Bruno Liebhaberg: EU should re-think liberalisation of network industries

Bruno Liebhaberg [Photo © HorstWagner.eu, FEPS Europe/Flickr]

Bruno Liebhaberg [Photo © HorstWagner.eu, FEPS Europe/Flickr]

This article is part of our special report An industrial policy for Europe ?.

SPECIAL REPORT: Providing quality services at affordable prices should be the guiding principles of regulation of network industries, according to Bruno Liebhaberg who urges the Juncker Commission to reconsider the EU’s approach to liberalisation in sectors such as telecoms, railways and energy.

Bruno Liebhaberg is Director General of the Centre on Regulation in Europe (CERRE), an independent think tank specialised in network industries. He spoke to EURACTIV’s publisher and editor, Frédéric Simon.

CERRE has published a report with a number of recommendations to the European Commission regarding the regulation of network industries. What are your conclusions?

Firstly, there is an urgent need for the new Commission to reassess the results of liberalisation, opening to competition and internal market objectives.

When Europe decided to go down the path of opening network industries to competition, clearly the objective was to achieve more efficient, innovative services and affordable prices for consumers. The liberalisation process was sometimes carried out on the assumption that competition would bring about efficiency and welfare gains. This assumption proved correct in a number of cases (for example, in telecoms), but in some sectors (for example, postal services), it seems in retrospect that policymakers might have overlooked that much of these gains would likely come from reduced labour costs. It would be wise to avoid this misstep in the current round of debate around the internal market in network industries.

Sometimes, the tools for achieving a number of results – liberalisation and market opening – became objectives in their own right. We now see the results of this.

The facts are there. We are far from having optimal services at affordable prices in all network industries across the EU. In addition, in a number of these sectors the environment is not geared to incentivise operators to make the large investments crucially needed in, for example, energy generation and infrastructure, electronic communications’ networks or rail transport.

Our report to the New European Commission – prepared by a group of 18 top-level academics and published on 18 June – recommends to the new College to make a thorough assessment of the situation in Europe’s network industries, based on the last 20 years’ experience.

 The questions to be addressed are straightforward: ‘What has been done? What has worked? What has not worked? Why has it not worked?’

In Britain, the rail transport sector – and the ‘unbundling’ of infrastructure and services – is often cited as an example of liberalisation gone wrong. Is this a fair assessment?

The problem in Britain has not been the failure to provide attractive services – traffic has boomed – but the failure to control costs, and unbundling has been a significant factor here.

There has been, however, intense competition for British franchises, whereas few countries have seen much competition in the passenger market. So it is probably franchising in a different way – (vertically integrated franchises or deep alliances with Network Rail, the infrastructure manager – that is the answer for Britain. But the solution will vary with circumstances.

Going beyond the UK, what is absolutely necessary for competition to take place is to ensure that there   are no barriers to entry in all member states, which is not currently the case. This is because there are shortcomings in regulation processes and systems. More concretely, fees for access to infrastructure should be set by the infrastructure manager with the approval, implicit or explicit, of an independent regulator. The manager should obviously be working independently of the incumbent operating company. This is the case in the UK, but not always in other member states.

In France, for instance, the Cuvillier Law, which has led to industrial action including a long strike in the rail sector, initially included a provision that ARAF (the regulator) would be stripped of its current power to approve the price set by the infrastructure manager (currently RFF, tomorrow SNCF Infrastructure), to allow rail operating companies, including potential competitors to SNCF, to have access to the tracks.

The role of the regulator in examining the efficiency of the infrastructure manager and approving track access fees is crucial. It is an essential element of the EU’s railway packages.

If regulators need not any more validate access prices to the infrastructure of natural monopolies and if, simultaneously, no thorough unbundling is required, how do you expect competition to increase, services to improve and prices to be kept on check?

What lesson do you draw from the French case?

The message is straightforward. Achieving competitiveness on the basis of efficient, quality services and lower prices requires a delicate balancing act. It demands a combination of structural and institutional measures, and clearly set responsibilities for each player involved, including regulators. The latter must be independent, accountable and efficient. Finally, the path chosen to open the market to competition is also critical.

The difficulty is that all the above conditions must be achieved simultaneously. The rail sector in the UK is a good example. Britain has one of the most sophisticated and most experienced rail regulators in Europe. An expert regulator is, however, not sufficient.

Would you recommend coming back on the unbundling when it comes to rail?

We are realistic. In the CERRE Regulation Dossier to the New European Commission, we clearly recommend not to insist on unbundling of ownership. There is no strong economic argument justifying doing so. If it works in a number of countries, fair enough. But local situations, e.g. in France or Germany, cannot be disregarded.

Nevertheless, it is important to fully ensure that the part of an integrated rail transport incumbent that deals with infrastructure management operates in a way that market access is guaranteed to all, including new entrants, on equal and fair terms. That does not necessarily rely on changing the existing ownership structures.

Turning to the telecoms sector, the 1990s directives on unbundling were widely praised as something that worked well. Do you agree, or should some nuances be made?

In the last ten years, regulation of telecom has had a number of positive effects. It is a sector where the combination of liberalisation and regulation has worked, with decreasing prices for consumers and new, innovative services.

However, the sector has changed dramatically since the 1998 Directives (revised in 2002) were introduced. Think of the wave of change brought about by OTTs, or the success of cable networks. Changes are therefore required to adapt to the new landscape.

Overall, we think that a more dynamic view of regulation is warranted, paying particular attention to the long –term implications of regulatory interventions, and that a more symmetric application of rules between competing platforms and services should apply.

I will give you some other specific examples of where we think changes are needed. Firstly, the current access rules needs to be updated. This involves, for example, fully reflecting the development of NGA networks as it is happening, with a leading role being played by hybrid copper/fibre networks and cable networks. It also requires taking into account the possible trade-off between low prices and higher investments, and looking more closely at how the availability of multiple wholesale access products impacts the incentives to invest for both the incumbent and the alternative networks.

Secondly, to ensure a level-playing field between incumbent operators and alternative network providers, it could be considered that, for instance, activations of new lines and repair services could, instead of being provided by the incumbent personnel, be outsourced to external technicians certified and trained by the incumbent. This would reduce the risk of non-price discrimination and improve the condition for effective competition. NRAs should become active in this direction when there is evidence of such non-price discrimination by incumbent telcos.

Thirdly, the principle of technological neutrality should be applied more pervasively to ensure there is a true level playing field. In practice this means that the same rules should apply to all alternative platforms (cable including), and to all competing services, independently of the platforms on which they are provided. OTT services and legacy communication services should therefore be treated the same when they are functionally substitutable for each other.

Fourthly, on spectrum, the incoming Commission should lay the groundwork to make harmonisation of spectrum policies feasible in the medium to long run. There is also still considerable differential treatment among mobile firms and broadcasters, which is difficult to sustain and leads to several technical and economic inefficiencies.

Finally, we think that the Digital Agenda 2020 targets are not very helpful in their current form. The economic case behind some of the targets is not proven and not much direction is given on how to reach the targets. A review of those targets would therefore be warranted.

On next generation networks, the incumbent operators argue, that by forcing them to grant competitors access to their own network does not provide them with an incentive to invest in more high performance networks. Is this oversimplified, or do you agree with this analysis?

Access to essential facilities and bottlenecks, such as last mile connections, has been a key pillar of the telecom reforms since 1998. Traditionally such essential facilities have been owned and operated by former national monopolists. The changes in the telecom landscape in the past 10 years means that today different platform compete with each other. The issue today is to ensure that all competing platforms, including those of the former monopolists and cable networks, are treated the same, so as to ensure there’s a level playing field where competition and investments can thrive.

The issue of access to next generation networks needs to be approached from this perspective. Different approaches to this problem have merged in Europe, generating different results. The right approach for one country will crucially depend also on the local conditions and consumer preferences.

The CERRE Dossier does not express a preference for one approach over the other, but sets out what principles should be common to all approaches to the regulation of access for next generation networks: a level playing field between competing platforms, a regulatory framework that gives the right incentives for investments to all competitors, and a more dynamic view of regulation which takes fully into account the potential trade-offs, at least in the short-term, between low prices and investments.

The new rules on roaming make things easier when you travel abroad. You do not have to choose, you know you have a price ceiling…. Is it not easier for the consumer?

We do not see any economic rational to what is happening for roaming. Of course, as consumers, we are happy; we can all go on holidays this summer and we’ll be able to make and receive calls at lower prices.

However, the EC Regulation of roaming prices at the retail level requires a sound justification to remain in place. In its present state, we think that the European Commission is not following its own principles, for example on proportionality of intervention, evidence-based policy making, and relying on competition as much as possible.

It is easy to understand why capped retail roaming prices are popular, but we see this regulation as an overly interventionist measure with possibly negative overall effects for consumers. Firstly, retail regulation should be the last resort only when wholesale regulation and the promotion of competition alone cannot fix the problem. Fixing retail prices inhibits competition. In this sense, at the wholesale level, we think that unbundling requirements of roaming services at the wholesale level, as provided for by the so-called Roaming III Regulation, appears to be a more appropriate policy.

Secondly, we think that a proper evaluation of such a regulatory intervention makes it necessary to take price effects in related markets into account. Would we as consumers still accept low roaming prices if this meant that the prices of domestic calls would go up? This type of analysis, to our knowledge, has not been done.

The fibre question is often cited by the telecom operators. What is your view on that particular market? Is ownership unbundling helpful?

As I said before, you have to look at the local conditions of each market to assess what is the best approach. The CERRE Dossier does not express a preference for one approach over the other, but sets out what principles should be common to all approaches to the regulation of access for next generation networks: a level playing field between competing platforms, a regulatory framework that gives the right incentives for investments to all competitors, and a more dynamic view of regulation which takes fully into account the potential trade-offs, at least in the short-term, between low prices and investments.

Centrally planned economies, like China, find it easier to do large-scale investments in heavy network industries. Does this not teach us a lesson in Europe as to the merits of planification, or maybe even ownership?

First of all, you have to recognise the differences in the starting points and economic conditions. In Europe we have had universal coverage for network services for many decades. This has given us, historically, an advantage, but it also poses the problem of financing costly upgrades. China, which started from a very different situation, can move straight to next generation infrastructures. This is cheaper than having to upgrade existing ones. In addition, China’s economic growth has benefited all sectors by allowing huge investments, including in network industries, at a time when Europe’s economies have slowed down considerably.

 More importantly, we have a system of rules in Europe which is built on democracy and freedom, market economy, a strong sense of solidarity and a special relationship to the environment. These four sets of features are the pillars of the ‘European model’. Therefore, many aspects of the Chinese approach are simply not applicable to Europe.

The lesson from a market like China that we can, however, take on board is the value of having a big, seamless internal market. We need to continue to build Europe’s internal market so that the benefits from economies of scale and scope can be increased and shared among businesses and consumers in Europe. In order to achieve that, the Commission has to take a lead to ensure harmonization and consistent implementation of rules.

Do you see the next Commission adopting a new political orientation towards network industries that could act as a guiding principle for all of them?

We would certainly encourage the new Commission to do so. As we say in our recommendations, the incoming Commission has to build on Europe’s 20-year experience with the liberalisation of network industries, while having the responsibility to adapt the existing framework to take into account of what has worked well and what has not done so. We expect the incoming Commission to embrace this task, starting in most network industries with an objective assessment of the pros and cons of the current approaches in the light of a more dynamic view of the regulation in those markets.

It will be interesting in this respect to see the stance that Vice-President Timmermans, in charge, among others, of the Better Regulation agenda, takes on the regulation of network industries.

We think there are some clear areas for improvement across all network industries. For example, in most network industries, EU-level regulatory action should now focus on simplifying existing rules and ensuring proper implementation and enforcement rather than introducing new rules.

There is also scope to improve the way rules are adopted at the European level. In our Dossier, we note that the growing convergence between sectors should lead to more systematic cooperation and possibly to reorganisation of those DGs involved in the regulation of network industries.

In this respect, the new structure of the Junker Commission, with seven Vice Presidents overseeing the work of all other Commissioners, seem to go in this direction. The Commission’s ability to propose to the Council and to the Parliament policies which are integrated, consistent, and clear to understand, and then to communicate these policies to the stakeholders and the general public will also depend on how well this new structure responds to the need for greater cooperation and coordination among Commissioners.

Why do you think Barroso did not do this? He had two mandates, although you could argue that for the first mandate, he did not have internal knowledge of the Commission. But after almost 10 years, could he not have done it? What is your recommendation to the Juncker Commission?

I do not think that looking backwards would help at this stage. We urge the new President and his colleagues to realise that if quality network industry services are not provided to all at affordable prices, unsatisfied users and consumers will also be frustrated citizens.

And that, as such, good regulation of network industries is part of the public face of good governance. It is politically loaded and not just a technical dossier to be left to civil servants and industry experts. If President Juncker’s ambition is to take the EU forward and to reweave the relationship between the citizens and the institutions, we do hope that our message and the analyses and recommendations contained in the CERRE Regulation Dossier to the New European Commission will be listened to and carefully considered.

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