1-may-15 1 network unbundling and the cost of misaligned coordination: lessons from electricity and...
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18 Apr 20231
Network Unbundling and the Cost of Misaligned Coordination:Lessons from Electricity and Railways
paper to appear soon on:http://b-e-r.user.jacobs-university.de/index.php/publications
Gert Brunekreeft
Jacobs University Bremen
November 22, 2013CRNI annual conference, Brussels
http://www.germany.info/Vertretung/usa
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Unbundling and Electricity
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EU: First directive 1996/92/EC
► Unbundling: accounting separationNon discriminatory network accessPrevention of cross-subsidiesTransparency
EU: Second directive 2003/54/EC:
► Legal, functional and managerial unbundlingLegal unbundlingManagerial unbundlingPersonnel splitIndependent decision rights for network maintenance. Firewalls
EU: Third Directive 2009/72/EG
► Option out of three:
1.Ownership unbundling
2.Deep-ISO
3.Independent Transmission Operator (ITO) (“third way”)
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Unbundling and Railways
Background:– 4th Railway Package 2013
EU-Commission, 2013, “The fourth railway package – completing the single European railway area to foster European competiveness and growth”, 31.01.2013, Brussels.
– Impact Assessment 2013EU-Commission, 2013, Impact Assessment, Brussels, 30.1.2013 SWD(2013) 12 final
Subgoal: “optimizing the governance of infrastructure management”
– Two “challenges”: •“Equal access challenge” •“Efficient management challenge”:
– Ensure better coordination/alignment between the infrastructure managers and rail operators
► Balancing between competition and coordination!GB 18 Apr 2023 3
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UK railways – McNulty-report
McNulty report 2011 for the UK-government on the UK railway system– UK railway system is a separation (unbundled) model
Two main conclusions:
► the UK railway system is significantly less efficient than comparable peers
• 40% inefficient!
► the main cause of the inefficiency is far-reaching fragmentation of the system
• leading to misaligned incentives GB 18 Apr 2023 4
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McNulty-report (cont’d)
“Barriers to efficiency” in more detail:– Fragmentation of structure and interfaces
– Ineffective and misaligned incentives
– Fares structures do not send efficient pricing signals
– The industry’s legal and contractual framework is complex
One of the main recommendations:“Closer alignment of route-level infrastructure management with Train
Operating Companies (TOCs), at one or other of the following levels:
– minimum – cost and revenue sharing, and joint targets; or
– intermediate – joint ventures or alliances; or
– maximum – full vertical integration through a concession of infrastructure management and train operations combined.”
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Cost of coordination: 3 sources
1. regulation versus unbundling dilemma– The combination of strict regulation and strict unbundling can quickly lead to
inefficient outcomes; see next slide
2. difficulties with optimal network charging– Distributional effects
– Legal constraints
– Informational constraints
– Unbundling itself: does the network charge reach the end-user?
3. strategic behavior resulting in misaligned incentives– Asymmetric information and incentive compatibility are real challenges
– Classical: sunk investment and long life duration, which is different for infrastructure and users
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regulation versus unbundling dilemma
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► Two numerical examples
Source: Brunekreeft, 2013, BEWP-DP 15, p. 11
► Either loosen regulation (revenue- and cost-sharing models) or loosen unbundling.
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Conclusions
In the unbundling debate, we need to weigh the benefits against the cost more carefully
We need to balance better between competition and coordination
Policy recommendation:– Either loosen regulation (revenue- and cost-sharing models) or
loosen unbundling– Find other innovative governance structures that strike a better
balance
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18 Apr 20239
Thank you!
Gert Brunekreeft
Jacobs University Bremen
http://www.germany.info/Vertretung/usa