Access Holidays and the Timing of Infrastructure Investment
Joshua S. Gans
University of Toronto - Rotman School of Management; NBER
Stephen P. King
Monash University - Department of Economics; Economic Regulation Authority of Western Australia (ERA)
December 12, 2002
Melbourne Business School Working Paper No.2002-14
This paper investigates policy responses to investment issues that arise when owners of essential facilities are subject to open access from downstream competitors. Our focus is not on the form of access pricing per se but on issues associated with regulatory commitment when there is ex ante uncertainty over the value of infrastructure assets. We establish that when regulators cannot commit to an access pricing regime, infrastructure investments are subject to a truncation problem whereby investors are not sufficiently rewarded in high value states for the risks associated with low value outcomes on their assets. This results in delayed investment relative to the unregulated and socially optimal outcomes. In contrast, when commitment is possible, both access pricing and investor profits should rise with realised investment value and can generate socially optimal investment timing. We then demonstrate that a regulatory commitment to a fixed period free of access - i.e., an access holiday - can remove delays that would otherwise emerge as a result of the truncation problem. We establish conditions under which an access holiday may improve investment timing over a completely unregulated case and also how the length of access holiday relates to underlying parameters and contestability of investments.
Number of Pages in PDF File: 38
Keywords: access pricing, essential facilities, infrastructure investment, access holidays, regulatory commitment
JEL Classification: L40, L50working papers series
Date posted: January 28, 2003
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