public interest. Fortunately, access agreements between very asymmetric players might break down as the dominant player attempted to exclude his competitor, and in such cases disputes would come to light, as with Clear and Mercury. Since then, the theory of access pricing has been developed (Armstrong, 1996, 1998; Laffont, Rey and Tirole, 1998a, 1998b) so that interconnection is now recognised to be an area of regulatory scrutiny, if not regulatory control.

## I mplicit versus explicit regulation of natural monopolies

New Zealand and Germany lack regulators for at least some network monopolies. In effect, the network owners are subject to implicit rather than explicit regulation – they can pursue profits providing they do not violate competition legislation, and specifically do not abuse their dominant position. This raises the question whether there are important differences between implicit and explicit regulation, and whether in particular there are additional advantages to implicit regulation (apart from avoiding the drawbacks of regulation already noted). Utilities might argue that any action that does not breach the rules of explicit regulation is legitimate. Poorly designed or incomplete regulation (for example, failing to address issues of quality) may then lead to unsatisfactory outcomes. Utilities might believe that the concept of abusing dominance was more encompassing and could include any outcome that damaged consumers compared to the counterfactual of a competitively supplied service, where consumers could choose according to quality and price. In that case implicit regulation might seem to have advantages.

The question is interesting but hard to answer. Poor regulation can normally be improved, although in some jurisdictions this might require new legislation that would be very hard to pass. $ ^{3} $ On the other hand, utilities might argue that abusing dominance was narrowly interpreted as unreasonable high pricing or unjustified discrimination. If there is no case law on other aspects, such as supplying unsatisfactory quality, then it might be hard to address such problems. There is a further and important point demonstrated in Germany. The justified (average) price for using a network will be the average cost, including a normal return on, and depreciation of, the capital. Valuing the capital in the network is therefore central to network regulation, and has been highly contentious in Britain (Newbery, 1997). The problem is whether to value the assets at historic cost, the privatisation sales value, or at written-down modern equivalent asset value (to take the most obvious alternatives). The differences can be profound: for water the sales value was $ £6 $ billion but the written down modern equivalent asset value was estimated at more than $ £100 $ billion.

In Britain, decisions by the regulator are typically appealed to and settled by the Competition Commission, thereby gradually building up suitable precedents. Without that process and the consequential development of case law, the courts examining whether prices were defensible or not might reach economically unsatisfactory conclusions, or might, particularly if the same competition authorities were involved as in regulatory dispute resolution, reach the same conclusions, but probably far more slowly and expensively.