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3rd Florence Conference on the Regulation of Infrastructures: Taking stock of current challenges
The third Conference on the Regulation of Infrastructures has brought together academics and
practitioners to discuss different questions related to the infrastructure industries namely transport,
energy, telecoms and water distribution. All network industries have gone and are still going through
processes of liberalization as well as de- and re-regulation. These processes lead to a variety of legal,
political and technical questions. The ambition of this Conference was to allow discussions that are
interdisciplinary as well as cross-sectorial.
As the sectors are not in the same stage of transformation, very different questions arise and different
policy options are being discussed. Yet general questions such as the complex interplay between
sector specific and competition regulation pertain to all sectors. The Conference allowed researches
to get high quality feedback from fellow colleagues and also to learn from the experience of other
industry sectors.
14 papers were presented in seven round table sessions each dedicated to one or two of the discussed
industry sections. While Energy, Telecommunications and Transport were also featured during last
year’s edition of the conference, in 2014 also water regulation was present with a dedicated session.
The Conference ended with a final joint session of all sectors, where a paper looking at a cross-
sectorial question was discussed. This session underlined the importance of engaging in cross
sectorial debates. The presented paper raised the question to what extent sector specific regulation
and competition regulation were “friends or enemies”. To understand these questions it is necessary
to compare the experiences of the different sectors and from a cross national perspective. In spite of
the increasing specialisation of discourses within the sectors such discussions are crucial to
understanding the development of infrastructure industries. The third Conference on the Regulation
of Infrastructures has made an important contribution to this.
Nadia Bert, David Kupfer, Organizers
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Regulating Transport
In the transport sessions papers and discussions were mainly focussed on current challenges in
railway regulation. Papers dealt with topics like infrastructure pricing and to what extent prices
can work as a coordination mechanism in capacity allocation of railway infrastructure. Looking at
the different case studies, it was often highlighted that path dependence influences the
development of network regulation in a given country. However, this should not prevent the
implementation of harmonised regulation and technical standards. The comparison between
European countries, where the EU is trying to act as supra-national regulator next, and
developing countries, where the role and the powers of the regulators are quite different, was also
made. A recurring issue was also the relationship between competition policy and technical
standards: European railways have to enable competition by further working on the
harmonization of technical standards, which could easily go much further than currently. Proof of
that can be found in another mode of transport: airways have achieved a level of technical
harmonization across the globe that allows operators to compete in different markets or change
their main location using the same fleet.
Matthias Finger, Director Florence School of Regulation Transport Area
Regulating Energy Networks
In the energy sessions, three papers were discussed. The first paper focused on regulatory
incentives for Electricity Transmission and Distribution System Operators to adapt the grid to
extreme events caused by Climate Change. The negative impacts of Climate Change on grid
reliability could be mitigated by incurring capital and operational adaptation expenditures. The
way incentives can lead to biases towards too little adaptation has been illustrated through a case-
study of German incentive-based regulation. Of course, the point has also been made that
different incentives could also lead to too costly adaptation measures. The discussion
emphasized the highly political nature of the problem: how to set the desirable level of grid
reliability when facing high risk low-probability events, and who will bear the risks in case of
inadequate adaptation?
The two last papers aimed at comparing the experiences of different sectors. The first of these
papers focused on the achievement of social objectives in infrastructure sectors. It featured both a
cross-country and a cross-sector analysis, trying to identify patterns specific to a certain sector or
a certain country. More specifically, a comparison of the postal sector reforms in France,
Germany, and the UK illustrated how the “type of capitalism” of a certain country can explain the
reform process in this country. The telecoms, postal, and electricity sector in the UK were also
compared, but the changing nature of each of these sectors made it more difficult to produce
clear-cut evidence. The discussion highlighted the need to take into account the influence of the
European Union on national reforms. The last paper also performed a cross-sector comparison of
retail markets in the energy and the telecoms industry in the UK. The paper built on the very
different perception of competition in these markets despite similar indicators (switching rate,
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average expenditure, number of market players). The paper and the discussions highlighted the
need for a variety of products and tailor-made offers to attract consumers engagement, as well as
the need for a holistic view of the value chain (including competition among networks when
possible) to foster competition.
Jean-Michel Glachant, Director Florence School of Regulation Energy Area
Arthur Henriot, Florence School of Regulation Energy Area
Regulating Telecoms
In the telecoms sessions, the papers and the discussions focussed on two main topics: broadband
networks and the Internet. As for the first, the works presented during the day looked at the
various factors and actors playing a role in the diffusion of broadband development. The
importance not only of the supply-side, but also of the demand-side was highlighted, as well as
the relevance of the latter’s local characteristics. By confronting different case studies, the
conclusion was reached that there might be no single pathway to success; a common model of
policy reform, like the ones applied in the past, might not result sufficient anymore. One of the
papers provided the possibility to look well beyond the European Union borders and to confront
four of the largest national broadband initiatives in the Asia Pacific Region. The comparison was
made among different models, in terms of funding, implementation entity, scope of the project
and the presence/absence of open access provisions in the regulation. This analysis allowed
collecting a number of indications concerning the effectiveness and efficacy of each model with
regard to the objectives that were to be achieved. As for the second main topic, one of the
perspectives adopted was to look at interconnections. With the evolution and diversification of
the Internet, interconnections terms and conditions between ISPs have also changed. The
possibility was provided to explore existing and likely future interconnections disputes and to
suggest how they could be resolved. The paper focused on the US scenario, but a recurring issue
was the parallelism between US and the EU. Moreover, the Internet was also examined with
regard to its disruptive effect on markets and markets dynamics. Ideas were shared on how
businesses and regulators have reacted to this effect, trying to put forward a number of policy
indications for the future. Finally, the afternoon session opened the doors to the comparison
between the retail markets for energy and telecoms. Discussions took place on the relation
between network regulation and competition in both markets, with the aim of identifying
successful regulatory experiences that could be used cross-sectors.
Pier Luigi Parcu, Director Florence School of Regulation Communications and Media Area
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Regulating Water Distribution
The 3rd Conference on the Regulation of Infrastructure held in Florence on Friday June 13th
hosted for the first time a parallel session dedicated to the Water sector. Two very different
papers were presented by their authors and discussed with the participants of the session.
Franco Becchis, from the University of Turin, presented a multidisciplinary methodology for the
analysis of local actors, incentives and information endowment that lie behind the success or
failure of local services, infrastructures and regulation. This tool is called FIELD for Framework
of Incentives to Empower Local Decision-makers. The presentation of this operational tool was
supported by two case studies in the water sector.
Thomas Bolognesi, from the University of Grenoble, made a presentation focusing on urban
water services in Europe (UWSE) and the consequences of their modernization. Firstly, the
UWSE modernisation proceeds through their depolitisation. This means that the role of the state
as an operator and as a regulator is decreasing and less and less direct. Secondly, the deeper the
modernisation principles are integrating, the more the dynamics of UWSE appears to be resilient
rather than resistant. The institutional arrangements are more able to absorb external shocks and
they evolve faster and more often. Thirdly, the modernisation of UWSE is unable to achieve per
se its own goals in terms of sustainability. This inability is due to the fact that it doesn’t take
sufficiently into consideration the transaction costs in the modus operandi of the modernised
systems.
These two presentations were followed by discussion touching on both theoretical and
operational grounds of water sector economic regulation & governance issues. Those fruitful
exchanges will feed into the preparation of the FSR Water Area next workshop scheduled on
Friday October 31st.
Maria Salvetti, Coordinator of the WaterReg project
Stephane Saussier, Director Florence School of Regulation Water Area
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Selected papers
Becchis, F., Vanin, E., Russolillo, D., Knowing the FIELD for infrastructure regulation at local
level: actors, information, incentives ......................................................................................... 7
Bolognesi, T., Examining the results of the network industries modernization: the case of urban
water services in Europe .......................................................................................................... 10
Eckert, S., Realizing social goals in infrastructure sectors: A political science perspective .............. 14
Godward, E., Holvad, T., Competitive European Railways ................................................................ 19
Kuligowska, I., Current regulatory challenges in access to the railway infrastructure in Poland ..... 21
Lemstra, W., The Dynamics of Broadband Markets in Europe: Realizing the 2020 Digital Agenda . 24
Lucas Gunaratne, R., Ilavarasan P. V., Kholilul Rohman, I., Fernando, S., National Broadband
Networks: What works and what doesn’t? ............................................................................... 27
Milner Frieden, R., New Models and Conflicts in the interconnection and Delivery of Internet-
mediated Content ..................................................................................................................... 31
Parcu, P. L., Stasi, M. L., The Internet: a Black Hole that is Freeing New Business Stars ................ 33
Pechan, A., Which Incentives Does Regulation Give to Adapt Network Infrastructure to Climate
Change? - A German Case Study ............................................................................................. 36
Pena-Alcaraz, M., Perez-Arriaga, I., Sussman J. M., Capacity pricing schemes to implement open-
access rail in Tanzania............................................................................................................. 41
Thatcher, M., Rangoni, B., Sector-specific regulation and general competition policy as friends not
enemies ..................................................................................................................................... 45
Thiebaud, J.-C., Amaral, M., Vertical Separation in Rail Transport: How Prices Influence
Coordination? .......................................................................................................................... 50
Wagner, I., Alexander, D., Competitiveness in the Energy and Telecom Markets .............................. 52
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Knowing the FIELD for infrastructure regulation at local level: actors, information, incentives Authors
Franco Becchis¹²*, Elisa Vanin¹ and Daniele Russolillo¹
¹Fondazione per l’Ambiente and Turin School of Local Regulation / Via Pomba 23, I-10124 Torino,
ITALY
²St. John International University / Castello Della Rovere, Piazza Rey, I-10048 Vinovo (TO), ITALY
*Corresponding author’s contact details: [email protected]; phone +39 011
5714750.
Keywords
Economic regulation, local public services, water and wastewater services, district heating, players,
information, incentives, institutions
Abstract
Public infrastructure investment will be a big theme in the coming years. Part of infrastructural
investments affect, for their dimension, the local context, producing consequences on the regulatory
capacity of local bodies: a good regulatory frame becomes therefore essential. Regulating and
managing local infrastructures and public services is subject to specific and additional challenges
compared to the regulation of big network services implemented at central level: locally, relations are
so intertwined that it becomes difficult to enforce the hardest part of regulation (franchising,
investments, tariffs and prices, rent control, punishment). Indeed, when designing policies and
investing in public services and infrastructures, an important issue to consider is the tangled web of
complex, difficult and asymmetric relationships among actors. The nature of these actors, their
information endowment, the incentives that drive their choices, the types of relationships established,
are all features that influence the outcome of policies and projects, their success or failure. This is
why a preliminary field analysis appears to be necessary before drawing a regulatory framework.
This paper presents FIELD (Framework of Incentives to Empower Local Decision-makers), a
multidisciplinary methodology for the analysis of local actors, incentives and information
endowment that lie behind the success or failure of local services, infrastructures and regulation. In
the first part the paper intends to present the methodology, which is under refinement within the
Turin School of Local Regulation (TSLR), and the scientific background. The main aim of FIELD is
to narrow the gap between the outcomes of academic research and strategic decision-making process
in local public service governance. In the second part, the paper presents the preliminary results of
the application of FIELD methodology to some specific case studies in two network industries that
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are characterized by strong local features and high demand for infrastructure investments: urban
water and sanitation services and district heating. The case studies analyzed in the water sector
include Bangalore, Belgrade and Sofia. The case studies in the district heating sector refer to Berlin
and Turin. The limited geographical representativeness of case-studies does not allow to provide
relevant and fruitful conclusions: nevertheless the first results identify some trends and suggest new
patterns for research that can enrich the current debate on local regulation, with positive fallouts on
local policy making and investment decisions. In the conclusions, an overview on the future steps
and potential developments of the research is presented: in the medium term the TSLR plans to
develop FIELD as an instrument to put local regulation analysis on fruitful pathways for the
development of investments, environmental protection and attention to consumer bills.
JEL Classification
K23, L43, L51, L97
Acknowledgments
This research was conducted by the Turin School of Local Regulation in the framework of
LORENET – Local Regulation Network project, co-funded by the Torino Chamber of commerce and
Fondazione Cassa di Risparmio di Torino. We are grateful to the individual correspondents who gave
their contribution to the survey, namely: Atanas Georgiev (Faculty of Economics and Business
Administration, Sofia University St. Kliment Ohridski), Tatjana Jovanic (Faculty of Law, University
of Belgrade), Vincent Pál (London School of Economics), Arvind Shrivastava (State Government of
Karnataka). We also thank the working group of the Turin School of Local Regulation for the
support, in particular Fulvia Nada and Andrea Sbandati.
References
F. Ottesen, Infrastructure Needs and Pension Investments: Creating the Perfect Match, OECD
Journal: Financial Market Trends, 1 (2011).
OECD, Infrastructure to 2030: Telecom, Land Transport, Water and Electricity, OECD Publishing,
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D. Sappington, Optimal regulation of a multiproduct monopoly with unknown technological
capabilities, Bell Journal of Economics, 14 (1982) 453-463.
D. Sappington, Optimal regulation of research and development under imperfect information, Bell
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F. Becchis, Le fatiche del regolatore: fattori di debolezza nella regolazione dei servizi pubblici locali,
Economia Pubblica, 1 (2003) 103-121.
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P. Carrington, Horizontal Co-optation through Corporate Interlocks, Ph.D. thesis, Department of
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R.S. Burt, Corporate profits and cooptation: networks of markets constraints and directorate ties in
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C. Mcloughlin, Topic guide on Political Economy Analysis, Governance and Social Development
Resource Centre, University of Birmingham, 2012.
E. Goffman, The Presentation of Self in Everyday Life, New York: Doubleday Anchor, 1959.
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Penguin Press, New York, 2014.
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Examining the results of the network industries modernization: the case of urban water services in Europe Author
Thomas Bolognesi
Univ. Grenoble Alpes-CNRS
PACTE-EDDEN
+33 (0)4 76 82 54 10
Postal address:
Domaine universitaire BP 47
38040 Grenoble CEDEX 9, France
Keywords
Urban water system; Network industries; Regulation; Sustainability; New institutional economics
Abstract
Aim and scope
Since 1980’s, the European Union favors regulatory reforms in network industries. These reforms
constitute a process of deregulation/reregulation (Finger et al., 2007; Ménard, Ghertman, 2009).
There is specific tempo to each sector (energy, railways, telecom, postal) and the water sector
appears to be the latest to be included in this process (Glachant, 2008; Glachant, Perez, 2008; Finger,
Kunneke, 2011; Ménard, Peeroo, 2011). We deal with this issue while questioning the concept of
“modernization of the Urban Water Systems in Europe” (UWSE) (European commission, 2003; Gee,
2004).
This modernization of UWSE correspond to the third generation of water regulations in Europe
(Kallis, Butler, 2001; Kaika, 2003; Allouche et al., 2008) which begins in the second middle of
1990 and the Water framework directive (2000) constitute its main element. Three core principles
provide the basis for the modernization of UWSE:
A rationalization of the public command
An increasing use of market mechanisms
The identification of sustainable development goals (Good ecological status, etc.)
These pillars show that there are two components in the modernization: organizational aspects and
sustainability concerns. Nowadays, the European regulation is transposed in the different national
Laws and the first official deadlines are approaching (2015). Thus, we have several years of
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hindsight to identify the effects of the UWSE modernization and its capacity to achieve its
sustainable goals.
Methodology
We approach these phenomena with the New Institutional Economics theoretical framework, both
with the economics of transaction costs and the analysis of the institutional environment
(Williamson, 2000; North, 2005; Ménard, 2005; Brousseau, Glachant, 2008). This framework allows
us to consider the UWSE modernization with a holistic view and to include results of classical
regulation and organizational economics (Lafontaine, Slade, 2007; Gibbons, Roberts, 2013). As a
way to conduct and test an institutional economics research (Wilber et al, 1978; Mäki et al., 1993;
Ménard, 2001), we carry out a case study which compares the “three leading models” of water
governance in Europe, as identified in the literature (Lorrain, 2005, Ménard, Peeroo, 2011). We test
our hypotheses with synchronic and diachronic comparisons and by sorting these models according
to their level of modernization as follow: the German, French, and English.
Results obtained
This research leads to three results, respectively in terms of institutional structure, institutional
dynamics and institutional efficiency (sustainability).
First, the UWSE modernization proceeds through their depolarization. This means that the role of
the state as an operator and as a regulator is decreasing and less and less direct. We explain this new
hybrid organization with three micro institutional determinants:
1. A reduction of the coordination by the “fiat”
2. A decentralization which causes responsibility transfers
3. A growth of the private participation in the supply of urban water services
and three macro-institutional factors:
1. An attenuation of the bundles of rights
2. A mutation of adherent organizations into contractual organizations to make credible new
hybrids
3. The development of cooperative beliefs and routines which support the modernization
Second, the deeper the modernization principles are integrating, the more the dynamics of UWSE
appears to be resilient rather than resistant. The institutional arrangements are more able to absorb
external shocks and they evolve faster and more often. Three micro-institutional determinants
explain this dynamic capacity:
1. An increase of the use of incentives rather than fiat
2. A reinforcement of unilateral and autonomous adaptation rather than conscious adaptation
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3. A reinforcement of the preference for flexibility and autonomy caused by neoclassical and
relational contracting
And three macro-institutional determinants:
1. A better disposition to innovation contained in the institutional arrangements
2. A credibilization of autonomy caused by the apparition of organizations which provide
protective safeguards and microinstitution
3. An acceleration of the loop upward-downward causation thanks to the increase and
diversification of social interaction.
Third, the modernization of UWSE is unable to achieve per se its own goals in terms of
sustainability. This inability is due to the fact that it doesn’t take sufficiently into consideration the
transaction costs in the modus operandi of the modernized systems. In fact, the modernization of
UWSE is largely based on a multiplication of formal norms to coordinate actors. They emerge from
the willingness to control or direct public regulation (classical state regulation) or by auto-
organization through the signing of more and more contracts and property rights that bind and
coordinate the increasing number of autonomous actors in an UWSE. It appears that this
multiplication of norms generates a reduction of the coherence in governance. Consequently, there
are more and more uncertainties and disincentives in the UWSE, which create barriers to achieve
sustainability.
References
ALLOUCHE Jeremy, FINGER Matthias, LUIS-MANSO Patricia, 2008, “Water Sector Evolution
Scenarios: The Case of Europe”, Water Policy, n° 10, pp. 221-238.
BOLOGNESI Thomas, 2013, Modernisation et soutenabilité des systems hydriques urbains en Europe:
une approche néoinstitutionnaliste des regimes de resources, PhD thesis, University of
Grenoble, 31th October.
BROUSSEAU Eric, GLACHANT Jean-Michel (dir.), 2008, New Institutional Economics: A Guidebook,
Cambridge University Press, Cambridge.
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European Water Scenarios, IWA Publishing, London.
FINGER Matthias, KÜNNEKE Rolf W., 2011, International Handbook of Network Industries, Edward
Elgar, Cheltenham.
GEE Alexander, 2004, “Competition and the Water Sector”, Antitrust, n° 2, pp. 38-40.
GIBBONS Robert, ROBERTS John, 2013, The Handbook of Organizational Economics, Princeton
University Press, Princeton
13
GLACHANT Jean-Michel, 2008, “La dérégulation des industries de réseaux comme politique
institutionnelle de création de marchés et de mécanismes de gouvernance”, Annals of Public
and Cooperative Economics, vol. 79, n° 3-4, pp. 487-525.
GLACHANT Jean-Michel, PEREZ Yannick, 2007, “Institutional Economics and Network Industry
Deregulation Policy”, Groupe réseaux Jean-Monnet Working Paper, n° 12 January.
KAIKA Maria, 2003, “The Water Framework Directive : A New Directive for a Changing Social,
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SHIRLEY Mary M., Handbook of New Institutional Economics, Springer, Dordrecht, pp. 291-
318.
MENARD Claude, GHERTMAN Michel (dir.), 2009, “Regulation, Deregulation, Reregulation:
Institutional Perspectives”, Edward Elgar, Cheltenham.
MENARD Claude, PEEROO Aleksandra, 2011, “Liberalization in the Water Sector: Three Leading
Models” in FINGER Matthias, KUNNEKE Rolf W. (dir.), Handbook of Liberalization, Edward-
Elgar Publishing, Cheltenham, pp. 310-327.
NORTH Douglass C., 2005, Understanding the Process of Economic Change, Princeton University
Press, Princeton.
WILBER Charles K., HARRISON Robert S., 1978, “The Methodological Basis of Institutional
Economics: Pattern Model, Storytelling, and Holism”, Journal of Economic Issues, vol. 12,
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14
Realizing social goals in infrastructure sectors: A political science perspective Author
Dr. Sandra Eckert
Assistant Professor in European Studies
University of Osnabrueck
Department of Social Sciences
Seminarstraße 33
49074 Osnabrück
Germany [email protected]
Keywords
Electricity, postal, public service, regulatory governance, social regulation, telecoms, varieties of
capitalism
Abstract
Regulatory reform in infrastructure sectors pursues various social objectives such as securing
universal provision or affordability of services. From an interdisciplinary perspective, social
regulation risks to infringe upon normative standards formulated by competition law and regulatory
economics. Social objectives often go beyond the correction of market failure, they appear as an
anomaly in the context of economic administrative law, and arguably open the door wide to political
instrumentalization. Political science overall takes a more permissive stance on social regulation, and
mainly aims at describing and explaining its emergence and execution.
This conference contribution examines how social objectives are being realized in infrastructure
sectors. The aim is to find out, first, to what extent social regulation varies across countries and
whether such variation is in line with insights from research on comparative capitalism; and second,
to what extent we can speak of emerging social models which are specific to a sector rather than a
country. To that end it compares postal regulation in France, Germany and the United Kingdom, and
then focuses on one country, the United Kingdom, to compare the telecoms, electricity and postal
sectors. The findings hint to varying social models and governance settings across countries, and
evolving social challenges posed in each sector. The UK liberal market economy has strongly
embraced the market model, and in terms of governance privileges independent sector regulation.
The German coordinated market economy accommodates change through practices of negotiation
with industry and trade unions, so that independent regulation plays a lower-profile role in policy-
shaping. The French state-led market economy tends to decide at a central political level about the
appropriate level of services provided, and narrowly circumscribes the leeway for sector regulators.
The social challenges posed in each sector are different, and subject to change: while securing a
universal service in telecommunication services is no longer of major concern at least in the
industrialized world, new issues have arisen related to equitable access to broadband capacity. In the
postal sector the massive decline of mail volumes caused by electronic substitution puts into question
15
the inherited universal service obligation. Price increases and security of supply are the predominant
concerns in the energy sector.
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19
Competitive European Railways Authors
Ernest Godward and Torben Holvad
European Railway Agency,
Rue Marc Lefrancq 120,
BP 20392,
FR59307 Valenciennes Cedex
Tel: +33 3 27 09 67 23 Fax: +33 3 27 09 68 23
[email protected] [email protected]
Keywords
Railways, regulation, competition, competitiveness , efficiency, market dominance, Technical
Specifications for Interoperability (TSIs), Common Safety Methods (CSMs).
Abstract
The aim of the paper is to give an understanding of how Competitive European Railways can be
achieved. The methodology used is to summarize the findings of internal Agency studies that lead to
this goal.
Introduction
After more than two decades of trying the European Union, is seeking in the proposed fourth
Railway Package to ensure that European Railways are fully competitive in all their forms of
operation, including inter-modally and intra-modally. It seeks to do this through transposed
regulation. Europe passes the directive which then gets transposed to National legislation. In the past
this process has not delivered effectively and while there has been some opening of the markets,
especially in the freight sector, the desired results have not yet been achieved, e.g. modal shift to rail
and the achievement of a more competitive railway sector. Secondary legislation, in the form of TSIs
and CSTs, have been more effective by harmonizing the technical and safety requirements needed
for an interoperable market, which is a necessary pre-condition for a competitive market. This paper
develops the concept of how a competitive railway market could emerge following the acceptance by
Member States of this package.
Removing the technical barriers
The promotion of rail interoperability is critical precursor to the strengthening of the competitiveness
of the railway vis-à-vis other modes. Indeed, the Commission has declared 2014 the year of
interoperability. The Technical Pillar of the 4th
Railway Package will build on the previous
interoperability directives by giving enhanced powers to the European Railway Agency particularly
in the areas of authorization, safety certification, ERTMS and generally improving the access for
customers to the railway system. Work undertaken by the Agency demonstrates that significant cost
20
savings of at least €500 million over a 10 year period. This will contribute to ensure that the market
opening reaches its full potential regarding efficient provision of rail services in Europe.
Competition “for the market” and “in the market”
Two strands of competition are currently present in the European Railway area. These concepts have
emerged from the previous packages. For rail freight markets the emerging evidence shows that the
competition is “in the market” and that a wide variety of players, both large and small are competing
for freight traffic. However, there are still major financial issues to address if the entry barriers are to
be further lowered. We observe a move away from former incumbent operators; however market
dominance by the players remains. This has led to the question being raised “Who will become the
Union Pacific of Europe?” and the corollary statement to this “where are the new efficient small
operators”. We know who this might be, but it doesn’t seem to be discussed much at present. The
discussions assume that Europe wants to become like the USA. However, there are a number of other
models that may be followed in the end.
By contrast, until recently, and only in those passenger markets that have been opened voluntarily
and in these cases largely driven by competition for the market. Many national passenger markets
still remain closed. However, there is now emerging “in the market” competition for passengers, e.g.
Austria, Czech Republic, Germany, Italy, Sweden and the UK. These take the form of “Open
Access” operators alongside former incumbents of franchised or concession operations. The paper
will draw on examples and research findings from selected Member States notably UK and Italy.
How will the European rail market look after 2030/2050?
On the basis of these influencing factors noted above plus others, e.g. wider economic conditions,
legislation for other modes, investment in the core European railway corridors along with market
opening we examine how the European railway market might evolve out to 2050 and what we might
expect to see emerging in respect of competition. This draws upon the findings contained within the
2010 White Paper as well as evidence that has emerged since then as well as ERAs internal studies.
Who will become the Union Pacific of Europe?
We attempt to answer this question based upon the above to see whether the question is appropriate,
and if so whether different approaches may be more effective. In this section we examine the role of
regulatory frameworks and how they can be used to ensure the emergence of competition. There are
issues raised by market dominance as to whether or not this is a good thing and we will examine this
issue as part of the paper. We draw upon research evidence previously discussed Holvad and
Godward (2013) and developed further since then.
Concluding remarks
Our research studies have identified the background trends prior to the introduction of a full set of
TSIs and CSMs highlighting key challenges for improving railway efficiency. Recently, we have
tried to assess the further impacts that will arise from having fully comprehensive and compliant
TSIs / CSMs in place demonstrating a significant potential for further enhancing the efficiency of the
system.
21
Current regulatory challenges in access to the railway infrastructure in Poland Author
Izabela Kuligowska, Ph.D.
Advisor to the President
Urzad Transportu Kolejowego (Office of the Rail Transportation)
ul. Chalubinskiego 4
00-928 Warszawa
Poland
mob.: +48600441381
office: +48226301511
mail: [email protected]
Keywords
Rail infrastructure, access, rail regulation, access to service facilities, freight
Abstract
The paper presents main regulatory challenges in ensuring open and non-discriminatory access to the
rail infrastructure in Poland. While many of those might be regarded as similar to the problems of the
regulatory regimes of the rail sector in the European Union, this paper will focus on the unique
solutions adopted by the Polish rail regulator (Urząd Transportu Kolejowego, UTK). It should also
be noted that the rail sector in Poland is undergoing rapid and significant changes mainly due to the
imposition of the EU competition regime, thus placing the rail regulator in position which requires
very careful balancing of the vital interests of all market actors while avoiding the introduction of
unnecessary administrative and financial burdens.
This article analyses solutions recently adopted by the Polish rail regulator enabling open and non-
discriminatory access to the rail infrastructure. Mostly pragmatic attitude to the regulation of the
access and strong commitment to the introduction of competition regime resulted in actual
application of few procedures allowed within Polish legal framework, for instance the decisions of
the President of the UTK replacing rail infrastructure access contracts, the open access to the internal
market of the rail passenger services, the development of the contractual penalty arrangements for
the delays on the network or the decisions of the President of the UTK on access to service facilities.
Due to increased investments in the infrastructure carried by main infrastructure manager in Poland,
PKP PLK, many complaints on disturbances and increased costs of the access to the rail
infrastructure both from passenger and freight operators were submitted. The problems reported by
the rail operators to the UTK in 2011 included the increased costs of train path replacement, the
necessity to provide additional resources, significantly longer travel times and constant changes in
timetables. Those resulted in decisions of the President of the UTK which imposed an obligation on
22
the infrastructure manager and the rail operators to agree upon the adequate compensation scheme
(so called decisions replacing rail infrastructure access contracts).
The development of the contractual penalty arrangements for causing the delays on the network, so
that delays imposed by one train operator on another require penalty payment, is another example
that the intervention of the regulatory body might be required. This kind of arrangements initially
agreed between the infrastructure manager and the rail operators remained optional until it became
clear that freight operators are less likely to join the scheme than passenger services operators as they
were not so tightly bound by the time factor. Thus the intervention of the rail regulator became
necessary, resulting in uniform application of the scheme to all rail operators.
Devised after recently presented by the European Commission implementing act to Article 11 of
Directive 2012/34/EU procedure for open access for internal market of rail passenger services with
the evaluation of the economic impact of the proposed new service on the services operated under
the public service contract are another example of pragmatic but also forward thinking approach.
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24
Book Preview:
The Dynamics of Broadband Markets in Europe: Realizing the 2020 Digital Agenda Author
Dr. Ir. Wolter Lemstra
+31 653 216 736
Delft University of Technology
Department Technology, Policy and Management
Jaffalaan 5
NL-2628 BX Delft
The Netherlands
Phone: +31152782695
Fax: +31152787925
First draft: 2014-02-12
Last revision: 2014-05-30
Released: 2014-05-30
Keywords
Broadband; Digital Agenda; competition; role of governments; regulation
Abstract
This paper will summarize a completed, but not yet published study on an EU-wide research project
describing and analyzing the development of broadband markets in Europe with the aim to facilitate
the realization of the broadband targets set for 2020 in the Digital Agenda for Europe.
The project started with a country cases study on The Netherlands, reported at TPRC 2009. This was
followed by a cross-case analysis of Belgium-Flanders and The Netherlands, reported at ITS Vienna
2012. The project evolved to include twelve longitudinal country case studies, being documented and
analyzed by in-country experts, placed in the context of EU policy and regulation. The focus of the
case study period is 2000-2013. The countries covered are: Belgium, Denmark, France, Germany,
Greece, Italy, Latvia, Netherlands, Poland, Spain, Sweden, United Kingdom. The project concludes
with a cross-case analysis to identify the emerging patterns and the unique case features.
The research findings will be reported along the lines of the major actors and factors that are
influencing broadband development, including: the role the European Union vis-à-vis the Member
States; the differences in role perception of central governments, from the ‘regulatory’ to the
‘developmental’ state; the role of infrastructure endowments, with a distinction between the role of
25
fixed in the older Member States versus mobile in the newer Member States; the role of
infrastructure-based competition, in particular the large diversity in the role of cable-TV networks
across Europe; the results from access-based competition, the role of unbundling and reaching the
final rung of the ‘ladder of investment’; the role of the central government stimulating the demand
and/or supply side; the role of municipalities in removing administrative barriers; the role of
municipalities in initiating fibre deployments; the role of third actors, breaking the strategic waiting
game in a technology-duopoly; the role of bottom-up initiatives by private actors, allowing
technology leap-frogging; the role of governments in bringing broadband to the rural areas, with the
central government as ‘chief architect’; and the role of municipalities as ‘lender of last resort’.
One of the most important conclusions from this research project is that for the next stage of
broadband infrastructure and digital economy development, there is no single policy pathway to
success. Each country’s unique legacy may be the most important factor in determining the set of
policies and practices necessary to implement the EU Digital Agenda objectives. A common model
of policy reform, such as the liberalization model that has been widely applied with significant
success in the past, is no longer sufficient. The most important determinants of success will be
government policies and industry investment programs that build on each country’s historical
development, and its current economic and governmental structure.
This research will be published as a book by Cambridge University Press later in the year.
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27
National Broadband Networks: What works and what doesn’t? Authors
Roshanthi Lucas Gunaratne*, Vigneswara Ilavarasan P, Ibrahim Kholilul Rohman, Sabina Fernando
*Corresponding author:
Roshanthi Lucas Gunaratne
Postal: LIRNEasia, 12 Balcombe Place, Colombo 00800, Sri Lanka
Phone: +94770223249
Email: [email protected]
Abstract
It is generally accepted that broadband plays a key role in society, impacting the economy (Qiang,
Rossotto, & Kimura, 2009), productivity, and employment. Due to many reasons including perceived
lags in access to broadband in rural areas, governments have started to fund national broadband
networks (NBN). Government initiatives range from simply constructing a fiber backhaul network to
implementation of Fiber to the Home (FTTH).
Most national broadband networks are fiber based and are implemented by the incumbent as in
Malaysia or a special purpose vehicle which is led by the incumbent as in India. As these NBNs are
mostly funded by mobile customers and operators through Universal Service Funds or tax payers
through Government funding, it is important to study these different models and assess what is most
beneficial to stakeholders. It is also critical from the point of view of other operators (especially
mobile) to ensure that these government funded networks are open access and do not stifle
competition from wireless broadband which is currently growing especially in developing countries.
Malaysia, India, Indonesia and Australia are four of the largest national broadband initiatives in the
Asia Pacific Region, and are following different models (in terms of funding, implementation entity,
whether they are providing fiber to the home or a backhaul network). This paper proposes to study
these NBNs and produce a country comparison report in terms of effectiveness, efficiency and
impact on broadband market share and operation.
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28
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31
New Models and Conflicts in the interconnection and Delivery of Internet-mediated Content Author
Rob Frieden
Pioneers Chair and Professor of Telecommunications and Law
Penn State University
102 Carnegie Building
University Park, Pennsylvania 16802
(814) 863-7996; [email protected]
web site: http://www.personal.psu.edu/faculty/r/m/rmf5/
Abstract
As the Internet has evolved and diversified, interconnection terms and conditions have changed
between Internet Service Providers (“ISPs”). These carriers experiment with alternatives to
conventional models that classify interconnection as either peering or transiting. The former typically
involves interconnection between high capacity carriers whose transoceanic traffic volumes
generally match thereby eliminating the need for a transfer of funds. Historically smaller carriers
have paid transit fees to larger Tier-1 ISPs for the opportunity to secure upstream links throughout
the Internet cloud.
With the growing availability of bandwidth intensive, full motion video content carried via the
Internet, traffic volume disparities have increased between ISPs. A new category of ISP has targeted
the downstream video content delivery market, all but guaranteeing that these Content Delivery
Networks (“CDNs”) will have more traffic for which they need to secure delivery to end users than
what retail ISPs can or will hand off to them for upstream delivery. Such asymmetry in traffic flows
traditionally has forced CDNs to become transit payers even if previously they qualified for zero cost
peering.
The migration from CDN peer to transit payer represents one of many adjustments in interconnection
compensation arrangements triggered by changes in traffic flows. Heretofore commercially driven
negotiations have managed the transition without resulting in many service disruptions. However it
appears increasingly likely that interconnection negotiations will become more contentious and
protracted, particularly when retail ISPs demand compensation from sources of high volume,
bandwidth intensive video content even though the ventures do not interconnect directly. Traditional
peering and transiting occurs between directly interconnecting carriers, but some retail ISPs believe
they should receive compensation from content sources like Netflix and Youtube, because of the
downstream torrent of traffic these ventures generate for final delivery.
Content providers have balked at making such payments, because they already pay CDNs and other
carriers with which they directly interconnect. Additionally retail ISPs charge their customers often
32
hefty broadband subscription rates that appear sufficiently compensatory for their costs incurred in
providing access throughout the Internet cloud.
This paper will examine existing and likely future interconnection disputes with an eye toward
identifying where conflicts will arise and how they can get resolved. The paper supports
commercially driven negotiations, but suggests that National Regulatory Authorities may need to
arbitrate and promote settlements when now essential Internet access becomes blocked or congested.
The paper concludes that ISPs should have the opportunity to provide both end users and content
sources alternatives to “best efforts” content delivery, but that they should not create artificial
congestion as justification for additional compensation.
33
The Internet: a Black Hole that is Freeing New Business Stars Authors
Pier Luigi Parcu, Maria Luisa Stasi
European University Institute
FSR Communications and Media
Tel +39 0554685738
[email protected], [email protected]
Abstract
The Internet ecosystem is rapidly and constantly expanding. By the end of 2014, almost 3 billion
people around the globe will be using the Internet, roughly 40% of the world population. In addition,
current statistics show that about half of the Internet users have bought products or services online;
these numbers give an idea of the continuously growing importance of the Internet for industries and
businesses.
In numerous sectors, the Internet has acted as a “black hole”, attracting the majority of transactions
and leaving none or little space to the offline businesses. Among others, the Internet has
dematerialized physical assets and services, lowered down of the production and distribution costs,
strongly contributed to the diffusion of the “free” goods and services, multiplied the multi-sided
markets and caused a shift from supply-driven systems to largely demand-drive ones. All these
features have impacted the traditional ways of performing economic activities. In order to cope with
the disruptive effect of the Internet, firms have transferred their business online, adapted and evolved
their business models or created completely new ones.
Often, the outcome of such transformations creates frictions with the traditional regulatory
environment where the businesses take place, and decision-makers and enforcers are dealing with
unprecedented challenges. In order to efficiently regulate - ex ante or ex post - the online markets,
decision makers and regulators might need to undergo the same process that firms were called to
perform, and thus transfer and adapt the rules to the online world. While accomplishing this change,
it might also be that, in some cases, it will be more efficient to set completely new rules instead of
trying to stretch the old tools to newly created online businesses. In those cases, it is important to
identify the right level of action; because of the global dimension of the Internet, intervening at
national level appears to be insufficient, while a regional or international intervention might prove to
be more appropriate.
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Which Incentives Does Regulation Give to Adapt Network Infrastructure to Climate Change? - A German Case Study Author
Anna Pechan
University of Oldenburg,
Ammerländer Heerstr. 114-118,
D-26129 Oldenburg, Germany,
Tel. +49 441 798 4523
Keywords
Electricity Networks, Regulation, Climate Change, Germany
Abstract
Climate change poses a new challenge in particular to long-lasting electricity networks. At the same
time, this industry is highly regulated, which greatly affects the behavior of network operators. In
this paper, the impact of regulation in general and of the German electricity grid regulation in
particular on anticipatory adaptation investments is analyzed.
The qualitative analysis shows that in general a whole set of elements of the regulatory model and
their coordination influence the decision of ex ante adaptation to climate change. A careful and
balanced design, e.g. of efficiency and quality measurement, is thus crucial to avoid inadequate
adaptation. The regulation in Germany discourages flexible adaptation to extreme weather events
(EWEs). For irreversible adaptation of new and existing infrastructure to EWEs, the incentives
highly depend on the cost approval of the regulator. Currently, the regulation discourages this type of
adaptation. But if the additional costs can be claimed, the network operator is indifferent to adapt.
Similarly, incentives to irreversibly adapt existing and new infrastructure to slow onset events
(SOEs) range between excessively high and undistorted depending on the regulator’s discretion.
Undistorted means that the decision to implement adaptation measures is not biased by regulation.
Undistorted are also the incentives for flexible measures to adapt to SOEs. Only in the undistorted
cases, the risk of inadequate adaptation are borne by the network operator.
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41
Capacity pricing schemes to implement open-access rail in Tanzania Authors
Maite Pena-Alcaraz*, Ignacio Perez-Arriaga, Joseph M. Sussman
Massachusetts Institute of Technology
*Corresponding author:
77 Massachusetts Avenue, Building E40-246, Cambridge, MA, 02139, USA
Phone: (+1) 617 803 2182, Fax: (+1) 617 253 7733, email: [email protected]
Keywords
Railway capacity pricing, shared-use railway systems, open-access railway systems, coordination of
vertically separated railway systems
Abstract
In 2013, Tanzania’s government committed to the implementation of an open-access railway system
(Big Results Now, 2013). Open-access will allow the access to the tracks of efficient operators and
will provide resources (access charges) to maintain the rail infrastructure and keep the system
operative in the future. Nonetheless open-access rail will also require new railway regulations that
clarify the roles and responsibilities of current Tanzanian railway institutions and will require the
definition and implementation of a capacity pricing scheme (Railistics, 2013; World Bank, 2014).
This research analyzes how alternative open-access capacity pricing schemes for freight operators
would affect the level of service of the system and the revenues collected to maintain the
infrastructure.
After the failure of the 2001 and 2006 concessions of the Tanzanian railway system (Olievschi,
2013; World Bank, 2003; World Bank, 2010), the country suffered a major underinvestment in rail
transportation (RAHCO, 2012; Railistics, 2013). This underinvestment in rail critically impacted the
reliability of the railway system, essential to improve accessibility to the East African landlocked
countries: Rwanda, Burundi, Uganda, and Western Democratic Republic of Congo (AICD, 2008;
Amjadi and Yeats, 1995; Arvis et al., 2010; Raballand and Macchi, 2009). In addition, the operating
capacity of the railway system has also been impacted. In the last ten years Tanzania has lost its
major market share on freight long-haul transport corridors to the already congested road system:
only 130,000 tons were transported by the railway system in 2013, compared to the 2 million tons
transported by train in 2003 (CPCS, 2012; CPCS, 2013; Nathan Associates, 2011).
In the next ten years, Tanzania’s government is planning an investment of $1.1 billion to revitalize
the railway system and to be able to accommodate the important transportation demand growth
expected in the area (Big Results Now, 2013; BNSF, 2009; CPCS, 2009; DB, 2009). Most of the
investment will be concentrated around the Central Corridor, which connects Dar es Salaam
(Tanzania’s main port) with both Mwanza (Lake Victoria) and Kigoma (Lake Tanganyika). In
addition, Tanzania’s government foresees the implementation of open-access rail that 1) could ensure
42
adequate level of service, and 2) could ensure availability of resources to maintain the system, as the
key component to ensure the sustainability of this investment. This would help avoid
underinvestment in rail in the future.
In this research, we first discuss why in the context of Tanzania, the use of access charges
proportional to the level of service (such as trains operated, distance traveled by the trains, or trains
weight) would result in an open-access rail where rational train operators operate fewer trains than an
integrated railway company (social planner). We then propose capacity pricing schemes for
containerized traffic under which rational train operators would offer the same level of service as a
social planner. The discussion is then extended to consider multiple services, such as non-
containerized general cargo, in addition to containerized freight traffic.
A financial model developed following (PPIAF et al., 2011; World Bank, 2014) has been used to
analyze the behavior of an integrated railway company and an independent train operator. The model
assumes rational companies, i.e. they determine the level of service (number of services per week) by
maximizing the annual operating margin (operating profits). An independent train operator would
only be sustainable, and hence, would only operate trains if the average annual net cash flow is
positive after remunerating any invested capital at an adequate rate of return (no operation subsidies).
The integrated railway company faces capital costs associated with the investments in railway
infrastructure (both for rehabilitation of the system and for periodic maintenance), variable costs of
operating trains (train lease, personnel, fuel), and obtains revenues from transporting freight. The
revenues are determined multiplying the freight transported (minimum between capacity of trains
operated and the demand) by the freight shipping rate. Due to the strong competition from trucks,
railway companies have low control over the shipping rate and the maximum demand percentage
that would likely shift to rail. The vertically separated case is similar: the train operator faces cost of
accessing the tracks (access charges), variable costs of operating trains, and obtains revenues from
transporting freight. The infrastructure manager faces investment costs in railway infrastructure,
maintenance costs, and obtains revenues from access charges.
Our findings show that the social planner will operate a train if the additional revenues produced are
higher than the additional variable costs to operate it. While making this decision, the cost of
infrastructure investment is a sunk cost for the social planner: it is a cost already made and it is
independent of the level of service. However, when the access charges of the system are for instance
proportional to the average train weight, the infrastructure investment is charged as a variable cost
for train operators. Therefore, a rational train operator will only operate a train if the additional
revenues produced are higher than the variable costs to operate it plus a variable share of the
infrastructure cost. In general, this would result in a mismatch between the levels of service offered
by a social planner vs. a rational train operator that will have incentives to operate fewer trains with
high load factors. We propose the use of capacity pricing schemes where the infrastructure costs are
not perceived as variable costs by train operators. This would ensure that the level of service
operated by rational train operators equals the one offered by an integrated railway company.
These results provide insight about the implications of different capacity pricing schemes, both for
Tanzania and other shared-use railway systems. These findings are valuable in designing capacity
pricing schemes that can ensure adequate levels of service, while also ensuring that the revenues
collected through access charges are enough to keep the system operative.
43
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44
Additional Material
Figure 1. Tanzania railway system map (World Bank, 2014).
Figure 2. Operating margin for different levels of service with variable and fixed access charges.
45
Sector-specific regulation and general competition policy as friends not enemies Authors
Mark Thatcher and Bernardo Rangoni
[email protected] [email protected]
Abstract
Introduction
Sector specific regulation and general competition regulation are generally seen as alternatives or
even as mutually incompatible. In the European Union (EU), they are characterized by important
differences in terms of institutional structures, legal powers, the distribution of powers between EU
and national regulators, and the discourse of aims and objectives. By focusing on the energy sector as
case study, the paper however argues that both sector specific and general competition regulation
have in fact operated in pursuit of similar aims, and in particular the expansion of large, especially
cross-border European firms. It concludes that this has resulted in a form of industrial policy
achieved through complementary sector-specific regulation and general competition policies.
Institutional differences
In the last decades we have observed a move from national monopolies, especially state-owned, to
liberalized and integrated markets. This process has been accompanied by a growth of different
institutional arrangements. In sector specific regulation, first the European Regulators Group for
Electricity and Gas (ERGEG) and then the Agency for the Cooperation of Energy Regulators
(ACER) have been tasked with facilitating the cooperation between national regulators and between
them and other actors (like transmission system operators), while parallel informal discussions have
taken place in the so-called ‘Florence process’. The Commission has enjoyed only limited direct
powers and even the powers of the EU level bodies remain circumscribed. At least in part for these
reasons, some have cautioned about the danger of over-wide national variations and of a ‘regulatory
gap’, besides the traditional risk of ‘capture’. In contrast, in competition regulation, the 1989
European Community Merger Regulation (ECMR) has empowered the Commission to take decisions
over large mergers. Merger control has thus been much more hierarchical and the Commission has
enjoyed stronger legal powers than in sectorial regulation. Those powers have been used extensively
in energy, which has seen many significant mergers. Moreover, general competition and sector
specific regulation have had a distinct focus. Whereas the chief goal of the former is preventing
market power, the main objective of the latter is ensuring access to essential facilities such as
networks. Sector regulation and competition regulation are therefore often contrasted and the
interplay between them is considered complex if not problematic.
Central arguments
46
Nonetheless, the paper argues that distinct institutional structures have, through different processes,
resulted in similar outcomes. By studying network access in the power sector, and notably
rulemaking processes within ‘stakeholder advisory groups’ to ERGEG and ACER (i.e., Project
Coordination Group, PCG; Ad Hoc Advisory Group, AHAG; and ACER Electricity Stakeholder
Advisory Group, AESAG), it shows that regulators and generators have been allied to develop cross-
border rules for building macro-regional and then a single-EU electricity market, often overcoming
opposition by transmission system operators and power exchanges. This finding is at odds with
general views that understand the relation between regulator and regulated industry as conflicting, as
well as with those that analyze it through the prism of regulatory ‘capture’.
The paper also examines Commission decisions under the 1989 ECMR between 1990 and 2009 in
the energy sector. Analyzing a dataset of energy mergers and then individual merger cases, it shows
that the Commission has approved almost all mergers, including by former ‘national champion’
firms, that there has been only one prohibition over 20 years, and that the outcome has been the
creation of larger European energy firms through mergers. It therefore finds that the European
Commission has in fact allowed most mergers or imposed only limited conditions, which contrasts
with the view that the ‘Commission has ended previous industrial policies of aiding ‘national
champion’ firms to grow through mergers and instead pursues a ‘merger-constraining’ policy of
vigorously using its legal powers to block mergers.
By explaining how their distinct institutional structures result in a common direction through
different processes, it suggests interpreting sector specific regulation and general competition
regulation as complementary. The wider implication concerns the objective of the single European
market and industrial policy, and namely is that ACER and the Commission can form coalitions with
each other and aid the development of larger European firms to deepen economic integration.
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50
Vertical Separation in Rail Transport: How Prices Influence Coordination? Authors
Miguel Amaral
57 bd Demorieux
72019 Le mans France
+33 2 43 20 64 76
Jean-Christophe Thiebaud
57 bd Demorieux
72019 Le mans France
+33 2 43 20 64 80
Keywords
Vertical separation, Regulation, Rail transportation.
Abstract
In the last two decades, major structural reforms have been implemented in most network industries.
Considerable attentions have been devoted by economists to the analysis of gas, telecom or
electricity industries and, surprisingly, relativity little notice had been paid to railways so far. Yet,
driven by the European institutions, the railway transport sector in Europe has also gone through
both institutional and organizational reforms during the last twenty years. A main objective of those
reforms was to break up the national monopolies in order to open up rail market services to
competition. Directive 91/440/EC was the first milestone to this process by introducing a degree of
vertical separation in the sector.
Directive 91/440/EC allows for different degrees of vertical separation and, as a consequence, four
main modes of organization can be found in Europe. A large body of the literature in industrial
organization analyses the pros and cons of vertical separation in network industries, especially in an
industrial economics perspective comparing the merits of the different vertical separation degrees.
Yet the coordination issues between the infrastructure manager and railway undertakings have not
led to any theoretical developments in the railway sector, despite being a central matter in the choice
of the governance structure.
The aim of this paper is to use the French rail sector example to shed the light on the crucial and
understudied impact of coordination costs. We focus on this process because both environmental
uncertainty and opportunistic behavior can arise. Our read on the situation is that with vertical
separation, the cost of coordination will increase because of the need for flexibility along the
allocation process while commitments in specific inputs are made. We believe indeed that this
51
approach may help identifying drawbacks arising with separation in the sector and, therefore,
providing public policy recommendations to prevent those failures when possible.
We develop a preliminary model using a normal form game explaining why inefficient outcomes
may arise in the railway sector when vertically separated firms have to commit ex ante on quantities.
Our paper highlights that a key step of the coordination between the infrastructure manager and the
operators is the capacity allocation process. The railway sector is facing uncertainty on the final
demand due to the overall length of this process. Therefore the attribution process was made very
flexible, both sides not having to commit to one another. Yet the firms have to commit themselves to
the total input they will need. This could lead to uncoordinated market outcomes, thus a loss of
performance for the railway sector. With vertical integration such outcomes should not arise given
the administrative control.
Our first results indicate that credible and effective price regulation can overcome the limits of
separation on the infrastructure side. On the other hand, if the market is not flexible enough, it may
become harder for railway undertakings to sustain an equilibrium with high output as the
downstream market is becoming more competitive.
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52
Competitiveness in the Energy and Telecom Markets Authors
Ian Alexander¹ and Daniel Wagner²,
Cambridge Economic Policy Associates
¹[email protected], ²[email protected]
Abstract
In this paper we investigate the relation between network regulation and competition in the retail
market by comparing the UK retail markets for energy and telecom services. The energy and
telecoms industries went through a process of privatisation and vertical unbundling in the 1980s and
1990s. On the European level the two sectors are going through a similar process of market
integration with a number of national champions establishing a pan-European footprint. However,
over the last decade there have been diverging views on the retail competition for household
consumers in the two sectors. There is growing political and regulatory concern about insufficient
competition in the energy sector while competition in the telecom sector is largely considered
healthy. As in most network industries, competition in the energy and telecom markets is directly
affected by the underlying network infrastructure. The regulation of both sectors aims at fostering
competition in the retail market while allowing the right price signals for long-term investment in the
underlying infrastructure.
We compare the two industries and their regulation regarding two research questions:
Are there systematic differences between the two industries that explain the perceived difference
in competitiveness? and
Are there lessons of successful regulation that can be learned and transferred between the two
sectors?
Our comparison starts with the privatisation and vertical unbundling of the industries in the 1980s
and 1990s and the regulation that remains in place for the incumbent network operators. Special
attention is given to the vertical value chain, including the link between wholesale and retail markets
and the interaction between network regulation and retail competition. We also look at recent trends
of regulatory interventions in the energy sector, for example the restriction of the number of retail
tariffs.
The next step of our research is to compare the structure of the two sectors, starting with the number
of major market players in the market, their scale, integration and vertical connection to other parts
of the value chain. We also look at observed consumer behaviour, in particular consumer awareness
and customer churn. This analysis draws on information collected by the UK energy regulator as part
of its recent retail reviews and on data from the telecom regulator’s annual Communications Market
Report.
53
Finally, we look for systematic differences that could explain different levels of competitiveness and
the diverging development of the two sectors since privatisation. We focus on infrastructure
competition, the impact of market segmentation on routes to market entry and on competition for
marginal customers. We briefly contrast commercial customers with household consumers and
consider the investment risk of market entry in both markets. We also consider the role of
complementary products and pressure from (partial) substitute products such as broadband internet,
mobile telecommunications, dual-fuel and other bundle services.
We conclude our paper by identifying areas of the energy sector where targeted regulatory
intervention could foster the successful development towards functioning competition as observed in
the telecom sector.
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