1-may-15 1 network unbundling and the cost of misaligned coordination: lessons from electricity and...

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

g.brunekreeft@jacobs-university.de

November 22, 2013CRNI annual conference, Brussels

http://www.germany.info/Vertretung/usa

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”)

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

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

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.

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

g.brunekreeft@jacobs-university.de

http://www.germany.info/Vertretung/usa