Infrastructure access pricing with long-term take-or-pay contracts, capacity expansions and demand uncertainty

Heard, Christopher (2014). Infrastructure access pricing with long-term take-or-pay contracts, capacity expansions and demand uncertainty Honours Thesis, School of Economics, The University of Queensland.

       
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Author Heard, Christopher
Thesis Title Infrastructure access pricing with long-term take-or-pay contracts, capacity expansions and demand uncertainty
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2014-11-11
Thesis type Honours Thesis
Supervisor Flavio Menezes
Total pages 113
Language eng
Subjects 14 Economics
Formatted abstract
The regulation of access to essential facilities is an important goal of public policy. Optimal regulation will consider both the need to limit inefficient monopoly pricing and the need to provide appropriate incentives for investment. This thesis builds a model based on the real options framework of Camacho and Menezes (2009) to study the optimal regulation of a facility where access is allocated using long-term take-or- pay contracts in the context of uncertainty about future demand. These conditions closely mirror those at the Dalrymple Bay Coal Terminal (DBCT), an important piece of regulated infrastructure in Queensland, Australia. The major contribution is to consider how access prices should be set when long-term contracts mean that first- mover access seekers, rather than access providers, bear the demand risk associated with the essential facility. It is shown that it is often necessary to guarantee first-mover access seekers a favourable allocation of total surplus to encourage signing of long-term contracts at the socially optimal time, and that the size of the allocation depends on market conditions. It is shown that, under some conditions, uniform pricing does not achieve the socially optimal outcome and it is argued that during worsening market conditions regulators should `err on the side of caution' by allocating more surplus to first-movers. The model is then extended to consider the optimal allocation of costs following a costly capacity expansion. It is shown that the scope for sharing costs between access seekers depends on the per-unit cost of the expansion compared to the original facility, and is very limited following an expansion with increasing average costs. In light of these results it is argued that uniform pricing should be reconsidered at DBCT and similar facilities.
Keyword Infrastructure Access Pricing
Capacity Expansions
Demand Uncertainty

 
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