Regulating private infrastructure investment: Optimal pricing for access to essential facilities

This paper analyzes optimal pricing for access to essential facilities in a competitive environment. The focus is on investment incentive issues arising from regulation under complete information. To that end, examining the provision of a natural monopoly infrastructure with unlimited capacity, it is shown that the fixed component of a regulated access price can be structured so as to induce a "race" between market participants to provide the infrastructure. An appropriate pricing formula can ensure that a single firm chooses to invest at the socially optimal time (taking into account producer and consumer surplus) despite the immediate access granted to rivals and the non-existence of government subsidies. Under the optimal pricing formula, firms choose their investment timing based on their desire to pre-empt their rivals. This pricing formula is efficient (a two part tariff), implementable ex post, and robust to alternative methods of asset valuation (replacement or historical cost). When firms are not identical, the access pricing formula resembles, in equilibrium, a fully distributed cost methodology.