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1-May-15 1 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, 2013 CRNI annual conference, Brussels http://www.germany.info/V ertretung/usa
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Unbundling and Electricity GB 1-May-15 2 EU: First directive 1996/92/EC ► Unbundling: accounting separation Non discriminatory network access Prevention of cross-subsidies Transparency EU: Second directive 2003/54/EC: ► Legal, functional and managerial unbundling Legal unbundling Managerial unbundling Personnel split Independent 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: –4 th 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 2013 EU-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 1-May-15 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 1-May-15 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.” GB 1-May-15 5
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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 GB 1-May-15 6
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regulation versus unbundling dilemma GB 1-May-15 7 ► 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 GB 1-May-15 8
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1-May-15 9 Thank you! Gert Brunekreeft Jacobs University Bremen g.brunekreeft@jacobs-university.de http://www.germany.info/V ertretung/usa
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