2This paper provides a discussion of the relationship between access regulation andinvestment in essential facilities. Regulation of access terms and prices affects the return afacility provider can expect to receive on its investment. Hence, expectations of the natureof regulation affect investment incentives. A regulator, therefore, has the power toinfluence investment indirectly by pre-committing to an access pricing regime. However,uncertainty and inappropriate signals can potentially have an adverse influence oninvestment. So the regulator must take care when stating regulatory policy and applyingregulatory instruments.In Australia, Part IIIA of the
Trade Practices Act
(1974), gives the AustralianCompetition and Consumer Commission (ACCC) the power to determine prices of accessto essential facilities. These powers are constrained somewhat, however. For example:
s44W(1): The Commission must not make a determination that would haveany of the following effects ...(d) resulting in the third party becoming the owner (or one of theowners) of any part of the facility, or of extensions of thefacility, without the consent of the provider,(e) requiring the provider to bear some or all of the costs of extending the facility (or maintaining extensions of the facility).
This indicates that the ACCC does not have absolute power to impose any form of pricing.In this paper, we wish to review how regulation affects investment in infrastructurethat involves sizable sunk costs. In particular, we suppose that the infrastructure producesits services by way of a natural monopoly technology. In addition to the sunk costs of itsprovision, there are constant marginal costs involved in its use. Moreover, theinfrastructure effectively has unlimited capacity. It is not certain that the ACCC has thepower to regulate access to such infrastructure. The
Trade Practices Act
requires that inorder for a service to be declared it must be “uneconomic for anyone to develop anotherfacility to provide the service.” (s44G(b)) For a natural monopoly technology, a singleprovider is economically efficient. However, it may be commercially viable to duplicate thefacility allowing an entrant to bypass an incumbent. In this paper, we will cast a broad netconcerning the powers of the ACCC in this regard and assume that it can regulate the