## The evolution of liberalisation towards structural reform

Telecommunications was the first network utility to be privatised in the UK, and the first to be liberalised in the United States, in both cases for good reason. The underlying case for liberalising network industries is that it allows competitive pressure to be put on sleepy monopolies, and restricts cross-subsidies that frequently take the form of a tax on competitive medium-sized industry to subsidise domestic consumers (and sometimes politically powerful large business). In the case of telecoms, where technical progress is rapid, competition is the best way of identifying winners and enabling them to replace losers. It is also easier to sustain telecoms as a private regulated utility than with most other utilities, as there is less difficulty in designing a system of regulation that will be credible and therefore sustainable.

While the United States had strong Constitutional protection of regulated utilities, reinforced by extensive case law and underpinned by Administrative Law (Levy and Spiller, 1996), Britain had a sovereign Parliament that was free to change laws, and hence to threaten the stability of any legal arrangements. The essence of credible regulation is that the private investor should have confidence that his sunk investment will not be subject to regulatory opportunism, by, for example, reducing regulated prices to non-remunerative levels. The temptation to act opportunistically is counterbalanced by the threat of the utility to not invest if it finds the regulatory compact has been broken (Gilbert and Newbery, 1996; Newbery, 2000). In the case of telecoms, the rate of growth of demand is high, the need for investment in new technology continuous, and the expertise of the telecoms company in managing the software and equipment critical. All these factors give the utility strong bargaining power in the repeated game between regulator and utility.

Telecoms industries are, however, atypical of other network utilities, in that liberalisation normally retains the initial industrial structure, with entry taking place by competing networks that require interconnection. The United States was relatively unusual in that AT&T agreed to its own break-up into Regional Bell Operating Companies (RBOCs) and the long-distance AT&T, reflecting the earlier functional organisation of the company and the vast size of the United States (Temin, 1987). BT was allowed to retain its local exchanges with their local loops as well as its long-distance network and international lines; a model followed in most modest-sized countries. Even in the United States, competition took place between different interstate networks, each of which had to interconnect with an RBOC. In that sense, long-distance networks had ceased to be natural monopolies, although they continued to be regulated by the FCC.

The quest for increased competition in the United States led to the gradual restructuring of regulation in the privately owned but regulated natural gas industry. The gas industry appeared ideally suited to competition, with over 8,000 producers, the 40 largest of which accounted for 57% of 1990 gas production. They were connected to more than 1600 Local Distribution Companies through 44 major interstate pipeline systems and hundreds of smaller pipeline companies (IEA, 1994). Despite the obvious prospect of competition in supply, well-head gas prices were regulated, creating huge inefficiencies after the oil price rises of the 1970s. The subsequent collapse of the market as long-term contracts were signed at the peak of the oil