Employing Endogenous Access Pricing to Enhance Incentives for Efficient Upstream Operation

Endogenous access pricing (ENAP) is an alternative to the more traditional form of access pricing that sets the access price to reflect the regulator’s estimate of the supplier’s average cost of providing access. Under ENAP, the access price reflects the supplier’s actual average cost of providing access, which varies with realized industry output. We show that in addition to eliminating the need to estimate industry output accurately and avoiding a divergence between upstream revenues and costs, ENAP can enhance the incentive of a vertically integrated producer to minimize its upstream operating cost.