Regulatory Economics: Recent Trends in Theory and Practice ACCC - - PowerPoint PPT Presentation

ACCC: PRK-July 04 1

Regulatory Economics: Recent Trends in Theory and Practice

ACCC 2004 Regulatory Conference July 29-30, 2004 Sea World Nara Resort Paul R. Kleindorfer University of Pennsylvania Kleindorfer@wharton.upenn.edu

ACCC: PRK-July 04 2

The Past 20 Years or So** (A Mostly U.S. Perspective)

• Theoretical Developments Over the Period
• Developments in Practice
• Implications for the Future

**Based in part on the earlier survey by M. A. Crew and P. R. Kleindorfer, “Regulatory Economics: Twenty Years of Progress?” J. of Regulatory Economics, 21(1), January, 2002.

ACCC: PRK-July 04 3

Rationale for Regulation

• Theory

– Desire to avoid monopoly inefficiency, but allow for capturing economies of scale/scope – Protect the consumer from monopoly exploitation

• Practice

– Regulatory capture – Opaque Redistribution: taxation & subsidization – Rent-seeking Behavior set in motion with its consultants and advocates of all stripes

• Result:

– Piecemeal and selective implementation of changes and reforms—in tightly coupled systems, like electric power, this has led to real problems.

ACCC: PRK-July 04 4

Regulation Since 1980

• Telecommunications

– AT&T divests 7 RBOCs – Privatization of British Telecom – New technologies begin to enter (PCs, optical fibre, the Internet and wireless technologies)

• Natural Gas and Electric Power

– Natural Gas: long-term take-or-pay contracts to an industry driven by competitive forces, intermediaries, risk hedge instruments benchmarked on spots etc. – Electric Power: Many problems

• Other Sectors: Move to the Market

ACCC: PRK-July 04 5

Deregulation ??!!?

• Deregulation is itself an ambiguous term

– Consistent with any change in regulation – It means what it means!

• Could be taken to mean reducing regulation,

but that isn’t how it has worked out.

• Generally: Unbundling & Competitive Entry

ACCC: PRK-July 04 6

Theory: Pre-1980s

• Advances of the 50’s-70’s provided the rich

foundations for economic analysis (Samuelson, Arrow-Debreu, The Postwar French School, ...), Welfare Economics in the British School ... Collective Choice to Econometrics to Game Theory, ... Theory was alive and vibrant.

• The Carnegie School on Behavioral Foundations

(Simon, Williamson), leading to Tversky- Kahneman, Smith, Plott and the experimentalists

• The Work of Averch-Johnson, Boiteux-Steiner, ...

Integration of monopoly theory into General Equilibrium Theory.

ACCC: PRK-July 04 7

Developments in Theory in U.S.

• In many ways, the research of 70s & 80s was

inspired in significant ways by the resources invested in microeconomics by AT&T.

– Bell Journal (Panzar, Bailey, Sibley, besides established scholars) – The Baumol School, including Bailey, Panzar and Willig, and Contestability Theory, Weak Invisible Hand Theorems, Pricing under entry, Multi-product firms, joint costs, cross-subsidy tests ...

• A. Kahn’s Books on Regulatory Economics,

spawning a host of innovations in (Non-linear and Priority) Pricing and Regulation.

ACCC: PRK-July 04 8

The New Regulatory Theory

• Arguably these developments still had the

traditional “regulated firm” and “regulated markets” in mind as the center-piece of attention. Indeed, most of these were rooted in practical problems, from Telecom pricing to Airline deregulation.

• New Force appeared in early 1980s—Mechanism

Design Literature; Information Economics

ACCC: PRK-July 04 9

Enter P-A Type Models

• Mechanism-design based Regulation, beginning with

Baron and Myerson (1981) and strongly promoted by Laffont and Tirole (1993), was based on strong assumptions like common knowledge. [Loeb-Magat, Vogelsang-Finsinger, ...]

• Information not available to (or at least not usable by) the

regulator even with contested discovery process

• Regulator concedes some information rents to the firm.
• Commitment of the Regulator was claimed to be the chief

barrier to achieving the efficiencies demonstrated in these theoretical models.

ACCC: PRK-July 04 10

The Practice of PCR/PBR was Different Regulatory Judgment, Not Formulaic

• Littlechild and PCR (Decouple Revenues from

Costs): Basic Objectives: Incentives for efficiency while reducing transactions costs and micro management

• On-going adjustments based on true-ups derived

from assessment of past returns and likely future conditions.

• The periodic tuning of PCR parameters was very

much like the traditional Cost-of-Service rate hearing, with discovery, argument, etc. Little resemblance to the Mechanism-Design Paradigm.

ACCC: PRK-July 04 11

Understanding Regulatory Commitment

• Regulatory commitment is not the appropriate framing of

the Achilles heel of PCR. The real problem is missing the essential attributes of the regulatory context.

• Key Difference between Littlechild’s approach and the

mechanism design approach: More realistic view of the constraints on regulatory commitment that are likely to be fundamental to the very nature of regulation.

• Commitment as a two-sided process requiring commitment

by both sides. This is understood in practice by regulators, companies and investors. Informed consent and reasonable returns, with transparent metrics: Wolak (2004) “smart sunshine regulation”

ACCC: PRK-July 04 12

Major Advances in Regulatory Economics: 1984-2004

• Price Cap Regulation (PCR) and its cousin PBR
• PBR: E.g. Yardstick Competition (Shleifer, 1985) leads to

Balanced Scorecards/VAD and detailed Metrics

• Cross-subsidy Analysis, and the analysis of the multi-

product partially regulated firm

• Depreciation Analysis and Capital Recovery
• Empirical tools for productivity assessment
• Experimental Economics and Institutional Analysis

(including Market Monitoring)

• Auctions and Bidding, Spectrum Auctions, and other

approaches to Privatization

• Access Pricing—ECPR, Global Price Caps

ACCC: PRK-July 04 13

Developments in Practice

• Some Adventuresome Experiments and Great Lessons!
• Practical problems and a general conviction that change

was required have driven the field of Regulatory Economics

• Primary driver in practice has remained the redistribution
• f monopoly rents
• Increased use of simulation and experimental models to

support analysis of regulatory institutions before the fact; Good Development!

• Increased recognition of the key role of independent

market oversight and good data.

14

Developments: Electric Power

GENERATION Plants produce the product - Electricity TRANSMISSION The Towers move the product

DISTRIBUTION The wires carry electricity into

• a house
• a business
• an industry

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Big Impacts on Typical Utilities

Old Structure New Structure

G T D

Genco Trading Ventures Transmission Distribution Wholesale Customers New Retail Customers Existing Retail Customer Base

???

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Fuel Supply Transmission Distribution Sales & Tariffs End Users DSM Inside the Fence Generation Controls & Onsite Services Metering Services Risk

Management

to End User Local Delivery of Service Risk Management

• f

Transmission

Risk

Management

• f Fuel

Fuel Supply

Contracts

Permits for

Env’ment

Water) Generation Risk

Management

• f

Generation

Long- Term

Generation

Supply

Economy Energy

Supply Spinning Reserve

On-Call Wheeling into

Out of & Across

The System

Spinning Resvs

and Frequency

Support

Unbundled Electricity Value Chain

ACCC: PRK-July 04 17

Unbundling Pricing and Costing

Example: Power Distribution Related Services

• Distribution System Usage
• Customer Assistance, Records, Billing and

Collection

• Meter Reading
• Meter Operation and Maintenance
• Meter Connection and Disconnection
• Street Lighting and Signal System Support
• Other Customer Related Services (Electric)

ACCC: PRK-July 04 18

Changes in Distribution Company Strategy Learning to Spell “Marketing”

Mapping Customers by Their End-Uses and Price Sensitivity

End Uses Lighting Motive Power Transportation Process/Domestic Use Climate Control

(Illustrative) Source: EPRI

Residential Commercial Industrial Annual Market Size ($100 Million) Relative Price Sensitivity = Insensitive = Sensitive

ACCC: PRK-July 04 19

Regulatory Issues at the DISCO Level

• Distinguishing competitive advantage from

market power abuse (both in Retail and Wholesale Competition)

• Removing barriers to entry to Distributed

Generation (DG)

• Establishing default/standard offer
• bligations & policies
• Performance-based regulation

ACCC: PRK-July 04 20

Transmission

“Regional Tranmission Operators (RTO) Design” “Problems are often the unanticipated result

• f the solution of some previous problem!”

US Wholesale & Electricity Markets

Western Interconnection

Load 118,494 MW Capacity 154,377 MW Margin 30% Control Areas 33

Texas Interconnection

Load 45,636 MW Capacity 55,230 MW Margin 21% Control Areas 9

Eastern Interconnection

Load 497,644 MW Capacity 585,231 MW Margin 17% Control Areas 98

ACCC: PRK-July 04 22

Transmission: Critical Enabler

• Promotes Efficient Technology Mix
• Promotes Competition among and with

Generation, including DG

• Assures Reliability and Real-time System Balance
• But …the Economics are complicated, especially

as relates to the interplay between short-run and long-run decisions

• Need to understand link between physical and

financial systems as basis for providing investment and assuring reliability.

ACCC: PRK-July 04 23

The Previous Solution : “Unbundling” Coordinating Physical & Financial Realities

ACCC: PRK-July 04 24

Short-Term & Long-Term Efficiency

Max Welfare = Profits of Service Providers + Surplus of Consumer Segments Subject to: (1) Balancing Equations Relating Injections and Extractions (2) Security Constraints (3) Ancillary Generation Requirements for Voltage and Frequency Control

ACCC: PRK-July 04 25

Problems & Solutions & Problems & …

• Continuing underinvestment problems in transmission, with 25%

growth in demand expected but only 4% growth in grid investments, underlined by the 8/14/03 blackout in the Northeastern U.S. and Canada

• Similar underinvestment issues may be emerging in some parts of

Australia per the Courier Mail, 7/27/04 discussion of Energex and Ergon Energy in Queensland: “Summer Blackouts Loom”

• Four Major Orders Issued by FERC (after 1992 EPAct)

– Order No. 888 (1996) (Open Access) – Order No 889 (1996) (OASIS) – Order No. 592 (1996) (Merger Policy Rule) – Order No. 2000 (1999) RTO

• The Search Continues …

ACCC: PRK-July 04 26

Order No. 2000: The Solution?

• Regional Transmission Organizations (RTOs)

– Independent from other power market participants – Sole provider in real time of transmission service – Controls transmission dispatch, short-term reliability – “Responsible” for providing reliable, non- discriminatory service, including a planning function

• All transmission owners must place their

transmission facilities under the operational control of an RTO

• Specifies characteristics and functions of the RTO
• Establishes a collaborative process to develop

RTOs further, with some incentives for doing so

ACCC: PRK-July 04 27

Solutions and New Problems

• The “2000 Model” solves the short-term problem
• f dispatch and may also (as in PJM) provide

some metrics on overall performance (shadow prices and congestion costs)

• Does not solve the long-term problem. Indeed, it

may exacerbate it. PJM FTRs provide valuable metrics on the value of transmission at the “bid- based, security constrained economic dispatch” enabled and executed by PJM in its ISO function, but also incentives to leave congestion in place.

ACCC: PRK-July 04 28

PJM & NGC/NGT

• Congestion Cost Comparisons (nominal $’s)

– NGC (1994-2003): > $1Billion to $600 Million – PJM (1999-2003): $60 Million to $460 Million

• What is going on here?

– NGC is responsible for congestion costs, paid out of regulated “uplift” subject to a declining CAP – PJM is an autarchic organization with distributed

• wnership and no incentives to manage its congestion

costs in the medium and long term

ACCC: PRK-July 04 29

Solutions & New Problems:

Regional Transmission Planning (RTEPP)

• Phase 1: New Rules for Merchant Xmission
• Phase 2: RTEPP (the 6-step, multi-year process)

– Initial Thresholds on Congestion Costs – Publish the Results – Unhedgeable congestion > UT – Cost/Benefit Analysis – One-year for Market to Respond – PJM “requests” TAPs to make necessary upgrades

ACCC: PRK-July 04 30

Existing and Proposed RTOs

• Autarchic: Loosely connected TAPs, with

multiple regulators (state and federal) involved in determining policies that affect revenue and capital recovery; RTO only has real-time

• perational control, plus “planning”
• Mutualized: Stronger conveyance of decision

rights to RTO for expansion and investment planning; RTO operates in the name of TAPs

• Integrated: All transmission assets ceded to the

RTO at the launch of the RTO, which then is responsible going forward for management of these assets.

ACCC: PRK-July 04 31

Modeling Reliability/Security Investments z = Joint and Several Investments

STATE #2: Disruption State STATE #1: System is operating

Time Zero (decisions) Prob = r(z) Prob = (1-r(z))

Random Events

ACCC: PRK-July 04 32

Predicted Results from these Models (Focused on Reliability)

• Autarchic: (Cournot-Nash) Underinvestment in

Reliability which is worse the higher the number of TAPs

• Mutualized (Nash Bargaining, for profit): With no

transactions costs and full sharing of benefits, reliability investments are the best; transactions costs

• f bargaining erode efficiency until autarchy is

reached

• Integrated (regulated monopoly RTO, for-profit):

Lower than Mutualized reliability investments (with TC = 0), but performance penalties lead to improvements if profits and penalties are internalized

ACCC: PRK-July 04 33

Summarizing

• Nature of ownership and decision rights fundamental to

reliability and system operations; the issue is not just independence but also decision quality

• Reliability and system balance have important

characteristics of a public good and Free Rider Issues are likely to be significant

• Distributed and diverse ownership of the grid remains the

central feature and the central problem relating to progress in establishing workable wholesale electricity markets in the U.S.

• To be honest, “we” have not figured out how to combine

effectively profit/price regulation, market monitoring and efficient operations of ISOs & market participants

ACCC: PRK-July 04 34

Guiding Objectives?

• UP1*: A successful market and RTO design

requires that the RTO have the authority and bear the responsibility for assuring performance of the essential functions of transmission service, from planning and management of grid control and expansion, through real-time balance. * UP = Utopian Principle

ACCC: PRK-July 04 35

Guiding Objectives?

• UP2*: A successful market and RTO design

requires that the RTO have the incentives to be customer focused in defining and delivering transmission service offerings, and in providing information to stakeholders on the performance and planned evolution of the transmission grid going forward.

* UP = Utopian Principle

ACCC: PRK-July 04 36

Guiding Objectives?

• UP3*: A successful market and RTO design

requires that the RTO have the incentives to integrate engineering and economic aspects

• f grid expansion and operations; both good

economics and good engineering are required for sustainable operations.

• * UP = Utopian Principle

ACCC: PRK-July 04 37

Guiding Objectives?

• UP4*: A successful market and RTO design

requires an organization and governance structure that will provide the RTO appropriate incentives and the autonomy to integrate investment, market interactions and engineering risk analysis without the necessity of multiple regulatory bodies to

• versee and micromanage the process.

* UP = Utopian Principle

ACCC: PRK-July 04 38

Natural Gas Markets

• Long-term contracts give way to short-term

markets, with well-developed underlying spot markets.

• Unbundling leads to Extensive Intermediation and

Brokerage Activity: Long-term objective to have Inter-regional Pipelines as Common Carriers and Multiple Sources of Competition

• Energy Derivatives have become a central feature

for price discovery and risk management. Financial Market links are more direct and more evident in restructured markets (JRE, May, 2004).

ACCC: PRK-July 04 39 PRODUCER PIPELINE END USER DISTRIBUTOR Physical Gas

Buy/Sell Transaction

Natural Gas in the U.S.: The Ancien Regime

ACCC: PRK-July 04 40

Natural Gas in the U.S.: The Nouveau Regime

PRODUCER

PIPELINE

END USER DISTRIBUTOR Physical Gas Buy/Sell Transaction MARKETING COMPANY BROKER

PURCHASING AGENT

ACCC: PRK-July 04 41

The Rise of Risk Management

C $ 25 $28 A B $ 22

ACCC: PRK-July 04 42

A

Sell B u y Buy for Resale

Multiple Positions, Multiple Opportunities Risk Management is Central Here!

ACCC: PRK-July 04 43

Standardized Products

(Energy, Storage, Transportation)

• 5 x 16 On-Peak without Holidays
• 7 x 8 Off-Peak
• Wrap 5 x 8 + 2 x 24
• On-Peak

8 - 22

• Off-Peak

All Others (22-8)

• Next Hour, Next Day, Next Week, Next Month, Next Year

ACCC: PRK-July 04 44

Portfolio Optimization Problem*

(Typical Energy Risk Mgmt Problem)

• Given a set of fixed obligations demanding Dt on the day,

what portfolio of fixed assets and forwards and options should the “Buyer” have to maximize expected profits subject to a risk constraint (to be specified)?

• Options can include both Calls and Puts as well as fixed

forward contracts (of some standardized form). * See P. R. Kleindorfer and L. Li, “Multi-Period VaR-Constrained Portfolio

Optimization”, forthcoming, The Energy Journal, 2004.

ACCC: PRK-July 04 45

Value-at-Risk (VaR)

Portfolio P/L Prob.

Prob{Loss > x} = γ %

VaR = z(γ)σ - µ

ACCC: PRK-July 04 46

Max Expected Profits subject to a Value at Risk Constraint for any Given Period

Π = (Pc – Ps)D Net Revenues + Σi[Ps – ei)+ - ri]Qi Call Options/Forwards + Σj [pj – Ps)+ - sj]Qj Put Options

• F

Fixed Capital Payments Problem: Max E{Π} s.t. Pr{Π > -VaR} > γ

ACCC: PRK-July 04 47

Portfolio Example

Asset Label ei ri mi Mi Jun Storage 1 25 5 1000 Jun Forward 2 32

• 400

400 Jun Daily Call 3 40 1.8

• 300

300 Jun Daily Put 4 25 1.1

• 300

300 Jun Daily Call 2 5 50 0.6

• 300

300 Jun Daily Put 2 6 20 0.5

• 300

300 Jun Hourly Call 7 40 2.2

• 300

300 Jun Hourly Call 2 8 50 0.8

• 300

300 Jul/Aug Storage 1 9 25 5 1000 Jul/Aug Storage 2 10 30 400 Jul/Aug Forward 11 40

• 400

400 Jul/Aug Daily Call 12 50 2.8

• 300

300 Jul/Aug Daily Put 13 25 0.8

• 300

300 Jul/Aug Daily Call 2 14 60 1.4

• 300

300 Jul/Aug Daily Put 2 15 20 0.3

• 300

300 Jul/Aug Hourly Call 16 50 3.8

• 300

300 Jul/Aug Hourly Call 2 17 60 2

• 300

300

ACCC: PRK-July 04 48

Efficient Frontier (Example)

5050000 5060000 5070000 5080000 5090000 5100000 5110000 5120000 5130000 5140000 121300000 121350000 121400000 121450000 121500000 121550000 121600000

All-Period VaR E{Pi}

ACCC: PRK-July 04 49

The Natural Gas Industry: a Limited Success

• Risk Management well integrated with capital markets and
• perational cost management
• Market Monitoring (relationships with affiliates) and

Information Sources now “refurbished” after Enron

• Market-based Concepts and Planning for Contracting and

Customer Service for Large Customers

• Continuing protection for Small Customers under

traditional utility regulation on the distribution side

• Safety, Environment and Security Related Risks well

integrated with operations and financial strategies and regulations

ACCC: PRK-July 04 50

Telecommunications

1984 AT&T Divestiture & The RBOCs 1996 Telecommunications Act

Lots of M&A Activity—Not Much Direct Competition

2002-2004 Judicial Decisions

ACCC: PRK-July 04 51

Debate on Sabotage/Divestiture by Vertically Integrated Access Providers

• In telephony the local network conveys major

advantages and opens up potential opportunities for sabotage (raising rivals costs and/or decreasing their quality of service)

• Mandy 2000; Weisman & Kang (2001) and Crew,

Kleindorfer & Sumpter (2004) show strong incentives for engaging in sabotage and reducing welfare, unless there are very strong economies of scope across retail and wholesale service elements.

ACCC: PRK-July 04 52

ILEC Prior to 96 Act

End Users RBOC Network used for RBOC Retail service RBOC Retail Sales

Service Service

RBOC Integrated OSS Network OSS Retail Sales

Service

Service Orders Service Orders Service Orders

ACCC: PRK-July 04 53

Facility-based Competition

End Users RBOC Network used for RBOC Retail service RBOC Retail Sales

Service Service

RBOC Integrated OSS Network OSS Retail Sales

Service

Service Orders Service Orders

CLEC Network CLEC Retail Sales CLEC Integrated OSS

Service Orders

Facility Based CLEC

ACCC: PRK-July 04 54

UNE-P, UNE-Loop and Facility-based Competition

End Users RBOC Network used for RBOC Retail service RBOC Retail Sales

Service Service

RBOC Integrated OSS Network OSS Retail Sales

Service

Service Orders Service Orders

CLEC Network CLEC Retail Sales

CLEC Integrated OSS

Service Orders RBOC UNE- P/UNE-L OSS RBOC Network used for CLEC Retail service

ACCC: PRK-July 04 55

Opportunities for “Sabotage”

(In Red)

End Users RBOC Network used for RBOC Retail service RBOC Retail Sales

Service Service

RBOC Integrated OSS Network OSS Retail Sales

Service

Service Orders Service Orders

CLEC Network CLEC Retail Sales

CLEC Integrated OSS

Service Orders RBOC UNE-P/UNE-L OSS

RBOC Network used for CLEC Retail service

^^^^^^^^^^^^^^^^ ^^^^^^ ^^^^^^

ACCC: PRK-July 04 56

Examples of “Non-Price” Sabotage?

• Misrouting local calls as toll calls (forcing ILEC customers to dial

1+10 instead of 7 digits)

• Failure to load NXXs in LEC switches
• Failure to do NPAC dip on LNP numbers
• Restrictions on LNP porting (how many)
• Mis-administration of 800 database
• Issuing “completion indicator” before testing circuit
• PIC freeze on CLEC to CLEC transfers
• Dropping customers from white/yellow pages after customer selects

CLEC

• Unnecessary changes to OSS, forcing CLECs to change back-office

systems

• Scheduling facility cuts during the business day
• …..

ACCC: PRK-July 04 57

Divestiture??

Crew, Kleindorfer & Sumpter (2004)

End Users

Service Service

Network OSS Retail Sales

Service

Service Orders Service Orders

CLEC Network CLEC Integrated

OSS

Service Orders

Facility Based CLECs

CLEC Retail Sales (including former RBOC sales & Marketing) NETCO Network used for CLEC Retail service NETCO UNE- P/UNE-L OSS

ACCC: PRK-July 04 58

Conclusions: U.S. Telecom

• For telecommunications in the U.S., it is likely that

sabotage is causing efficiency losses and that divestiture is efficiency enhancing

• Recent actions by DOJ in not appealing rejection of FCC

policies on access and competition were based on the claim/belief that technological progress may bring the cure! (Cable-based telephony, together with wireless)

• Divestiture could occur if regulators police anticompetitive

practices and RBOCs see the benefit of moving into areas like long distance, broadband and wireless without

• restrictions. It’s a long shot at this point. Vigilance!
• Rockefellar example shows that divestiture can be very

good for shareholders as well!

ACCC: PRK-July 04 59

The Postal Sector Trends in The Global Postal and Logistics Market

Globalisation of business

• increasing cross-border

mail and express deliveries

• increasing demand for

cross-border logistic service

Globalisation of business

• increasing cross-border

mail and express deliveries

• increasing demand for

cross-border logistic service

New technologies

• e-mail / bybrid mail
• e-commerce

New technologies

• e-mail / bybrid mail
• e-commerce

Deregulation

• increasing deregulation

in the EU

Deregulation

• increasing deregulation

in the EU

Four key trends driving the future development

• f postal operators worldwide

Four key trends driving the future development

• f postal operators worldwide

Customer demand for intergrated service

• fferings
• ne stop shop
• revenue management

services

• integration of post with

businesses’ mail room

• perations

Customer demand for intergrated service

• fferings
• ne stop shop
• revenue management

services

• integration of post with

businesses’ mail room

• perations

ACCC: PRK-July 04 60

European Posts’ Setting the Example

• Three major market strategies are evident:

– Global expansion – Pan-European expansion – Focus on domestic market

• National letter-mail markets are drifting into fierce

competition (a Global Phenomenon)

• Specialisation and technology will play key roles

in the development of large-customer services

• Enhancing cost-efficiency in evidence
• M&A Activity to boost international presence and

scope of competencies

ACCC: PRK-July 04 61

Spurt of M&A Activity in the Postal Sector

Royal Mail Group/6 DPWN/34 TPG/49

Express/parcels: Mail: Mail:

• 2
• 4
• 18

Logistics: Financial Services: Express/Parcels:

• 1
• 1
• 13

Retail: Logistics: Logistics:

• 2
• 7
• 16

Financial Services: Express/Parcels: eCommerce:

• 1
• 20
• 1

Retail: Consulting/Direct Mail:

• 1
• 1

Consulting:

• 1

La Poste-France/27 Posten AB/9 Canada Post/6

Mail: Mail: Express:

• 7
• 1
• 1

Express/Parcels: Transport: Logistics:

• 9
• 1
• 2

Logistics: Parcels: Information Technology:

• 2
• 5
• 2

Financial Services: Logistics: Consulting:

• 2
• 2
• 1

eBusiness:

• 2

Technology/Consulting:

• 5

ACCC: PRK-July 04 62

Varying Strategies of Postal Operators

• Sweden’s Posten: For the time being, focus on development of traditional

mail services and divestment of non-core subsidiaries: Swedgiro discontinued in the Baltic countries and Poland, Direct Link in Belgium

• sold. Posten will also dispose of unprofitable cashier services (120,000 daily

customers). Continuing restructuring.

• La Poste, France: Particular focus on European markets through alliances.

Approval of five-year € 1 Billion investment programme to increase

• productivity. La Poste aims to expand its financial services, provoking
• pposition from banks.
• Royal Mail Group: Postcomm has tightened its control and aims to increase

competition in the UK market. Royal Mail (currently unprofitable) is involved in a retrenchment programme: 30,000 job losses (11%) within three years. RM may widen its range of banking and insurance services.

ACCC: PRK-July 04 63

Supply Chain Management Will Increasingly Involve the Management of Global and Rapid- Cycle Fulfilment Architecture

Source: Turku School of Economics and Business Administration, 24 March 2004

ACCC: PRK-July 04 64

Near-term Outlook for Postal Sector: Global and Integrated Competition

Lettermail is slumping. Pressure on the USO; Move to competitive products by the larger players The boundary between public and private operators in the postal marketplace is becoming blurred, raising the usual questions about ”regulated competition”. Globalisation and liberalisation will produce highly competitive, integrated groups in the logistics arena. Collaboration will be a key requirement regardless of whether an operator seeks to provide specialised, regional carrier services or to manage complex intermodal networks. In Europe, moves by smaller Postal Operators to combine with commercial entities and new market entrants could redefine the structure of the global market.

ACCC: PRK-July 04 65

Summary: Some Accomplishments

• Access Pricing, e.g. in Postal Worksharing
• Peak-load and Real-Time Pricing introduced, but still

underdeveloped

• Model-based approaches to yield management and

profitability based on economics – Airlines: Combined price discrimination and peak-load pricing – Energy: Risk Management and the e-Economy

• Regulation meets the e-Economy: E.g. Implementing the

Coasian Ideal in Environmental Regulation

• Generally, Governments worldwide have moved to push

GSE’s to commercialization and privatization.

ACCC: PRK-July 04 66

Summary: Continuing Challenges

• California, an expensive learning experience for economists

& regulators; complicated by Enronitis

• The problem of DSO/USO: Allowing entry as per

Deregulation, but still assuring that the incumbent responsible for DSO is not towed under is complex

• Theory is still about 1-on-1 regulation; the practice is about

n-on-m regulation

• Regulation and wealth transfers during the Transition Game

– Power of the Incumbent – Transition Charges and Stranded Assets – The Long-run and the Short-run

ACCC: PRK-July 04 67

Conclusions

• Regulatory Economists have accomplished a great deal in

the past 20 years, including an open record of research on questions of continuing importance for major sectors in the economy and a framework for discussing these. This framework drives policy discussions, company strategies, and the market place. This is a global phenomenon, and expertise in regulatory economics has equal currency in Europe, Asia, ASEAN and Latin America as the language and methodology for analyzing regulated industries.

• The diffusion and continuing refinement of this framework

as a lever for communication, analysis and action has undoubtedly been an important element of progress in the past twenty years and augurs well for the future.

• Humility about our current state of knowledge is, however,

greatly needed and may still be in short supply.