Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy The Limits of Unbundling in Rail and elsewhere 1

Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy Research question and arguments This is a critical reflection on unbundling: are there limits to unbundling? If yes, which ones? This has not really been done so far, most of the literature focusing on the (positive) effects of unbundling Yet, unbundling is before all a theoretical (and even an ideological) construct; one may therefore ask how well unbundling does in practice As such, it is part and parcel of the de-regulation (but not the privatization) agenda, i.e., a means to kill the monopolist But there are some real problems when unbundling, must of them pertaining to the technological nature of the infrastructures Mostly, these pertain to the fundamentally technological nature of the interfaces between the infrastructure and the services So, the question is: how far can and shall we go with unbundling? Railways is a perfect example, a paradigmatic case for this question 2

Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy Structure The idea (theory) of unbundling: what was/is unbundling for? The practice of unbundling: does it really happen? The problems of unbundling iin the different network industries Pursue or abandon unbundling? Summary: the limits to unbundling Are there alternatives to unbundling? 3

Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy The idea (theory) of unbundling Originally an idea by institutional economists: the sharp separation of the monopolistic element(s) of an infrastructure from its competitive element(s) ( organization preventing markets) this separation will allow for competition where no competition existed previously ( market creation) Once competition exists (somewhat), unbundling guarantees … - non-discrimination in the access to the infrastructure - non-biased investments (development of the infrastructure) The EU/EC has transformed unbundling into a political project (e.g., European integration) - one seamless European infrastructure - one single European (infrastructure services) market State of research on unbundling: mostly on the effects of unbundling on competition, market creation (sustenance), services, investments, etc. 4

Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy The practice of unbundling Quite rapidly, it was realized that unbundling cannot be put into practice (by the EC) from one day to the other, thus, the creation of an «unbundling ladder»: from accounting (imperfect) to functional to legal to ownership (perfect) unbundling However, many other forms exist and firms are quite creative when it comes to twist the unbundling norms. For example: - ISO in electricity - EDF-RTE model - SNCF-RFF model - Swissgrid model - the numerous hlding models - others, yet to be invented Overall, it is clear that firms do not unbundle by their own will; rather, unbundling is the result of political (EC) pressure: - via ownership - via regulation 5

Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy The problems of unbundling Unbundling, in many cases, cannot be done properly, owing to the technological nature of the infrastructures, i.e., the technical interfaces; examples abound: - ERTMS (Rail) - smart meters (electricity) - ATC communication systems (air) Regulating these interfaces does not always make economic sense and may turn out to be counter-productive (costs of regulation > benefits): - ticketing, timetables (rail) - balancing energy (electricity) - airport services (air) Un-bundling leads to re-bundling, owing to economies of scale and scope in the infrastructures: - franchising (rail) (instead of access competition) - implicit auctions (elecricity) (instead of explicit auctions) - vertical integration (ATC, airports) 6

Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy Pursue or abandon unbundling? Once competition has been created, (some) market forces push for further unbundling: - new entrants (which are generally not perfectly unbundled incumbents in their own countries) find market access without heavy investments - suppliers find business opportunities in the problematic interfaces (e.g., safety systems, smart meters) The European Commission has no alternative than to push for further unbundling: - in order to realize its political project of an European infrastructure a Single European market - regulation (of further unbundling) and strenghtening of regulators is its only policy instrument But there are numerous forces (besides technology), resisting/reverting unbundling: - firms (see above) - nation-states (supporring their firms) - nation-states worried about (national) security of supply and independence 7

Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy Summary: the limits to unbundling 1.Technological limits: the existence of technological interfaces: - operational interfaces - safety, emergency interfaces 2.Political limits: - security of supply (national independence) - nation-states resisting «regulatory Europe» - power of regulators triggering political reactions 3.Bureacratic/institutional limits: - regulatory bureaucracy and procedures 4.Economic limits: - regulatory costs 5.Firm behavior 8

Matthias Finger, PhD Swiss Post Chair in Management of Network Industries Director, Institute of Technology and Public Policy Are there alternatives to unbundling? There is no way back (to monopolies) However, competition in the network industries remains and will always remain limited «Perfect» unbundling is unattainable and pushing for it is economically and politically counterproductive Can we settle for: - a less perfect (unbunding) model? - with less powerful regulators? - a less perfect market? 9