With the progressive introduction of competition into the traditional public utility industries, it becomes necessary for regulators to ensure access of competitors to the bottleneck facilities controlled by the incumbent monopolists on terms consistent with efficient competition. Efficient component pricing correctly solves that problem: under its rules, competition is enabled to achieve first-order, technical efficiency. The rule is also consistent with allowing competition to promote dynamic efficiency, although achieving this goal also requires reforming traditional cost-plus regulation. The Baumol and Sidak rule does not in itself, however, permit competition to fulfill its other functions of eroding monopoly profits and promoting allocative efficiency. It can therefore be permitted only when the charges for the essential inputs are regulated, so as to ensure that any markups above marginal costs in those charges are no greater than is necessary to afford the challenged utility companies a fair opportunity to earn a return on their invested capital
Alfred E. Kahn & William E. Taylor,
The Pricing of Inputs Sold to Competitors: A Comment,
Yale J. on Reg.
Available at: http://digitalcommons.law.yale.edu/yjreg/vol11/iss1/10