Presentation @ Turin School of Regulation, Italy 5 September 2019 by Jean-Michel Glachant Loyola de Palacio Chair Prof. & Director Florence School of Regulation European University Institute (Florence, Italy)

1. Regulation: lessons learnt
(1840-2040)
Turin School of Regulation
5 September 2019
Jean-Michel Glachant
Loyola de Palacio Chair Prof.
& Director Florence School of Regulation
European University Institute (Florence, Italy)

2. 2
Good old days
and… Public
Regulation’s
roots
I’m 4 Ys old

3. Regulation
…
What’s
new…
& Beyond?
??
3
Xxx years later:
I’m even older

4. Fasten
your seat
belt:
Take-off!
4
Now please…

5. Regulation: a Lego to play…
• 1- Old roots & bones: From infrastructures to Public Service
“GrandPa”
1- Old roots & bones are “EU 1840 infrastructure monopoly” (or “US
1877 essential facility”)
2- > But real flesh is “Universal mass market services” framed by
“Political economy”
• 2- 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”
5

6. Regulation: a Lego to play…
• 3- 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
<calls for> coordination
• 4- Schumpeterian wave Decentraliz.+ Digitaliz.?: New needs of coordination
+ New tools of coordination > “innovation + new Governance” to lead?
(Regulators + Indus.Modularity + PioneerEntrepreneurs + UsersComm) > spread
into 5 worlds?
1-Forums ~2-Innovation Zoos (Sandboxes) ~3-Communities ~4-Platforms ~5-
Outlaw Territories6

7. 1- Old roots & hard bones …
From infrastructures to Public Service “GrandPa”
1- Old roots & hard bones are “infrastructure monopolies”
(“essential facilities”)
# Monopoly of essential facility: a bridge on a river (1840)
# Utility for society is usage, then pricing. Monopoly price is not
good for society.
# Society will price monopoly: fair price for owner & fair price for
users.
Average Price? Marginal Price? Fixed costs?
7

8. 1- Old roots & hard bones …
From infrastructures to Public Service “GrandPa”
2- But real flesh is “Universal mass market”, framed by “Political economy”
~Investments: Where to put bridges? > Everywhere > Universal Service
~Price discrimination: How to discriminate?> Why to? > Postal Stamp
~Quality of service: How to discriminate?> Why to? > Quality Standard
~>~Technology choice & innovation: Within Universal Service & Postal Stamp?
~>~Postal stamp is average pricing> Affordability > Add Social tariffs
3- Regimes for Universal Mass Markets
Either (LOW equilibrium) Universal Public Service + private sector [Typical for
Health & Education]
Or (Differentiated Three tier Service & Tariff) [Typical old TV chains or radios]
= Basic (or) Advanced (or) Premium8

9. 2- New wine in old bottle…
(Double unbundling + incentive regulation) substitute to Public
Service Grandpa
1- Unbundling of “Infrastructure facility”, from “final services”
Infrastructures to be regulated > Final services to go to markets
(B2B) or (B2C = Retail)
2- Unbundling of “Regulation”, from “Political economy”
To regulate “industry unbundling” you need a (Regulator)
unbundled from (Grandpa Political economy) >> Independence of
regulator
Like a judge, the indep. regulator tells the “Society Common Good”
directly from her civil servant chair

10. 2- 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: ROR - Price Cap - Perf. Based Reg - Menu of
contracts - Yardstick Competition
>> Incentive regulation is “Modular Regulation”; which the best?
4- And face the “seams”: Incentive regulation has seams - think EU,
US “Internal” market, in multi-level institutional frame
# Regulators seams: statute rights (“able” to; “willing” to) +
resources (skills & experience)
# TSOs seams: TSOs have 9 tasks to perform & are influenced by 7
differentiation factors

11. 11
Alignment of the regulatory tools with the
regulator’s abilities. Source: Glachant et al.
(2013), p. 275.

12. 12
Decision tree to align tasks, regulatory
tools and regulator’s capabilities. Based
on: Glachant et al. (2013), p. 283.

13. 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
13

14. 14

15. 15

16. 16
The EU legal framework - electricity

17. 17

18. 3- 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”
18

19. 19
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

20. 3- 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 the Infrastructures assets & used technology
The chosen System Operation rules
 Interact with Final Services (production or delivery)
This questions the Market rules: that we call therefore Market Design
 In fact > Infrastructure operation is “bundled” with Market operation
 O. Williamson: Integration via Contracts substitutes to Vertical integration;
think LT contracts Gas Upstream / Downstream
20

21. 3- 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 their market infrastructures
These market infrastructures interact with infrastructure operation via system
operation
Electricity trade transaction <> Electricity system coordination
Hard fact; any Comprehensive “Electricity Transaction” is 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 transaction is made of 3 goods: Energy, Power, Network.
“Energy only” is only an “incomplete market”, not self-sufficient
21

22. 4- Schumpeterian wave Digitiz.Decentriz.?
Innovation wave: Digitiz (new info & control tools) + Decentraliz (new decision
process for invest & operation) > Market Design & Coordination move again
1/ (Digitalization as Massive & Individual data processing)
+ (Decentralization of invest & operation – think “Sharing Economy”)
brings “Internet & Smart Tools” inside Electricity world as 4th Industrial revolution
> “Transactive Energy”
You don’t believe it? El. Vehicles; self-driven cars
2/ More Decentralization creates more Industry Unbundling
And a more “modular” elec. Industry
Which immediately spreads into more “modular” Market Design(s)
>> Electricity industry already has local “trade platforms” (Uber or Lyft ) for
particular local products (see Piclo company in UK)
22

23. 4- Schumpeterian wave Digitiz.Decentriz.?
Innovation wave: Digitiz (new info & control tools) + Decentraliz (new decision
process for invest & operation) > Market Design & Coordination move again
3/ The 4th Indus Revolution “Digitiz + Decentraliz” accelerates need to change:
# More micro modularity of industry
Say > “Renewable Energy”, and “Prosumers”
# More modularity of “Market Designs”
Say > New Intermediaries as Aggregators; alternative intermediation as
Platforms; or even “automated direct trade” as Blockchains; etc.
# It opens new “Users Modularity”, another new world for Governance
Say > “Peer-to-Peer” (individuals TO individuals; calling for new coordination)
vs “Community” (fully self-organized grouping of voluntary individuals)
23

24. 4- Schumpeter wave Digitiz.Decentriz.?
Governance “innovation / regulation” to lead?
4/ New worlds for Industry, Markets, Coordination, Regulation, Governance
Already 5 competing areas:
~1- Forums Open general debate for new system-wide coordination rules
~2- Innovation Zoos “Sandboxes” for particularly advanced innovators, being
put outside common regulation
~3- Communities “Users Clubs” : self-regulated territories behind closed doors
~4- Platforms “Plug&Play” new trade infrastructures designed for new products
~5- OutLaws “Behind-The-Meter”= Outside energy sector regulation. As “Device
Fleet management” applied to smart: cars, appliances, buildings (California
ZNC). Will end up into another enormous new world: “Internet of Things”
~6- Big e-Sisters “At the Gate” = Google, Apple, Amazon, etc. creating “Re-
Integrated” alternative resorts. Irony is they can offer sort of: universal access;
“postal stamp” or “Social tariff” as basic services for free
24

25. How to conclude such amount of novelties?
#Is GrandPa so dead? # To see-smell corpses in 2024?
25

26. www.florence-school.eu 26
Thank you for your attention
Email contact: jean-michel.glachant@eui.eu
Follow me on Twitter: @JMGlachant near to 55,000 tweets
My web site: http://www.florence-school.eu