The Relationship Between Regulation and Competition Policy for Network Industries

One of the central questions facing the regulatory and competition authorities is whether to delegate the regulation of the potentially competitive elements of the utility to specialised regulatory agencies, or whether they should be solely subject to normal competition laws enforced by the competition authorities – often referred to as ‘light-handed regulation’. German electricity and New Zealand utilities exemplify this approach, with the United States at the other extreme in granting considerable powers to federal regulatory agencies. Britain evolved a system of licensing the majority of network activities, including the larger part of the potentially competitive services such as electricity generation and supply, gas trading and supply, and mobile telephony. The EU, in contrast, has always placed more emphasis on the application of competition law, and has sought to make sector regulation consistent with general competition law. This is most clearly evident in the 2003 EU Communications Directives which required considerable changes on the British approach to telecoms regulation. The paper discusses the appropriateness of this approach for telecoms and electricity. Post-modern utilities like telecoms, in which facilities-based competition is possible, lend themselves to the approach laid out in the Communications Directives. Regulators must first determine whether markets are effectively competitive or suffer from Significant Market Power (SMP). Only in the latter case is ex ante regulation warranted, and then only if it is necessary, justified and proportionate. The paper considers how this approach works in the case of mobile call termination, and the implications of restricting regulation solely to the market experiencing SMP. Electricity does not fit comfortably into this approach, in part because the wholesale market is more likely to suffer from collective dominance than the single firm dominance that allows for an easier determination of SMP. Licence conditions are no longer needed under the Telecommunications Directives, but appear to retain advantages for electricity, where information and continuing market surveillance are desirable, and where it may be necessary to modify market rules in a timely and well-informed manner. The paper considers the example of the English Electricity Pool, which suffered from tacit collusion in the period 1996-99, and the unsuccessful attempts of the regulator to impose a Market Abuse Licence Condition. JEL: G18, L94, L96