COMPETITION vs. COORDINATION: THE ANALYTICS OF OPEN ACCESS WITH ILLUSTRATIONS FROM RAILROADS

1. COMPETITION vs. COORDINATION:THE ANALYTICS OF OPEN ACCESS WITH ILLUSTRATIONS FROM RAILROADS José A. Gomez-Ibañez Annual Regulatory Conference of the Australian Competition and Consumer Commission, Surfers’ Paradise, Queensland July 29, 2010

2. Open Access in Network Industries Traditionally IntegratedTraditionally Open Networks: Track Wires Pipes Port Highways Services: Trains Elec. Water Ships Trucks etc. Other terms: vertically unbundled vs. vertically integrated services-based vs. facilities-based competition

3. Competition-Coordination Tradeoff(Ronald Coase, 1927) Integration decision (make or buy) Buy normally preferred Make (integrate) if: • Durable, relationship-specific assets important • Needs too complex and uncertain to contract Forced open access or unbundling: competition-coordination tradeoff

4. Outline • Simple Analytic Model of Tradeoff • Coordination costs important • The Tradeoff in Railroads • Published empirical estimates • Case studies of coordination costs • Australia: Complexity of the interface • Europe: Network capacity and user diversity • North America: Reciprocity and selectivity • Applications

5. Competition-Coordination Tradeoff(Oliver Williamson, 1968) Price P1 P2 A C MC2 MC1 B Demand curve Q1 Q2 Quantity

6. Before Open Access Price P1 A MC1 B Demand curve Q1 Quantity

7. Before Open AccessA+B = profits to producer Price P1 A MC1 B Demand curve Q1 Quantity

8. After Open Access Price P1 P2 A C MC2 MC1 B Demand curve Q1 Q2 Quantity

9. Net Social Gain or Loss From AccessB = coordination loss to producersC= competitive gain to consumers Price P1 P2 A C MC2 MC1 B Demand curve Q1 Q2 Quantity

10. Transfers from Producers to ConsumersB = coordination loss to producersC= competitive gain to consumersA= transfer from producers to consumers Price P1 P2 A C MC2 MC1 B Demand curve Q1 Q2 Quantity

11. Complications • Continuing need for tariff regulation • “wholesale” (access) rather than retail tariffs • Divestiture or ring fencing • Access as a means to privatization • Dynamic issues • Investment • Innovation and technological change

12. The Importance of Coordination Losses

13. Railroads: Published Estimates • Competitive gains • US freight railroads: 10% to 20% tariff reduction if second carrier • Passenger railroads: no estimates because subsidies • Coordination losses • US freight railroads: 5% to 40% increase in costs • European railroads: mixed results

14. Australia: Interface Complexity • Access the norm beginning 1995 • Most track infrastructure still government owned • Most train operators now private • Pilbara iron ore railroads (integrated & private) • BHP and Rio Tinto • Smaller miners want access • Queensland coal railroads (integrated & government) • Miners oppose privatization as vertically integrated railroad

15. Pilbara and Queensland

16. Pilbara and Queensland Heavy haul railroads • Heavy axle weights • 30 to 40 tons vs. 20 to 25 tons • Wheel-rail interface • Part of complex supply chain • Mines, stockpiles, ports, ships in addition to trains and track • Dispatching and capacity investment

17. Pilbara and Queensland

18. Europe: Network Capacity and User Diversity • EC requirements • Open access for many train services beginning 1991 • Separation of infrastructure from train operations • Continental Europe: few lessons • Relatively few added services • Infrastructure companies government owned and many heavily subsidized

19. Britain • British Rail restructuring and privatization (1994-97) • One infrastructure company (Railtrack), 25 passenger train companies, etc. • System of access charges and penalties • Low fee per added train encourages more trains • Industry regulator orders Railtrack and train operating companies to negotiate over capacity improvements • Railtrack bankruptcy (2000) • Hatfield accident • West Coast Main Line upgrade

20. Hatfield Accident

21. West Coast Main Line

22. North America: Reciprocity and Selectivity(171,000 U.S. freight track miles) • Voluntary exchanges of access • Urban: terminal railroads (≈ 5,000 track miles) • Mainline: e.g. directional running (≈ 24,000 miles) • Government-compelled exchanges • Amtrak and VIA intercity passenger services (1970s) • Conditions for US mergers (1990s, protect 2-to-1 shippers, ≈ 6,000 track miles) • “Inter-switching” in Canada (30 kilometer limit) • Powder River Basin in Wyoming

23. U.S. and Canadian Frieght Railroads:Only seven class 1 carriers

24. North America • Amtrak and the freight railroads • No reciprocity • Belt Railroad of Chicago (BRC) • Too many owners • Canadian inter-switching • Leveraging the first 30 kilometers • Powder River Basin • Coordination costs despite reciprocity and leverage

25. Amtrak: Little Reciprocity, Too Long Route miles: 22,000 Own track: ~ 700

26. Belt Railway Companyof Chicago: Six Owners

27. Canadian Inter-switching: Reciprocal, Short

28. Powder River Basin Joint Line: Reciprocal, Short

29. Conclusions • Access a competition-coordination tradeoff • Often significant competition already • A little lost coordination offsets a fair amount of increased competition • Coordination losses higher • More complex and sensitive the provider-user interface • Network is close to capacity • Access seekers have diverse needs • Little reciprocity in access rights • Rights are broad rather than selective

30. Applications to Other Industries • Road vs. rail • Vehicle-highway interface more forgiving • Competitive benefits of highway access greater • Telecommunications • “Short” access often important (poles and towers) • Voice telephony vs. broadband • Competitive benefit has declined significantly with both • Broadband greater pressure for capacity • Broadband interface more complex and changing