perfectly competitive when the following conditions prevail:

(A) There are a large number of firms each with an insubstantial share of the market;

(B) The firms possess perfect information and produce a homogeneous service using identical production processes; and

(C) There is free entry into and exit from the industry.

(II) Perfect competition implies that both marginal revenue and average revenue are equal to price in long run equilibrium. Thus, firms are price takers and can sell as much as they are capable of producing at the prevailing price.

(bb) "Price ceiling" means the maximum level at which a provider may price a service.

(cc) "Price discrimination" means the act of selling different units of a service at price differentials not directly corresponding to differences in cost.

(I) Price discrimination includes both:

(A) The sale of identical units of the service to different customers at different prices; and

(B) The sale of identical units of the service to the same customer at different prices.

(II) In order for a firm to practice price discrimination profitably with respect to a particular service, it shall have:

(A) Some control over the price it charges for that service;

(B) The ability to segregate its customers for that service into groups with different price elasticities of demand; and

(C) The ability to prevent resale of the service by those customers who can buy it at the lower price.

(dd) "Price floor" means the minimum level at which a provider may price a service.

(ee) "Ramsey pricing" means, as subject to relevant regulatory constraints, the practice of pricing all products and services such that the sum of customer and producer welfare is maximized.

(ff) "Replacement cost" means the cost that the provider of a service would incur to construct its plant and facilities using the current, best technology at current prices but without changing the physical position of such facilities.

(gg) "Residual pricing" means that service price is set so that revenues from the service equal all costs not covered by revenues from all other services offered by the firm once their prices are set.

(hh) "Service-specific fixed cost" means a fixed cost caused by the existence of a specific service within the array of services currently offered that does not vary with changes in the number of units produced but would be eliminated if the specific service were deleted from the current array of services offered.

(ii) "Shared cost" means a cost incurred for facilities and resources used in common for the production of two or more services.

(jj) "Short-run costs" means the costs incurred by a firm operating within a planning horizon where many elements of the production process are fixed and cannot be readily varied, including the size and type of certain used facilities.

(kk) "Stand alone cost" means the total cost incurred by a firm to produce a given volume of a service or group of services as if it were the sole service or group of services produced by that firm.

(ll) "Sunk cost" means a cost that has already been incurred, is irretrievable, and cannot be avoided, even by discontinuing production entirely.

(mm) "Total cost" means the sum of all costs (including fixed and variable costs) incurred by the firm to produce any given level of output.

(nn) "Total incremental cost" means the change in total cost resulting from an increase or decrease in output. In mathematical terms, total incremental cost equals total cost assuming the increment is produced, minus total cost assuming the increment is not produced.

(oo) "Total service incremental revenue" means the change in the firm's total revenues resulting from adding or deleting a service.

(pp) "Total service long run incremental cost" (TSLRIC) is equal to the firm's total cost of producing all of its services assuming the service (or group of services) in question is offered minus the firm's total cost of producing all of its services excluding the service (or group of services) in question.

(I) The strict definition of TSLRIC requires that it be calculated by producing two total cost studies and then subtracting one from the other. An estimate of TSLRIC can be made directly.

(II) The strict definition of TSLRIC incorporates a forward looking concept which shall, therefore, include the costs that the firm would incur today if it were to install its own original network. An estimate of TSLRIC can be arrived at by assuming that the geographic locations of routes and possible switching locations are the same as those available to the firm today and that future technological changes can be anticipated. In making this estimate, the assumptions underlying it shall be made explicit and the estimating procedure shall reflect the time period in which the resulting prices are anticipated to be in effect.

(III) TSLRIC includes both fixed and variable costs specific to the service (or group of services) in question.

(IV) The TSLRIC for a group of services is at least equal to the sum of the TSLRICs of the individual services within the group. If the TSLRIC for the group is greater than this sum, the difference is equal to the shared costs attributable to the group of services and/or to some subset of that group. In other words, these shared costs are part of the TSLRIC of the group but are not part of the TSLRIC of any individual service within the group.

(qq) "Unbundling" means a situation in which the rate elements and tariff provisions for a retail service are disaggregated to the lowest level practicable to permit customers to buy the features and functions they desire without having to purchase those they do not want.

(rr) "Variable cost" means a cost that changes (but not necessarily proportionately) either with the number of units produced of a given set of services or with the number of services provided.

4 CCR 723-2-2461

39 CR 21, November 10, 2016, effective 12/1/2016

40 CR 15, August 10, 2017, effective 9/1/2017

41 CR 03, February 10, 2018, effective 3/2/2018

42 CR 02, January 25, 2019, effective 2/14/2019

42 CR 07, April 10, 2019, effective 4/30/2019

43 CR 02, January 25, 2020, effective 2/14/2020

43 CR 17, September 10, 2020, effective 8/17/2020

44 CR 17, September 10, 2021, effective 8/11/2021

44 CR 18, September 25, 2021, effective 10/15/2021

45 CR 03, February 10, 2022, effective 12/29/2021

45 CR 01, January 10, 2022, effective 1/30/2022

46 CR 05, March 10, 2023, effective 3/30/2023