Response to Peter Monkhouse

Abstract

The regulation of infrastructure by the ACCC and other economic regulators in Australia is based around net present value estimation techniques. Recently; Monkhouse (2007) suggested that real options valuation would provide better incentives for investment in infrastructure; but did not elucidate how a regulatory system based on real options valuation should operate. This paper endeavours to sketch the outlines of such a system; and finds that it has considerable promise as an alternative to the status quo; provided an appropriate technique for addressing monopoly rents can be developed.Railways; economic regulation