Regulation and the Option to Delay

This paper examines a simple two-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the minimum price that an unregulated monopolist demands to bear the demand uncertainty and invest early, that is, the price that incorporates the value of the option to delay. In a regulated environment, we show that in the absence of downstream competition and when the regulator cannot commit to ex-post demand contingent prices, a regulated price that incorporates the option to delay is the minimum price that ensures early investment. Furthermore, when the regulator has a preference for early investment, the option to delay price generates higher welfare than other forms of price regulation. We also show that when the vertically integrated network provider is required to provide access to downstream competitors, and the potential entrant is less efficient than the incumbent, an access price that incorporates the option to delay generates the same investment level output as and higher overall welfare than an unregulated industry that is not required to provide access. By contrast, under the same market conditions an ECPR-based access price generates the same overall welfare than an unregulated industry. Moreover, when the potential entrant is more efficient than the incumbent, an Option to Delay Pricing Rule generates the same investment level output as and (weakly) higher overall welfare than the Efficient Component Pricing Rule (ECPR). In addition, the option-to-delay-based access price is (weakly) lower than the ECPR-based access price.

The Contamination Problem in Utility Regulation

This paper formally examines the implications of a utility’s diversification into an unregulated industry. In our framework, the utility is the most efficient provider in the unregulated industry (up to a particular capacity) and, as such, there is no question about the desirability of allowing it to operate in that market. Nevertheless, the risk faced by a diversified utility is greater than the risk faced by a utility that operates only in a regulated market. This additional risk can potentially affect the diversified utility’s credit rating and, therefore, increase the cost of capital for the regulated business that will be recovered from ratepayers. We show that by allowing a regulated firm to diversify into an unregulated market, the regulator faces a trade-off: a lower cost in the unregulated market versus a higher cost in the regulated market. If the regulator only cares about welfare in the regulated market, then a ringfencing requirement is optimal subject to implementation costs not being substantial. Of course, the ring-fencing requirement effectively prevents the firm from achieving a lower cost in the unregulated market. Therefore, if the regulator cares about welfare in both regulated and unregulated markets, ring-fencing may no longer be optimal.

Giant Enhancement of Stimulated Brillouin Scattering in the Subwavelength Limit

Stimulated Brillouin scattering (SBS) is traditionally viewed as a process whose strength is dictated by intrinsic material nonlinearities with little dependence on waveguide geometry. We show that this paradigm breaks down at the nanoscale, as tremendous radiation pressures produce new forms of SBS nonlinearities. A coherent combination of radiation pressure and electrostrictive forces is seen to enhance both forward and backward SBS processes by orders of magnitude, creating new geometric degrees of freedom through which photon-phonon coupling becomes highly tailorable. At nanoscales, the backward-SBS gain is seen to be 10(4) times greater than in conventional silica fibers with 100 times greater values than predicted by conventional SBS treatments. Furthermore, radically enhanced forward-SBS processes are 10(5) times larger than any known waveguide system. In addition, when nanoscale silicon waveguides are cooled to low temperatures, a further 10-100 times increase in SBS gain is seen as phonon losses are reduced. As a result, a 100-mu m segment of the waveguide has equivalent nonlinearity to a kilometer of fiber. Couplings of this magnitude would enable efficient chip-scale stimulated Brillouin scattering in silicon waveguides for the first time. More generally, we develop a new full-vectorial theoretical formulation of stimulated Brillouin scattering that accurately incorporates the effects of boundary-induced nonlinearities and radiation pressure, both of which are seen to have tremendous impact on photon-phonon coupling at subwavelength scales. This formalism, which treats both intermode and intramode coupling within periodic and translationally invariant waveguide systems, reveals a rich landscape of new stimulated Brillouin processes when applied to nanoscale systems.U.S. Department of Energy's NNSA DE-AC04-94AL85000DDRE under Air Force FA8721-05-C-000MesoDynamic Architectures program at DARPASandia's Laboratory Directed Research and Development programChemical Engineerin

Price Regulation and the Cost of Capital

This paper investigates how price regulation under moral hazard can affect a regulated firm’s cost of capital. We consider stylised versions of the two most typical regulatory frameworks that have been applied over the last decades by regulators: Price Cap and Cost of Service. We show that there is a trade-off between lower operational costs and a higher cost of capital under Price Cap regulation and higher operational costs and lower cost of capital under Cost of Service regulation. As a result, when the extent of moral hazard is not significant, Price Cap regulation generates lower welfare than the Cost of Service regulation.

From Collapse to Freezing in Random Heteropolymers

We consider a two-letter self-avoiding (square) lattice heteropolymer model of N_H (out ofN) attracting sites. At zero temperature, permanent links are formed leading to collapse structures for any fraction rho_H=N_H/N. The average chain size scales as R = N^{1/d}F(rho_H) (d is space dimension). As rho_H --> 0, F(rho_H) ~ rho_H^z with z={1/d-nu}=-1/4 for d=2. Moreover, for 0 < rho_H < 1, entropy approaches zero as N --> infty (being finite for a homopolymer). An abrupt decrease in entropy occurs at the phase boundary between the swollen (R ~ N^nu) and collapsed region. Scaling arguments predict different regimes depending on the ensemble of crosslinks. Some implications to the protein folding problem are discussed.Comment: 4 pages, Revtex, figs upon request. New interpretation and emphasis. Submitted to Europhys.Let

Price Regulation and Investment: A Real Options Approach

This paper examines a three-period model of an investment decision in a network industry characterized by demand uncertainty, economies of scale and sunk costs. In the absence of regulation we identify the market conditions under which a monopolist decides to invest early as well as the underlying overall welfare output. In a regulated environment, we first consider a monopolist facing no downstream competition but subject to a price cap on the downstream retail (final good) market. We identify the welfare-maximising regulated prices using the unregulated market output as a benchmark. In particular, we show that the optimal regulation depends on market conditions (that is, the nature of demand) and there are three possible outcomes: (i) price regulation does not improve welfare; (ii) regulated prices include an option to delay value and provide a positive payoff to the firm; and (iii) regulated prices yield a zero payoff to the firm. Second, we consider a vertically integrated network provider that is required to provide access to downstream competitors. We show that when the regulator has only one instrument, namely the access price, an option-to-delay pricing rule generates (weakly) higher welfare than the Efficient Component Pricing Rule (ECPR), except under very specific conditions.

Realization of an all-optical zero to π cross-phase modulation jump

We report on the experimental demonstration of an all-optical π cross-phase modulation jump. By performing a preselection, an optically induced unitary transformation, and then a postselection on the polarization degree of freedom, the phase of the output beam acquires either a zero or π phase shift (with no other possible values). The postselection results in optical loss in the output beam. An input state may be chosen near the resulting phase singularity, yielding a pi phase shift even for weak interaction strengths. The scheme is experimentally demonstrated using a coherently prepared dark state in a warm atomic cesium vapor

Some Properties of the Speciation Model for Food-Web Structure - Mechanisms for Degree Distributions and Intervality

We present a mathematical analysis of the speciation model for food-web structure, which had in previous work been shown to yield a good description of empirical data of food-web topology. The degree distributions of the network are derived. Properties of the speciation model are compared to those of other models that successfully describe empirical data. It is argued that the speciation model unifies the underlying ideas of previous theories. In particular, it offers a mechanistic explanation for the success of the niche model of Williams and Martinez and the frequent observation of intervality in empirical food webs.Comment: 23 pages, 6 figures, minor rewrite