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Access Regime Design and Required Rates of Return: Pitfalls in Adjusting for Inflation and Tax Effects


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  • Kevin Davis


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    Some access pricing regimes derive allowable cash flows to provide investors with an expectation of receiving a required real pre-(company) tax rate of return, with compensation for inflation built in via the allowable return of capital (depreciation). The required real pre-tax return is derived from nominal (or real) post-tax required returns. Techniques commonly used to transform post-tax into real pre-tax returns are biased, because they fail to capture accurately the characteristics of tax depreciation allowances. There is no general solution to this “transformation problem”, but alternative approaches can achieve the benefits prompting the use of a “real pre-tax” approach without suffering from this problem Copyright Springer Science+Business Media, Inc. 2006

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Regulatory Economics.

    Volume (Year): 29 (2006)
    Issue (Month): 1 (01)
    Pages: 103-122

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    Handle: RePEc:kap:regeco:v:29:y:2006:i:1:p:103-122

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    Related research

    Keywords: access pricing; rate of return; depreciation; tax; inflation; G38; L43; L51; L90;

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