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.

4th TILEC Energy Round Table

On Monday 11 December 2006, from 2.00 to 5.00 pm, Tilburg University organizes the fourth TILEC Energy Round Table. The round table meeting will discuss the highly important subject of consolidation in the electricity sector and the potential (abuse) of market power by dominant firms. As a consequence of the DG-competition sector inquiry, the new wave of consolidations of electricity firms and the protectionist attitude of some EU member states, this topic received a lot of media attention recently and is high on the agenda of policy makers (by invitation only). Read more.

Accountability mechanisms for regulatory decisions (Pierre Larouche and Maartje de Visser)

Pierre Larouche and Maartje de Visser have published a Discussion Paper reviewing the relationship between the Commission, the national regulatory authorities (NRAs) and the national courts in the light of the Commission's proposals for reform as set out in the 2006 Review. The focus is on two interrelated issues, namely the interaction between the NRAs and the Commission through the procedure of Article 7 of Directive 2002/21, and the accountability mechanisms for regulatory decisions, first and foremost review of NRA decisions by national courts, as set out in EC law in Article 4 of Directive 2002/21. The paper finds that the Commission proposals fail to address core issues such as the standard of assessment under Article 7, the accountability for decisions taken upstream of the NRA, and the scope and depth of judicial review and it suggests a number of factors that ought to be taken into consideration in tackling those issues.

Do Mergers and Acquisitions Affect Bondholders in Europe? (Luc Renneboog and Peter Szilagyi)

Do bondholder lose money in mergers and acquisitions (M&As)? Does creditor protection in bankruptcy codes or corporate governance regulation influence the position of bondholders in takeovers? These questions are answered by Luc Renneboog and Peter Szilagyi in their paper "How Do Mergers and Acquisitions Affect Bondholders in Europe? Evidence on the Impact and Spillover of Governance and Legal Standards". The authors show that bondholder wealth is strongly affected by cross-country variations in governance and legal standards. They find that governance considerations are in fact better predictors of Eurobond performance than either deal or firm characteristics.
Firstly, bond returns in both bidding and target firms are systematically higher in M&As that involve firms from the stakeholder-oriented governance regimes of continental Europe. Secondly, cross-border deals tend to induce lower bond returns. However, bondholders reap considerably higher gains if the deal exposes their firm to a jurisdiction with better creditor rights and claims enforcement. This suggests that cross-border M&As provide much greater scope for the functional spillover of creditor protection than has been previously assumed. Finally, bond performance is driven by both asset and financial risk changes, the merging firms' relative size, as well as a negative listing effect. The paper is published at SSRN and in the TILEC Discussion Paper Serie.

The Regulation of Gambling: European and National Perspectives (Alan Littler and Cyrille J.C.F. Fijnaut eds).

Following the colloquium entitled "The European and National Perspectives of the Regulation of Gambling", hosted by Tilburg University in 2005, The Regulation of Gambling: European and National Perspectives brings together a wide range of perspectives from the contemporary debate surrounding the regulation of this sector within the European Union. In bringing together contributions from academics, lawyers and operators with European and national perspectives, this book provides a valuable and timely contribution to what has become an increasingly important issue. As national policies come under closer scrutiny, it is interesting to see how this debate is divided in numerous ways, with varying approaches to gambling, national policies, European law, state monopolies and 'deregulation' all finding a place in this debate, and in this book.
On 23 November 2006 the second colloquium on gambling was organized at Tilburg University. The colloquium dealt with one of the most hotly debated topics within the field of gambling: "The Economic aspects of Gambling Regulation: EU and US perspectives". Read more.

Erik Brouwer appointed as professor of Competition and Innovation

As of 1 November 2006 Erik Brouwer is appointed as professor of Competition and Innovation. His chair is financed by PricewaterhouseCoopers. Professor Brouwer is especially interested in the interrelationships between innovation, competition and productivity. Innovation proves to be strongly affected by market forces, but there is little academic consensus about how the interrelationships work and what market type performs best in terms of innovation and productivity increases. In the coming years, professor Brouwer will work on these and other issues in the area of innovation and competition. He will be affiliated with the Faculty of Economics and Business Administration and with TILEC. He can be contacted at +31 (0)20 568 6133, e-mail: e.brouwer@uvt.nl. Read more in the press release.

Inaugural lecture Damien Geradin

On 3 November 2006, Damien Geradin held his inaugural lecture as Professor of Competition Law and Economics at Tilburg University. The title of the lecture was "Twenty years of Liberalization of Network Industries in Europe: Where Do We Go Now?". The lecture focused on the origins of the EC liberalization policy, chronicled successes and failures and identified the main issues which arose and which are still current now.

Netherlands pensionland

On October 5, together with Netspar, TILEC organised a meeting on the future of Dutch pension funds in a European context. Directive 2003/41/EC creates the possibility of pan-European pension funds and countries like Ireland and Luxemburg are actively trying to attract these funds. At the same time, Dutch pension funds seem to be in a good starting position to take advantage of the opening up of the market; after all they manage Euro 35.000 for every Dutch citizen. Yet, there are also expansion barriers and limits to competition: employees and firms don't have freedom of choice; pension funds have exclusive rights, but are restricted to a specific sector and face line of business restrictions. Experiences in other countries (UK, Sweden) show that reforming the sector should be carefully thought through. The October 5 meeting made an inventory of the various issues, with emphasis on unbundling and good governance. The liberalisation of the pension sector links the two research lines of TILEC (competition policy and financial markets) and will be an important theme in our future research, to be pursued in cooperation with Netspar.

Activities TILEC in the area of communications law reform

With the European Commission's proposals for changes to the European regulatory framework for electronic communications now on the table, TILEC researchers are very active in the policy and scientific discussions now taking place. Already at the beginning of the year, TILEC presented an extensive contribution to the Commission's call for input. This fall, Pierre Larouche and Maartje de Visser are working on a more fundamental contribution on the relationship between the Commission, the national regulatory authorities and the national courts. The work was presented at a ThinkTel workshop in Brussels on 20 September and at a conference organized by WIK and others in Wroclaw on 19 and 20 October, and will be available as a TILEC DP soon. It will be published on the TILEC website. TILEC members will also be participating in the ENCORE Symposium on the Future of Telecoms Regulation on 2 and 3 November. Alexandre de Streel, a TILEC visitor in 2005, defended a thesis on key aspects of that reform (supervised by Jacques Ziller, Massimo Motta and Pierre Larouche) at the European University Institute on 17 October. Earlier this fall, TILEC held a seminar on network neutrality featuring Prof. Greg Sidak from Georgetown University. Filomena Chirico is presenting her paper on the economic rationale for Internet regulation as part of a session on the state of the art in Internet governance research at the First Annual Symposium of the Global Internet Governance Academic Network (GigaNet) on 29 October in Athens.

How (not) to measure competition

Jan Boone is currently working on the project "How (not) to measure competition". In a paper co-authored with Jan van Ours and Henry van der Wiel (CPB), three measures of competition are considered. Two of these (concentration and price cost margin) are well-known, but may be misleading: more intense competition can lead to higher industry concentration and higher average price cost margins. In such cases, these measures incorrectly suggest that competition diminished, while actually it increased. The third measure is new and does not have these problems. It is based on the elasticity of profits with respect to cost: by what percentage do firms' profits fall in response to a 1% increase in costs. If this elasticity is high, competition is intense: firms are punished more harshly for a loss in efficiency. It turns out that, on average this elasticity is around 7 for Dutch industries. However, there is quite a bit of variance: in some industries it is bigger than 20, in others it is close to 0. In general, it is higher in manufacturing than in services. The paper also shows that under certain conditions there is no correlation between the traditional measures of competition and the elasticity that is estimated. For further information you may contact Jan Boone.

Credit registries reduce competition between banks

Private credit registries are an increasingly common way for banks to share information about borrowers - and a helpful tool for reducing losses on unprofitable borrowers. Jan Bouckaert (of the University of Antwerp) and Hans Degryse show that they also reduce competition between banks and raise the cost of credit for good borrowers who have suffered bad luck. The disclosure of information is often presented as a solution to prevent bad borrowers from making markets function properly. But as this study shows, that is not the only story: banks disclose information about their borrowers' repayment history to reduce entry into their market niche. Credit information exchange between banks, common in all Western countries, often occurs through public and private credit bureaus. While the former are mainly organized on reciprocal basis around the central bank, the private registries are initiated voluntarily. More than 50% of these do not require lenders or others to provide data to get access. An important reason why incumbent banks voluntarily disclose their borrowers' repayment history is to reduce the extent of entry by new competitors. Disclosure of repayment histories prevents entry into the segment of good borrowers with bad luck whose repayment histories are pooled with unprofitable borrowers. As a result the incumbent enjoys monopoly rents on these good borrowers with bad luck, increasing its overall profits. While information disclosure is helpful to the banking industry to reduce the losses on unprofitable borrowers, it also dampens banking competition by locking in good borrowers with bad luck. 'Entry and Strategic Information Display in Credit Markets' by Jan Bouckaert and Hans Degryse is published in the July 2006 issue of the Economic Journal.

Job openings at TILEC

TILEC, in cooperation with the CentER for Economic Research is offering a Tenure-Track Assistant Professor in Economics, with a focus on "Industrial Organization, Trade and Competitiveness". We are looking for an expert who will strengthen our group working on "institutions, competition policy and economic regulation" by adding an international trade dimension. In addition we also want to strengthen our group with a legal expert that is specialised in international trade law, global competition policy and economic regulation. More details of this second position will be given in the next TILEC newsletter.

Inaugural lecture Damien Geradin

Prof. D. Geradin will give his inaugural lecture 'Twenty years of liberalization of network industries in Europe: Where do we go now?' on the 3rd of November at 4.15 pm in the Auditorium of Tilburg University. Damien, who holds the chair in Competition Law and Economics at TILEC, was appointed as the first University professor of Tilburg University in 2005, in the framework of an incentive scheme aimed to attract international top level academics. Damien is also affiliated with the College of Europe at Brugge, he is a visiting professor at Harvard University, and Director of the Global Competition Law Center, an internationally respected think tank in the area of antitrust law and economic regulation. He has acted as an advisor to the European Commission and the Worldbank and is also affiliated to the international law firm Howrey at Brussels. In his inaugural lecture, he argues that the liberalization of network industries has been a long and complex process which is not entirely completed yet. The EU Member States have a fundamental responsibility in making liberalization work by correctly transposing EU directives, creating functioning independent regulatory authorities and refraining from protectionist behaviour. Unless Member States take their responsibility, liberalization will remain a theoretical construct at least in some network industries.

AFM-chair on Financial Market Regulation

In 2005, the AFM (the Dutch Regulator for Financial Markets), after competition, selected TILEC to host a special chair focussing on financial market regulation. The University matched the AFM-money so that, in fact, two chairs could be established. Earlier this year, Hans Degryse was appointed as chairholder in economics, while, on September 1, Joe McCahery and Erik Vermeulen were appointed on the chair in Law, see press release (in Dutch). Joe and Erik will organize a conference on hedgefunds later this year.

TILEC at the 23rd Conference of the European Association of Law and Economics

Last 14-16 September in Madrid, the 23rd Annual conference of the European Association of Law and Economics took place. The event offered several members and Ph.D. students of TILEC an opportunity to present their recent work. In addition, the meeting offered the opportunity to make contact again with several colleague researchers that had been visiting TILEC in the past. Four current or former TILEC members presented their papers and served as discussants: Filomena Chirico, Restrictions of competition in Internet Governance. Jun Zhou, In Litigation: How Far Do The “Haves” Come Out Ahead? A Game Theoretical Study. Andrei Medvedev (with Bruce Lyons), Bargaining Over Remedies in Merger Regulation. Evgenia Motchenkova (with Rob van der Laan), Strictness of Leniency Programs and Cartels of Asymmetric Firms. One more TILEC member, Sofia Johan, co-authored the paper presented by D. Cumming: Regulatory Harmonization and the Development of Private Equity Markets. The conference programme, organized in various Panels, covered many research fields, among which: Competition Policy and Regulation, Tort and Crime, Contracts and Property, Corporate Law, Bankruptcy and financial Regulation, Legal rule making. Two plenary sessions were dedicated to discussing: “Private Enforcement of Antitrust Law in Europe” (invited speaker: Jurgen Basedow, Max-Planck Institute, Hamburg) and "Past Behaviour and the Desirable Modification of the Law” (invited speaker: Steven Shavell, Harvard Law School).

Recent Research: Network Neutrality

TILEC has published a report Network neutrality and the nature of competition between network operators written by Paul de Bijl and Viktória Kocsis on request of DGET of the Dutch Ministry of Economic Affairs. The paper deals with the problem that the neutral architecture of the Internet is being challenged by various parties, such as network operators providing the connections to end-users, who are strongly interested in gaining control of the information exchanged over the Internet. The paper analyses what are the effects on competition and welfare of such practices. Currently, there exists very little economic theory on network neutrality, and the paper provides a preliminary analysis of the type of economic modelling that can address network neutrality, as well as of the type of results that can be expected. In terms of policy recommendations, the paper suggests that laissez-faire might be risky because of the potential welfare loss of tactics that undermine network neutrality. To minimize the risk of regulatory failure, imposing minimal obligations on network operators, rather than imposing detailed regulations, may be a no-regret option for policy. The paper suggests that economists take a closer look at this type of option.

Ting Jiang wins Mozaiek grant of NWO

Ting Jiang a junior member of TILEC has won a NWO-Mozaiek grant which will allow her to do a Ph.D.-project at TILEC. Mozaiek is a subsidy program that aims to get more members from minority groups into scientific careers. Ting is one of the 23 winners (across all fields of science) from the 121 applicants that applied in this year's round. Ting's proposal on combating corruption by leniency schemes was supervised by Jan Boone and Eric van Damme.

Hiil Grant for Pierre Larouche and co-workers

Pierre Larouche, Filomena Chirico and Saskia Lavrijssen have been awarded a grant of 211 600 Euros by the Hague Institute for the Internationalisation of Law (HiiL) for the project "Coping with the challenges of globalization". The aim of the project is to analyse from a legal, economic and political perspective how national legal systems can cope with the pressures of globalization. The project uses an interdisciplinary approach to analyse how national legal systems can cope with the pressures of globalization. The project is divided in two sub-projects. The first one deals from an economic and legal perspective with the convergence and divergence of legal systems. Its research questions are: In the light of globalization, why is there convergence or divergence of legal systems and how can it be identified and measured? When and how should divergence be corrected, if at all? The second research question touches upon the evolution of fundamental principles in the light of globalization and new modes of governance for the regulation of economic and social behaviour. Its research question is if and how the fundamental democratic principles of the rule of law and accountability are translated in new forms of governance. The project will start in 2007 and the expected output will be scientific articles for legal and economic international journals and a monograph which will contain a collection of the results of the project.

Bert Willems appointed on position sponsored by Essent

Essent, a Dutch energy company is sponsoring TILEC research on energy issues. Part of the money is used to conduct Blue Sky Research, whereas another part is devoted to research with a more applied nature. The latter is presented, and influenced by discussions, at Round Tables that TILEC organizes. In previous years, Gert Brunenkreeft held the position sponsored by Essent. Now that Gert has been appointed as professor in Bremen, the position is held by Bert Willems, an engineer and industrial economist from Leuven, who has also been affiliated with the California Energy Institute; see the Press release (in Dutch).

TILEC Newsletter

This is the first issue of the monthly newsletter of TILEC, the Tilburg Law and Economics Center. We at TILEC are delighted to inform you about the latest TILEC events and about the research results that have been obtained by the TILEC members. In case, you do not want to receive further issues, simply unsubscribe by clicking on the link at the bottom of this mail. We also apologise in case you receive this mail more than once. TILEC was established in September 2002. After a positive Peer Review Evaluation last year, the parent faculties and the Executive Board of Tilburg University decided to further invest in TILEC. TILEC has set up a Research Program on Market Governance, which comprises two research lines: (i) Market Design, Competition, Regulation and Innovation, and (ii) Corporate Governance and Financial Market Regulation. As TILEC has now matured, we feel ready to send you our newsletter.