Optimal time-of-use access charges

This paper examines the setting of optimal time-of-use access charges in a deregulated network industry environment. Firms, which may include the incumbent, compete in the final retail market. The regulator sets an access fee for use of the essential facility, allowing the incumbent to recover fixed costs. If the retail market is perfectly competitive the optimal access charge varies with time-of-use according to the Ramsey-Boiteux elasticity rule. However, with downstream market power the regulator needs to correct retail price distortion, as well as recover fixed costs efficiently. As a result, the regulator's initial impulse to set higher access charges during "peak periods" may be reinforced, moderated or even reversed - and optimal access charges diverge from a Ramsey-Boiteux pattern.