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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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Abstract

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

Suggested Citation

  • Kevin Davis, 2006. "Access Regime Design and Required Rates of Return: Pitfalls in Adjusting for Inflation and Tax Effects," Journal of Regulatory Economics, Springer, vol. 29(1), pages 103-122, January.
  • Handle: RePEc:kap:regeco:v:29:y:2006:i:1:p:103-122
    DOI: 10.1007/s11149-005-5128-7
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    More about this item

    Keywords

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

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L90 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - General

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