Competition and Regulation in Network Industries

Infrastructures have mostly developed and have also been regulated in silo, especially in the liberalization phase. As economic, societal and technological patterns toward convergence of infrastructure sectors can now be observed, how to regulate such phenomena obviously raises many questions. In this context, the cross-sector regulation laid down by the Directive 2014/61/EU on measures to reduce the cost of deploying high-speed electronic communications networks constitutes an interesting legal primer in EU law, although little discussed. Six years after the adoption of the Directive, the present paper aims to draw lessons from it, from its transposition and from the related dispute-settlement practice in the Member States, with the perspective of cross-sector regulation. What type of cross-sector regulation does the Directive bring about? What are the factors having an influence on the (im)balance between the sectors and/or sectoral regulations? It seems all the more necessary that the newly appointed European Commission (“EC”) announced its willingness to revise the Directive within the next 5 years. The study of the BCR Directive may also contribute to inform how to regulate the phenomenon of increasing convergence between network industries. The paper refers to “cross-sector regulation” as, broadly, a type of regulation where several sectors, traditionally subject to specific regulations, are brought together, irrespective of the mode of interaction between them. Particularly, “cross-sector regulation” does not assume that the sectors and/or the sectoral regulations would be placed on an equal footing.

This paper shows with a formal model that under monopoly regulation, OPEX-risk can be a source for a CAPEX-bias. If OPEX and CAPEX are substitutes, the regulated firm can reduce the risk of the firm and thereby reduce the true cost of capital by rebalancing OPEX and CAPEX. If the regulated rate-of-return on capital is not influenced by the firm’s actions, this creates a margin between the regulated rate-of-return and the true cost of capital; this causes a CAPEX-bias. We examine the so-called fixed-OPEX-CAPEX-share (FOCS), which is a variation of TOTEX-regulation, as a promising remedy to address the CAPEX-bias. We argue that FOCS is effective to address the CAPEX-bias, while it can easily be implemented.

A specific challenge related to infrastructure creation that is faced by several countries has to do with the lack of participation to an optimal level of subnational governments in the development of Public Private Partnership (PPP) projects which, in turn, could offset the existing infrastructure limitations. In this article, we analyze the Mexican case, whose main feature is that, despite implementing the PPP scheme for almost 10 years and having technical assistance from international organizations to establish the required institutional framework (i.e. legal and technical dimensions), local governments have not been able to create the necessary competencies to carry out this type of project. In order to assess local governments on this subject, we conducted an analysis based on the model designed by the OECD in relation to the execution of PPP projects. A proposal to explain the lack of local government participation in PPP schemes, rests on the foundations of so-called “subnational authoritarianism.”

5G attains the role of a GPT for an open set of downstream IoT applications in various network industries and within the app economy more generally. Traditionally, sector coupling has been a rather narrow concept focusing on the horizontal synergies of urban system integration in terms of transport, energy, and waste systems, or else the creation of new intermodal markets. The transition toward 5G has fundamentally changed the framing of sector coupling in network industries by underscoring the relevance of differentiating between horizontal and vertical sector coupling. Due to the fixed mobile convergence and the large open set of complementary use cases, 5G has taken on the characteristics of a generalized purpose technology (GPT) in its role as the enabler of a large variety of smart network applications. Due to this vertical relationship, characterized by pervasiveness and innovational complementarities between upstream 5G networks and downstream application sectors, vertical sector coupling between the provider of an upstream GPT and different downstream application industries has acquired particular relevance. In contrast to horizontal sector coupling among different application sectors, the driver of vertical sector coupling is that each of the heterogeneous application sectors requires a critical input from the upstream 5G network provider and combines this with its own downstream technology. Of particular relevance for vertical sector coupling are the innovational complementarities between upstream GPT and downstream application sectors. The focus on vertical sector coupling also has important policy implications. Although the evolution of 5G networks strongly depends on the entrepreneurial, market-driven activities of broadband network operators and application service providers, the future of 5G as a GPT is heavily contingent on the role of frequency management authorities and European regulatory policy with regard to data privacy and security regulations.