The Governance of infrastructure regulation: An economist's view
INTRODUCTION: Network industries—electricity, gas, road, telecommunications, and private water supply—need regulation in one way or the other. Very often only one network operates in a given market. The expenses of developing a second network are substantial, and the first network often fully satisfies the demand for services. Counting on market forces to ensure better sector performance—in terms of prices, quality, and access for consumers—usually implies several firms offering services in the same network. Since there are limits to the number of suppliers in a network, competition has often been for the market, rather than in the market. Even if it is technically possible for a market to set prices, the price-setting process often fails to secure fair and undisputed competition between suppliers. There are many reasons for this—among them political support for price regulation, subsidies for consumers and suppliers, manipulation of supply to push prices up, and a dearth of firms in the market. Benitez and Estache (2005) highlight political resistance to reducing market concentration and skepticism toward private solutions. Despite the well-established understanding of the benefits of market forces in the countries of the Organisation for Economic Co-operation and Development (OECD), Benitez and Estache find Europe to be one of the regions where market concentration in network sectors (particularly electricity) is most intense.
Economists have studied the challenges and offered a steady stream of alternatives for governance of sectors in which network industries operate. Economic results have indeed had a huge influence on network sector regulation. How can it then be that welfare-promoting competition is so difficult, while surplus rents for firms and weak sector performance continue? Have economists failed to deliver practical policy recommendations? Or could it be that policy recommendations are not implemented as intended and thus fail to deliver results?
