The Impact of EU Regulation in Network Industries

Author: Elisa Trujillo-Baute

Defense date: September 15, 2014

Advisor/s: Daniel Montolio | Francesc Trillas Jané

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Research fields: Regulation Economics |

Within the European Union (EU), economic regulation is often used as a promotion mechanism to achieve specific objectives. In the telecommunications and the energy sectors this is observable through those regulations that promote the participation of new agents and/or new technologies Access regulation has been implemented in the EU to promote the entrance of new agents in the telecommunications sector. With the aim of stimulating competition and achieving its desired effects in markets and among consumers, new entrants have been provided with access to incumbents fixed-line infrastructure at the wholesale level. Similarly, as part of the EU 2020 energy strategy, the Climate and Energy Package undertook to implement the “20-20-20” targets. Among these, arguably the most challenging is raising up to 20% the share of EU energy consumption produced from renewable resources. Member States have embraced this target by promoting the production of electricity from renewable energy sources. Within the telecommunications sector, one of the markets affected by changes in the European regulatory framework is that of the broadband service. The rationale behind access regulation is that entrants be allowed initially to provide a service that requires minimum direct investment while relying on the incumbents existing network; however, subsequently, entrants are expected to increase their investments as they develop their own infrastructure in a process captured by the “ladder of investment” theory . This EU regulation has clear implications for the firms investment decisions and, as such, for aggregate infrastructure investment at the country level in the telecommunications sector. From a firm level point of view, in the context of the access regulation implemented in the EU, new market competitors are able to provide broadband access for customers by using the incumbents infrastructure, the prices for which are regulated. As such, firm performance is, in part, dependent on regulatory decisions, while the implementation of regulated rates directly affects firm performance in two ways: by impacting the entrants production costs through the input prices and by impacting the incumbents wholesale and retail income. In addition, a firms behavior will also be determined by the firms characteristics, and given that in most countries broadband services are now provided by a broad range of operators, including incumbents and entrants as well as national and multinational firms, these are fundamental for any regulatory analysis. Within the energy sector, following the setting of the 20-20-20 targets under the corresponding EU regulation, the feed-in tariff regulation has become the most widely adopted mechanism by Member States to encourage the take-up and development of electricity generation from renewable energy sources. Under the feed-in tariff regulation, a specific price is guaranteed per unit of electricity generated by the target technologies. In most Member States the cost of resources assigned to promoting the production of electricity from renewable energy sources is borne by the final consumer. In recent years, however, the recession has caused governments, industry and consumers alike to worry about high retail energy prices, and here some of the blame has been attributed to climate policies, in general, and to the feed-in tariff regulation, in particular. In this regard, two components of the electricity retail price can be expected to be influenced by the feed-in tariff regulation: the incentives to those firms producing electricity from renewable energy sources and the wholesale price of electricity. The two components, which act over the electricity retail price in opposite directions, are functions of the proportion and type of renewable sources in the energy mix. Technology-specific considerations are clearly therefore important for any empirical analysis of the impact of EU regulation on the energy sector. This dissertation undertakes an empirical analysis of the impact of EU regulation. More precisely, I analyze the effects of access regulation on the telecommunications sector and of the feed-in tariff regulation as a policy mechanism designed to accelerate investment in renewable energy technologies on the energy sector.