# **Annex II: The OECD ETCR Indicators** (from Conway and Nicoletti, 2006)

The OECD indicators of regulation in energy, transport and communication (ETCR) are calculated using a bottom-up approach in which the regulatory data are quantified using an appropriate scoring algorithm and then aggregated into summary indicators by sector of activity in each of the four areas or across them. While this approach involves a degree of discretion, notably in choosing scores and aggregation weights, it has the merit of transparency and makes it possible to trace each indicator value to the underlying detailed information about policies and market conditions.

All of these indicators are constructed from the perspective of regulations that create barriers to entrepreneurship and restrict competition in domestic markets where technology and demand conditions make competition viable. It is important to note from the onset that the sole objective of the indicators is to quantify the degree to which regulatory settings in a given sector are anticompetitive. They make no attempt to measure the stance of regulation with respect to public policy goals other than promoting competition. Including public ownership among regulations that hinder competition in some sectors reflects the idea that, with public enterprises often enjoying soft budget constraints and state guarantees, the playing field is not level in markets where they operate.

Given the sectoral focus of the indicators, the coverage of the various regulatory areas – such as public ownership, barriers to entry or price controls – is tailored to the structural characteristics of each industry. In addition, the indicators are nested, aggregating detailed information into progressively larger regulatory areas according to a pyramidal structure (see Figure). This allows specific aspects of regulation – such as barriers to entry – to be assessed in isolation in country benchmarking or empirical research.

In general, the computation of sectoral indicators involved three main steps:

- First, the basic information is coded into quantitative scores that are increasing in restrictions to competition.

- Second, these basic scores are aggregated into indices that cover specific areas of regulation (henceforth low-level indicators). In all sectors, these low-level indicators cover barriers to entry, i.e. regulations that curb entry and/or distort market structure relative to a competitive outcome (for instance limiting the number of competitors in a given market or the proportion of consumers who can choose between competing suppliers).

- In the third step, the low-level indicators are aggregated into an overall indicator of regulation for the sector.

The way in which the basic scores and/or the low-level indicators are aggregated differs across sectors depending on how many regulatory data are available One potential difficulty with measuring the impact of regulation on competition is accounting for the influence of enforcement. Stringent regulations may not bite on competition if not enforced, and even the most liberal regulatory settings may not promote competition if not implemented correctly. Similarly, in some cases, regulations enacted at the national level may have little impact on markets if applied by local authorities (as gas sector in Croatia) or if local legislation is contradictory in spirit. To go some way towards overcoming this difficulty, data on actual market and industry structure (such as market shares or the degree of vertical integration) are incorporated into some of the sectoral 55