Paper prepared for the
1st International Conference
Economics and Management of Public Utilities
15-16 July 2010
University of Eastern Piedmont “A. Avogadro”, Novara
University Bocconi, Milan
Italy
Proposed Parallel Session: Liberalization and Regulation Public Policies
Liberalization and regulatory reform of public utilities in Italy:
a cross-sectoral analysis
Dr Alberto Asquer
Abstract
This study aims to contribute investigating the difficulties to reap the intended benefits from
liberalization and regulatory reforms of network industries. This issue is tackled through the
'theoretical lenses' of new institutional economics, in particular by applying the Institutional
Analysis and Development (IAD) framework. The study is a comparative analysis of
liberalization and regulatory reforms of network industries within the same country context. In
Italy, various reforms of network industries have been made and implemented during the 1990s
and 2000s, especially in water, gas, electricity, telecommunications, railways, highways, local
public transports, and urban solid waste. These reforms generally resulted in greater or lesser
degrees of changes of regulatory institutions and industry structure, but in relatively modest
competitive pressures on the whole. This analysis suggests that the difficulty to implement
liberalization and regulatory reforms of network industries in Italy may be explained by various
concurrent mechanisms, which have to do with the rent-seeking behavior of the actors of the
industry's community, the rise of barriers to entry against competitors, and the risk of collusive
practices between regulators and regulated. This study suggests some generalizations concerning
the effectiveness of reforms intended to open up network industries to competitive pressures.
Keywords
Liberalization, regulatory reform, industrial restructuring, network industries, Italy.
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Liberalization and regulatory reform of public utilities in Italy:
a cross-sectoral analysis
1. Introduction.
Within the field of study of liberalization and regulatory reform, the so-called 'standard
prescriptions' (Joskow 1996, 1998) provide a design template for reforming vertically and
horizontally integrated industries which exhibit natural monopoly traits. These prescriptions
include the privatization of state-owned enterprises, the unbundling of potentially competitive
segments of the industry from the natural monopoly ones, the regulation of access prices in order
to prevent discrimination, provisions for ownership separation between vertical activities,
deregulation and facilitation of market entry in the competitive segments, incentive regulation in
natural monopoly segments, and direct access of retail customers to wholesale markets. These
prescriptions can potentially result in improved service quality and lower prices because of
competitive pressures in the non-natural monopoly segments of the industries, in particular if
barriers to entry and switching costs are lowered.
When this reform design template is translated into practice, however, the promised
performance effects may not be realized. A significant body of literature highlights that
liberalization and regulatory reforms of public utilities do not necessarily result in enhanced
competition. Newbery (1999), for example, argued that privatization and restructuring of
network industries may not lead to improved overall welfare effects if they are not coupled with
pro-competitive actions. Gómez Ibáñez (2003) showed that regulatory reform of infrastructure
industries is undermined by the politics of regulatory capture, contract incompleteness, rent
seeking and expropriation, regulatory discretion and improper unbundling. Landy et al. (2007)
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pointed out that reforms which aim to create competitive markets may result in inadequate or
misguided interventions or even in spectacular failures if they are not assisted by political
oversight. On the whole, this literature suggests that attention to the design of liberalization and
regulatory reforms should be coupled with a deep concern with the political economy of
implementing liberalization and regulatory reforms of network industries, such as public utilities.
This study aims to contribute investigating the difficulties to reap the intended benefits from liberalization
and regulatory reforms of network industries. This issue is tackled through the 'theoretical lenses' of new
institutional economics (Ménard 2003; Ménard and Shirley 2005; Glachant 2002). New institutional economics
holds the view that economics should be understood taking into account a number of features which make the
market mechanism depart from the simplifying assumption of the standard neoclassical model. New institutional
economics highlights, for example, the role played by the distribution of property rights, asset specificity, contract
incompleteness, transaction costs, information asymmetries, economies of scale and scope, and externalities
(Williamson 1975, 1985; Coase 1960, 1988; Demsetz 1968; Laffont and Tirole 1993). According to this perspective,
industrial behavior and performance of network industries should be understood taking into account the specificity
of the physical, technical, institutional and economics features of these industries.
This study aims to develop explanatory research arguments for the industrial behavior
and performance effects of liberalization and regulatory reforms of eight network industries in
Italy. Empirical evidence consists of episodes of liberalization and regulatory reforms of the
electricity, gas, water, telecommunications, railways, highways, local public transport, and urban
solid waste industries in Italy carried out in the 1990s and 2000s. As we shall see, these episodes
of liberalization and regulatory reforms resulted in quite different effects in terms of industrial
behavior and performance – as illustrated by the degree of openness to new entrants, market
power retained by the incumbents, concentration of the industry, prices, and investments. On the
whole, according to various policy reports issued by sectoral regulators (in the sectors of
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electricity, gas, water, and telecommunications) and 'think tanks', the effects of these reforms
have been relatively unsatisfactory so far, with respect to the intended stated objectives of
policy-makers (in general, those to 'modernize' aging infrastructure, improve customer service,
and/or reduce consumers' prices) (AEEG 2009; CO.N.VI.R.I. 2009; AGCOM 2009; ANCE
2009; Arrigo 2007; Bozzi 2006, 2009; Chiades and Torrini 2008; CNEL 2005; Giuricin 2008;
Lagambiente 2008; Osservatorio Nazionale sui Rifiuti 2008; Viotto 2008). The comparative
analysis of these episodes will lay the foundations for generalizing arguments concerning the
design and implementation of liberalization and regulatory reforms.
The rest of the paper is organized in four sections. Section two will outline the theoretical
framework employed for analyzing the industrial behavior and performance effects of
liberalization and regulatory reforms. Section three will illustrate the essentials of regulatory
institutions, industrial structure, industrial behavior, and performance of the eight network
industries in turn. Section four will compare and discuss the industrial behavior and performance
effects of the reforms across the industries. Finally, section five will draw generalized arguments
concerning the implementation and effects of liberalization and regulatory reform in network
industries.
2. Theoretical framework.
The implementation of liberalization and regulatory reforms has been widely researched
in many industries and countries. Previous works on this topic include studies on the industries
of electricity (Joskow 1996; Green 1996, 1999; Yarrow 1995; Arocena et al. 1999; Nelson and
Dowling 1998), gas (Doane and Spulber 1994; Hawdon and Stevens 2001; Rosellon and Helpern
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2001; Ahrend and Tompson 2005; Mathias and Szklo 2007), water (Cowan 1997; Tisdell et al.
2002; Wilder and Lankao 2006), telecommunications (Boylaud and Nicoletti 2001, Gutierrez
and Berg 2000; Melody 1999; Hulsink 1999; Levy and Spiller 1996), railways (Lodge 2002,
2003; Filippini and Maggi 1993; Nilsson 2003), highways (Albalate et al. 2009: Benfratello et al.
2009; Estache et al. 2000; Schultz 1980), local public transports (Yvrande-Billon 2006; YvrandeBillon and Ménard 2005; Gagnepain and Ivaldi 2002; van de Velde 1999; Andersen 1992), and
urban solid waste (Bel and Miralles 2003; Bartone et al. 1991). Among these studies, some
comparative works have been made with a country-specific focus, especially the UK (Armstrong
et al. 1994; Bishop and Thompson 1992; Kay et al. 1988).
These works show that efforts to liberalize and regulate network industries may result in
improved performance effects, but – more often than not – they also miss delivering the expected
efficiency and effectiveness gains. Reasons for modest performance effects of liberalized and reregulated network industries include, but are not limited to, poor policy design, over-optimistic
expectations, governance failure, regulatory capture, and incumbents' anti-competitive behavior.
Another reason is the way in which the particular features of country-specific institutions (e.g.,
stability of constitutional rules, completeness of legislation, and jurisdictional integrity) facilitate
or hamper the working of network industries' regulatory system (see, for instance, the
comparative work of Levy and Spiller 1996, 1994). An interesting issue arises, then, concerning
whether, within given country-specific institutions, is there any difference in the way the
industrial behavior and performance effects of liberalization and regulatory reforms vary across
sectors. In other terms, it is possible that country-specific institutions may be more or less
supportive of liberalization and regulatory policies, and also that, within a given country, some
5
network industries are (possibly because of sector-specific features) more or less responsive to
liberalization and regulatory reform efforts.
This issue is tackled by analyzing, in comparative perspective, liberalization and
regulatory reforms of network industries within the same country context. In Italy, various
reforms of network industries have been made and implemented during the 1990s and 2000s,
especially in water, gas, electricity, telecommunications, railways, highways, local public
transports, and urban solid waste. These reforms generally resulted in greater or lesser degrees of
changes of regulatory institutions and industry structure. In terms of industrial behavior and
performance effects, some of them led to enhanced competitive pressures and improved service
delivery while others did not significantly affect consolidated market positions and service
quality. On the whole, reform efforts generally delivered modest results, at least with respect to
the presumed benefits from implementing liberalization and regulation policies in a way akin to
other countries' experiences (as it was intended, in general, by policy reformers). What makes it
so difficult to implement liberalization and regulatory reforms of network industries in Italy?
What accounts for the variety of performance outcomes achieved after liberalizing and reregulating network industries?
Liberalization reforms are understood here as removal or reduction of legal restrictions to
market access. The main aim of liberalization of network industries is to enhance competition in
the provision of network-based services. The design of liberalization policy may take different
forms, e.g., opening access to all of network-based services or only part of them, and providing
ways of granting limited access to the field or of lowering barriers to entry in order to allow
multiple competitors to operate within the same network infrastructure. Regulatory reforms,
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instead, are conceived here as changes of regulatory systems, that is, of processes designed to
correct the behavior of monopolist or market dominant firms. Regulatory reforms coupled with
liberalization typically consist of a shift of the mode of regulation from public ownership to
franchise competition, or discretionary regulation, or regulation of access, price, and quality
(Gómez Ibáñez 2003). Liberalization and regulatory reform are also often combined with
privatization policies, that is, the substitution of incumbent public sector agencies with business
companies in the provision of network services. In the episodes of liberalization and regulatory
reform of network industries in Italy, privatization generally consisted of the reincorporation of
incumbent public sector providers into business companies, which could be then partially or fully
sold to business investors, or form joint ventures with private operators.
New institutional economics is the approach which is employed here to analyze how
features of sector-specific institutions affect industrial behavior and performance effect of
liberalization and regulatory reforms. Within this approach, the Institutional Analysis and
Development (IAD) framework suggests a way to understand how action arenas produce
outcomes through the pattern of interaction between rational agents (Ostrom et al. 1994; Ostrom
1999, 1998). In the formulation of Ostrom et al. (1994), the action arena (i.e., the social space
where actors interact) is affected by three classes of causal conditions, namely features of the
physical world (i.e., attributes of natural resources and technical systems), of actors' community
(i.e., attributes of actors' preferences, shared understanding, canons of acceptable behavior, and
resource allocation), and of rules (i.e., required, permitted, and prohibited actions with associated
sanctions). Patterns of interactions, which arise from the opportunities, constraints, and
incentives that actors face, result in outcomes which are subject to actors' evaluation. Depending
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on actors' evaluative preferences, outcome can feedback into actors' preferences and action
situations.
Following the IAD framework, we can model the industrial behavior and performance
effects of liberalization and regulatory reforms as follows (Figure 1). Actors of the action arena
include firms which own of the network infrastructure, firms which operate network services,
regulators, and users. Context features include the physical attributes of the goods or services
delivered through the network and of the network infrastructure (e.g., possibility of common
carriage, feasibility of unbundling, territorial extension of the network), characteristics of actors
of the policy community (e.g., firms' ownership structure, degree of independence of the
regulator, users' behavior and trend of the demand for network services), and constitutional and
legislative rules (e.g., competences attributed to sub-national governments, exclusive rights
granted to public sector agencies, and safety and environmental requirements). Actors are
assumed to behave according to canons of instrumental rationality, e.g., firms aim to maximize
target functions such as long-term profit, market share, or budget. Patterns of interaction result in
various dimension of performance outcome, e.g., service quantity and quality, prices, and
investments.
< insert Figure 1 about here >
The model is relatively under-specified in various respects in order to fit sector-specific
institutions. For example, network infrastructure and network service operator firms may be
combined in one only company (e.g, in the Italian water industry), or be legally separated into
two different companies which belong to the same holding firm (e.g., in the Italian railways
8
industry), or may belong to separate owners (e.g., in part, in the Italian telecommunications
industry, in which network services are delivered by both the same network infrastructure firm
and various other operators). Regulatory functions may be played by an independent authority
(e.g., in the Italian electricity and gas industries), or a governmental body (e.g., in the Italian
railways industry), or sub-national governments (e.g., in the Italian local public services
industry). The model, therefore, allows to contrast and compare alternative institutional
arrangements of network industries within the given country-specific context.
3. Regulation, industrial organization, and performance of utilities in Italy.
3.1. Water
The water industry in Italy is regulated, by and large, according to the terms provided by
the 1994 reform (Act 36/1994) (Citroni et al. 2007; Anwandter and Rubino 2006; Goria and
Lugaresi 2002). Local regulatory authorities (Autorità d'Ambito), which are established by local
governments within water administrative jurisdictions called Ambiti Territoriali Ottimali
(Optimal Territorial Areas or ATO), award franchise concessions for the provision of all water
services (i.e., drinkable water supply, sewage and wastewater treatment). Franchises are awarded
through tender offer competitions, but exemptions to this rule (especially, those provided by two
subsequent reforms of local public services in 2001 and 2003, and lastly by Legislative Decree
135/2009, which aligned national legislation to EU directives on public services of general
economic interests) allowed many local government-owned water firms to be assigned water
concessions without opening water service provision to the market. Investments in water
infrastructure and water tariffs are regulated according to the terms provided in a plan attached to
9
the franchise contract. Water tariffs are subject to a price-cap mechanisms according to the terms
provided by the national committee which supervises the use of water resources (CO.N.VI.R.I.
or Comitato Nazionale di Vigilanza sulle Risorse Idriche) and applied by each local regulatory
authority.
The water industry in Italy is characterized by geographically localized production and
distribution systems. Water catchment works required massive investments in infrastructure,
especially in the mountainous and droughty areas of the country. Pipeline transport system
generally carry water within limited range, apart from a few notable exceptions (e.g., Sele
aqueduct in the south-east of the country, about 244 Km long). Local distribution and sewage
networks present typical traits of natural monopoly, provided that dual networks are not
economic and common carriage is hardly feasible. Wastewater treatment brings about
considerable externalities, especially in terms of health and environmental protection.
The structure of the water industry is progressively consolidating, at least with respect to
the 1980s, when national statistics reported about 23,500 water operators in the country.
Nowadays, water services are organized in 92 OTAs into which the country territory has been
divided, each comprising about 0.65 million people on average. Water concessions have been
awarded in 69 OTAs only, which include a population of about 80% of the country. In these 69
OTAs, water services are provided by 114 firms, comprising local government-owned
companies (about 57%), mixed public-private ownership companies (14%), public companies
floated in Milan stock exchange (14%), and privately-owned business companies selected
through tender offer competitions (5%). The industry includes some relatively large 'regionalscale' operators, such as Acea based in Rome (serving about 7 million users), AQP in Puglia (4.5
10
million), Hera in Bologna (2 million), Smat in Turin (2 million), Abbanoa in Sardinia (1.6
million), and Iride in Genoa (0.9 million). In the other 23 OTAs in which no water concession
has been awarded according to the current regulatory system, water services are still provided by
an uncertain number (possibly thousands) of small water firms generally owned by local
governments.
The performance of the water industry has been long characterized by problems of
leakage, unreliability of supply, pollution, and public mistrust towards tap water for drinking.
Water concessions provide investment plans which are generally intended to improve reliability
of supply and water discharges treatment, but evidence shows that investment programs are
considerably delayed. For example, the national supervising committee showed that, in a sample
of 54 plans, actual investments amounted to about €3.3 billion rather than €5.9 billion expected
(56%) (CO.N.VI.R.I. 2009). Water tariffs have significantly increased with respect to previous
decades (in which they had been kept low because of anti-inflation targets), but they are
relatively lower than those charged in other main EU countries. For instance, in a sample in 48
OTAs water tariffs amounted to about €1.42 per m3 (for consumption of about 250 m3/year)
(CO.N.VI.R.I. 2009), while tariff ranges charged in other countries amount to 1.93-2.72 €/m3 in
France, 2.87-4.30 €/m3 in Germany, and 2.08-4.39 €/m3 in the UK (ASTRID 2008).
By and large, the objectives of the 1994 reform have not been fully realized. On the one
hand, the original fragmentation of the water industry has been reduced and several water firms
seem to have improved their delivery service. On the other one, relatively few private operators
and investors have entered the water industry, and anyway there are no data to assess the
efficiency and effectiveness of the franchised water firms yet. Particular issues arise, moreover,
11
with respect to the effectiveness of the regulatory system itself: local regulatory authorities,
which are controlled by local governments, have generally directly awarded water concessions to
incumbent local government (fully or majority) owned firms. The regulatory system, then, does
not really provide any pressure to improve water firms' performance, either from market forces
(as tender offer competitions are absent or substantively precluding access of business
companies) or from incentive regulatory mechanisms.
3.2. Gas
The gas industry was subject to various regulatory changes during the last about 15 years.
In 1995, the main gas operator in the country, the state-owned ENI (Ente Nazionale Idrocarburi,
established in 1953), was privatized (although the government retained ownership of a
significant minority share) and the sector fell under the jurisdiction of the newly established
regulatory authority for energy and gas (Autorità per l'Energia Elettrica ed il Gas). In 2000, the
government transposed EU directive 98/30/CE with Legislative Decree 164/2000, which opened
up access to any segment of the gas industry. In production, the decree provided the termination
of ENI's legal monopoly of extraction. The Ministry of Industry, Commerce and Handicraft
Work would issue licenses for importing gas from abroad and import quantity caps were placed
on largest operators. Accounting or legal separation was required between gas storage firms and
other segments of the industry. Firms operating transport of gas were required to be legally
unbundled from those managing other segments of the industry. Gas distribution, which fell
under the exclusive competence of local governments (Act 2578/1925), would be competitively
tendered out to business companies for periods of 12 years. In 2004, Act 239/2004 completed the
12
transposition of EU directive 2003/55/CE by providing derogation to tariff and access rules to
firms which invested in infrastructure for gas imports, including liquified natural gas (LNG)
plants.
The gas industry is characterized by heavy dependence on imports from abroad.
Domestic production steadily declined in the last two decades, while consumption boomed,
especially after the 1986 ban on nuclear energy. Imports are mainly delivered through pipelines
from Algeria (about 51%), Russian Federation (37%), the Netherlands (12%) and Norway. A
minor amount of imports are shipped by sea in LNG form. Storage facilities, generally consisting
of depleted gas fields, ensure continuity of transmission in face of demand fluctuations and
interruption of supply from abroad. Distribution networks, which are currently present in about
6,400 out of 8,100 local governments in the country, are managed either directly by local
governments agencies or by business companies, which – before the 2000 reform – were
generally chosen through ad hoc negotiations.
Before the regulatory changes in the 1990s and 2000s, the structure of the gas industry
was vertically integrated. The state-owned company ENI enjoyed quasi-monopoly in both
production and import, controlled storage, transmission, and dispatching through its subsidiaries
Stogit and SNAM, and exerted a dominant position in distribution through its subsidiary Italgas.
After the regulatory changes, the gas industry has been moderately opened to competitive
pressures, even if companies of the ENI group still play a pivotal role. ENI provides about 86%
of domestic gas production and about 75% of gas imports (AEEG, 2008). The number of
competitors in importing gas increased in the last decade (from 3, in 2000, to more than 20), but
the opening of this industry segment was more apparent than real, because, in order to bypass
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quantity caps, ENI sold part of the gas shipped through international pipelines to other gas
operators just outside the Italian border. ENI also controls one of the two LNG plants currently
operating in the country, in Panigaglia (3.4 Gmc/year capacity), while the other in Rovigo (8
Gmc/ year) is owned by competitors (ExxonMobil, Qatar petroleum, Edison). Other LNG plants,
controlled by competitors (e.g., E.ON, Iride, British Gas, ENEL), are currently under
construction or pending approval (Gallottini 2009). The segments of gas storage and transport,
instead, are largely dominated by ENI-controlled firms, Stogit (managing 98% of storage
facilities) and SNAM (96% of transmission pipelines) (Cavaliere 2007). The segment of gas
distribution has been progressively consolidated (about 800 firms operated at the end of the
1990s, while 275 were counted in 2007; Giacomelli 2008), and nowadays the biggest 20
operators (e.g., the ENI-controlled Italgas, ENEL, local government-owned Hera, AEM Milan,
and Iride, and E.ON) serve about 86% of the market. Most of gas distributors enjoy consolidated
incumbent positions, whose concessions could be extended according to the terms provided in
Legislative Decree 164/2000. The segment of retail, finally, has been relatively stable over time,
counting about 400 operators. Generally, gas distribution and retail are managed by the same
firms (e.g., 15 out of the biggest 20 gas distribution firms also rank among the biggest 20 gas
retail operators; AEEG 2008).
Despite the relative decline of wholesale gas prices, tariffs for final consumers are not
pushed down by competitive pressures (Cavaliere 2007; Giacomelli 2008) and remain relatively
aligned to the average of EU countries (Eurostat 2009). Investments in gas infrastructure exhibit
a checkered pattern: more investments are needed for interconnecting the country to international
pipelines and for storage than actually made (AEEG 2009); investments in LNG plants, instead,
14
are increasing, although their construction is hampered by the opposition of sub-national
governments (in particular, by the regions, to which the 2001 constitutional reform granted
concurrent competences with the State on energy and the environment, and which can therefore
veto the LNG plants) and local communities [which often oppose the construction of new plants
nearby – the so-called NIMBY (Not in My Backyard) syndrome – or anywhere – the so-called
BANANA (Build Absolutely Nothing Anywhere Near Anything) syndrome]. Investments in
LNG plants are encouraged by the central government, however, which cultivates the aspiration
to make the country a European-level 'hub' for international gas network.
In general, the performance of the gas industry is not fully satisfactory yet. The country,
which relies on gas for about one third of its energy needs, is largely dependent on long-term
contracts that generally contain so-called 'take-or-pay' (TOP) clauses, for which gas is to be paid
irrespective of the actual take. Such clauses, which reduce the risk for gas exporting countries
and for investors in gas infrastructure, also place high fixed costs and relatively nil marginal
costs to the gas import operators, which therefore do not engage in any price war in order to
break even (Polo and Scarpa 2002). Competition is also stifled in the distribution and retail
segments because of the little number of tender offer calls which have been made so far (by
2007, only 4% of the gas concessions had been competitively re-assigned according to the new
regulatory system; Giacomelli 2008). In terms of customers' choice, the switching rates are still
relatively low: among large industrial customers, switching rate is about 23% (in comparison, the
rate is about 85% in the UK), among small and medium businesses, it is about 3% (75% in the
UK), and among very small businesses and households it is about 1% (47% in the UK)
(Cavaliere 2007).
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3.3. Electricity.
For about three decades, the electricity industry was characterized by the monopoly of the
state-owned company ENEL (Ente Nazionale per l'Energia Elettrica), established in 1962. In
1991, the generation of electricity was partially liberalized (Act 9/1991) by allowing private
operators to generate electricity from renewable sources and 'assimilate' ones (i.e., from garbage
incineration), which ENEL should purchase at a regulated price. In 1992, ENEL was privatized
and, from 1995, was subject to regulation of the energy and gas regulator (AEEG). In 1999, then,
a reform (Legislative Decree 79/1999, which implemented EU directive 96/92/CE) attempted to
open up the electricity industry to competition. In the segment of generation, part of ENEL's
capacity was de-merged into three new companies and generation capacity caps were placed. In
transmission and dispatching, ENEL transferred the ownership of the national grid to a newly
established company, Terna, and the management of the grid to another newly established one,
Gestore della Rete di Trasmissione Nazionale (GRDN, later renamed Gestore dei Servizi
Elettrici) that would guarantee access to the network to any third party. Distribution and retail at
the local level would be opened up to competitive tender offers in each municipal area.
The implementation of the 1999 reform led to the creation of three competitors of ENEL
in generation, Elettrogen (5.4 GW capacity, acquired by a joint venture which included the
Spanish electricity company Endesa and the local government-owned multi-utility ASM based in
Brescia), Eurogen (7 GW, purchased by a joint venture led by Electricité de France), and
Interpower (2.6 GW, taken by a joint venture which included the Belgian electricity company
Electrabel and the local government-owned multi-utility ACEA based in Rome). In distribution,
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ENEL established two subsidiaries, ENEL Energia and ENEL Distribuzione (later renamed
ENEL Servizio Elettrico), for serving the wholesale and the retail segments of the market.
Despite these restructuring operations, ENEL still retains a dominant role in the industry as it
operates about two thirds of the national production (about 14% of electricity is imported, mostly
from Electricité de France). The liberalization led to the emergence of 149 distributors in the
retail market, but 70 of them are small firms based on the northern border region Trentino Alto
Adige (and about 50 of these operators count less than 1,000 users) and ENEL Distribuzione
serves about 86.4% of customers. The wholesale market is more fragmented instead, as ENEL
only serves about 24.6% of the clients (AEEG 2008).
The liberalization and re-regulation of the electricity industry did not result in significant
effects on tariffs, which are relatively quite high in comparison to EU countries (Eurostat 2009).
On the one hand, the high level of electricity tariffs in the country is commonly justified on the
basis of various factors, which include the industrial structure of electricity generation, which is
heavily dependent on expensive thermoelectric plants (i.e., oil and gas based) rather than on
carbon or nuclear ones; the charge for the incentives which had been provided by Act 9/1991 and
by the decision of the Inter-Ministerial Price Committee no. 6 in 1992, also known as 'CIP6', to
electricity generation plants from renewable sources or 'assimilated' (amounting to about 6-7% of
the tariff); and various taxes and excises. On the other one, the degree of competition achieved in
the industry is relatively modest, so that – rather than allowing prices to follow market trends –
AEEG still keeps under price caps and scrutiny the tariffs of both the retail and wholesale market
segments.
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In general, the performance of the electricity industry is not fully satisfactory yet. ENEL
has retained a dominant position in generation and part of distribution, also because of the
relatively long periods of the electricity franchise contracts awarded at the local level, which last
for up to 30 years. The presence of business companies is relatively modest, as ENEL's
competitors include public sector firms such as Electricité de France, Endesa, ATEL, Electrabel,
and local government-owned firms such as AEM Milan. Competitive pressure is hampered by
potentially collusive practices, such as 'mild' price aggressiveness between ENEL and EDF in the
respective domestic markets.
3.4. Telecommunications.
Once a public monopoly, the telecommunications industry in Italy was reformed in the
1990s with the introduction of a sector regulatory authority (Autorità Garante delle
Telecomunicazioni, AGCOM) and the privatization of the state-owned company STET, which
led to the establishment of Telecom Italia (fixed lines operator) and Telecom Italia Mobile
(mobile operator). The liberalization and regulatory part of the reform, which originated from the
transposition of EU directive 90/388/CE, provided the opening up of access to
telecommunication infrastructure. The privatization part provided that the newly established
Telecom company would be partially owned by a 'core' (nocciolo) group of financial institutions
while the rest of shares were floated in the stock exchange. The financial institutions, however,
were not able to provide consistent direction in the management of the company, which was
subject to a leveraged buy-out in 1999. Stifled by debt burden, the company sold several of its
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assets abroad and – apart from a significant presence which was kept in Brazil – mostly
refocused its operations to the domestic market only.
The telecommunications industry is characterized by strong economies of density,
positive externalities, and technological innovation. Economies of density, which arise from the
predominance of fixed costs of transmission systems and increasing returns in relation to the
amount of traffic and number of lines (Madden 2003), and externality effects generally favor
incumbent operators with a large customer base with respect to new entrants. Technological
innovation, on the other hand, opens up business opportunities also for new entrants, especially
in alternative infrastructure-based network services (i.e., competition over mobile network rather
than fixed lines). In the Italian case, the telecommunication fixed network is owned by the
former monopolist Telecom (apart from a few alternative local networks, such as Fastweb's),
which is required to grant access to competitors for servicing retail consumers (i.e., local loop
unbundling). It is the booming segment of mobile network services, anyway, which attracts most
of Telecom's competitors efforts.
Since the liberalization of the industry, the incumbent Telecom gradually lost market
shares in both fixed and mobile network services. Telecom's market share in fixed network
services has been eroded by various competitors, especially in the most densely populated urban
areas, such as Vodafone, Fastweb, Wind, and Tiscali. Demand for fixed network services is
rather stable however, one of the reasons being that, so far, Telecom did not invest in new
generation network (e.g., optic fiber) which could better support multimedia streams and rather
exploited the existent copper-based infrastructure through x-DSL technology. In the segment of
mobile network service, competition has recently intensified with the entry of 'mobile virtual
19
network operators' (MVNO), which pay for access to competitors' mobile infrastructure and
generally target specific market niches.
On the whole, the intensification of competition in the telecommunications industry has
led to a general increase of variety of services and decline of prices of both fixed and mobile
network services (AGCOM 2009). How exactly prices have declined for various
telecommunication services, however, is not straightforward because of the difficulty to compare
bundles of services commonly offered by telecommunication companies. Whether investments
have been adequate, instead, is controversial. Telecom claims that the fixed network has been
fairly maintained and upgraded, while its competitors contend that more money should be spent
to improve local loop performance. After AGCOM recently increased access tariffs, Telecom's
main competitors Vodafone, Wind, and Fastweb have pondered the construction of a new
generation network which they could run independently from the former monopolist.
In general, after the implementation of the liberalization and regulatory reform the
telecommunications industry in Italy has been characterized by an increasing number of
competitors and variety of services. Various issues are still open, however, especially concerning
bridging the 'digital divide' between urban and rural areas, upgrading the infrastructure network
to fully support last generation applications (e.g., multimedia streams), and securing equality of
access of Telecom's competitors to the infrastructure network at fair prices and without any
prejudice for the quality of service delivery (i.e., 'net neutrality'). Critics of Telecom's influence
on the telecommunication industry have proposed disentangling ownership of the infrastructure
network from the former monopolist's network service activities, but full political support for
this design option has not been marshaled yet.
20
3.5. Railways.
During the course of the 2000s, the EU provided several regulations intended to create a
competitive market for railways service. Three 'packages' of EU directives (2001/12, 2001/13,
and 2000/14; 2004/881, 2004/49, 2004/50, and 2004/51; and 2007/58 and 2007/59) introduced
the liberalization of freight rail transport and provided preliminary steps towards liberalization of
passenger rail transport, the requirement to separate infrastructure ownership from rail transport
service, and the establishment of authorities to regulate rail transport services. In Italy, these
regulations have been only partially implemented, as the same sate-owned company group
Ferrovie dello Stato (FS) still retains ownership of the rail infrastructure and operates both
freight and passenger rail transport, access to the industry has been mostly opened in the freight
rail transport only, and no proper system of economic regulation is in place. At the regional
level, railways services have been generally assigned to FS-owned passenger rail transport
operator Trenitalia, while only rarely they have been awarded through tender offer competitions
(e.g., in Lombardy, Veneto, and Emilia Romagna).
During the last decades, railways traffic in Italy has slightly declined in both freight and
passenger rail transport services (Bozzi 2006). This trend, which correlates with an increase of
use of private transport, is contrary to the one experienced in other EU countries, especially in
those which have made decisive steps towards liberalization of rail transport services, such as the
UK and Sweden (Giuricin 2007). With respect to other main EU economies, the railways
infrastructure in Italy is relatively underdeveloped, especially in the segment of high-speed
railways (HSR), which is managed by FS-owned company Treno Alta Velocità (TAV). About
21
564 Km HSR have been built so far, in comparison to about 1,548 in France and 1,030 in Spain
(Giuricin 2007). Additional HSR investments are under way, although they have been
occasionally opposed by local communities (e.g., Turin-Lyon line; Boitani et al. 2007).
The state-owned incumbent monopolist, FS, owns both most of the railways
infrastructure (through the subsidiary Rete Ferroviaria Italiana, RFI) and the main passenger
and freight rail transport operators, Trenitalia and Trenitalia Cargo. According to current
regulatory framework, RFI grants licenses to rail transport operators at a fee, provided that they
comply with maintenance and safety standards inspected by RFI-owned agency Cesifer. In the
segment of freight rail transport, various operators have entered the industry, especially in the
northern regions of the country. In the one of passenger rail transport, instead, Trenitalia retains
almost complete monopoly – apart from a few regional players such as Cisalpino and Ferrovie
Centrale Umbra. Both Trenitalia and Trenitalia Cargo's revenues, however, cover a fraction only
of operating costs and the central government provides yearly subsidies to maintain their activity
(subsidies are estimated about €4.4 billion per year – including both operating and
maintenance/investment costs) (Ponti 2009; Giuricin 2008).
The performance of the railways industry is controversial in various respects. Transport
tariffs are relatively low with respect to other EU countries (although the tariff system is rather
complex because of the many price conditions offered for the same route), but they do not allow
the main operators Trenitalia and Trenitalia Cargo to achieve financial self-sufficiency if not
with the support of governmental subsidies. In principle, tariffs are regulated by the InterMinisterial Committee of Economic Planning (Comitato Interministeriale di Programmazione
Economica or CIPE) according to the terms of a price cap system (CIPE deliberation 173/1999),
22
but in practice they have been often set by the Minister of Treasury – which generally aimed to
contain tariff increase over time. Performance is disputable – especially in terms of lack of
punctuality (Gatti 2009) and speed of traveling (Congedo 2007). Investments in HSR proceed
relatively slowly and the cost of new railways per kilometer is astonishingly high, in comparison
to other main EU countries (e.g., average cost of HSR construction in Italy is about €/Km 32
million, while it is €/Km 10 in France and €/Km 9 in Spain; Giuricin 2008).
On the whole, the railways industry in Italy is affected by a lack of proper liberalization
of rail transport services so far. EU directives have been only partially implemented, and there is
no actual competition especially in the passenger rail transport service yet. The incumbent
former monopolist is protected by a combination of heavy governmental subsidies and barriers to
entry, which include both the requirements to comply with maintenance and safety standards set
by Cesifer and the shortage of tender offer competitions for passenger rail transport services.
Cesifer, in particular, enjoys some degree of discretionary power (Bozzi 2009) on licensing rail
transport operators, which it can exercise at the advantage of the incumbent companies of the
same FS group.
3.6. Highways.
Since 1948, highways infrastructure development and operation had been mainly
conducted by the state-owned agency ANAS (Azienda Autonoma Strade Statali), which also
granted build-and-manage franchises to other companies, including the state-owned Società
Autostrade Concessioni e Costruzioni. During the 1990s, the Inter-Ministerial Committee for
Economic Planning (CIPE) provided that highways franchisees should charge tariffs subject to
23
price cap rules, dependent on planned inflation, expected productivity increase, return on capital
invested, forecasted demand growth, and compliance with service quality standards. In 1997,
then, ANAS extended the franchise granted to Società Autostrade (which would be later
privatized in 1999 and renamed Autostrade per l'Italia) until 2038, and, in the next years, to other
franchisees. ANAS acquired de facto a regulatory function, as it negotiated reviews of highways
infrastructure development plans with franchisees – especially, with Autostrade per l'Italia in
2002. The reviewed investment plan of Autostrade per l'Italia – the so-called IV Atto Aggiuntivo
– was later ratified by the government (Act 47/2004).
After massive construction programs carried out during the 1960s and 1970s, by 1975 the
highways network in Italy was the most extended one among European countries. Construction
of new highways routes, however, stalled during the 1980s and 1990s, while traffic more than
tripled (increase of traffic was 310% between 1990 and 2006; Benfratello et al. 2006). In 2001,
however, the central government launched an extensive public works program (about €17.4
billion for the period 2002-2012), including new highways construction. Nowadays the national
highways network extends over about 6,554 Km, which are operated by 23 franchisees –
including Autostrade per l'Italia (which manages, also through various subsidiaries, about 3,400
Km), ANAS (about 1,200 Km), and the privately-owned group Gavio. Apart from Autostrade
per l'Italia and Gavio, most of highways operators are owned by public sector entities – including
regions, local authorities, and chambers of commerce.
During the 2000s, highways services raised some concern of the users because of
increase of tariffs, which had been kept relatively low in the previous decades (e.g., tariffs on the
route Milan-Turin, managed by Gavio group, increased 19.5% in 2009 and 12.6% in 2010;
24
Ragazzi 2008, 2010). Tariff increases contributed improving franchisees' profitability, while only
partially were they invested in the extension of the network infrastructure. Although the
franchise contracts provide an incentive mechanism which links tariffs to investments, most of
money spent seem directed to 'gold plate' the existing network (e.g., through frequent paving
works, whose frequency reduced from about 11 to 6 years on average; Benfratello et al. 2006)
rather than extending the reach and the capacity of highways routes.
On the whole, the highways industry in Italy is affected by various problems. First, the
regulatory framework lacks in terms of transparency and credible commitment. Established as a
business company in 2002 (owned 100% by the Ministry of Economics), ANAS directly invests
in and contracts out several infrastructure development works without complying with strict
accountability standards, and regulates franchisees through concession contracts which are not in
the public domain. Highways operators seem to achieve relatively high profitability (Gallo 2007)
without being subject to competitive pressures (existing franchises have been extended for
relatively long periods, up to 40 years) nor to requirements to expand network infrastructure.
Moreover, despite the several construction works recently completed or in progress, the
highways network is relatively small in comparison to other main EU countries (e.g., in Italy
there are about 6,000 cars/Km of highways, while in France and Germany there are about 3,700
cars/Km and in Spain about 2,200 cars/Km; ANCE 2009).
3.7. Local Public Transport.
During the course of 1990s and 2000s, local public transport (LPT) services have been
subject to various regulatory changes. In 1997, the industry was opened up to competitive
25
pressures by Act 422/1997, which provided the attribution of planning function to the regions,
regulatory functions to local governments, and management functions to LPT firms which would
be selected for the award of franchises through tender offer competitions. The reform was
implemented unevenly across the country – in Tuscany, tender offer competitions for the award
of transport concessions were called in 1998, while various other regions, especially in the south
of the country, proceeded more slowly. The application of tender offer competition rule, in
particular, was postponed according to the terms provided by various legislations (Act 400/1999,
and two subsequent local public services reforms in 2001 and 2003) which opened up the
possibility to directly assign LPT concessions to fully local government-owned ('in house')
transport firms rather than to business companies. In 2008, Act 112/2008 restated the general
principle that LPT concessions should be assigned through tender offer competitions, but
relatively a small amount of calls have been carried out, especially in a few regions – Lombardy,
Tuscany, and Emilia Romagna (86 tender offer competitions for LPT concession had been
launched by May 2008; Carminucci and Procopio 2008).
The structure of the LPT industry is quite fragmented, as several firms operate in
relatively small user basin areas (i.e., municipal or provincial territories). LPT services have been
traditionally carried out by local government-owned firms, in both the dominant segment of bus
transport (which carried about 78% of passengers; Boitani and Cambini 2001) as well as in local
railways, metro, and tram. Generally, local government-owned transport firms charge very low
tariffs (in comparison to other EU countries), and their revenues are much below operating costs.
Continuity of service is ensured by relatively high subsidies (which range from 25 up to 75% of
operating costs; Fraquelli et al. 2001), which are provided by regional governments. Tender offer
26
competitions could, in principle, allow local governments to relieve the financial stress arising
from loss-making LPT firms by contracting out the transport service to business companies. The
LPT industry, however, is relatively unionized and resistance to award transport franchises to
new entrants hampered the development of competitive pressures so far. Relatively often, tender
offer competitions for the transport franchises have been won by the same local governmentowned incumbents (Arrigo 2007).
Performance of the LPT industry is characterized by relatively high operating costs and
relatively low revenues. Operating costs have been estimated about €/Km 3.62, with respect to
an average of €/Km 3.02 in other LPT industries based on public ownership of transport firms in
the EU (Fraquelli et l. 2001). Average operating costs are remarkably lower, instead, in those EU
countries which have opened up access to regulated transport services (e.g., most of the UK) or
have regulated some forms of competitive pressure (e.g., Scandinavia, France, city of London).
Revenues have been estimated to cover only about 31% of operating costs (Boitani 2005). The
infrastructure employed in LPT (i.e., buses) is relatively older than in the rest of the EU (on
average, 10.25 years, while in the EU it is 7 years), and less extended (e.g., total metro network
in Italy is about 121 Km, while it is 558.7 Km in France, 478.5 Km in the UK, and 369.7 Km in
Germany) (CNEL 2005).
On the whole, the LPT industry has not realized the full potentials for improving its
economy and performance yet. The industry remains heavily subsidized and relatively
inefficient, both in terms of service delivery and pricing. Not many tender offer competitions for
the award of transport franchises have been made yet, and many of them did not precisely
specify the requirements of service quality standards and economic efficiency improvement
27
(Arrigo 2007). The regulatory system followed in LPT has not been keyed to provide incentives
to reduce costs, improve service quality, and undertake investments needed to extend and
upgrade the transport network infrastructure.
3.8. Urban solid waste.
The urban solid waste industry has gone through a significant reorganization during the
1990s and 2000s. In 1997, a reform (Legislative Decree 22/1997) provided the reorganization of
waste services into optimal territorial areas (Ambiti Teritoriali Ottimali, or ATO), the separation
of the planning and management functions, the integration of the management of different
activities as a coordinated whole, and a new tariff system (price cap, administered by local
regulatory authorities) aimed at stimulating economic efficiency and investments. The reform
also provided special regulation for packaging disposal (which contributes for a large share of
waste, about 9 million tons per year over a total of about 32.5; Chiades and Torrini 2008;
Greenbook 2009), as it required producers and users firms to establish a consortium (CONAI,
devoted to the recycling of aluminum, steel, cellulose, wood, plastic, and glass waste) for
funding the recycling of packages (about 40% is actually recycled).
The waste industry is articulated into various segments, including waste collection,
treatment, and recycling (Perra 2000; Massarutto 2007). Waste collection presents typical
features of natural monopoly (i.e., sub-additive cost function and network economy). Waste
treatment is characterized by increasing variety of (capital intensive) waste disposal technologies
(e.g., incinerators for electric or thermal energy production). Waste which is not treated and
recycled is accumulated in landfills, especially in the southern regions of the country (where
28
about 70% of waste is land-filled). Over time, however, the number of landfill sites declined –
from about 800 in 1999 to about 340 in 2005 – especially in the central and northern regions of
the country (Chiades and Torrini 2008).
The waste industry is rather fragmented (about 4,000 firms were counted in Cima 1999)
and heterogeneous (including both local government agencies, especially in smaller
municipalities, and business companies, in larger ones). Direct local government management of
waste services is frequent but declining over time, while an increasing number of franchises have
been awarded to business companies selected through tender offer competitions (59 cases
conducted so far, which serve about 3.3 million people in 475 local governments, mostly in the
southern regions of the country; Greenbook 2009). Notoriously, the award of waste service
franchises opens up business opportunities to crime organizations (especially, 'camorra' in
Campania region), which have been targeted by several police operations (in the last five years,
30 operations have been conducted and led to 241 arrested and 247 firms involved in illegal
waste traffic and corruption; Legambiente 2008).
In various respects, performance of the waste industry is improving over time, although
unevenly across the country. Differentiated waste collection is up to about 40% in various areas
in the north of the country (e.g., Milan, Turin), but significantly lower in southern regions (e.g.,
about 10% in Rome, about 8% in Naples) (Buonanno and Mastrobuoni 2008). Tariffs tend to
increase over time (e.g., 3.4% in 2009 with respect to previous year), although they vary a lot
between regions (e.g., in Campania, about three times more than in Molise; Greenbook 2009).
Cost coverage is increasing over time too (from 82.7% in 1998 to 94.7% in 2007; Greenbook
2009). In general, cost effectiveness does not seem to be related to types of (public or private)
29
ownership (Cambini 2001), while seems higher in firms which operate the whole activities of the
industry.
On the whole, the waste industry presents some positive and some negative traits.
Positive traits include the diffusion of differentiated waste collection, increase of cost coverage,
and some competitive pressure put in tender offer competitions. Negative traits include, instead,
the difficulty to overcome the advantage of incumbents in tender offer competitions (incumbents
win about 60% of tender offer calls; Chiades and Torrini 2008), the influence of crime
organizations in part of waste service industry, the resistance of local communities to the
construction of additional waste incineration plants, and the design of better franchise contracts
intended to trigger further cost effectiveness.
4. A comparative analysis of the eight industry cases.
Regulatory regimes, industrial behavior, and performance of the eight network industries
can be compared across several dimension. With reference to the IAD framework sketched in
section 2, the analysis will focus on features of the physical infrastructure and network service
delivery system, of the industry's community, and of the industry's regulatory system, on the
constellation of main actors of the industry, of some indicators of performance outcomes, and on
the main issues identified by policy experts and academics. Table 1 contains a snapshot view of
the attributes of each of the eight industry cases, which are commented in more details below.
< insert Table 1 about here >
30
In terms of features of the physical infrastructure and network service delivery, the water,
waste, and LPT industries are characterized by relatively localized assets and limited extension
of the users' basin (the ATO in both the water and waste industries, and traffic users' basins in the
LPT industries). The industries of gas, electricity, telecommunications, railways, and highways,
instead, are characterized by nation-wide infrastructure networks, which are also connected to
international networks. The telecommunications industry is also characterized by dual
infrastructure network – the fixed and mobile ones. With respect to other industries, the
telecommunications one also offers some degree of competition between networks, e.g.,
Fastweb's proprietary network as an alternative to Telecom's one.
In terms of features of the industry's community, all the eight industry cases are
characterized by a dominant role played, to a greater or lesser extent, by incumbent firms. In
most of the industries, incumbents are still fully or partially owned by public authorities (which
are generally able to exert influence on utility firms even if holding a minority share, such as in
the cases of ENI and ENEL). In the gas, electricity, railways, and highways industries, central
government-owned firms (e.g., ENI, ENEL, FS, and ANAS) retain an influential role despite
market quotas (e.g., gas, electricity) or licensing and franchise concessions. In the water, gas,
electricity, LPT, and waste industries, a significant role is played by local government-owned
firms, which often diversify their operations in more than one of these network industries (i.e.,
'multi-utilities'). In the telecommunications industry only, the former central government-owned
Telecom Italia has been fully privatized and new entrants have been able to significantly erode
incumbents' market share.
31
In terms of features of the industry's regulatory system, most of industry cases are
regulated through mechanism of franchise allocation, generally awarded (in principle at least)
through tender offer competitions. In the railways industry, access and conduct of competitors is
regulated through a similar mechanism of awards of licenses for the use of the rail infrastructure,
provided that specific maintenance and safety requirements are met. In the telecommunications
industry only, access and conduct are left to market mechanisms, provided that the incumbent
owner of the infrastructure network (Telecom) ensures equal treatment to competitors. Price cap
mechanisms are administered by industry regulators in water and waste (local water authorities),
gas and electricity (Authority of Energy and Gas), railways and highways (CIPE – although, in
these two industries, the price cap mechanisms has been occasionally overruled). In the gas and
electricity industries, market quotas (to gas imports and energy generation) also limit the conduct
of the main incumbent operators.
These features of the industry regulatory systems are related, in part, to EU legislation
pertaining to the regulation of network industries. The regulatory systems instituted in the
electricity, gas, telecommunication and railways sectors, in particular, are aligned with sectoral
regulatory frameworks formulated at the EU level. Those established in the water, urban solid
waste, and local public transports have been framed in such a way as to comply with EU
legislation, especially regarding EU directives about environmental protection and discipline of
so-called “services of general economic interest”. The regulatory system of the highways sector
(especially the regime concession), instead, is not related to any sectoral-specific EU legislation,
although it is subjected to the general public works and public service contract regulation.
32
Each of the eight industry cases exhibit relatively complex actors' constellations. Industry
regulators are present in water (local regulatory authorities), gas and electricity (Authority of
Energy and Gas), telecommunications (Authority of Telecommunication), and waste (local
regulatory authorities). In the cases of railways, highways, and LPT, instead, regulatory
functions are played by public authorities or public agencies, such as FS and ANAS. The
relationship between the regulator and the regulated is not always characterized by mutual
independence, however: local regulatory authorities in the water and waste industries are
established by local government, which often hold shares in the same utility firms subject to
regulation; FS and ANAS in the railways and highways industry, respectively, negotiate license
or franchise contracts which are not subject to public scrutiny.
In terms of performance, service quality could be improved in various dimension in any
industry (e.g., punctuality in railways, routes in LPT, reliability of supply in water, congestion in
highways, tariff options in electricity, composition of service bundles in telecommunications,
etc.). With respect to prices, some industries (water, railways, LPT) are characterized by
relatively low tariffs, which are generally related to lack of cost coverage and need for subsidies
to ensure continuity of service. Other industries (electricity, highways, waste) exhibit relatively
high or increasing tariffs, despite some efforts made to re-regulate the industries (electricity) and
set up franchise systems (highways, waste) which have not been coupled with significant
competitive pressures yet. Other industries (gas, telecommunications) present relatively constant
(or slightly declining) tariffs, although not any significant reduction as could be expected after
efforts to liberalize access to the industries.
33
In terms of investments, which could be understood as actions that can affect future
performance, most of the industries are characterized by relatively less money spent than
expected or needed. In the water industry, actual investments lay well behind the planned amount
of infrastructure development (although the plans might have been drafted over-optimistically).
In the gas and telecommunications industries, paucity of investments may be related to
incumbents' resistance to expand network capacity to host competitors or new entrants. The
expansion of the rail network may have been hampered by the relatively high cost of
construction of HSR infrastructure. Modest investments in extending the highways network
seems related to lack of regulatory incentives, and those in extending the LPT networks (e.g.,
metro) to lack of public funding.
Finally, each of the eight industry cases present various open issues. The most recurrent
one is the use, design, and effectiveness of tender offer competitions for the selection of the
franchisee firms, provided that in some industries either franchises are awarded directly without
any competitive selection, or a few (if not one only) companies apply to the calls, or the
incumbent companies seem more likely to win the competition anyway (e.g., water, gas and
electricity distribution and retail segments, regional rail passenger transport, LPT, and waste). In
some cases (e.g., electricity, highways), the duration of the franchise contracts is also relatively
long (30-40 years) so that any competitive pressure is significantly postponed. Other common
issues are the quality of the regulatory governance – that is, of the mechanisms for ensuring
independence between the regulator and the regulated and settlement of conflicts in a nonarbitrary way – and the design of better clauses which should induce network service operators
to improve cost effectiveness and service quality, especially in the industries of water, LPT,
34
waste, railways, and highways. Other issues are more industry-specific, such as those of
overcoming contractual or regulatory barriers to entry (e.g., dependency from long-term import
contracts in the gas industry and on maintenance and safety regulator Cesifer in railways),
bridging the digital divide gap and ensuring net neutrality (telecommunications), and
counteracting the presence of crime organizations (waste).
On the whole, this analysis suggests that the difficulty to implement liberalization and
regulatory reforms of network industries in Italy may be explained by various concurrent
mechanisms. One mechanism plainly has to do with the rent-seeking behavior of the actors of the
industry's community. Executives of incumbent utility firms can be assumed to seek maintaining
or enhancing their dominant positions in the network industries. Public officers in government
are understood to seek retaining or increasing their influence on public sector-owned utility
firms, especially in order to affect decisions concerning job appointments and construction
contracts. Utility firms' employees are expected to seek retaining or increasing favorable work
contracts. Interests of these actors may partially clash, for example if executives aim to fund the
growth of utility firms at the expense of employees' salaries. There is some scope, however, for
these actors to collude in protecting incumbent firms from competitive pressures and distribute
between them the benefits of monopolistic or dominant industry positions.
Another mechanism is related to the rise of barriers to entry against competitors. In the
water, electricity distribution and retail, and highways industry, entry to the industry is postponed
by relatively long duration of franchises (e.g., about 30-40 years). In the gas import industry,
competitors are kept at bay by long-term supply contracts that the main incumbent ENI signed
with import countries' operators. In the railways industry, entrants are potentially obstructed by
35
the requirements to comply with maintenance and safety standards set by incumbents' subsidiary
Cesifer. In gas storage and transmission, as well as in telecommunications, competition might
develop further if additional investments in capacity were made.
One further mechanism is related to collusive practices between regulators and regulated.
In localized industries such as water, waste, and LPT, typically the same local governments have
a stake in both the regulators, either directly or through the control of local regulatory authorities,
and the regulated utility firms, which they often fully or partially own. In such regulatory
regimes, the regulatory function may be exercised with the aim of accomplishing local
governments' objectives rather than improving utility firms' performance. In railways, the central
government both controls the main operators FS and regulates tariffs and investment plans, and
the same FS both controls the rail transport operator Trenitalia and regulates access to the rail
infrastructure network. In highways, the central government-owned ANAS both owns and
operates highways services and regulates franchises of Autostrade and the other operators.
These mechanism can result in different performance outcomes achieved after
liberalizing and re-regulating network industries. At a relatively broad level, we can distinguish
two main alternative 'problematic' performance scenarios across the eight industry cases. In one
scenario, actors' interactions result in relatively low tariffs, low cost effectiveness, loss-making
utility firms, and low investments in expanding or upgrading the infrastructure network. The
railways industry is exemplar here: rail transport tariffs are relatively low in comparison to other
EU countries, subsidies are needed to keep Trenitalia continue its operations, and relatively low
investments are made for maintenance and expansion of the railways network and cars. In
another scenario, industrial behavior leads to relatively high or increasing tariffs, which enhance
36
firms' profitability or stakeholders' rent appropriation, in conjunction with relatively low
investments, which originate from lack of incentives to improve customers' service or strategic
concern with stifling competition. The highways industry is germane here: highways tariffs have
increased over time, and highways firms have achieved relatively high profitability; investments
to expand the highways network, however, have been relatively modest.
The provision of sectoral regulatory frameworks at the EU level seems partially related to
more decisive steps made towards the liberalization and re-regulation of network industries in
Italy. The regulatory reforms implemented in the electricity, gas, and telecommunication sectors
(where national sectoral legislation was closely aligned to EU's one), for example, resulted in
remarkable changes in actors' constellation, actors' interactions, and, to some extent, industry
performance. The regulatory systems established in the water, urban solid waste, and LPT
sectors (which are subjected to EU legislation focused on environmental preservation and
discipline of so-called “services of general economic interest”, but not providing any sectoral
economic regulation), instead, are accompanied by modest reconfiguration of actors'
constellation and interaction (e.g., incumbent local government-owned firms often retain their
dominant role in the local industries and are not subjected to independent regulatory authorities).
The highways sector (where relevant EU legislation only relates to general public works and
public service contract regulation), instead, is mainly regulated through a price cap scheme
administered by the national government committee CIPE, which seems unable to address issues
related to infrastructure development and service quality.
While EU legislation may play a role in shaping the regulatory system of network
industries in Italy, evidence suggests that this feature of the institutional context is not sufficient
37
to improve industrial performance. The case of the Italian railways industry shows that, even
within a sector characterized by EU legislation aimed at promoting market opening, entry of new
competitors is limited and performance – in both terms of infrastructure development and service
quality – is rather disappointing. The presence of pro-competitive EU legislation, therefore,
needs to be complemented by domestic policies intended to reconfigure actors' constellation and
establish a transparent regulatory process, otherwise actors' interactions tend to perpetuate the
dominance of incumbent firms at the expense of new entrants. The implications of lack of procompetitive domestic policies is particularly evident in the Italian railways industry, but also
evidence collected in the other sectors shows that tepid governmental support of market opening
hampers or delays the improvement of industrial performance.
5. Conclusions.
Drawing from the analysis of the eight industry cases, this section outlines some
generalizing arguments concerning the determinants of industrial behavior and performance of
network industries. The analysis suggests that the regulation of network services based on
localized infrastructure through franchise allocation mechanisms controlled by local
governments which have stakes in the incumbent service firms may result in the preservation of
the incumbents' dominant position in the network industries. This regulatory regime may persist
over time, especially if a system of subsidies originating from higher government layers (i.e.,
regional or central) ensures continuation of service (e.g., in the water and LPT cases). This
regulatory regime, instead, may be partially undermined by the need to carry out more
investments than public sector-owned firms are able to financially sustain (e.g., in the waste
38
case). Incumbents' dominant position in the network industries may be eroded by new entrants,
however, if either barriers to entry are relatively low (e.g., in the telecommunications case) or
market quotas make the incumbents reduce their production or market share (e.g., the gas and
electricity cases). The physical features of the infrastructure and service delivery system seem
paramount in this respect. Duplication of the infrastructure network may be a viable option in
specific industry case only (e.g., the telecommunications case), while in others the technical
possibility of common carriage seems important to allow substitution of one (incumbent)
operator with another (new entrant) one without prejudice to service delivery (e.g., the gas and
electricity cases).
With respect to previous studies done in this field, this one explores the role played by
industry-specific conditions on industrial behavior and performance effects of liberalization and
regulatory reforms of network industries, within a given (i.e., country-specific) institutional
context. In a sense, this work is complementary to many others done on the role played by
country-specific institutional features on the regulation of network industries. The work of Levy
and Spiller (1994), for example, highlighted that the performance of regulatory systems is
dependent on the features of country-specific political institutions. One conclusion of their work
is that the level of investment in network industries depends on the extent to which countries'
political institutions combine with the regulatory ones to ensure regulatory commitment. While
this work does not contradict Levy and Spiller's (1994), we can add to this argument that
infrastructure investment is also dependent on sector-specific features of the physical
infrastructure and service delivery system, industry's community, and industry's regulatory
system, in the ways elaborated above following the IAD framework.
39
This study also allows to draw some lessons concerning the design and implementation
of regulatory reforms intended to promote market opening. First, evidence in the gas, electricity,
and telecommunication industries shows that incumbent public sector monopolists can be
dismantled and industry segments can be opened to competitive pressures, although performance
gains may not be immediately passed to the consumers. Features of the physical infrastructure
and service delivery system, of the industry community, and of the regulatory systems
(especially, domestic regulation backed by EU legislation) seem important requisites for
unleashing competitive forces. The cases also suggest, however, that market opening may be
facilitated by the presence of market opportunities that incumbent firms can pursue abroad (as it
was the case for ENI, ENEL, and Telecom Italia), as they make them less dependent on the
reformed domestic network industry. The resistance of other incumbent public sector firms
against the liberalization process (e.g., FS, ANAS, and most of water, local public transport, and
urban solid waste operators), instead, may be related to their lack of foreign activity. Hence,
policy-makers should be attentive to market conditions in order to understand how regulated
firms react to changing features of the sectoral regulatory system.
Second, evidence in the gas, electricity, and telecommunication industries shows that
reforms of the regulatory systems may result, to some extent, in improved performance in terms
of service quality and infrastructure investments. The cases of the transport industries (railways,
highways, and local public transport), instead, are exemplar of relatively modest results delivered
by the incumbent dominant firms within regulated network industries. Better service quality and
higher levels of infrastructure investments seem related to regulatory systems that include
independent regulatory authorities endowed with the power to enforce regulation of access,
40
price, and investment, as these regulatory institutions are more conducive to trigger competitive
pressures and attract private investors. Policy-makers, therefore, should take care of designing
regulatory systems that grant regulators the independence and power needed to steer the behavior
of dominant incumbents if they are determined to stimulate performance improvements of the
regulated network industries.
Third, evidence in localized network industries or industry segments, such as water, local
public transport, urban solid waste, and gas retail, shows that the mechanism of franchise
allocation through tender offer calls may not result in fierce competitive pressures. The case of
electricity retail (where greater competitive pressures are present), however, suggests that the
problems encountered with opening the market for localized network services are not necessarily
imputable to the relatively small scale of service areas. Features of the industry's community
(especially, the stakes of sub-national governments in the local network infrastructure and
services firms) and of the regulatory system (in particular, sub-national governments' role in
performing regulatory functions) seem important to account for the modest level of competition
for franchise contracts. New entrants, in fact, may be discouraged to challenge incumbent local
government-owned firms in tender offer calls administered by the same local governments (or by
authorities appointed by the local governments). Policy-makers, then, should supervise the
liberalization process in such a way as to prevent sub-national governments to foreclose the
possibility of competition for franchise allocation by granting preferential consideration for local
government-owned firms.
Finally, a few words of caution concerning the limitations of this analysis. The empirical
focus on one country only implies that all industry cases may be affected by common selection
41
bias, i.e., that some country-specific institutions affect the industrial behavior and performance of
the observed network industries in a more significant way than any of the industry-specific
context conditions. Italy, for example, is characterized by corporative variety of capitalism,
relatively unionized labour force, and relatively modest protection of minority shareholders.
These features may be relevant to account for the pattern of interaction and outcomes in any
network industry, but their effects may be difficult to single out if not through comparisons with
network industries in other countries. Also, the analysis does not take adequately into account
interference effects between industries (e.g., cross-sectoral learning), which may be relevant to
explain the pattern of interaction and outcome in some industries because of complementarity
and substitution effects (e.g., railways and LPT) or because of synergies between firms' business
areas (e.g., water, gas, and electricity 'multi-utilities'). Furthermore, the analysis here conducted
is largely interpretative and exploratory, rather than subjecting any hypothesis to statistical test.
These limitations of the analysis suggest possible venues for further research. As a
country selection bias might have affected the results of this study, additional research is needed
in order to conduct cross-sectoral comparative works within other national institutional contexts.
This research effort would help better understanding whether countries sharing homogeneous
institutional traits (e.g., corporatist variety of capitalism) exhibit similar problems in
implementing liberalization and re-regulation processes. In addition, this research would help
comprehending whether – setting country-specific institutions aside – sectoral features (e.g.,
physical attributes of the infrastructure network) may account for greater or lesses difficulty to
open up network industries to competitive pressures. The outcome of this line of research may
42
be fruitful to better inform policy reformers concerned with improving network industries'
performance.
Acknowledgements
I wish to thank the Editor-in-chief and two anonymous referees for their comments and suggestions on the previous
drafts of this paper.
43
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Figures and Tables
Figure 1. The Institutional Analysis and Development framework; adapted from Ostrom et al.
1994.
51
Water
Gas
Electricity
Telecom
Railway
Highway
LPT
Waste
Features of the
physical
infrastructure and
service delivery
system
localized
infrastructure
Nation-wide
infrastructure,
internationally
connected
Nation-wide
infrastructure,
internationally
connected
Dual (fixed and
mobile) nationwide
infrastructure,
internationally
connected
Multiple
interconnected
infrastructure,
internationally
connected
Nation-wide
infrastructure,
internationally
connected
localized
infrastructure
localized
infrastructure
Features of the
industry's
community
Incumbent firms'
dominant position
Local government
ownership
Incumbent firms'
dominant position
Local government
ownership
Central
government
ownership
Incumbent firms'
dominant position
Local government
ownership
Central
government
ownership
Incumbent firms'
dominant position
Incumbent firms'
dominant position
Central
government
ownership
Incumbent firms'
dominant position
Central
government
ownership
Incumbent firms'
dominant position
Local government
ownership
Incumbent firms'
dominant position
Local government
ownership
Features of
industry's
regulatory system
Franchise
Price cap
Franchise
Price cap
Import quotas
Franchise
Price cap
Generation quotas
Open access
Licenses
Price cap (not
applied)
Franchise
Price cap (not
applied)
Franchise
Franchise
Price cap
Main actors
Local regulatory
authorities
Local governments
Local governmentowned firms
Business
companies
Authority of
Energy and Gas
ENI group
Local governmentowned firms
Business
companies
Authority of
Energy and Gas
ENEL group
Local governmentowned firms
Business
companies
Authority of
telecommunications
Telecom group
Business
companies
CIPE
Ministry of
Treasury
FS group
Business
companies
ANAS
CIPE
Autostrade group
Business
companies
Regions
Local governments
Local governmentowned firms
Business
companies
Regions
Local governments
Local governmentowned firms
Business
companies
Performance
outcomes
Prices increasing
but relatively low
Investments less
than expected
Prices relatively
stable
Investments less
than expected
Prices relatively
high and stable
Prices decreasing
Investments less
than expected
Prices relatively
low
Investments less
than expected
Prices increasing
Investments less
than expected
Prices relatively
low
Investments less
then expected
Prices increasing
Main issues
Regulatory
governance
Incentive contracts
Tender offer
competitions
Tender offer
competitions
Long-term import
contracts
Tender offer
competitions
Long term
contracts
Net neutrality
Network upgrade
Digital divide
Regulatory
governance
Tender offer
competitions
Independence of
maintenance and
safety regulator
Regulatory
governance
Incentive contracts
Network
expansion
Regulatory
governance
Incentive contracts
Tender offer
competitions
Regulatory
governance
Incentive contracts
Tender offer
competitions
Crime
organizations
Table 1. Comparative analysis of the eight network industries.
52