Network Industries, Third Party Access and Competition Law in the European Union

Lapuerta, Carlos, Moselle, Boaz | January 1, 1999

This article addresses a set of issues that arise in the context of market liberalization for a special and important class of industries, the so-called “network industries,” which include electricity, natural gas, rail transportation and telecommunications. Each of these industries combines activities that are potentially competitive, such as generation of electricity, with ones that are naturally monopolistic, such as transmission of electricity. This combination produces a unique set of challenges to competition law and policy in designing a market structure and regulatory framework which maximize the benefits of liberalization while effectively controlling any tendencies to monopolistic abuse. We analyze “Chicago School” theories that would support negotiated access as an efficient option. After exploring the apparent contradictions between Chicago School predictions and British Gas’s behavior, we analyze the theoretical weaknesses in the Chicago School approach and identify several reasons why voluntary negotiations should not form the basis of government policy. We review the limited experience with negotiated access to electricity transmission in Germany, which confirms our conclusion that negotiated access would deter the development of competition in the European gas and electricity industries. We propose an alternative frame for regulation based on vertical separation of the network and regulated third party access with cost-based pricing. Incumbents may merit compensation for past investments or for continuing obligations such as universal service. However, any such compensation should be provided by transparent and competitively neutral funding mechanisms.