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Pricing Access: Forward versus Backward Looking Cost Rules

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  • Guthrie, Graeme
  • Small, John
  • Wright, Julian

Abstract

Regulators across many different jurisdictions and industries have recently adopted the practice of setting access prices based on the current costs of providing the relevant facilities. Though widely regarded as being efficient, this practice has not been formally analyzed. Our analysis shows that given stochastic costs, forward looking access prices retard investment and are dominated by access prices determined by historic cost whenever investment is desired, unless the cost of investment is trending upwards with low volatility.

Suggested Citation

  • Guthrie, Graeme & Small, John & Wright, Julian, 2002. "Pricing Access: Forward versus Backward Looking Cost Rules," Working Paper Series 33482, Victoria University of Wellington, School of Economics and Finance.
    • Handle: RePEc:vuw:vuwecf:33482
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    File URL: https://ir.wgtn.ac.nz/handle/123456789/33482
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    References listed on IDEAS

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    1. Laffont, Jean-Jacques & Tirole, Jean, 1994. "Access pricing and competition," European Economic Review, Elsevier, vol. 38(9), pages 1673-1710, December.
    2. J. Gregory Sidak & William Baumol, 1995. "Transmission Pricing and Stranded Costs in the Electric Power Industry," Books, American Enterprise Institute, number 52281, September.
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