Crampes, Claude and Laffont, Mathias (2014) Connection Pricing and Universal Service Obligations in Distribution Networks. Competition and Regulation in Network Industries, 15 (1). pp. 32-58.

Abstract

This article provides an economic view on how the connection to a distribution network should be priced when the operator considers the spatial distribution of consumers. It highlights the impact of public service constraints on the investment in service quality, the size of the network and the connection fee. The main ingredient is the geographical dispersion of potential consumers in the distribution area and the costs linked to this dispersion as opposed to those common to all connected customers. We first determine the optimal size of the network. Its characteristics lead to a price structure undesirable from two points of view: i) the net profit of the operator is negative, ii) the price paid proportionally to distance can be viewed as discriminatory by politicians who favor “postage stamp”. We then successively determine the second-best pricing policy under a budget constraint and an intra-zone price adjustment. Finally, we analyze the redistributive effects of two-part pricing if the operator has the obligation to serve a certain number of consumers and to recoup its cost.