DEREGULATION of telecommunications and electric power raises an important question: How should access to the transmission and distribution network of the incumbent utility be priced? If access is priced excessively high, efficient entry may be discouraged and duplicative facilities will be created to bypass the existing network. If access is priced inordinately low, excessive entry and congestion may result, and the incumbent utility might fail to cover its costs. The key issue is how to balance cost recovery for the incumbent with incentives for entrants. The efficient component-pricing rule (ECPR) promises a solution to the access-pricing problem.

The question of how a regulated firm should price its sale of services to competitors arises whenever an incumbent utility is the only supplier of an input used both by itself and by an entrant to provide some final product. If the utility charges its rival more for the input than it implicitly charges itself, it will have handicapped that rival's ability to compete. The reverse will be true if regulation forces the utility to charge the entrant less for the input than the utility charges itself. This chapter examines ECPR pricing for the case in which the incumbent utility serves as the sole supplier of network facilities. In chapter 9 we turn to ECPR pricing when facilities-based competition exists.

The modern analysis of access pricing arose with the purchase of trackage rights by one railroad from another.