Competition issues in network industries Russell pittman Antitrust division, u.s. department of justice Ukrainian competition forum Kyiv, Ukraine, 2-3 march 2017 The views expressed are not necessarily those of the u.s. department of justice

Competition Issues in Network Industries The issue: “natural monopoly” networks and potentially competitive services Sector Railways Electricity Natural Gas Telecoms Water Network Track and Infrastructure Long-distance Transmission and Local Distribution Lines Pipelines “The Last Mile”: Wires to Homes and Businesses Pipes Potentially Competitive Services Train Operating Companies (Freight and Passenger) Generation Exploration, Development, and Production Internet, Cable TV Extraction and Purification

The debate: competition? How? Competition Issues in Network Industries The debate: competition? How? Assume networks are a natural monopoly – though this is not always the case Can competition be created “upstream”? Not always realistic, especially in electricity Not always worth the effort, especially in water If so, should the network operator be vertically integrated into service provision? Mainstream economists: Of course not – it will always discriminate against independent providers New institutional economists (and incumbents): Of course it should – otherwise lose valuable economies of vertical operation

Issues for the competition authority – and policy makers Competition Issues in Network Industries Issues for the competition authority – and policy makers If network operator vertically integrated (or still affiliated) into services Incentives for network operator to discriminate against independent providers Price, but also terms of service Details depend on sector, but detection and proof of discrimination often difficult “Separate accounts” often tried, not always successfully If network operator not vertically integrated into services Network operator has a monopoly (though not always true monopoly power) Thus incentives to charge high prices and offer inferior service. Common strategy: require purchase of meters or other complementary products at unregulated prices Addressing this is usually the regulator’s job, but if the regulator is weak, may fall to the competition authority by default In some countries this is the most common type of “abuse of dominance” case brought by the authority

Promoting competition: as much art as science Competition Issues in Network Industries Promoting competition: as much art as science Situation-specific application of standard competition agency tools Sometimes requires finding the “binding constraint” on competition Frequently this has to do with barriers to entry into the market Two recent USDOJ case examples US Air/American Airlines merger: settlement involved divestiture of “slots” in slot- constrained airports NYC tour buses: settlement involved divestiture of permits for particular bus stops near major tourist attractions

Competition Issues in Network Industries For policy makers (and competition authorities engaged in competition advocacy): some broader issues Investment in the Network Traditionally the “Achilles heel” of government-owned infrastructure Look for ways to attract private investment Does the “natural monopoly” actually have monopoly (or market) power? Telecoms: Mobile and cable TV can compete for households, businesses Railways: Motor carriers and water carriers can compete for much – not all – freight traffic Sectoral issues: Electricity Effective competition difficult without “plenty of cheap natural gas” Sectoral issues: Railways “Horizontal separation” has worked well in some countries Sectoral issues: Water Most important issue is often ancient, deteriorating network – creating competition for extraction and purification does nothing to address this