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Regulated prices and real options

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  • Guthrie, Graeme

Abstract

This paper shows how the cash flows received by an unregulated firm operating in a workably competitive market can be replicated for a regulated firm. The only change to standard regulatory practice is that each time the regulated firm invests, the amount added to its rate base is the product of its capital expenditure and a multiplier, greater than one, that captures the reduction in value of the unregulated firm's growth options that occurs whenever the firm invests. The regulated firm is allowed to earn a rate of return equal to its weighted-average cost of capital, applied to this rate base. Four possible approaches to estimating the size of the multiplier are presented, each based on an established real-options investment model.

Suggested Citation

  • Guthrie, Graeme, 2012. "Regulated prices and real options," Telecommunications Policy, Elsevier, vol. 36(8), pages 650-663.
    • Handle: RePEc:eee:telpol:v:36:y:2012:i:8:p:650-663
    DOI: 10.1016/j.telpol.2012.04.013
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    3. Hongjun Peng & Tao Pang & Fuliang Cao & Juan Zhao, 2018. "A Mutual Subsidy Mechanism for a Seasonal Product Supply Chain Channel Under Double Price Regulation," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 35(06), pages 1-26, December.
    4. Inderst, Roman & Peitz, Martin, 2014. "Investment under uncertainty and regulation of new access networks," Information Economics and Policy, Elsevier, vol. 26(C), pages 28-41.

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