Access Holidays for network Infrastructure Investment

Abstract

ational Competition Policy is approaching its ten-year anniversary.In August 1993, the independent committee of inquiry on National Competition Policy released its final report (Commonwealth of Australia, 1993).This report, commonly known as the Hilmer report, set in train reforms that have changed the landscape facing Australian industry.In telecommunications, electricity, gas, ports, railroads, airports and other utility sectors, the past decade has seen industry restructuring, corporatisation and privatisation.Monopoly bottlenecks, such as electricity transmission grids and rail networks have been subject to access regimes to open these facilities to competing service providers.For existing facilities, regulated infrastructure access is relatively easy.The key bottleneck infrastructure in telecommunications, energy and transport largely pre-dates the Hilmer reforms.Even if regulators set the 'wrong' access prices, this infrastructure was not going to go away.Over time however, as bottleneck infrastructure requires major renewal, or new infrastructure needs to be built, the effects of regulated access pricing on infrastructure investment becomes critical.Traditionally, economic analysis of infrastructure investment and regulation has focussed on time consistency.How does a regulator commit not to effectively expropriate an investment by setting a low allowed price or rate-of-return after the infrastructure expenditure is sunk?This research has highlighted the importance of legal constraints on regulators, the design of appropriate regulatory institutions and the potential for a regulatory 'contract' to form between infrastructure owners and regulators (Newbery, 1999:chapter 2; Sidak and Spulber, 1997).With access regulation, however, there is an additional problem for high-risk projects.Intervention to guarantee regulatory access is generally only required if a project is at least reasonably successful.If a project is a failure, for example due to low realised retail demand, then there will be little if any wholesale demand for facility access.But in these circumstances, investors bear all the project costs.In contrast, if the project is highly successful, regulatory access most likely will be sought.Even if regulators allow investors a 'reasonable rate of return' in these circumstances, unless this return fully compensates investors for the ex ante risk associated with project failure, access regulation will mute investment incentives.Put simply, investors will bear all the down-side risk of the investment and face a truncated up-side return due to access regulation.The potential problem of project failure is most relevant for high-risk infrastructure investments.Augmentations to existing gas pipelines or fixed

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