Meier The overlooked option

Self-regulation in Infrastructure Industries
1. Auflage 2006
ISBN: 978-3-89936-415-6
Verlag: Josef Eul Verlag
Format: PDF
Kopierschutz: Adobe DRM (»Systemvoraussetzungen)

E-Book, Englisch, 347 Seiten

As governments continue to privatize infrastructure services like electricity or gas the importance of private infrastructure providers increases. After some years these providers are often confronted with stricter state regulation that impacts their freedom of action and reduces their profitability. Providers often experience such stricter regulation as an unexpected risk that could not have been prevented.

This book casts a different light on state regulation. In a first step, it shows that stricter state regulation is no unexpected force, but often a political feedback that reacts to actions of providers. This insight enables providers to develop strategies to deal with political feedback.

In a second step, this book presents self-regulation as a tool to manage regulatory risks. In six case studies spanning the institutional history of several infrastructure industries like power, telephone and railroads in the US and Germany it analyses self-regulation in depth. The insights distilled from these case studies enable current infrastructure providers to better understand the opportunities and pitfalls of self-regulation and help them to develop their own regulatory strategy.

Über den Autor:

Christoph Meier, born 1971 in Hildesheim, worked as trainee for Deutsche Bank AG and studied business administration at the Catholic University of Eichstätt/Ingolstadt and at the University of Edinburgh. Since 1998 he has worked for the Boston Consulting Group, primarily in the power and gas business. In 2002 he graduated from the John F. Kennedy School at Harvard University with a Master of Public Administration. At Harvard he worked as a Fellow for Taubman Center of State and Local Government. In 2004 he got a doctorial degree in economics at the Catholic University of Eichstätt/Ingolstadt.

Autoren/Hrsg.

Meier, Christoph

Inhaltsverzeichnis

1;PREFACE;6
2;TABLE OF CONTENTS;8
3;ABBREVIATIONS;12
4;EXHIBITS;14
5;I THE OVERLOOKED OPTION: SELF-REGULATION;16
6;II THE INFRASTRUCTURE DILEMMA STRUCTURE AND INCOMPLETE BARGAINS;22
6.1;II.1 The Infrastructure Dilemma Structure : Substantial and Specific Investment, Lock-in and Hold-up;22
6.2;II.2 The Regulatory Bargain and Credible Commitment;28
6.3;II.3 Incomplete Bargains and Feedback;40
6.4;II.4 The Provider’s Challenge: Commitment and Flexibility;56
7;III FILLING THE REGULATORY BARGAIN: ALTERNATIVES;58
7.1;III.1 Spot Markets;58
7.2;III.2 State Regulation;60
7.3;III.3 Self-regulation;70
7.4;III.4 Cases Studies in Institutional History;85
8;IV US TELECOMMUNICATIONS: THE POWER OF FEEDBACK;87
8.1;IV.1 The Rise of BELL’s Monopoly;88
8.2;IV.2 Dual Service: Unleashing Business Feedback200;91
8.3;IV.3 VAIL’s Bargain: State Regulation for Consolidation;94
8.4;IV.4 Unraveling State Regulation: Business and Political Feedback through MCI’s Entry;100
8.5;IV.5 A New Bargain for State Regulation: AT&T’s Divestiture and the 1996 Telecommunications Act;106
8.6;IV.6 Power of Feedback and the Limitations of State Regulation;109
9;V US TELEGRAPH: CREDIBILITY THROUGH LOWER BARRIERS OF ENTRY;112
9.1;V.1 Overcoming Precarious User Commitment via Government Subsidies;112
9.2;V.2 Rapid Expansion, Competition and the Failure of Negotiated Selfregulation;114
9.3;V.3 Self-regulation by WESTERN UNION through Lower Barriers of Entry;115
9.4;V.4 Credible Commitment through Lower Barriers of Entry;120
10;VI US RAILROADS: SUCCESS AND FAILURE OF VARIANTS OF SELF- REGULATION;122
10.1;VI.1 Overcoming Precarious User Commitment via Land Grants;123
10.2;VI.2 Successful Self-regulation: Interconnecting Rail Networks via Associations and Express Companies;128
10.3;VI.3 System Building and Competition;130
10.4;VI.4 Failed Self-regulation (I): Voluntary Rate Associations;134
10.5;VI.5 Failed Self-regulation (II): Consolidation - Community of Interests and Trusts;139
10.6;VI.6 Failed Self-regulation (III): The ICC as Enforcer;141
10.7;VI.7 The Stable Regulatory Bargain: The ICC as State Regulator;143
10.8;VI.8 Temporarily Supressing Business Feedback: Expanding State Regulation on Competing Modes;147
10.9;VI.9 The Final Unraveling of State Regulation: Barriers to Change and Breakdown;149
10.10;VI.10 Successful Self-regulation (II): Deregulation with Long-term Contracts;150
10.11;VI.11 The Opportunities and Pitfalls of Self-regulation;151
11;VII INTERNET BACKBONE INDUSTRY: CREDIBILITY WITHOUT PROFITABILITY;153
11.1;VII.1 Internet Technology and its Economic Implications;154
11.2;VII.2 Development of the Internet Backbone Industry;158
11.3;VII.3 Interplay of State Regulation and Self-regulation;163
11.4;VII.4 Endurance of the Balance of Power and Looming Feedback;170
11.5;VII.5 Ways out of the Deadlock: Lessons from other Infrastructure Industries;190
11.6;VII.6 Credibility instead of Profitability;193
12;VIII GERMAN GAS: TAILOR-MADE PRIVATE CONTRACTS;195
12.1;VIII.1 State Regulation via Municipal Concession Contracts;195
12.2;VIII.2 Competition: Dual Concessions and Electricity;198
12.3;VIII.3 State Operation instead of State Regulation;199
12.4;VIII.4 Self-regulation I: The Wholesale Market;200
12.5;VIII.5 Self-regulation II: The Retail Market;203
12.6;VIII.6 Carefully Tailored Self-regulation;208
13;IX GERMAN ELECTRICITY: COMBINING STATE AND SELFREGULATION;210
13.1;IX.1 Innovation I: Mixed Enterprises;211
13.2;IX.2 Innovation II: Light-handed Regulation;218
13.3;IX.3 Innovation III: The Associations’ Agreement;226
13.4;IX.4 Ways out of the Deadlock;281
13.5;IX.5 Complements, Not Substitutes;299
14;X MANY OPPORTUNITIES, BUT NO WONDER CURE;300
14.1;X.1 The Providers’ Challenge: Commitment and Flexibility;301
14.2;X.2 The Tightrope Act of Self-regulation: Balancing Commitment and Flexibility;306
14.3;X.3 Homogeneity and Few Stakeholders as Key Success Factors;309
14.4;X.4 Influence of Providers on the Regulatory Framework;311
14.5;X.5 Stability of Self-regulation;314
14.6;X.6 Self-regulation: Not Only in the Interest of Providers?;316
15;REFERENCES;320

Leseproben

V US TELEGRAPH: CREDIBILITY THROUGH LOWER BARRIERS OF ENTRY (p. 97-98)

The US telephone history has shown how a provider can use state regulation as a tool to make its own commitments more credible. However, there are other tools with different characteristics as well. The institutional history of the US telegraph industry illustrates one: lowering the barriers of entry. At first glance, this looks paradoxical, because the true advantage of a monopoly is its high barriers of entry. However, the entry of competitors had a similar effect on WESTERN UNION as a cold on a human being. While colds are a nuisance everyone would like to avoid, they do provide protection against influenza, which can be considerably more than a nuisance, posing a real threat to health and life.

The origins of the US telegraph system can be traced back to ALFRED MORSE’s patent. However, this was not sufficient to roll out the infrastructure as in BELL’s case. In addition, the first line between Washington and Baltimore needed government subsidies (Section V.1). Once its advantages were proven, many telegraph providers sprung up, creating a network that spanned the US (Section V.2). While negotiated self-regulation failed, the industry consolidated itself into the quasi-monopolist WESTERN UNION. It was able to prevent political feedback and make its commitment credible by (unintentionally) lowering the barriers of entry (Section V.4). Under this institutional arrangement, WESTERN UNION had to beat off several entrants, but was able to enjoy high profits without state regulation or, somewhat later, very light state regulation. This chapter demonstrates that there are alternatives to state regulation as a credible commitment tool (Section V.4).

V.1 Overcoming Precarious User Commitment via Government Subsidies

The origins of the telegraph industry lie in ALFRED MORSE’s crucial invention in 1837. He soon put his patent into a partnership in order to finance the cost of building a telegraph system. In contrast to Alexander BELL, he had severe difficulties obtaining sufficient financing to build a first line which could demonstrate the benefits of the new infrastructure service. In the second quarter of the 19th century, an infrastructure service like telegraphy was something completely new. There were no financiers who were willing to provide the considerable upfront investment without knowing whether users were going to accept the new service or not. When BELL needed financing for a similar project 30 years later, on the other hand, he could refer to the positive example of the telegraph. This shows how the major problem with all new infrastructure industries is that the initial investment by a provider is extremely risky, as it is very difficult to find sufficient users who are willing or able to commit themselves credibly to using the new service.

This commitment problem is often overcome by the state. As the union of all citizens – and potential users – the state can act in the interest of potential users and provide the very risky seed financing via subsidies. This was the approach that MORSE adopted. He was able to convince Congress to appropriate a subsidy of $30,000 for the construction of a test line between Washington and Baltimore. When the line had proved the technological feasibility and the huge potential benefits of the telegraph, MORSE offered the US government the right to build a line between Washington and New York City, because ‘the telegraph, with its great potentials for good or evil, should be controlled by the government rather than by private individuals or associations’.264 When Congress could not reach agreement, MORSE started to license technology to private entrepreneurs.

Even though telegraphy became a private business from that point on, the state continued to play an important role. It continued to provide ‘seed money’ to roll out this crucial infrastructure in areas in which there was not yet sufficient demand. The most important example is the subsidizing of the first transcontinental telegraph line of 1861. Southern states and the State of California offered similar incentives to accelerate the roll-out of telegraphy.