sou · GTB34 · 2006-01-01 00:00:00 — In many cases market failures can be handled by means of vari- ous types of regulation. Regulation may, however, fail and entail costs or other less desirable effects. In this context the effects of market power are of special inter- est. There are several different ways of handling market power. The best way is that entry into the market – or the mere threat of en- tering the market - will lead to the elimination of market power. Competition per se may in such a case be the force that disciplines the market. In many markets such a mechanism may be expected to function well. However, several of the markets studied by the Commission – , electricity, postal and railway services – are mainly characterised by the fact that they are network industries with high entry costs. It appears to be less likely that the problems of market power would disappear entirely in such industries. It is true that liberalisation means that many decisions are left to the market players, but even after liberalisation various measures are required to counteract the utilisation of market power. In the table below a summary is given of the trends for a number of key indicators in the respective markets Table Summary of developments after liberalisation according to the Regulatory Reform Commission Incomes in relation to trade and industry in general The figure below presents the price trend in relation to the CPI for the years 1980-2004. In order to give comparability over time and between industries the effect of taxes has been excluded. If the prices in an industry excluding taxes had increased at the same rate as the average prices excluding taxes the index would have been 100. Of the industries examined, taking into account the entire pe- riod surveyed, only had a lower trend of price increases than the total net price index (NPI, which is CPI excluding taxes and subsidies). Consumer prices in the electricity sector decreased in relation to the NPI in the 1980s and 1990s, but in the period from 2000 to 2003 increased at a considerably faster rate. The rail- way, , postal and taxi sectors have seen faster price in- creases than the NPI for the entire period. For the three latter sectors consumer prices increased in relation to the CPI only from the beginning of the 1990s. It is important to point out that the CPI measures a varying percentage of total consumption in the different markets. Graph Price trend relative to the CPI, excluding tax Sources: Statistics and own calculations. Since the CPI only measures the price trend for a part of the mar- ket it must be supplemented by other price measurements to en- able an assessment to be made of the total price trend. According to the the average price for health- care related by taxi rose by about 30 percent between 1993 and 2003. and , , reckons that the price level for pre-sorted bulk mail fell by about 30 percent between the beginning of the 1990s and the beginning of the 2000s. According to Statistics analysis of list prices for business tickets by domestic , these increased by 18 percent between 1996 and 2003. Electricity prices for industry increased by 37 per- cent between 1996 and 2004 according to the . The productivity trend shows how much more is produced without changing the intermediate consumption. The most rele- vant measurement is total productivity, i.e. when consideration is given to the input of both labour and capital. There are, however, relatively few studies for the markets in question where any at- tempt has been made to measure total productivity. According to Falkenhall and (2004) Posten ABs la- bour productivity in letter production increased by about 30 per- cent between 1993 and 2000. According to , the Swedish In- stitute for Transport and Communications Analysis, the number of train kilometres produced per employee increased substantially in the railway sector in the 1990s. The increase in productivity, measured as the number of paid ton-kilometres per employee, has also been considerable for . Veiderpass (2004a and b) in two studies has examined produc- tivity in the electricity supply industry before and after liberalisa- tion. The studies show that there are distinct differences in pro- ductivity before and after liberalisation. In the period 1970-1995 total productivity fell on average by 16.9 percent, while in the pe- riod after the electricity market reform there was a productivity increase equivalent to 19 percent. The Regulatory Reform Commission has compiled data from Statistics business database on trends in the number of companies on each respective market. It is important to point out that we do not look at the growth in numbers of companies in neighbouring industries that may also have been affected. As shown in the table below, the number of companies, according to this source, has increased in all sectors apart from the sector. Table Number of companies in the respective sectors in 1987 and 2002 and percentage change Source: Analysis of Statistics statistics by , . An indicator of the degree of competition in a market is the distri- bution of market share. In all the markets studied the three largest companies have a very high total market share. The predominant company in the industries examined has, with the exception of mobile , a considerably higher market share than the next largest company. Apart from in the market, however, the market share of the largest company decreased between the middle of the 1990s and the beginning of the 2000s, but it is important to point out that many airlines entered the market after 2001. The effects of liberalisation. The Regulatory Reform Commission has decided to mainly base its evaluation on social efficiency. It is, however, difficult to assess social efficiency. The Regulatory Reform Commission started from previous evaluations and supplemented them with indicators of social efficiency. The assessments are thus made more in the form of discussions around a number of important variables. The six in- dustries we have been instructed to investigate are described below. The electricity market reform meant that the vertically integrated elements of electricity generation, electricity trading and distribu- tion were to a certain extent separated. Electricity generation and electricity trading were exposed to competition, while distribution remained a monopoly. The company concentration decreased after liberalisation in that the local/regional monopolies in generation and sale of electricity were removed and the Nordic market was opened. After liberali- sation the ownership structure, however, has become increasingly concentrated. The number of producers, network companies and companies trading in electricity have become fewer, mainly because the larger groups have bought up small and medium-sized compa- nies. This trend was already taking shape before the reform and is not a direct consequence of liberalisation. The price of electricity excluding tax for the final has risen in relation to the net price index. Since it has not been possi- ble to separate the effect of liberalisation on electricity prices, above all from the hydrological effects, the Regulatory Reform Commission cannot assess whether electricity prices are higher or lower than would have been the case if the electricity market re- form had not been implemented. There are advantages and disadvantages of the present structure of the electricity market. The advantages are that the market has been opened to competition and that supervision of the monopoly has been strengthened, which are essential conditions for the mar- ket to be able to generate prices that distribute generation re- sources and electricity use as effectively as possible. The disadvan- tages are that the separation of the various components of the business has increased transaction costs for both and producers. The Regulatory Reform Commission believes that the electricity market has not yet achieved its ultimate form but that the reforms carried out have contributed to a positive development. The Com- mission believes that it is neither possible nor desirable to return to the former market structure. The Commission does not have sufficient reference data to be able to assess whether the present market structure is sufficiently satisfactory or whether the advantages of a further vertical separa- tion outweigh the disadvantages. A first step towards strengthened competition is to tighten up the regulation of the network compa- nies and above all the supervision of regional network companies. If this measure is not sufficient, the network companies should be fully separated from the operations that are exposed to competi- tion. Regardless of how the future electricity market is constructed, the Regulatory Reform Commission believes that it is probable that electricity prices will rise in the long term. The Nordic coun- tries have the lowest electricity prices and integration with more countries will thus imply increased electricity prices. The Regulatory Reform Commission believes that the govern- ment has a central role in strengthening the position of consumers in the markets in which they have an unequal relation with the producers. This is true of the electricity market and the Commis- sion therefore makes proposals that strengthen the position of household when entering into agreements, when there is a time lag in settling electricity bills and when there is an electricity supply failure. These proposals are presented in the section on con- sumer protection later in the summary. is to supervise all networks but in practice has mainly supervised the local networks and to a very small extent (if at all) supervised the transmission and grid tariffs. The Regula- tory Reform Commission considers it very important that all net- works are supervised. Later in the summary we submit a proposal that the independence of the part of the that regu- lates distribution should be strengthened and that it should be transformed into an independent authority. In the opinion of the Commission more transmission capacity is needed between and other countries in order to create a more efficient electricity market. This is needed both to increase competition and to reduce the need for reserve capacity. But there are objections to this solution. We would like to point out that the Regulatory Reform Commission has not had access to estimates that show how socially efficient an expansion would be. Regardless of whether more transmission capacity is built or not, the need to monitor concentration at the power generation level remains. Increased monitoring of developments by the competition authorities is therefore needed, as well as clearer requirements as regards mergers and acquisitions of companies. Despite the fact that the intention was to integrate the Nordic electricity generation markets, no Nordic supervisory institutions have yet been created. Co-operation between the Nordic supervi- sory authorities is limited. Increased co-operation between the Nordic supervisory authorities and harmonisation of the regulatory framework would strengthen the monitoring of competition in the electricity market. The international market is at present undergoing rapid transformation. This of course is also having an effect on the Swedish domestic market. The old flag-carriers are experi- encing major economic problems while so-called low price compa- nies are taking an increasing share of the market. Since the market is undergoing rapid transformation it is difficult to draw conclu- sions as to the effects of liberalisation, even though it has probably played a decisive role in many of the processes now taking place. Liberalisation of the market meant that obstacles to en- try into the Swedish domestic market decreased. Even though at first companies entered the market, SAS was able after a couple of years to strengthen its position in the domestic market instead. In recent years, however, competition has again increased. It is difficult to describe the price trend in the market after liberalisation. It is not given that competition entails lower prices, since companies can choose to compete on quality rather In , however, most companies that have tried to enter the domestic market have competed on price rather than quality, with one important exception, . Few companies have been able to survive, however, and their price level may thus only be regarded as sustainable in the short term. When the market was liberalised SAS held a dominant po- sition and this made it necessary to enable entry on equal terms in order to create competition. Since SAS was partly state-owned this made heavy demands on the regulatory framework and supervision of the market. Government monitoring of the market is needed by the and the Swedish Competi- tion Authority and the available rules must be used to prevent abuse of a dominant position. The Regulatory Reform Commission considers that the separation of the formerly undifferentiated , , into the , which maintains the railway network, and , who operate the traffic, has had a positive effect on developments in the railway sector. The Commission considers that the productivity improvement that has taken place to a certain extent can be attributed to the division and the in- creased clarity of roles that ensued from it. The reform of the railway market was carried out in stages and the market is today only partly liberalised. Market entry for goods traffic is in principle free, but for passenger traffic, SJ has the sole right to business that the company considers can be run at a profit. Other passenger traffic is procured by the National Public Trans- port Agency (interregional traffic) and the regional transport au- thorities (regional and local traffic). The existence of competition in the tendering procedure for traffic business has also had a positive effect on the railway market. The available information indicates lower costs for the contracting entities and that the additional players in the market have contrib- uted to developing traffic and making it more effective. The prices of railway journeys have increased considerably faster than the general price trend. It should be noted that the price measurement includes both business procured through a competi- tive tendering procedure and business carried on by SJ under exclu- Large parts of the price measurement therefore refer to business that is not exposed to competition. The price increases may to a certain extent be explained by the fact that high-speed train traffic using the X2000 was introduced during the period. The X2000 is a new product with shorter travel- ling time, which is partly aimed at new customer categories. On certain routes there is competition with the airlines and the pricing has been affected by this. Price differentiation on the total range of railway services has also increased. For regional traffic the price increase may to some extent be at- tributed to the fact that the regional transport authorities subsidies have decreased. As a consequence of strained finances some re- gional transport authorities in recent years have decided to raise ticket prices and reduce the degree of subsidy in the business pro- cured. A general problem in the sector is the very weak profitability for the operators. This applies both to the dominant companies and the new players in the market. Weak profitability, which is also found in the rest of Europe, according to the Commission, is a very important experience of the period after liberalisation. It is true that weak profitability already existed before liberalisation, but the new allocation of roles in the sector and the way of steering the state operators is based on an assumption that the earnings capacity of the operators is on a level with other players in the transport market. The reform process in the railway sector has been carried out in stages and over a relatively long period of time. The gradual implementation of liberalisation has been a disad- vantage as regards the availability of so-called common functions in the sector. SJ for example, retained ownership and control over stations and terminals for a long time, despite the fact that the market had been opened to new players. Similarly, the decisions on allocation of capacity and the operative traffic routing remained for a time under SJ. This was probably unfair to or deterred new play- ers in the market. Certain maintenance and service functions also remained with the dominant players, which led to deficient com- petition in the market for services in the sector. The Regulatory Reform Commission has made a number of ob- servations in the railway sector in the course of its work which we believe should be given attention in framing future railway policy. SJs exclusive right to profitable passenger traffic should be de- fined more precisely and linked to certain conditions regarding scope and content of the traffic. Decisions on infrastructure investments should be more clearly linked to macroeconomic benefit. Economic incentives should to a greater extent be included in the agreements between the and the operators. In the postal market the substitute competition from other forms of communication has increased in the period after liberalisation. This makes it difficult to differentiate between the effects of liber- alisation and the effects of technological development. The Regulatory Reform Commission believes that the existence of competition has had a positive effect on the letter market. Since CityMail is the only significant competitor to on the letter market CityMails market entry has thus been of major im- portance to the development of competition. Since the regulatory framework was not clear before liberalisation, liberalisation has probably played a decisive role in allowing CityMail to establish itself in the letter market. The Regulatory Reform Commission believes that the rebalanc- ing of the price structure that has taken place has meant increased efficiency, since prices have become fairer, but that the price differ- ences between the parts of the letter market exposed to competi- tion and those not exposed to competition are remarkably large. The Regulatory Reform Commission is of the opinion that in- creased competition has put pressure on to improve the efficiency of its operations. The number of letters forwarded per employee in Posten AB increased substantially between 1993 and 2000 and this increase can be mainly attributed to the liberalisation of the postal market and the conversion of the Post Office into an independent company. now processes about the same number of items of mail with considerably fewer employees, which indicates that the previous number of employees was high in rela- tion to the workload. After the liberalisation of the letter market many new companies entered the market, at the peak there were over 100 companies li- censed to carry on postal business activities. However, only one company has succeeded in establishing a relatively large-scale op- eration. Since there are no legal obstacles to entry into the part of the market where Posten is at present the only company, using an- other definition the letter market can be said to be entirely exposed to competition. The same applies if substitute competition is taken into consideration. The Regulatory Reform Commission considers that the need for sector-specific legislation was underestimated at the time of liber- alisation. The fact that the old regulatory code was abolished be- fore a new one was ready may be criticised, but under the circum- stances prevailing it seems to have been necessary. The fact that the 1994 Postal Services Act contained no provisions governing access to postal infrastructure proved subsequently to be a misjudgement of the possibilities of achieving functioning competition without sector-specific rules for the postal market. The government could have more actively ensured that set a good example as regards not abusing the company's dominant position in the market. The Commission submits the following proposal as regards the postal market. Separate from Posten. Give PTS (the and ) the right to terminate unutilised licenses for carrying on postal business activities. Postens price ceiling should be retained but reformed. An investigation should be made as to whether it would imply a financial burden for Posten to supply services, how great this burden would in that case be and how it should be fi- nanced. Adjust the quality requirements imposed on Posten to a level closer to the actual level. PTS should be given a competition promoting role in the postal market. Introduce provisions in the Postal Services Act concerning for- warding. PTS should publish an annual report as to whether Postens prices for services are cost-based. PTS should draw up a method in collaboration with Statistics to follow the price trend for the entire letter market. The Regulatory Reform Commission considers that the more sub- stantial increase in prices for taxi journeys compared with the NPI can mainly be explained by the fact that the costs of production of taxi services has increased more than the general price trend. Since 1993, however, prices have increased in total more than production costs (measured as a taxi index). The Regulatory Reform Commission believes that the reason for the increased prices over and above the cost increases is mainly that the product has changed. Many taxi attach a high value to the waiting time and reduced waiting times therefore provided scope for higher prices. Reduced waiting time requires more cars and thus fewer journeys per car, which must be compensated by higher prices. The prices of private individuals taxi journeys have increased at a faster rate compared with the county councils taxi journeys. This can probably be explained by the fact that private individuals taxi journeys were previously subsidised. Before liberalisation even those who procured large volumes had to pay the same price per journey as private individuals who made few journeys. If the costs of producing state-financed and private journeys respectively are different, differentiated prices will imply increased efficiency. The previous regulation seems to have kept wages at a level that did not reflect labour supply and demand in the taxi market. Liber- alisation therefore meant reduced incomes for those employed in the taxi sector. Wages have also been forced down by increased problems of illegal activities in the taxi business. This pressure does not, however, entail an adjustment to the correct wage level. It is obvious that the regulators underestimated and misjudged the transition problems and inconvenience that liberalisation would involve, in particular as regards the position in relation to the producers and the lack of competition on equal terms. The Regulatory Reform Commission considers that the decision-mak- ers actions to rectify the problems arising after liberalisation were far too passive and long drawn-out. There is no authority that has the overall responsibility for fol- lowing developments in the taxi market. This has meant that knowledge of market conditions and development of competition in the taxi market is deficient. The Regulatory Reform Commis- sion believes that in a recently liberalised market there must be an authority that has the main responsibility for following market de- velopments. The taxi market is a clear example of this need. The Commission submits the following proposal as regards the taxi market. In order to enhance competition there is a need for better or- der in the taxi market as regards reporting of incomes.