The Limits of Unbundling in Rail and elsewhere

1. The Limits ofUnbundlingin Rail andelsewhere

2. Research question and arguments • This is a critical reflection on unbundling: are there limits to unbundling? If yes, which ones? • This has not really been done so far, most of the literature focusing on the (positive) effects of unbundling • Yet, unbundling is before all a theoretical (and even an ideological) construct; one may therefore ask how well unbundling does in practice • As such, it is part and parcel of the de-regulation (but not the privatization) agenda, i.e., a means to “kill the monopolist” • But there are some real problems when unbundling, must of them pertaining to the technological nature of the infrastructures • Mostly, these pertain to the fundamentally technological nature of the interfaces between the infrastructure and the services • So, the question is: how far can and shall we go with unbundling? • Railways is a perfect example, a paradigmatic case for this question

3. Structure • The idea (theory) of unbundling: whatwas/isunbundling for? • The practice of unbundling: doesitreallyhappen? • The problems of unbundlingiin the different network industries • Pursue or abandon unbundling? • Summary: the limits to unbundling • Are there alternatives to unbundling?

4. The idea (theory) of unbundling • Originally an idea by institutionaleconomists: the sharpseparationof the monopolisticelement(s) of an infrastructure fromitscompetitiveelement(s) ( organizationpreventingmarkets) thisseparationwillallow for competitionwhere no competitionexistedpreviously ( marketcreation) • Once competitionexists(somewhat), unbundlingguarantees…- non-discrimination in the access to the infrastructure- non-biasedinvestments (development of the infrastructure) • The EU/EChas transformedunbundlinginto a politicalproject(e.g., Europeanintegration)- one seamlessEuropean infrastructure- one single European (infrastructure services) market • State of researchon unbundling:mostly on the effects of unbundling on competition, marketcreation (sustenance), services, investments, etc.

5. The practice of unbundling • Quiterapidly, itwasrealizedthatunbundlingcannotbe put into practice (by the EC) from one day to the other, thus, the creation of an «unbundlingladder»: fromaccounting (imperfect) to functional to legal to ownership (perfect) unbundling • However, manyotherformsexist and firms are quitecreativewhenitcomes to twist the unbundlingnorms. For example:- ISO in electricity- EDF-RTE model- SNCF-RFF model- Swissgrid model- the numeroushldingmodels- others, yet to beinvented • Overall, itisclearthatfirms do not unbundle by theirownwill; rather, unbundlingis the result of political (EC) pressure:- via ownership- via regulation

6. The problems of unbundling • Unbundling, in many cases, cannotbedoneproperly, owing to the technological nature of the infrastructures, i.e., the technicalinterfaces; examplesabound:- ERTMS (Rail)- smart meters (electricity)- ATC communication systems (air) • Regulatingthese interfaces does not alwaysmakeeconomicsenseand mayturn out to becounter-productive(costs of regulation > benefits):- ticketing, timetables (rail)- balancingenergy (electricity)- airport services (air) • Un-bundling leads to re-bundling, owing to economies of scale and scope in the infrastructures:- franchising (rail) (instead of accesscompetition)- implicitauctions (elecricity) (instead of explicit auctions)- vertical integration (ATC, airports)

7. Pursue or abandon unbundling? • Once competition has been created, (some) market forces push for furtherunbundling:- new entrants (which are generally not perfectlyunbundledincumbents in theirown countries) findmarketaccesswithoutheavyinvestments- suppliersfind business opportunities in the problematic interfaces (e.g., safetysystems, smart meters) • The European Commission has no alternative than to push for furtherunbundling:- in order to realizeitspoliticalproject of an European infrastructure a Single Europeanmarket- regulation (of furtherunbundling) and strenghtening of regulatorsisitsonlypolicy instrument • But there are numerous forces (besidestechnology), resisting/revertingunbundling:- firms (seeabove)- nation-states (supporringtheirfirms)- nation-states worried about (national) security of supply and independence

8. Summary: the limits to unbundling • Technologicallimits: the existence of technological interfaces:- operational interfaces- safety, emergency interfaces • Politicallimits:- security of supply (national independence)- nation-states resisting «regulatory Europe»- power of regulatorstriggeringpoliticalreactions • Bureacratic/institutionallimits:- regulatorybureaucracy and procedures • Economiclimits:- regulatorycosts • Firmbehavior

9. Are there alternatives to unbundling? • There isno way back (to monopolies) • However, competition in the network industries remains and willalwaysremainlimited • «Perfect» unbundlingisunattainable and pushing for itiseconomically and politicallycounterproductive • Can wesettle for:- a lessperfect (unbunding) model?- withlesspowerfulregulators?- a lessperfectmarket?