Resource Rent Taxation – A New Perspective for the (Swiss) Hydropower Sector

The electricity generation in Switzerland is mainly based on hydropower accounting for 58 percent of the total production. The exploitation of water in the hydropower sector can generate significant economic rents. These rents –the so-called resource rents - are defined by the surplus return above the value of capital, labor, materials and energy used to exploit water resources. States and regulators have different methods of procuring these rents (see, e.g., Watkins (2001)), for instance through a fixed water fee system or a resource rent tax system. The latter is usually employed in the oil extraction industry. For many decades Swiss producers of hydropower have paid to the owners – usually the cantons – a certain fee per kW gross capacity which is fixed in accordance with the federal law at a maximum of about 52 Euro1. With the fixation of this fee on a kW basis, the substantial differences in cost and revenue structures and levels of the hydropower plants are not directly taken into account. The goal of this paper is to propose a new scheme for these hydropower fees, based on the economic concept of the so-called resource rent. Basically, we propose a resource rent tax (RRT) system, which was first developed by Garnaut and Clunies Ross (1975). The basic novelty in this paper is the combination of the RRT system with the econometric estimation of the variable costs in order to overcome the asymmetric information problem and to forecast the RRT per company respectively.