Companies active in electricity generation or supply that also own transmission or distribution network assets are generally presumed to have an economic interest in using its monopoly position as network owner to prevent or hinder competition in other areas of the value chain. This can happen in many ways such as raising rivals’ costs, price squeezes or by providing essential information only to affiliated companies. All of these practices distort a level playing field. In order to limit the risk of such behavior from occurring Member States of the European Union introduced a “regulated third party access” regime under which third parties have a right to access the network in a non-discriminatory manner. It is the purpose of the paper to derive the welfare implications of a regulation of access charges for electricity grids taking the costs of transmission as a benchmark. It shows that a cost-based regulation is second-best optimal only if the gap between the incumbent’s and the downstream entrant’s efficiency is sufficiently large. In all other cases an access charge deviating from the transmission costs is second-best optimal. There is no simple and generally applicable rule for the determination of second-best optimal access charges.
© 2008 by Lucius & Lucius, Stuttgart