ESRI Report - Is Utility Regulation Failing Irish Consumers ?

damien

ESRI Press Releases

"Is Utility Regulation Failing Irish Consumers?", Special Article in the Quarterly Economic Commentary, Winter 2004. - 21/12/2004
By Patrick Massey – Director Compecon Limited.

Patrick Massey argues that current arrangements for regulating gas, electricity, telephone and postal charges is not working and radical reforms are required.

The paper proposes a number of reforms to address these issues.

» Steps need to be taken to promote greater competition in gas, electricity and postal services.
» In gas and electricity ownership and control of the transmission and distribution networks needs to be transferred to companies that are independent of ESB and BGE to allow effective competition.
» There is a need for a properly resourced consumer body that is capable of undertaking the necessary research to present a counter case to the regulated firm. This body should have a right to appeal all regulatory decisions, including decisions to grant price increases to regulated firms.
» The existing regulatory agencies for energy, telecommunications and airports should be combined into a single regulatory agency.
» Future price reviews should be conducted by means of a public hearing in order to allow the arguments put forward by firms to be challenged directly.
» Regulators’ budgets should be capped - the paper suggests a price cap of CPI - 10% for the next five years – to curb the natural tendency toward regulatory creep.
» There should be a single appeals panel to consider appeals against regulatory decisions. This should include a right of appeal against any decisions relating to prices and/or price caps.
» Where complaints are found to be unjustified, the complainant should bear the cost of any investigation by the regulator. Similarly parties should bear the cost of unsuccessful appeals.

---

Patrick Massey was a member of the Irish Competition Authority for ten years. This includes four years as the Authority’s Director of Competition Enforcement

I found a copy of this paper here: http://www.nuim.ie/academic/economics/pdf/N1451104.pdf

The paper concentrates a lot more on Energy Regulation than Telecoms but it is still worth reading. I've plucked some text out of the report, assimilate at will:

pg 4

Fixed line telephone charges declined by over 30% between 1997 and 2001 but have risen by 9% over the past three years. (See Fig.2) Eircom’s line rental charges are double the European average

pg 5:

The NCC (2004, p.ii) stated bluntly that: “Better regulation is needed in sectors such as energy, telecoms and professional services to ensure more vigorous competition and drive down the cost of doing business in Ireland.”

pg 7:

Regulation has frequently been seen as a necessary temporary measure “to hold the fort” until competition develops. (Littlechild, 1999)


The issues in telecommunications are somewhat different to those in gas and electricity. Rapid technological change and the growth in rival mobile networks mean that the natural monopoly problem may no longer arise. (Ricketts, 2004). Littlechild (2004) nevertheless argued for the vertical split up of BT, pointing out that, whereas price regulation had been removed in UK gas and electricity markets it remained in place for telecommunications.

Stephen Littlechild was one of the consultants used to write the LLu documentation.


pg 8

Dealing with Information Asymmetries. Price cap regulation attempts to overcome the information asymmetry problem by encouraging the regulated firm to reveal accurate information about the potential for cost reductions. The price cap is supposed to provide a strong incentive for the regulated firm to achieve greater cost savings than those set by the regulator, since this will increase its profits.

This in turn provides more accurate information to the regulator about potential efficiency gains when the price cap is due for review.* Regulation is a repeated game which provides scope for strategic behaviour by the regulated firm. It will recognise that, while it can retain additional efficiency gains in the short-run, such gains will lead to tighter price caps in the future. (See Laffont and Tirole, 2003).

Giulieti and Waddams-Price (2000), in a study of the effects of price caps in UK utilities, along with airports and telecoms in the US, found “little evidence that firms had moved towards more efficient pricing structures” under price cap constraints. They reported evidence of considerable gaming around the time of price reviews in an attempt to get price caps raised as much as possible. In contrast they report a move toward cost reflective pricing where competition had been introduced.

* Setting price caps for a basket of products simplifies the task of the regulator and allows the firm flexibility to adjust prices in response to changes in costs and increase profits. Provided the price cap ensures that consumers, as a whole, are not worse off as a result of such price increases, the result is increased social welfare. Flexibility also enables the firm to unwind any cross-subsidies which may exist.

pg 9:
Under heading: Why Regulation Isn't Working

The EU Directives on opening up energy and communications markets only set out certain general principles and left Member States considerable scope to decide how such measures should be implemented. As Waverman and Sirrel (1997, p.115) noted: “Experience in many countries shows that the devil is in the detail and that competition does not arrive overnight.”

pg 11/12

Price Regulation. Massey and Daly (2003) report how ComReg rewarded Eircom and An Post, in spite of evidence of serious inefficiencies. The latter firm had also failed to achieve service targets set by the regulator. If the regulator simply allows monopolists to pass on the cost of inefficiencies to their customers, which is what an unregulated monopolist would do, it begs the obvious question – why have a regulator?


pg 12/13:

The regulator supported its decision to ease Eircom’s price cap in 2003 by stating that other licensed operators had asked for this “so that they can achieve the increasing returns expected by their financiers.” It went on to state:
“From the point of view of competition, competitors in Ireland need some breathing room if they are to grow and in future provide increasingly sharp edged competition to Eircom if users are to get what they need on a sustainable basis.”(ODTR, 2002, p.5).

Such measures are unlikely to foster “sharp-edged” competition.

pg 14:

Counting the Cost of Regulation

Total expenditure by the CAR, CER and ComReg in 2002 amounted to €22.5m. (See Table 1). This is roughly seven times the cost of the Competition Authority whose remit covers the entire economy. ComReg’s costs were more than twice those of the CER and four times those of the CAR. In February 2003 the Minister issued a formal direction to ComReg to keep its costs to a minimum under section 13 of the Communications Regulation Act, 2002. Whether this will suffice to curb monopoly regulatory rents is a moot point.

...

Direct regulatory costs represent only a fraction of the true cost of such a regime. The main cost of regulation is due to compliance costs, which are borne by the industry and for the most part are never even measured. In effect regulation suffers from a form of negative externality since the direct costs of regulation borne by the regulator are less than the cost to society resulting in an excessive level of regulation from society’s point of view.


pg 16:

Regulatory Accountability
Regulators are themselves monopolies, which suggests that there is a need to ensure that they are subject to an adequate level of accountability.


Westrup (2002) found that Oireachtas Committees had failed to properly oversee the activities of regulatory bodies because of a combination of inability; ignorance or partiality; and lack of interest. He observed that “the Oireachtas has shown little enthusiasm for carrying out its scrutiny role” (p.55) and described “the apparent unwillingness of different Oireachtas committees to meet with the different regulators on even an annual basis is an indication of a reluctance to take seriously a scrutiny role”.

It appears that committees only take an interest in the activities of regulators when such issues become hot topics politically and present an opportunity for political points scoring. This of course does not permit for the sort of detailed and in-depth performance reviews that are necessary.

Getting the Market Structure Right

The lesson from other countries is that, where competition is possible, it is far superior to regulation at increasing efficiency and ensuring the lowest possible prices to consumers. (Kahn, 1988) Policies which seek to limit competition, and rely instead on regulation to safeguard the interests of public utility customers are therefore misguided.

page 19

Future price reviews should be conducted by means of a public hearing. This would allow the arguments put forward by regulated firms to be challenged directly. It would also require those opposing price increases to present more rigorous arguments.


Customers and customer groups should have a right to appeal decisions on prices and price caps with a single appeals panel responsible for considering appeals against regulatory decisions.

pg 20:

In Ireland’s case a price cap of CPI - 10% for the regulator(s) for five years would encourage moves towards developing effective competition and reducing the scope of regulation. The base point for the regulator’s price cap should reflect ComReg’s actual regulatory outlays rather than its revenue.


Technological developments have fostered increased competition in telecommunications in spite of such policy inadequacies.

Judge

Given that (1) it's published in association with those right-wing nitwits from the Department of Economics in Maynooth and (2) he namechecks both Sean Barrett and Colm McCarthy (two of the biggest twits Irish economics has produced) in his acknowledgements I wouldn't consider this 'research' (most of his sources are 'newspapers' for God's sake) worth the paper it's written on.

eircomtribunal

Judge wrote:

Given that (1) it's published in association with those right-wing nitwits ...I wouldn't consider this 'research' worth the paper it's written on.

You're fast-shooting from the hip and only hitting your own foot there.

If putting consumer interests to the fore and pointing out the weakness of the current regulatory system, which fails to curtail the monopolistic practises of the likes of Eircom is right-wing policy... then I'd be curious which ideological ground you're standing on.

Sean Barrett has played his part in deregulation of the Irish airlines industry. This will of course be regarded by that part of trade unions as offensive that is in reality itself perpetrator of the worst kind of right-wing economic policy (parasitic, monopolistic, anti-competitive), because it comes under the disguise of being left and good for society. Have a look at the performance and negative impact of the CWU on our Eircom debacle.


Massey references Isolde Goggins, thanking her for remarking on his draft. Funny, in a document which proposes the most unkind of cuts to the regulatory bodies:"In Ireland’s case a price cap of CPI - 10% for the regulator(s) for five years would encourage moves towards developing effective competition and reducing the scope of regulation. The base point for the regulator’s price cap should reflect ComReg’s actual regulatory outlays rather than its revenue."

May I also again recommend reading the analysis on comwreck: It's the regualator, stupid!

P

jd

eircomtribunal wrote:

Sean Barrett has played his part in deregulation of the Irish airlines industry.
P

How exactly?
And wrt to his credibility, bear in mind this guy was anti-Dart too in the early 80s..

eircomtribunal

jd wrote:

How exactly?
And wrt to his credibility, bear in mind this guy was anti-Dart too in the early 80s..

Let's keep in mind that Sean Barret is not involved any more than Isolde Goggins of ComReg with the article in question: the author merely thanks them in a footnote for their comments on a draft version of the document.

I don't know enough to seriously discuss the merits or otherwise of Sean Barret. I am not that sure he is anti-rail for example, he sure was anti CIE – and I would not blame him for that.

What I am very much against is to dismiss a highly relevant discussion on the Irish regulatory system (which in my opinion is at the heart of he mind-boggling "achievement" for a young, well-educated and English speaking country to be almost en par with Greece in the EU broadband league table) by character assassination of some referenced persons.

P.

Some accusations against Barret's part in the Dart story are here: http://www.platform11.org/rail_bashing.html

ixoy

eircomtribunal wrote:

by character assassination of some referenced persons.

Kind of funny that: doesn't your whole ComWreck website assasinate some characters in the Govt and in ComReg?

eircomtribunal

ixoy wrote:

Kind of funny that: doesn't your whole ComWreck website assasinate some characters in the Govt and in ComReg?

"What I am very much against is to dismiss a highly relevant discussion on the Irish regulatory system by character assassination of some referenced persons."

I have no intentions to assassinate characters. Most of the persons in ComReg and gov know that and can easily handle the satirical surface of ComWreck. Again, read It's the regulator, stupid! to see that I am not after persons, but what they are doing and what effect their actions have.

P.

Gvork

Sounds like ComReg are happy you have doctored pics they are in and endorse you naming "bending over backwards" awards after them. I do find it ironic that while IrelandOffline is meant to be a professional group meeting the likes of ComReg and the Minister they still allow people on their own forum to call Dempsey a gobshíte and have others ridicule the regulator.
I do agree the regulator needs a severe kick up the ass and the Dept needs to stop spinning their work, but surely if IrelandOffline wants to go further it needs to gain the respect of the various groups out there. You can still be civil and not get personal and still be a strong activist group

jd

eircomtribunal wrote:

I am not that sure he is anti-rail for example,
Some accusations against Barret's part in the Dart story are here: http://www.platform11.org/rail_bashing.html

familiar with it..anyway arguments about Sean Barrett's economics are probably for another forum