The illusions of competition in the water sector: a response to the OFWAT/Cave consultations on introducing competition in the water sector in England and Wales

The paper provides a critical review of the role of liberalisation and competition in the water sector, based on empirical evidence from the UK and internationally. The paper is submitted as evidence to the official reviews of competition in water sector in England and Wales

Vertical separation of the energy-distribution industry; an assessment of several options for unbundling

The Dutch Minister of Economic Affairs has proposed to replace the currently implemented structure of legal unbundling of the energy distribution industry by ownership unbundling. In this study we analyse the costs and benefits of this proposal. We compare the proposal�to the current situation and to two alternative options that strengthen legal unbundling. We identify four mutually-related categories of benefits: better performance of networks, more efficient regulation, improved effectiveness of competition, and benefits of privatisation; and three categories of costs: one-off transaction costs, loss of economies of scope and the risk of less investment in generation. The analysis highlights that the benefits depend on the future development in small-scale generation and on allocation of the management of transmission networks. Mainly because of the uncertainty about the future role of small-scale generation and the uncertainty about the magnitude of the one-off transaction costs related to cross-border leases, the net welfare effect of ownership unbundling at the distribution level is ambiguous. We identify an alternative route for achieving some of the benefits considered.

Regulating privatized rail transport

Traditionally, transport regulation has been viewed as an exercise in second-best optimization, acknowledging the existence of huge information problems. Then the rail industry was deeply restructured worldwide to halt erosion of the sector's share of transportation markets. Restructuring took different forms in different countries, ranging from simple reorganization measures to extreme restructuring -with the private sector increasingly participating in the sector and with the provision of infrastructure separated from the provision of services. The authors argue that regulation of the rail industry cannot remain unaffected by these changes. New regulatory scenarios and issues have emerged. For example, contracts have to be defined for private participation and quality surveillance instruments must be defined. Traditional price controls have to be adapted to, and mechanisms designed to manage and plan infrastructure investments in, the new environment. Restructuring has brought new problems, too. Where licenses have been used, for example, several concessionaires have been unable to meet the objectives spelled out in the concession contract. Contracts should be flexible enough to take account of novel situations that may affect company performance. And yet, for the system to be credible, there cannot be systematic, unjustified deviations from the franchise objectives. Regulation of the sector should be simple and flexible, with license contracts designed to include the private sector and with industry organization adapted to local circumstances. Regulation should be governed by principles that foster competition and market mechanisms, wherever possible. At the same time, it should provide a stable legal and institutional framework for economic activity. Otherwise, regulators should refrain from intervening in the market-unless the goal of economic efficiency (subject to the socially demanded levelof equity) is in jeopardy.Municipal Financial Management,Banks&Banking Reform,Decentralization,Enterprise Development&Reform,Public Sector Economics&Finance,Railways Transport,Banks&Banking Reform,Municipal Financial Management,Water and Industry,Public Sector Economics&Finance

Organisational Structures in Network Industries – An Application to the Railway Industry

This paper analyses the incentives to upgrade input quality in vertically related (network) industries. Upstream investments have a biased effect on the downstream companies and lead to vertical product differentiation. Different vertical structures such as vertical integration, ownership and legal unbundling lead to different investments. We find that, without regulation, vertical integration and legal unbundling regimes provide highest investment incentives and lead to highest welfare. However, we also find foreclosure in the downstream market if the potential degree of horizontal product differentiation of the entrant is low. Under ownership unbundling, investment incentives are lower but there is never foreclosure of the entrant since this would worsen double marginalisation. When the network operator is subject to a break-even regulation, the investment incentives are crowded out under legal and ownership unbundling whereas they remain nearly unchanged under vertical integration. Welfare and co umer surplus decrease under legal unbundling, but increase under the two other regimes.Vertical Integration, Investment, Foreclosure, Regulation

Privatising Network Industries

privatization, regulation, competition, telecoms, electricity, gas, water, rail

Railway reforms: Do they influence operating efficiency?

This paper considers railway operations in 23 European countries during 1995-2001, where a series of reform initiatives were launched by the European Commission, and analyses whether these reform initiatives improved the operating efficiency of the railways. Efficiency is measured using Multi-directional Efficiency Analysis, which enables investigation of how railway reforms affect the inefficiencies of specific cost drivers. The main findings are that the reform initiatives generally improve operating efficiency but potentially differently for different cost drivers. Specifically, the paper provides clear empirical evidence that accounting separation is important for improving operating efficiency for both material and staff costs, whereas other reforms only influenced one of these factors.European railways; reforms; operating efficiency; Multi-directional Efficiency Analysis (MEA)

The reform process of the railway sector in Europe: A disaggregated regulatory approach

The railroad package of 2001 focusing on access regulation is in the process of a reform. Particularly, the European Commission intends to remove the obstacles to fair competition that have been identified since 2001. In this context, the paper points out the relevance of the disaggregated regulatory approach. It is necessary to differentiate between infrastructure components which are monopolistic bottlenecks (e.g. railway tracks) and competitive components (e. g. service functions like ticketing). Competition on the markets for railway transport services requires non-discriminatory access to the railway infrastructures. As well the horizontal interoperability between national railway networks is a prerequisite that full competition on European markets for railway services can evolve. Train access charges should provide incentives for the different track companies to participate in collaborations offering international cross-border based track capacities, whereas a regulatory prescription of international track corridors conflicts with the competence to allocate the track capacities of the different track companies. Finally, the complex question of the interplay between discrimination and the deficit problem is addressed in order to present solutions to avoid crosssubsidization between track infrastructure and markets for transport services and to guarantee the efficient usage of public funds. --

The Economics of EU Railway Reform. Bruges European Economic Policy (BEEP) Briefing 8/2004

The EU began railway reform in earnest around the turn of the century. Two ‘railway packages’ have meanwhile been adopted amounting to a series of directives and a third package has been proposed. A range of complementary initiatives has been undertaken or is underway. This BEEP Briefing inspects the main economic aspects of EU rail reform. After highlighting the dramatic loss of market share of rail since the 1960s, the case for reform is argued to rest on three arguments: the need for greater competitiveness of rail, promoting the (market driven) diversion of road haulage to rail as a step towards sustainable mobility in Europe, and an end to the disproportional claims on public budgets of Member States. The core of the paper deals respectively with market failures in rail and in the internal market for rail services; the complex economic issues underlying vertical separation (unbundling) and pricing options; and the methods, potential and problems of introducing competition in rail freight and in passenger services. Market failures in the rail sector are several (natural monopoly, economies of density, safety and asymmetries of information), exacerbated by no less than 7 technical and legal barriers precluding the practical operation of an internal rail market. The EU choice to opt for vertical unbundling (with benefits similar in nature as in other network industries e.g. preventing opaque cross-subsidisation and greater cost revelation) risks the emergence of considerable coordination costs. The adoption of marginal cost pricing is problematic on economic grounds (drawbacks include arbitrary cost allocation rules in the presence of large economies of scope and relatively large common costs; a non-optimal incentive system, holding back the growth of freight services; possibly anti-competitive effects of two-part tariffs). Without further detailed harmonisation, it may also lead to many different systems in Member States, causing even greater distortions. Insofar as freight could develop into a competitive market, a combination of Ramsey pricing (given the incentive for service providers to keep market share) and price ceilings based on stand-alone costs might be superior in terms of competition, market growth and regulatory oversight. The incipient cooperative approach for path coordination and allocation is welcome but likely to be seriously insufficient. The arguments to introduce competition, notably in freight, are valuable and many e.g. optimal cross-border services, quality differentiation as well as general quality improvement, larger scale for cost recovery and a decrease of rent seeking. Nevertheless, it is not correct to argue for the introduction of competition in rail tout court. It depends on the size of the market and on removing a host of barriers; it requires careful PSO definition and costing; also, coordination failures ought to be pre-empted. On the other hand, reform and competition cannot and should not be assessed in a static perspective. Conduct and cost structures will change with reform. Infrastructure and investment in technology are known to generate enormous potential for cost savings, especially when coupled with the EU interoperability programme. All this dynamism may well help to induce entry and further enlarge the (net) welfare gains from EU railway reform. The paper ends with a few pointers for the way forward in EU rail reform