The Effect of Uncertainty in Regulatory Delay on the Rate of Innovation

When a regulated firm considers the undertaking of an effort to innovate, it often faces incentives quite different from those confronting an unregulated firm. At least three types of uncertainty arise. First, will an innovative effort result in an implementable technology, and if so, when? Second, will the implementation of the technology be delayed by a regulatory authority, and if so, for how long? And finally, when the regulator permits the use of an innovation, what level of benefits will the firm ultimately receive

The Role of Antitrust in a Deregulated Environment

In recent years, the extent of regulation has been lessened in a number of industries, including among others airlines, stockbrokers, railroads, telephones, cable television, and hydrocarbon producers. This trend toward deregulation can be expected to continue in these industries and extend in others such as motor carriage. Deregulation measures alone cannot guarantee that markets will perform in a competitive fashion. Thus, an increased reliance on antitrust policy is inevitable. This paper focuses on new trends and problems that will confront antitrust enforcers as a result of deregulation. It emphasizes those problems that are either new or take on more significance because of deregulation rather than reiterating well-known problems often treated in a number of textbooks on antitrust. We draw numerous examples from industries most likely to be affected by deregulation. Since no single form of deregulation can be viewed as typical, the role of antitrust will vary from one industry to another

An Analysis of Fully Distributed Cost Pricing in Regulated Industries

This paper examines the economic consequences of allocating common costs by (1) gross revenues, (2) directly attributable costs, and (3) relative output levels (such as ton-miles) to determine fully distributed cost prices for regulated firms. The analysis characterizes FDC tariffs, examining the nature of the economic inefficiency associated with the rules, and explains how opportunities for entry by unregulated firms might change if Ramsey optimal pricing were used instead of FDC pricing

The Workback Method and the Value of Helium

It is sometimes the case that the value of a resource at one stage of production must be assessed in the absence of a well defined market at that stage. One tool for valuation is the "workback" method, which imputes a value to a resource at an early processing stage by subtracting from an observed price for the resource at a more refined stage all of the costs incurred between the two stages. The workback method has been used by the courts in attempting to assess the wellhead value of helium extracted from helium-bearing natural gas streams during the Helium Conservation Program. This paper describes conditions necessary for a correct application of the workback method generally, and then provides an economic analysis of two court decisions using the workback method in the helium industry. Most importantly, the paper shows why a correct application of the workback method requires an understanding of market structure, whether the method is applied to helium, other natural resources, or more general multistage production processes

Demand Uncertainty and the Regulated Firm

Demand uncertainty is an important element of many regulated markets. Firms often must select plant size before actual demand is observed, and with some expectation of regulatory action if the actual levels of profit or rate of return do not fall within accepted ranges. We analyze a model of a regulated firm that faces a relatively complex regime of price regulation, reflecting to at least some extent the multiple aspects suggested by Joskow (1974). The firm behaves as though it expects the current tariff to remain in effect unless, at the actual demand observed after plant size is chosen, one of two things occurs. First, if profits are negative, the firm plans to petition for and expects to receive a new tariff yielding zero economic profits. Second, if the rate of return on capital exceeds some specified maximum, the firm expects the regulator to reduce the tariff so that the firm earns only that maximum

Demand Uncertainty and the Regulated Firm

[Introduction] In this paper, we investigate the impact of demand uncertainty on the choice of plant capacity by a regulated firm. Over the past few years, demand uncertainty has become a major element in the decision-making of utilities, and particularly in their decision-making with respect to capacity choices. In a recent study by SRI [1977], it was reported that to maximize expected consumers' surplus, more generating capacity was required for the electric utility industry when operating under demand uncertainty than under demand certainty.1 This finding raises the question whether the structure of rate regulation of electric utilities provides the appropriate incentives for them to invest in more capacity under demand uncertainty then under certainty. The present paper addresses such questions