Reliability in Network Industries

1
Reliability in Network Industries

• Rob Aalbers (OCfEB)
• Marcel Canoy (CPB)
• Elbert Dijkgraaf (SEOR)
• Adriana Perez (Toulouse)
• Victoria Shestalova (CPB)
• Sander Onderstal (UvA)

2
Introduction

• Network industries in the past
• State owned
• Cost-plus regulation
• Vertical integration
• Now and in the future
• Privatisation
• Liberalisation
• Vertical separation
• New types of regulation

3
Introduction

• Recent accidents
• Electricity black-outs Italy, US
• Gas explosions Den Haag, Amsterdam
• Train accidents Roosendaal, Amsterdam, UK
• The press, politicians, policy makers
• Does one cause the other?

4
Set-up

• What is
• A network industry
• Reliability
• Given the industrys characteristics
• what is the relationship between policy
• and reliability?
• Empirics
• Some conclusions

5
What are network industries?

• Supply via network infrastructures
• PLUS market power
• Technology
• Electricity distribution
• Legal constraints
• Post
• Monopoly
• Electricity distribution
• Tight oligopoly
• Mobile telecom

6
What are network industries?

• Utilities
• Electricity, gas
• Drinking water, waste water
• Communication
• Telecom, Internet, post
• TV, radio
• Transport
• Railways, public buses
• Harbours, airports
• Taxis (?)

7
What is reliability?

• Can the network deliver the demanded
• quantity?
• Is the water delivered?
• Leakage
• Breaks
• quality?
• What is the quality of the delivered water?
• Average chemical X in the water
• Not in accordance with standards
• Reliability depends on investments
• which depend on government policy

8
What is reliability?

• Security of supply
• Reliability
• Lack of supply
• Quality
• Reliability
• Correctness of bills
• Friendliness at the information desk

9
What is reliability?
10
The network operator
11
Market characteristics

• Feasibility of competition
• Contractibility of reliability
• Convergence of commercial and public interests
• Characteristics vary
• between industries
• between countries
• in time
• in between extremes

12
Privatisation

• Schiphol
• Pro
• Solve fiscal problems
• Incentives to increase reliability
• Incentives to innovate
• Incentives to operate efficiently
• Commitment
• Con
• The government cannot guarantee public interests
• Incentives to abuse market power
• Cost cuts may lower reliability
• The option value of waiting

13
Privatisation works if (and only if)

• Competition between networks is feasible
• And introduced (liberalisation)
• Or Reliability is contractible
• And contracted upon (regulation)
• Or Commercial and public interests converge

14
Liberalisation

• Post
• Pro competition
• Incentives to increase reliability
• Incentives to reduce the price
• Incentives to innovate
• Incentives to operate efficiently
• Competition law is sufficient
• Contra liberalisation
• Competition is not always feasible
• Artificial competition

15
Regulation

• Electricity distribution
• Price regulation
• Cost-plus (low)
• Price-cap (high)
• Yardstick competition (high)
• Quality regulation
• Minimum quality standards (low)
• Compensation schemes (high)
• Yardstick (high)

16
Regulation

• Competition is feasible
• No regulation (beyond competition law)
• Reliability is contractible
• High, high
• Convergence of interests
• High, low
• Otherwise
• Low, low

17
(Vertical and horizontal) Unbundling

• Electricity distribution and supply
• Pro
• Facilitation of competition
• Efficiency and effectiveness of regulation
• Contra
• Foreign take-overs
• Hold-up of investment
• Real-time operation problems
• Double marginalisation
• Financial risks

18
Unbundling

• How to mitigate disadvantages
• Vertical contracts
• Competition
• Supplier of last resort
• Relationship between market characteristics and
  unbundling
• If competition is feasible leave it to the firms
• No further links

19
Commitment

• Railways
• Ratchet effect
• Commitment versus flexibility
• How to organise commitment?
• Privatisation
• Contracts
• Law
• Reputation
• Decentralisation to local governments
• Independent regulator

20
Empirical support for the theory

• Overview of the empirical literature
• Case studies
• Electricity
• Gas
• Drinking water
• Waste water
• Railways

21
Empirics

• Liberalisation
• Lower prices
• Reliability/quality is stable or increases
• Privatisation
• No effect of ownership on reliability
• More costs efficient

22
Empirics

• High powered price regulation
• Reliability improves under quality regulation
• Reliability improves when interests converge
• Reliability may go down otherwise
• More cost efficient
• Unbundling
• No clear answers
• Commitment
• No clear answers

23
Some conclusions

• A roadmap for optimal reliability
• Some empirical support
• The devil is in the details
• The roadmap is based on polar cases
• The roadmap is not a self-contained recipe