Price ceiling regulation
This is one of the systems incorporated into Japan's new fare setting method for passenger railway services, implemented January 1, 1997. The new method (1) introduces a price ceiling regulation under the full-cost principle, (2) strengthens the yardstick element, (3) improves the method of cost calculation, (4) simplifies procedures, and (5) promotes information disclosure. The price ceiling regulation under the full-cost principle represents a system whereby service providers can alter fares freely up to a ceiling price, which is equal to the full-cost. This differs from the price cap regulation, which determines the price cap based on deflator factors, including the consumer price index. At the end of October, 1998, the fares of 38 companies were set below the approved ceiling in 5,978 service routes.
Full-cost principle
This regulation sets service fares by adding "appropriate returns" to the "appropriate costs" required to provide public utility services. Here, the "appropriate costs" refers to the total cost assuming a streamlined business management and including sales expenses, depreciation, and relevant taxes. The "returns," on the other hand, refer to capital cost (the cost of raising business capital required for maintenance and healthy development of the management base). It includes costs against owned capital (profits) and costs against borrowed capital (interest payments). The fare is set such that full-cost, the sum of the "appropriate costs" and "appropriate returns", equals the total revenue required from the pertinent business. There are two systems for calculating the amount of returns; the expense aggregation method and rate-base method.