sou · GTB34 · 2006-01-01 00:00:00 — The market has successively developed from an unregu- lated monopoly to the present legally regulated market which is increasingly exposed to competition. The increased competition is explained to a large extent by the transition from a business con- trolled by the government through to a market where state companies are subject to the same regulatory code as all other market players. Developments in the past twenty years are, however, to a great extent also a result of technical progress and increasing interna- tionalisation of the market. Successive rule changes have therefore often been a reaction to the fact that such changes in the business environment brought about a change in conditions and new op- portunities in the market. It is not really possible to separate the effects of technical pro- gress from the effects of liberalisation. The Regulatory Reform Commission believes, however, that the regulatory system con- tributed to the emergence of competition and that it thus had positive effects on the market. By means of the Telecommunications Act, which imposed stricter requirements on dominant players, the market has gradu- ally been opened to new players through such things as toughening up the right of access to others' telecommunications networks. The steering of the market towards liberalisation and in- creased competition has taken place mainly through successive government regulation of the players behaviour. In that the regu- latory code imposed more stringent requirements on dominant players than on others, small and newly established players have been able to assert themselves and survive to greater strength. Be- tween 1990 and 2002 the number of companies on the market in- creased from 49 to 293. As regards prices, there is for example a lot to indicate that changes in the rules had an effect. Firstly through a tightening up of the Telecommunications Act in 1997 PTS (the and ) was able to actively intervene and determine interconnection conditions for fixed telephony, above all as regards interconnection rates, which meant that more interconnection contracts could be made and that the interconnection rates fell considerably. The measure that in addition probably had the greatest signifi- cance for opening up competition in the market for fixed teleph- ony is the so-called pre-selection reform, completed in 2002. The increased competition meant that could not continue to cross-subsidise in fixed telephony, for example between local calls and long-distance calls. The rebalancing of the price structure that took place brought increased effectiveness because prices be- came fairer. This should also have led to better adaptation and de- velopment of the service offering. On the mobile market the changed rules were not as successful. The consumer prices in are relatively high in comparison with the other Nordic countries and are at about the aver- age. In the area there are now more networks in addition to Telias nationwide fixed network. In particular the mobile net- works that have come into existence have taken a growing and now considerable share of the market. Even if a large propor- tion of telecommunications requires the use of 's fixed net- work, there is competition not only between service-providing op- erators, but also between infrastructure alternatives. But access to the access network also gives advantages in other and new parts of the market. still has a unique position in the market because the company is alone in having a fixed access network that reaches all permanent dwellings and business estab- lishments in the country. There is all reason to assume that liberalisation has contributed to the substantial increase in productivity in the sector. Above all the increased competition should have put pressure on to improve the efficiency of its operations. It is, however, difficult to determine what are the effects of technical development and what are the effects of liberalisation. A clear lesson from the development of the Swedish market is that in a network industry more advanced institutional support may be required than in other industries in order for com- petition to really function. It seems, however, as though the legis- lator imagined when the Telecommunications Act came into exis- tence that on this market it would be sufficient to rely on the regulatory codes in the form of contractual, company and compe- tition law that make up the general basis of trade and competition. Subsequently this proved to be wrong, especially in two respects – protection against monopoly pricing and rules for interconnection. Consideration was also given to separating responsibility for the copper access network from other telephony in a separate company or authority in a similar way as applied at the same time to the rail- way and electricity industries. One assessment is that such a separation would have made the emergence of competition easier, particularly for fixed telephony in 1993–1997, and perhaps would also have had some impact on de- velopments as regards broadband/ADSL. In both cases the com- peting companies encountered a price squeeze in which squeezed the between the price of semi-finished products (access to the access network and/or ADSL) and the price to con- sumers. The arguments for vertical separation of still remain. At the same time the conditions for such a separation have been made more difficult by the company having been listed on the stock exchange. It is not possible to assess the costs and conse- quences of such a separation. The relatively slow rate at which certain reforms have been im- plemented could be criticised. Ambitions for a high degree of accessibility in connection with the allocation of frequency licences also risk limiting the market. The Commission submits the following proposal as regards the telecommunications market. The government should set up an inquiry to investigate and make proposals for measures that can improve efficiency of procedure and reduce the time taken for a PTS decision to gain legal force after appeal. PTS should be instructed to develop price monitoring of the market. The government should appoint a special to submit proposals on how is to achieve an economi- cally more effective spectrum use through a system with more market-controlled spectrum allocation. Regulation and regulatory authorities The so-called school was critical at an early stage to the assumption that it was possible to achieve effective regulation. (1971) pointed out the following: The central tasks of the theory of economic regulation are to explain who will receive the benefits or burdens of regulation, what form regulation will take and the effect of regulation upon the allocation of resources. The starting point was empirical studies that showed that a regulated industry was not more efficient than an unregulated in- dustry and that the prices were not lower. There is a choice between the so-called school, which leaves markets to fend for themselves without the supervision of regulatory institutions, and a more regulation-friendly school. The extremities in this context can be described as on the one hand the state only guaranteeing basic ownership rights and legal security, and on the other the state taking on the entire responsi- bility for and running infrastructures. The Regulatory Reform Commission considers that strong in- stitutions will always be required in relation to markets for infra- structure services. We believe, however, that there are good reasons for the government to consider the schools objections to the possibility of effectively regulating network markets. This ap- plies above all to the conditions governing regulatory authorities. The regulatory institutions have not developed at the same rate as markets have been liberalised and the role of the state has de- creased. Experience from the financial markets shows that the sig- nificance of powerful regulatory bodies for creating sound markets has been underestimated. Liberalisation is still in its infancy, and its success will depend on the degree of autonomy and power of the institutions that develop. If the regulators are strengthened there is less chance for special interests to influence them. Special interests, however, vary in strength and effectiveness and a market can be vulnerable if the special interests do not balance out each other. Rules are also needed to achieve equality between buyers and sell- ers. Regulation in is, in the opinion of the Commission, relatively weak. One reason for this may be our weak tradition for this type of regulation, for example in comparison with the . Another reason is the organisation of the authorities and the tasks they have been allocated by the Riksdag (Swedish parliament) and the government. Several of the regulation authorities are small. The duties of the authorities vary considerably. There are relatively large variations between how the various markets are regulated. None of the authorities seem to be a pure government agency, their tasks vary considerably. Authorities must be independent In the opinion of the Commission strong, separate and independ- ent regulatory authorities are often a condition for successful liber- alisation. By independent is not meant independent of political de- cisions. We mean that independence involves applying statutes and regulations objectively and impartially. The authority should be fully responsible for decisions and measures within the framework of its given mandate. The Riksdag and the government should also continue to regulate operations through statutes and regulations in the sense of clarifying which decisions the authorities may make (of course not how the authorities should decide on individual is- sues). Strengthen the independence of the heads of the authorities Those who head the government authorities are at present subject to the same conditions as other directors general. In the opinion of the Commission there is reason to discuss strengthened job secu- rity for certain heads of regulatory authorities. The reason for this is that the authorities that the Commission is analysing in many cases have a significant responsibility for standard-setting. Their decisions affect millions of consumers, major asset values and in certain cases considerable future investments. They may also have credibility problems, since in most of the industries there are very large and strong state interests. In the areas being examined by the Commission it is also true that the latter interests and authorities are responsible to the same ministry. A regulator in theory must be all-knowing, benevolent and able to be bound in advance to a code of practice. In practice such a form of regulator is less probable. A strong head of an authority may, however, as shown above, affect many different interests. In order to facilitate effective decision-making and future career paths it is therefore necessary to improve security of employment. Such strengthened security of employment must also be linked to clear accountability procedures. The premise is, however, that it is the government that appoints the heads of the authorities. Strengthen the clarity of roles There is a risk that the organisation of government regulatory au- thorities will lead to credibility problems. The authorities that the Commission is analysing are all under the , Employment and Communication. At the same time the ministry has owner responsibility for a number of dominant players in the markets being examined by this Commission. Thus the govern- ment is both regulator and owner of companies with a decisive in- fluence over the infrastructure that is of significance for competi- tion in the markets. In addition, the administration of the regula- tory authorities takes place in an environment that handles sectoral policy and competition issues. One way of isolating the regulatory function may be to the regulatory authorities under one ministry without specialised responsibility for the areas in which the companies/utilities operate. In the opinion of the Commission transparency needs to be in- creased. Increased transparency is also a further way to strengthen the regulatory authorities and increase independence. the sense that discussions concerning regulatory risks and taking over regulatory controls can be analysed in a more independent way. There may also be a tendency towards irreversible regulatory control. The authorities are constantly seeking new tasks to justify their activities. One way of influencing the above-mentioned problems is to expose the regulatory authorities to systematic and recurring evaluation. There are also other deficiencies in regulation and supervision. Certain of the markets being examined by the Commission are not subject to supervision or regulation despite the existence of mo- nopolistic enterprises. In comparison with sector-specific regulators, competition au- thorities, by virtue of their collective knowledge, experience and institutional culture, seem to be better suited to handle questions concerning protection of fair competition. For the same reason sector-specific regulators seem better suited than competition au- thorities to handle economic regulation. Such regulation is by its nature continuous rather than periodical and is based to a large ex- tent on sector-specific knowledge. This is not, however, as obvious when it comes to regulation of entry. The Regulatory Reform Commission believes that it is not just interest groups outside the political system who may have an inter- est in a certain type of regulation; consideration must also be given to the structure and function of the political system. There is a po- litical economy that determines how liberalised markets will be regulated. There are interests that influence both the liberalisation process and the relation between the regulators and the regulated companies. The Commission submits the following proposal as regards regulation and regulatory authorities. The independence of the part of the energy agency that regu- lates distribution should be strengthened and it should be transformed into an independent authority. The new authority should be financed by direct charges. The government should consider whether such a form of financing should also include the newly formed . Heads of government authorities that mainly handle regulatory and supervisory issues should have stronger independence and augmented security of employment. The Commissions pro- posal applies to the heads of the , the Authority, the , the and and a possi- ble independent part of the energy agency. and , the , the and a possible independent part of the energy agency should be placed under the . The regulatory authorities should be subject to systematic and recurring evaluation. A committee should be instructed to review the regulatory and supervisory authorities in the six industries being examined in this report. The Authority should be annually com- missioned to analyse , the and (national grid) since the extent of supervision of these is relatively small. The Authority should be annually commissioned to report on the function of regulatory control within the taxi industry and to analyse the competition situa- tion in the industry. The states corporate governance The state is largest company owner. Most of these com- panies operate in markets where the state-owned company holds a dominant market position. In most of the industries examined in this report state-owned companies also have a decisive influence over the infrastructure that is of significance for competition in the markets. This applies particularly to the infrastructure that acts as a bottleneck for the entire market. The state – in its capacity of both regulator and owner of the dominant player – has an integrated and unique possibility to work towards a market development with increased competition and ef- fective utilisation of resources. A number of operations are natural monopolies and for that rea- son are state-owned. They may also be state-owned because the government wishes to achieve objectives that are not purely com- mercial, for example to promote a particular public interest. The Commission considers that more effective corporate governance in state-owned utilities and enterprises will contribute actively to in- creased economic efficiency. Strengthen the ownership function in the Government Offices and increase clarity of roles is not the only means to achieve more ef- fective operations in the areas covered by this report. If liberalisa- tion is to lead to both higher economic efficiency and better achievement of social goals, corporate governance should be strengthened. factors are more effective evaluation of targets set and clearer accountability procedures. This assumes in turn clarity of roles and transparency for a more effective evaluation of the companies. In our opinion, there is an evident risk of uncertainty and ill-de- fined roles in the governments ownership organisation. In effect there are three strong objections to the present organisation. A very strong objection is that both the regulatory authorities and the companies subject to regulation and/or supervision are within one and the same ministry. This is very pronounced for the industries analysed in the report. Another strong objection is that the ministry handles policy areas in which many of the government owned companies op- erate. This applies mainly to companies that are subject to commercial profitability requirements and that operate in an environment exposed to competition. A third objection is that the , Employment and Communication is also responsible for competition issues that are to be handled in parallel with ownership issues in state- owned companies. In our opinion these objections indicate considerable conflicts of role and interest that may weaken the owner role and also reduce credibility in other areas. In the assessment of the Commission a more integrated ownership function should be created, which is associated with the Swedish Government Offices. The function should be kept separate from the regular organisation in the Gov- ernment Offices to reduce obvious conflicts of role and interest. There are several conceivable alternatives as regards strengthen- ing the ownership function. For example the ownership function could be integrated for all state companies and public utilities in a ministry without specialised responsibility for the areas in which the companies/utilities operate, or else a special ministry could be set up for state corporate governance. However, we have instead considered the of one or more state holding companies in order to make corporate gov- ernance more effective. A disadvantage of such a solution is, how- ever, the control function: Who will watch the watchman? All models have their advantages and disadvantages, and the Commission cannot make any decision as to the alternatives pre- sented above. We submit a proposal, however, that the ownership function in the Government Offices should be strengthened and isolated. Develop the goals of state-owned companies In the assessment of the Commission the present ownership or- ganisation leads to several problems. The dual targets – achieving economic efficiency and social goals – often cause problems. Con- trol models for state-owned operations cannot be simply trans- ferred from private commercial business operations. There are often goals that are not effectively evaluated. This may apply to public enterprise, such as SJ whose profitability targets have not been achieved for long periods. This seldom entails any consequences for the board of directors and management. The pre- sent economic evaluation is not fully credible, since in practice no requirements are imposed to achieve the profitability targets set. At the same time a companys management may understand im- plicit goals on the part of the owner, since state-owned companies handle operations that work in segments where both economic and political goals are to be achieved. State enterprises often have an objective function that is differ- ent from private commercial operations. For that reason it is not always appropriate to have goals concerning shareholder value, which owners of companies listed on the stock exchange, for ex- ample, may have in their objective function. Shareholder value is not an appropriate premise when the purpose of owning the com- panies is other than financial. In addition, most of the state-owned companies are not listed on the stock exchange, and therefore it may be difficult to assess their real value. It is, however, possible to get an idea of the value via company valuation models. Many of the state-owned companies/utilities operate within both legal and natural monopoly areas, as well as in competition with other companies. However, no explicit goals for the various operations are set, but the goals seem to apply to the com- panys/utilitys entire operation. This may lead to distortion of competition and faulty allocation of resources. The governance policy, for example the required return, in the opinion of the Commission, should be adapted to the fact that the operations are carried on under fundamentally different market and competition conditions. State-owned companies often have ambiguous as regards the purpose of the company. We propose clear and realistic profit- ability targets that are supplemented by operational objectives such as customer satisfaction, availability or timeliness. These goals are not financial and reflect what the owner wishes to achieve with the operations. In many cases there are no such goals or else they are unclear. If the social goals of the companies are established and/or clarified a higher degree of transparency will be achieved. Further, it is not appropriate to use portfolio theory when man- aging state-owned companies. Companies that are managed as though they are part of a portfolio assume that the principals are considering selling or buying companies from or to the portfolio in the foreseeable future. When the principal instead intends to retain the companies for a very long time, almost in perpetuity, it is not fruitful to have an ordinary portfolio theory approach. It is reason- able for the government to speak of a company group instead of thinking in terms of portfolios, and the Commission has noticed impulses towards changes in this direction. It is important that citizens/owners can obtain information as to goals and results in the state-owned companies. The goals may of- ten be multiple, unclear and incomplete. Several of the Commis- sions proposals, such as the ownership function and goal formula- tion, concern increased transparency. The government is responsible for competition policy, but in the opinion of the Commission it also has a further important and more direct role as owner of the companies/utilities that own the infrastructure that functions as a bottleneck for the entire market. The Commission has not had the opportunity to analyse the need for further rules for the state-owned companies. We would like to see, however, that competition issues are given greater weight in the governments ownership policy and that the requirements con- cerning the companies information on this issue are increased. According to the Commission, the government should also analyse the liberalisation process more stringently. The background is of course the dominance of the state-owned companies in most of the markets that have been liberalised. The Commission submits the following proposals as regards state corporate governance. Strengthen the ownership function in the Government Offices. The goals of state-owned companies should be made more visi- ble, clear and measurable.