Structural separation in regulated industries Report on implementing the OECD Recommendation 2016 Structural separation in regulated industries Report on implementing the OECD Recommendation 2016 This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the OECD or of the governments of its member countries or those of the European Union. This document and any map included herein are without prejudice to the status or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city, or area. Please cite this publication as: OECD (2016), Structural separation in regulated industries: Report on implementing the OECD Recommendation © OECD 2016 3 Foreword On 26 April 2001, the OECD Council adopted a Recommendation Concerning Structural Separation in Regulated Industries suggesting to OECD countries that when regulated firms have activities that are potentially competitive and linked to non-competitive activities, such as natural monopoly activities, governments should consider the benefits and costs of structural measures separating two activities. The Recommendation was accompanied by a detailed report, and both advocated careful consideration of the potential pros and cons of structural separation versus the potential pros and cons of behavioural measures. Since then, the OECD has conducted reviews of experience with structural separation in many countries and in a variety of sectors. The sectors have always included electricity, gas, railways and telecommunications, in addition to other sectors. In 2011, the Recommendation was modified to ensure that potential impacts on investment are taken into account when the possible appropriateness of structural separation is considered. This is the fourth report issued to monitor the implementation of the Recommendation. It concludes that structural separation remains a relevant remedy to advance the process of market liberalisation and notes that other areas of application could also be included such as vertically integrated industries where only some activities are subject to competitive constraints. To include these and other points, a second amendment of the recommendation was made and is appended to this Report. Overall, the report concludes that the recommendation is still important and relevant, with substantial evolution of policies since the initiation of the recommendation. STRUCTURAL SEPARATION IN REGULATED INDUSTRIES: REPORT ON IMPLEMENTING THE OECD RECOMMENDATION © OECD 2016 5 TABLE OF CONTENTS Chapter 1. Introduction ............................................................................................................................... 7 1.1 The Recommendation and its context .......................................................................................... 8 1.2 Structural separation in theory and practice ............................................................................... 10 1.3 Structural separation: recurrent themes in recent practice ......................................................... 13 Chapter 2. Update on experiences in established sectors ......................................................................... 17 2.1 Electricity ................................................................................................................................... 17 2.2 Natural gas ................................................................................................................................. 24 2.3 Rail ............................................................................................................................................. 30 2.4 Telecommunications .................................................................................................................. 40 Chapter 3. New sectors for application of the Recommendation ............................................................. 51 3.1 Postal services ............................................................................................................................ 51 3.2 Ports ........................................................................................................................................... 57 3.3 Water and sewerage ................................................................................................................... 64 3.4 Banking ...................................................................................................................................... 72 3.5 Bus services ............................................................................................................................... 85 3.6 Payment systems ........................................................................................................................ 87 3.7 Consumer reporting agencies ..................................................................................................... 90 3.8 Additional sectors ...................................................................................................................... 91 Chapter 4. Concluding remarks ................................................................................................................ 93 Annex. Recommendation of the OECD council concerning structural separation in regulated industries ........................................................................................... 95 STRUCTURAL SEPARATION IN REGULATED INDUSTRIES: REPORT ON IMPLEMENTING THE OECD RECOMMENDATION © OECD 2016 7 Chapter 1. Introduction In April 2001, the Council adopted the “Recommendation of the Council concerning Structural Separation in Regulated Industries”1 (hereafter “the Recommendation”). In essence, the Recommendation encourages OECD countries to consider structural separation as a mechanism for enhanced competition reorganisation, in contradistinction to behavioural measures, particularly in the context of privatisation, liberalisation or regulatory reform. The Recommendation was preceded by a detailed report, entitled Restructuring Public Utilities for Competition.2 This report considered the competition problems that may arise from vertical integration; it explored the options of vertical separation in comparison with access regulation; and it provided a brief overview of experiences with different approaches to structural separation across a variety of industries, including airports, ports, roads, electricity, natural gas, rail services, telecommunications, broadcasting and broadband interactive services, and postal services. In addition, the Recommendation instructed the Competition Committee to review, three years after its adoption, the experiences of OECD countries in implementing its recommendations. A first report was issued in June 2006,3 which provided an overview of experiences across the OECD, alongside a series of more detailed case studies with respect to the electricity, gas, telecommunications, rail and postal sectors. A second report was submitted to the Council in 2011,4 providing a detailed update on relevant experiences in the areas of electricity, gas, telecommunications and rail. This second report placed considerable emphasis on a growing body of scholarship that focused on the potential investment effects that may stem from structural separation.5 It led, accordingly, to a revision of the Recommendation to include reference to the potential “effects on corporate incentives to invest” within the calculus of factors that may lead an OECD country to opt for or against structural separation. This report provides a third update on experiences with structural separation to date. It builds on considerable existing work of the OECD in this area and extends it by examining potential new sectors 1 Recommendation of the Council concerning Structural Separation in Regulated Industries, adopted on 26 April 2001 [C(2001)78/FINAL], amended on 13 December 2011 [C(2011)135 and CORR1] and on 23 February 2016 [C(2016)11 - C/M(2016)3], www.oecd.org/daf/competition/recommendations.htm. 2 OECD, Restructuring Public Utilities for Competition (2001) (hereafter the “2001 report”), www.oecd.org/daf/competition/sectors/19635977.pdf. 3 OECD, Report to the Council on Experiences on the Implementation of the Recommendation concerning Structural Separation in Regulated Industries [C(2006)65, Annex], published June 2006 (hereafter the “2006 report”), www.oecd.org/daf/competition/sectors/45518043.pdf. 4 OECD, Recent Experiences with Structural Separation: a Report to the Council on Implementation of the 2001 Recommendation concerning Structural Separation in Regulated Industries [C(2011)135, Annex I and CORR1], published January 2011 (hereafter the “2011 report”), www.oecd.org/daf/competition/sectors/50056685.pdf. 5 2011 report, pp.108-112. STRUCTURAL SEPARATION IN REGULATED INDUSTRIES: REPORT ON IMPLEMENTING THE OECD RECOMMENDATION © OECD 2016 8 for application of the Recommendation, as well as experiences in certain non-Members. This report was prepared by the OECD Secretariat on the basis of a questionnaire sent to delegates of the Working Party No. 2 on Competition and Regulation (hereafter the “WP2”) on 6 October 2014, discussions at meetings of the WP2 on structural separation on 15 December 2014 and 19 June 2015 and on Secretariat fact- finding work. An earlier draft of the report was shared with delegates on 9 June 2015and this