Regulation 1840-2040 (from Grand-Grandpa to Digitalization & Decentralization) Turin School of Regulation - 6 September 2018

1. Regulation 1840-2040Regulation 1840-2040
((From Grand-Grandpa toFrom Grand-Grandpa to
Digitalization & DecentralizationDigitalization & Decentralization))
Turin School of RegulationTurin School of Regulation
6 September 20186 September 2018
Jean-Michel GlachantJean-Michel Glachant
Loyola de Palacio Chair
& Director Florence School of Regulation
European University Institute (Florence, Italy)

2. Regulation: a Lego to play…
• Old roots & bones: From infrastructures to Public Service
“GrandPa”
1- Old roots & bones are “1840 infrastructure monopoly” (or “1877
essential facility”)
2- But real flesh is “Mass market services” framed by “Political
economy”
• New wine in old bottle: Double unbundling + incentive
regulation
1- Unbundling “Infrastructure facility” from “final services”
2- Unbundling “Regulation” from “Political economy”
3- Then you can go to “Incentive Regulation”, face its “seams”2

3. Regulation: a Lego to play…
•New bottle for new wine: Coordinating the unbundled + Designing the market
1- Rules for Infrastructures interact with “final services market” via “system
operation”
2- “System operation neutrality” is “market design” sensitive
3- Revenge of Ronald Coase: markets need market infrastructures; transaction
<> coordination
•Schumpeter wave Digitaliz.Decentraliz.?: Governance “innovation /
regulation” to lead?
(Regulators + Indus.Modularity + PioneerEntrepreneurs + UsersComm) > spread
into 5 worlds?
1-Forums ~2-Innovation Zoos ~3-Communities ~4-Garage Cow-Boys ~5-Big e-
Sisters
3

4. Old roots & bones …
From infrastructures to Public Service “GrandPa”
1- Old roots & bones are “infrastructure monopoly” (“essential
facility”)
# Monopoly of essential facility: a bridge on a river.
# Utility for society is usage, then pricing. Monopoly price not
good for society.
# Society will price: fair price for owner & fair price for users.
Average Price? Marginal Price? Fixed costs?
4

5. Old roots & bones …
From infrastructures to Public Service “GrandPa”
2- But real flesh is “Mass market services” framed by “Political economy”
*Investments: where to put bridges? > Universal Service
**Price discrimination: why to discriminate?> Postal Stamp
***Quality of service: why to discriminate?> Universal Service
** **Technology choice & innovation: within Universal Service & Postal Stamp?
** ***Postal stamp is average pricing: Social tariffs
3- Either(LOW equilibrium Universal Public Service) + private sector [Typical
Health & Education]
Or (Differentiated Three tier Service & Tariff) [Typical TV chains or radios]
= Basic (or) Advanced (or) Premium
5

6. New wine in old bottle…
Double unbundling + incentive regulation > substitute to Public
service Grandpa
1- Unbundling “Infrastructure facility” from “final services”
Infrastructures to be regulated – Final services to go to market
(B2B) or (Retail)
2- Unbundling “Regulation” from “Political economy”
To regulate “industry unbundling” you need (Regulator) unbundled
from (Grandpa Political economy) >> Independence of regulator
Like a judge, indep. regulator tells the “good for society” directly
from her chair

7. New wine in old bottle…
Double unbundling + incentive regulation > substitute to Public service Grandpa
3- Then you can go to “incentive regulation”
It offers 5 tools: Price Cap and ROR, Perf. Based Reg, Menu of
contracts, and Yardstick Competition
>> Incentive regulation is “Modular Regulation”
4- to face its “seams”: Incentive regulation has (think in EU
“Internal” market) seams
# Regulators differ: statute rights (able to; willing to) + resources
(skills & experience)
# TSOs differ: have 9 tasks to perform & are influenced by 7
differentiation factors

8. 8
Alignment of the regulatory tools with the
regulator’s abilities. Source: Glachant et al.
(2013), p. 275.

9. 9
Decision tree to align tasks, regulatory
tools and regulator’s abilities. Based on:
Glachant et al. (2013), p. 283.

10. TSO’s many tasks
• Hardware: Transm.Own
- Connection of users
- Maintenance of assets
- Investment: Assets&Tgy
• Software: Syst.Op
- Balancing (Freq/Power)
- Congestion Manag.
- InfoSyst: Data &Analysis
- Coordin. with TSOs
- Coordin. with DSOs
- Coordin. with Mark.Ops
10

11. 11

12. 12

13. 13
The EU legal framework - electricity

14. 14

15. New bottle for new wine…
Coordinating the unbundled industry… Then… Designing the
market
1- Rules for Infrastructures interact
> with “final services market”
>> via “system operation”
15

16. 16
What’s “Essential
facility / Final service”
coordination issue?
My hotel room in
Australia: Access is
not only pricing >
(Transaction Costs)
Lovely  Aussie 
plugs… seen by a
continental EU visitor

17. New bottle for new wine…
Coordinating the unbundled industry… Then… Designing the market
1- Rules for Infrastructures interact with “final services market” via “system
operation”
It’s a sequence:
Given Infrastructures assets & technology
Chosen System Operation rules
Interact with Final Services production or delivery
>> It also questions Market rules (the Market Design)
There > Infrastructure operation is “bundled” with Market operation
(O. Williamson: Contract integration substitutes to Vertical integration; think
LT contracts Gas Upstream / Downstream)
17

18. New bottle for new wine…
Coordinating the unbundled industry… Then… Designing the market
2- “System operation neutrality” is “market design” sensitive
3- Revenge of Ronald Coase: markets need market infrastructures;
The market infrastructures interact with infrastructure operation via system
operation
Electricity transaction <> Electricity system coordination
Hard fact – Comprehensive “Electricity Transaction” made of:
1- Trading Energy “day-Ahead” in wholesale market
2- Looking if grid can deliver Energy Equilibrium > network capacity, congestion
3- Keeping Energy balanced “Real Time”> balancing with Power Reserve
“Real” electricity made of 3 goods: Energy, Power, Network. Energy only is
“incomplete market”18

19. Schumpeter wave Digitiz.Decentriz.?
Governance “innovation / regulation” to lead?
1/ Digitalization + Massive data processing + Decentralization operation
brings “Internet & Smart Tools” inside Electricity world 4th
Industrial revolution.
You don’t believe it? Electrical & self-driven cars
2/ Industry Unbundling created “modular” elec. Industry;
did already spread into “modular” Market Design(s)
3/ 4th
Indus Revolution accelerates it all:
# micro modularity of industry (say RES > Prosumers);
# modularity of “Transaction Designs” (Say > New Intermediaries as
aggregators, alternative Transaction Platforms, etc.);
# it opens too “users modularity” (Say> Block-chain Community)
19

20. Schumpeter wave Digitiz.Decentriz.?
Governance “innovation / regulation” to lead?
4/ we might enter new world made of
Industry Modularity + Pioneer newEntrepreneurs + Users Communities
If regulation follows, it can open 5 new worlds:
1-Forums (Open general debate for new system-wide coordination rules)
~2-Innovation Zoos (“Sand boxes” for advanced innovators put outside
common regulation)
~3-Communities (“Users Clubs” : self-regulated users close-shop)
~4- Platforms for Cow-Boys (NewYork: “plug-and-play” open local
infrastructures friendly designed for any type new entrant)
~5-Big e-Sisters (Google, Apple, Amazon,etc. creating “Re-Integrated”
alternative resorts. Irony: universal access; “postal stamp” or “Social tariff” as
basic service is for free – BEHIND the METER = Outside the sectoral regulation.
Up to “Internet of Things” applied to smart: cars, appliances, buildings
(California ZNC).20

21. How to conclude such amount of novelties?
#Is GrandPa dead? # To see-smell corpses in
2022?
21

22. www.florence-school.eu 22
Thank you for your attention
Email contact: jean-michel.glachant@eui.eu
Follow me on Twitter: @JMGlachant near to 44,000 tweets
My web site: http://www.florence-school.eu