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Regulation
of Network Industries The regulation of ‘network’ industries – such as telecommunications, energy, transport and water – has emerged as a key issue on the European policy agenda. Yet there has been very little high-quality economic analysis capable of guiding European policy-makers. A new CEPR series, Monitoring European Deregulation (MED), is intended to rise to that challenge. Produced in collaboration with the Swedish Center for Business and Policy Studies (SNS), MED will offer the results of new policy-oriented research on the key questions surrounding the liberalization of Europe’s major network industries. The
first report in the MED series, entitled ‘Europe’s
Network Industries: Conflicting Priorities: Telecommunications’,
was published in July 1998. The report is written by Lars
Bergman (Stockholm School of Economics), Chris
Doyle (London Business School), Jordi
Gual (IESE, Universidad de Navarra, and CEPR), Lars
Hultkrantz (Dalarna University, Borlänge), Damien Neven (Université de Lausanne and CEPR), Lars-Hendrik
Röller (WZB, Berlin, and CEPR) and Leonard
Waverman (London Business School), and edited by Romesh
Vaitilingam (CEPR). The report is divided into two parts. In the
first part (chapters 1–7), the general principles governing
competition and regulatory policy for the network industries are
discussed in detail. The second part (chapters 8–13) focuses on the
telecommunications industry – a sector in which shifting patterns of
ownership and market structure, in combination with extraordinary
technological change, are creating enormous challenges for regulators at
both the EU and national levels. An appendix provides details of some
key European legislation and procedures. The report notes that the establishment of a single market, and the promotion of competition in Europe’s network industries – air, electricity, maritime, natural gas, postal services, telecommunications and rail – have been at the forefront of economic and industrial policy in Europe in recent years. These industries traditionally have been sheltered from competition and operated within national or regional boundaries, but deregulation in the late 1980s and 1990s has greatly changed their structure. Whereas at one time most European consumers had little or no choice over the supplier of a network service, today there is an increasing number of firms operating in most of these industries, none more so than in the airline services and telecommunications industries. Although
deregulation has brought competition to Europe’s network industries,
regulation is still at the centre stage of activity. Indeed, the
conflicts between competition and monopoly, and market forces and
regulation, give rise to many challenging policy problems. The report
addresses these problems by exploring ten conflicting priorities that
European policy-makers face in defining an appropriate competition- and
regulatory-policy framework for the network industries. The report
stresses throughout that appropriate policy should take due account of
dynamic considerations, for otherwise investment and innovation, and
therefore consumer well-being and employment, may be adversely affected. While
competition has been or is being introduced into Europe’s network
industries, several factors, if left unchecked, will constrain its
effectiveness: a history of monopoly control; widespread public
ownership and state aids; political and institutional diversity;
public-service objectives; and the need for network interconnections
between rival firms. For these reasons, regulatory scrutiny perhaps is
needed more in the network industries than in most other European
industries. The
opening chapter identifies three phases of market structure as crucial
to the network industries. Here it is shown that deregulation means that
the network industries in Europe are evolving along a path from monopoly
(phase 1), to monopoly and competition (phase 2), and possibly to
competition (phase 3). Today, most European network industries lie in
phases 1 or 2. This combination of monopolistic and competitive
elements, however, gives rise to many problems. Somewhat paradoxically,
when a network industry is opened up to competition at the beginning of
phase 2, more – rather than less – regulation is required. Over
time, however, competition should become more effective during phase 2
and the need for regulation should diminish. Chapters
2 and 3 look at the vertical structure of network industries, outline
the significance of these industries to the European economy, describe
the economic characteristics of network industries, and explore the
importance of natural monopoly, oligopoly, interconnection,
externalities, coordination, standards and convergence. In chapter 4,
ten conflicting priorities are identified as characterizing the
regulatory environment in European network industries in phase 2. These
are: short-term versus longer-term objectives; efficiency versus equity;
competition versus monopoly; slow versus fast liberalization; public
versus private ownership; sector-specific regulation versus general
competition law; rules versus discretion; permanent versus temporary
regulation; centralized versus decentralized regulation; and
light-handed versus heavy-handed regulation. Each conflicting priority
is examined in detail and the implications for policy are discussed. Chapter
5 offers a detailed description of deregulation in the network
industries in Europe. This commences by looking at the relevant articles
in the European Treaty guiding European deregulation policy. This
includes a discussion on state aids, followed by a detailed exposition
on European deregulation in each of the industries. The chapter also
contains a discussion on country-level deregulation, which includes an
assessment of the experience in the United Kingdom. Chapter
6 provides a thorough account of the economic principles that shape
policy in phase 2. This includes a discussion of policies designed to
prevent monopoly abuse in both retail and interconnect markets. In
addition to considering policy that is directed towards achieving
economic efficiency, the chapter also looks at equity and the role of
universal service. This
assessment of the principles of economic policy and the way in which
deregulation has occurred is followed, in chapter 7, by a normative
account of the role played by regulators and regulatory institutions.
Both the form and level of regulation are discussed in detail. The
report suggests that a two-tier regulatory structure, which builds on
existing practice in Europe, would be likely to yield a more robust
regulatory environment. In particular, it highlights the need for more
central authority in some areas of competition and regulatory policy.
This could be achieved by strengthening existing institutions in Europe,
rather than through the establishment of new European regulatory
authorities. The
second part of the report focuses specifically on the telecommunications
industry. The first four chapters set out to establish and discuss the
nature of the industry, the existing regulatory framework and the chief
areas of concern for policy-makers. Chapter 8 describes how the industry
is still shifting in various directions. It argues that it is no longer
straightforward to define what is meant by ‘the telecommunications
industry’, as convergence and other factors are blurring traditional
market boundaries. In chapter 9, European deregulation in the
telecommunications industry, and the role of the European Commission,
are discussed. The report points out that there is not yet a single
market for telecommunications in Europe, as there is still considerable
diversity in policy implementation and other areas among the EU member
states. In
chapter 10, the key policy issues surfacing as the industry moves into
phase 2 are examined. The authors identify the obstacles to effective
competition and discuss the problem of regulating prices. They pay
particular attention to interconnection and unbundling. Chapter 11
assesses the social impact of telecommunications with a detailed
analysis of policy on universal service. The
last two chapters are forward looking, addressing the required
institutional, regulatory and other policy frameworks. Three options are
considered for the institutional and regulatory framework: (1) A
European Communications Commission; (2) Self-regulation through an
affiliation of national regulators; and (3) Two-tier regulation aimed at
greater harmonization. The report argues that the third option, which
implies building on the existing two-tier system of regulation, is the
preferred way forward. Finally,
the authors present a variety of policies as suitable for taking the
European telecommunications industry forward towards a competitive
market structure. They examine the risk that new national or Europe-wide
regulation will tilt the playing field in favour of some competitors
with potentially detrimental consequences both for consumers and for the
long-term development of the industry. The recommendations emphasize the
need to ensure that policy is designed and implemented so that
objectives are attained, while still preserving desirable investment
incentives. One proposal is for symmetric regulation between incumbents
and entrants. Universal service is seen as a problem area and the report
suggests that issues like internet access for schools properly belong in
education policy, and not in telecommunications policy. The need to
establish two-tier regulation, and to achieve greater consistency in
European competition and regulatory policy, is also reiterated. Europe’s
Network Industries: Conflicting Priorities: Telecommunications,
Monitoring
European Deregulation ISBN 1 898128 37 5 xxiii + 258 Please contact CEPR for details
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