TILEC 4th Energy Round Table: How to prevent abuse by electricity firms?

Ten years after the opening of the electricity markets, the results of the liberalization are mixed. Some progress has been achieved, but a healthy internal market for electricity has not developed. Abuse of market power by electricity firms is a growing concern, shared by both national and international regulators. Recently DG-competition launched a sector enquiry into the energy sector and concluded that there are 'serious malfunctions' in the market. Further actions by the European Commission are likely to follow in the beginning of 2007. In anticipation of these events, TILEC organized the 4th Energy Round Table on the consolidation of the electricity sector and the potential (abuse) of market power by dominant firms. Together with experts from the industry, the regulators and anti-trust authorities, two solutions were discussed to address market power in the wholesale market: (1) Merger policy is a very useful tool in the electricity market, but standard merger rules based upon HHI-indices and SSNIP-tests cannot be applied. Economic and legal practice has to create new and sector-specific rules to define relevant markets and to test the anti-competitive effects of a merger. (2) Market Monitoring and automatic mitigation is a solution which is used extensively in the U.S. to curb market power by electricity firms. The European Union has taken a different approach with respect to market power relying more on traditional anti-trust rules (Art. 82). Nevertheless, the European Union would gain a lot from improving the existing monitoring functions. The topic of the workshop forms part of the larger research at TILEC on the organization of energy markets. For more information you may contact Bert Willems.

What makes the water sector different?

In a special issue of the Dutch economics journal Economisch Statistische Berichten devoted to "Market Order and Competition", Eric van Damme published a paper dealing with the above question. While "water" shares many of the same characteristics of network industries such as telecommunications and energy, it is treated very differently from these both at the European and the national level. For example, in the Netherlands, there is a prohibition on privatization and there is no national regulator: there is a general trust in traditional political control mechanisms to guard the public interests, to ensure efficiency and to keep prices down. The new "Water Law" that was sent to parliament at the beginning of December maintains these aspects.  In a special issue of the Dutch economics journal Economisch Statistische Berichten devoted to "Market Order and Competition", Eric van Damme published a paper dealing with the above question. While "water" shares many of the same characteristics of network industries such as telecommunications and energy, it is treated very differently from these both at the European and the national level. For example, in the Netherlands, there is a prohibition on privatization and there is no national regulator: there is a general trust in traditional political control mechanisms to guard the public interests, to ensure efficiency and to keep prices down. The new "Water Law" that was sent to parliament at the beginning of December maintains these aspects. The paper "Leveren van water: met marktwerking meer nut", argues that benefits can be achieved by bringing water policy more in line with that in other sectors. In particular while (voluntarily) benchmarking has yielded efficiency improvements, the benefits have not yet been passed on to consumers: Dutch water companies generate (much) higher profits than a regulator, insisting on cost based pricing, would allow. These issues were also discussed in a TILEC seminar on December 15.

"Interconnection and Competition among Asymmetric Networks in the Internet Backbone" by Eric Jahn and Jens Prüfer The internet has become a global medium of data exchange. At the core it comprises a number of backbone networks. For e-commerce, Voice over IP or Video-on-Demand services to meet customer expectations, internet backbone providers must offer world-wide connectivity, meaning that they have to enter into contracts with each other to interconnect their backbones. A variety of interconnection regimes are encountered in practice. The specific regime of interconnection, i.e. the contractual rights and duties of the providers involved, influences competition for end-users, and vice versa. In their paper "Interconnection and Competition among Asymmetric Networks in the Internet Backbone", Eric Jahn and Jens Prüfer examine this interrelation between interconnection and competition in the internet backbone market by making use of a simple game-theoretic model explaining how networks with asymmetric sizes choose among different interconnection regimes and compete for end-users. More>>

The internet has become a global medium of data exchange. At the core it comprises a number of backbone networks. For e-commerce, Voice over IP or Video-on-Demand services to meet customer expectations, internet backbone providers must offer world-wide connectivity, meaning that they have to enter into contracts with each other to interconnect their backbones. A variety of interconnection regimes are encountered in practice. The specific regime of interconnection, i.e. the contractual rights and duties of the providers involved, influences competition for end-users, and vice versa. In their paper "Interconnection and Competition among Asymmetric Networks in the Internet Backbone", Eric Jahn and Jens Prüfer examine this interrelation between interconnection and competition in the internet backbone market by making use of a simple game-theoretic model explaining how networks with asymmetric sizes choose among different interconnection regimes and compete for end-users. The paper shows that a direct interconnection regime (peering) softens competition compared to indirect interconnection since asymmetries become less influential when networks peer. Sufficiently symmetric networks enter into a peering agreement while others use an intermediary network for exchanging traffic. These findings confirm to the regulatory approaches taken by non-US policymakers. In contrast, US policymakers prefer peering agreements among relatively asymmetric networks.
The main practical implications of the model both for networks, consumers, and policy makers inside and outside the US are the following:
1. If, besides Intermediary and Bill-and-Keep, networks also consider Paid Peering as a possible type of interconnection, we expect to observe more Paid Peering in the future. This would translate to more Peering agreements in general which, in turn, would lead to higher profits of networks.
2. This development would harm consumer surplus because of higher average prices for end-users.
3. Since the emergence of Paid Peering also lowers demand for IP-Transit, top level backbones can be expected to lose revenues.
4. As all top level backbones are US-based, non-US policy makers do not include profits from IP-Transit in their calculations. Instead of considering to punish large networks who refuse (Bill-and-Keep) Peering to smaller ones, these policy makers should consider to restrict Peering because networks do not care about the fact that fiercer competition under Intermediary benefits consumers, and peer excessively instead. In contrast, since US-based policy makers do account for profits from IP-Transit, they should favour Peerings among networks sufficiently asymmetric in size. Hence, they should seek to discourage large networks from refusing to peer with smaller ones. These implications could also be applied to a telecommunications market which was both unregulated in terms of inter-carrier compensation fees and not subject to price discrimination regarding destinations of calls.

Inaugural lecture Hans Degryse and Workshop on "The Microstructure of Financial Markets"

The Markets in Financial Instruments Directive (MiFID) in Europe comes into play in November 2007, and intends to create a fair level playing field between trading platforms. The MiFID seems to squeeze stock exchanges from two sides. Regulators call for further transparency concerning trading interests, and actual trades (see e.g. the Economist November 2006), and at the same time the exchanges' clients clamour for lower fees and threaten the exchanges with establishing new trading platforms (see the initiative of seven large banks to set up a new trading venue). Understanding how inter-market competition works therefore becomes more and more important. On January 19, 2007, the TILEC-AFM Research Network on Financial Market Regulation organizes a workshop on "The Microstructure of Financial Markets", on the occasion of the inaugural lecture of Hans Degryse, Professor of Financial
Market Regulation. Eminent speakers will provide you with the necessary insights in the latest developments on the microstructure and market design of different financial markets. The inaugural lecture of Hans Degryse is entitled "Competition on financial markets: does market design matter?". The lecture will start at 16.15 hrs at the Auditorium. More details.

Tilburg University Makes Substantial Additional Investment in TILEC

Following a successful assessment by a Peer Review Committee in 2005, Tilburg University, together with our two parent Faculties, has now decided to invest a substantial amount of money in TILEC for the period 2007-2011. These extra investments will enable us to finance the hiring of new researchers to strengthen our team, in areas such as Trade and Globalization as well as Healthcare Regulation. Furthermore, we will also be able to expand our visitors programme. We are very grateful to our University stakeholders for their appreciation of our work and the confidence they put in us.