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.
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.
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
This project has achieved a first cluster of results on a few general problems concerning the regulation and the financing of public services like public transport, water and sewerage and energy.
The topics addressed include:
- the allocation of property rights in networks;
- the structure of the regulatory contract between regulator and regulated service providers;
- the contracting out of services through auctions.
The results obtained are included in several publications that analyse problems in these areas with specific reference to Italy, where franchise auctions in local transport and water services have failed to attain the desired outcomes, and the remedies suggested by theory to such failures.
A few of the papers show that competition for the market in public services, though necessary, is not enough to promote efficient management of firms that run the services. What is further needed is a clear and stable regulatory framework, capable of setting up correct incentives through:
- a correct allocation of property rights;
- a correct allocation of the risks arising in the provision of public services;
- tariff mechanisms with appropriate revision schemes;
- auction procedures that appropriately deal with regulator’s information asymmetries, both ex-ante and ex-post.
This project has also tackled more specific topics:
- An estimation of the welfare effects of the various reforms in the field of public services in Italy has been attempted.
- A few theoretical papers have focused on the definition of appropriate inequality indexes for evaluating the effects of public policies in welfare terms. These papers have shown that increases in the expenditure for public services affect more the weakest social classes.
- Sector analyses of transport and electricity distribution have also been undertaken. An exhaustive review of the normative background of transport regulation, with special focus on the interaction between the regulatory systems of different transport means (motorways, railways, airports, etc.) has been made. Critical analyses of the Italian experience and several policy proposals have been made.
- With respect to electricity distributi
P1: For transport utilities, the lack of independent regulatory agencies seems widespread. A reason may well be the perceived technical differences in the various transport modes (some with controlled traffic, like railways, ports and airports, while toll highways have a free flow structure). Nevertheless, the setting up of independent authorities is highly recommended, since the basic issues remain the same even if the technologies are different: access rules, incentive tariffs and concession mechanisms, quality issues, efficient minimum dimension of the concessions and their duration, the regulation of investments, etc.
P2: The lack of proper regulatory agencies generates also a totally inadequate level of knowledge on the present worldwide experiences of regulation in this sector. An important factor for implementing consistent policies is the possibility of evaluating and comparing errors and best practices. Therefore, a general worldwide survey of these regulatory experiences seems mandatory. Following the research results, an initiative in this direction has been set up within the World Conference of Transport Research Society.