Public services and infrastructures: regulatory, financial and institutional problems
Overview
Background & policy context:
Over the last few years in Italy the public utilities sector has undergone a deep structural reform. Many changes have been made: the opening of monopolies to competition, the split-up of previously integrated industries, and the partial or total privatisation of public utilities. Their objective was to promote competition wherever possible, given the technology and industrial structure of the different sectors. The expected outcome was to get more efficient services and also the financial means necessary for new infrastructures from tariffs.
In fact, this process has been completed only in the telecommunication sector, while in others we observe a slow pace. The main cause is the legislator’s irresolute attitude who has kept changing the rules, thus creating a great uncertainty among operators.
However, a process of this kind does not only require changes in the industrial structure, to which operators have to adapt themselves, but also forces the state to modify its own functions: the job now is not to impose choices, but to design rules capable of inducing firms, even monopolistic ones, to behave in line with the public interest.
Public-utilities regulation faces various problems. First of all, there are different approaches with regard to regulatory institutions and asset ownership, whose basic alternatives are contracting out the service and selling assets. Clearly regulatory schemes are different according to ownership structure. Other problems are the industrial restructuring of the public service sectors and the need of fresh investments in infrastructure. The operation of networks poses special problems both with regard to regulation and the financial level, since some industries require huge investments that cannot be financed by the public sector - a problem that inevitably intertwines with tariffs regulation.
Public utilities regulation is today in need of relevant political decisions, but also innovative technical solutions, suitably tailored on the specific situations.
Objectives:
The objective of this project was to address a few current regulation problems, mainly from a practical point of view.
It is important to bear in mind that, on the one hand, choices regarding the contracting out of services, management and regulation of networks, investments incentives, etc., cannot do away with theory, on the other hand, that it is necessary to improve economic theory so that it may actually become a useful tool for public regulators and for the legislator who assigns them objectives and powers (good regulation requires good theory). In other words economic theory must develop more realistic models, capable of giving practical suggestions, rather than elegant but impractical solutions.
Many practical problems require new solutions that must come from theory. Therefore, two aspects are melted together in the project: the first is more theoretical but with a special attention to real-world problems; the second is more applicative, aimed at the analysis of sector problems and development of specific solutions that, however, need to be founded on economic theory. These two aspects are strongly intertwined and influence one another.
General issues that regard different sectors are studied including the allocation of regulatory power to different institutions, the impact of tariff reform, the effective use of bidding procedures for awarding franchise contracts.
Sector-specific problems were also to be studied, like the organisation of the new electricity market and the reform of the transport sector. This choice was made in coherence with the stated objectives, considering that the theoretical results obtained until now can be applied, with appropriate adaptations, to all public service sectors, while only a deep sector analysis permits the identification of the practical problems that economic theory has to solve.
Methodology:
Today the economic theory of public utilities regulation is boundless. However, there is a growing literature on country experiences and sector analysis.
This project has made use of theoretical literature in a critical way, looking for practical suggestions and trying to fill the gaps between theory and practice, trying to take advantage of studies on countries where public service reform is more advanced than in Italy in order to obtain useful suggestions and to avoid repeating mistakes. The general approach of this research has been to base the study on strong analytical foundations and achieve results that public regulators and operators can understand and implement.
Given the wide extent of the treated subject (regulation of public utilities with special reference to services that require substantial infrastructures), it was not possible to systematically deal with all problems of immediate relevance to the policy debate. Therefore, a few topics of both general and sectoral nature that are especially hot in today’s regulatory practice in Italy (though some of them may be of interest to other countries too) have been selected and analysed at a general level and at a sector level. Furthermore, two core topics have been identified: auctions as a tool for regulation and privatisation, and investments in infrastructure.
The main regulation problems addressed by the project belong to the following themes:
- Institutional levels of regulation. A first general problem is to understand how the reform of public utilities should be connected to the on-going institutional reforms in Europe and in Italy. This process comprises a general deregulation of services through separation of network ownership from services production and sale, regulation of network access, regulation of access tariffs, with a view to promoting investment. A second aspect of the process is the split of powers among different institutional levels: supranational, national, regional, municipal. Starting from current experiences and specific literature, this analysis has provided a contribution on a better understanding of which objectives to assign to the different institutional levels.
- Franchise auctions, tariff regulation and investment. In those sectors where natural-monopoly conditions persist (water, waste disposal, etc.) regulation takes place through concession contracts. The concession award is
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