Market structure and market design Lecture 2 bis Market structure and market design

Market design A traditional view of the natural monopoly (and some distrust of competition) led in the past to confusion about the activities that cannot be performed competitively; Once agreed that most utilities and transport sectors are multi-product industries the view emerged that some segments of those industries could be competitive; The networks are the core natural monopolies

Market structure:Electricity

Mkt structures Possible structures for utilities to choose depending on the relative importance of scope economies and transaction costs and potential benefits from competition: a) Legal monopoly vertically integrated. b) Liberalization without unbundling. Access can be negotiated or regulated. c) Operative separation in the management of the network. Property is not separated but amanagement is attributed to a separate public entity. d) Structural separation with liberalization. Regulation of access tariff. Club ownership..

Legal monopoly Organization form prevailing in the past usually with public firm; Belief that benefits from competition are weak maybe because even potentially competitive segments are interested by some scale economies (though not natural monopolies) Belief that scope economies are substantial; maybe multiproduct natural monopoly;

Liberalization without structural unbundling. Unbundling is the process of separating the activities in different segments; It can be accounting, legal or structural unbundling; Legal unbundling requires different companies operating in different segments (ex: RFI vs Trenitalia); Ownership can be the same; Some benefits from competition, but fear of losing scope economies; Competition is limited by deterrence of strategic use of the monopoly essential facility Access can be negotiated or regulated.

Operative separation in the management Operative separation of the network. Property is not separated but an external management is attributed to a separate (usually public) entity In italy this model was used within electricity with TERNA being owned by ENEL but under the control of a public company GRTN. GRTN could order TERNA to open access to third parties, fix rules as to the allocation of capacity and to the expansion of capacity; Separation of ownership and management is always a source of litigation and brings forth an inefficiency; Owner can ‘drag its feet’ for long

Structural separation with liberalization Large expected gains with competition; Small economies of scope; Belief that liberalization per se could not deliver strong competition without a level playing field on essential facilities; A third party network operator is the best guarantee for an entrant that it will not be discriminated against; Need for tariff regulation: the network operator is still a monopoly! Club ownership. Bad idea.

California Restructuring Service obligation at regulated price (no passthr.) for UDC Liberalization of wholesale mkt Divestiture of production System Operator (CAISO) independent: Market with obligations for UDC