The EFD as criterion for access granting

The application of the EFD can be seen from an economic point of view as a trade-off between static and dynamic economic efficiency. On one hand, it is desirable to limit the incumbent’s property rights to avoid the loss of welfare caused by the reduction of competition in at least one market. On the other hand, this limitation on property rights also reduces the incumbent’s incentives to invest, innovate and improve the coverage of infrastructure. This effect should not be underestimated, especially in the case of scarce, expensive-to-build infrastructure, such the one needed in transport, energy or telecommunications industries. Given the seriousness of the undesired effects caused by the limitation of property rights, the misuse of the EFD carries large risks. For this reason, it is important to establish clear criteria to select the cases where it is correct to apply the doctrine (Laffont and Tirole, 1993).

The desirability of the application of the EFD seems to be clear in cases when the facility is a natural monopoly and its use constitutes an essential input to produce goods in a related market. As discussed in previous sections, the duplication of natural monopolies would waste valuable social resources and increase the production costs of the goods produced with these facilities. Furthermore, its essentiality would increase the loss of welfare by facilitating the extension of monopoly power to potentially competitive markets–especially in the case when the monopoly is regulated.

The case is much less clear however when the input is not produced within a natural monopoly or its use is not essential to produce further goods (Maddock and Marshall, 1997). Indeed, the feasibility of duplication makes the market more contestable, thus reducing the potential of monopoly pricing. The application of the EFD in this context may also be counter-productive, given that the elimination of duplication incentives is likely to perpetuate the monopoly. In other words, the potential short-term gains of sharing may not compensate the long-term effects of reducing the owner’s incentives

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to invest and innovate. Analogously, the arguments for limiting property rights are weaker when the output produced by a natural monopoly can be substituted, for example, in cases when transport is possible both by railways and highways. In this case, even in the presence of sub-additivity of costs, the possibility of a monopolist excising market power is limited by competition.

As important as knowing in which cases the application of the EFD is desirable, is to correctly assess price and conditions under which access should be granted. If the price is too high or conditions are too restrictive, less-than-optimum access will occur, producing economic rents and thus loss of welfare. On the other hand, if the access is priced below costs or its conditions make the incumbent bear some of the costs that should be paid by the entrants, excessive entry will occur, thus reducing or eliminating the incumbent’s incentives to invest in new infrastructure.

In this respect, an issue raised by several authors is the inability of courts to correctly assess in which cases the EFD should be applied and to supervise its correct application in cases that access requires continuous supervision (Maddock and Marshal, 1997; Van den Bergh and Camesasca, 2001). According to Pengilley (1998), courts in general do not have staff with the required business expertise to evaluate commercial decisions, not even in the US, where courts have probably the greatest experience in EFD. In effect, US courts have not usually mandated access unless it is under “nondiscriminatory” conditions (in cases where access has been previously granted) or when the issue has been delegated to a specialized regulatory agency.

As we can see, the EFD serves as criterion to evaluate when access should be mandated, but not to set prices and conditions of such access. Considering the poor performance of courts in this matter, and that the specialized knowledge required for this task is similar to that necessary to price goods produced in monopolistic situations; it seems logical to entrust this task to an economic regulator. Indeed, in an increasing number of countries, access to natural monopolies is regulated by specialized agencies.

The system devised in Australia has two main innovations. The first one, considering the magnitude of the potential negative effects of misusing the EFD, the legislation aims to reduce regulatory failures by limiting the application of the access regime only to infrastructure regarded as of national importance. Moreover, in its 2001 review of the National Access Regime, the Productivity Commission recommends to mandate access only if this measure will increase competition in a substantial fashion (Productivity Commission, 2001). This choice implicitly supposes that undesired anti-competitive behavior can be dealt using antitrust law.

The second innovation of the Australian regime is the preeminence given to direct negotiation between the incumbent and the entrant. This limits the participation of the regulator to cases in which the parties do not reach an agreement. According to the Productivity Commission (2001), the regime is not intended to replace commercial negotiations between facility owners and access seekers, but to enhance the incentives

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for negotiation and provide a means of access on reasonable terms and conditions if negotiations fail. This feature, aimed to reduce the typical information asymmetries between regulators and regulated firms, is consistent with a theoretical development known as the “Coase Theorem”. This theorem indicates that if property rights are well defined and there are no transaction costs (or these are extremely low), negotiation between the parties will lead to a better resource allocation than if there was governmental intervention (Coase, 1960). In this context, the intervention of the regulator is justifiable only if its own costs are lower than the transaction costs of a negotiated agreement between the parties (Flor and Defilippi, 2003).

However, some authors are skeptical about the social efficiency of negotiated agreements. Maddock and Marshall (1997), for example, argue that only two outcomes are possible: access pricing according to the ECPR rule (under which the incumbent maintains its monopoly rents) and collusion between both parties to share the rents. These authors, however, do not analyze cases where other access pricing methods are used and ignore that the existence of economic profits will attract further entrants until this rent disappears. Furthermore, the authors implicitly suppose that the information asymmetry between the parties and the ACCC is such that this agency will fail to recognize potential threats to public interest.

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Appendix 3: United States v. Terminal Railroad