Setting the Regulatory Framework



Conclusions

It is difficult to regulate well. Consequently, regulation should be limited to essentials, using the simplest and least intrusive regime possible.112 Economic regulation of railways is required only if there is market power; it may be unnecessary if there is strong competition from road transport. The regulator should contribute to developing and sustaining competition so that less regulation is needed. If the industry structure allows third-party or open access—creating competition among rail operators—regulation should focus on the remaining natural monopoly, which is usually limited to infrastructure provision.

Regulation should be designed to ensure that its benefits exceed its costs. Economic regulation may be an appropriate response to market failure, but it is more efficient to develop a functioning market than to regulate. Although several forms of market failure exist for railways, monopoly is the form that requires the most regulation. However, by allowing competition in train services, regulation can be limited to infrastructure, particularly investment, and controlling and pricing access. Both access and investment objectives are more easily achieved using commercial incentives than using regulation.

No single best model for economic regulation of railways exists. Instead, regulation should be custom designed to achieve government objectives for the whole transport sector, taking account of other aspects of railway reform. These considerations determine the public interest objectives that regulation should be designed to achieve and these should determine the duties of the regulator that should be enshrined in legislation.

Experience suggests that it is more difficult to develop competition for rail passenger services than for freight services, implying that passenger-dominated railways may need more regulation than freight-dominated railways.

A regulatory regime should be flexible enough to respond to the unexpected, particularly when traffic fails to meet projections. Flexibility is easier to achieve through discretionary regulation than through a concession contract, although sometimes a combination may be the best solution.

External safety and environmental regulation is essential for railways but technical standards are often best left to the industry.

Institutional arrangements for rail regulation are important. Ideally, economic regulation should be carried out independent of government and industry; if this cannot be achieved immediately, it should be an eventual goal.

    











112 J. A. Gomez-Ibanez, Regulating Infrastructure: Monopoly, Contracts and Discretion, (Cambridge, Mass. Harvard University Press, 2003).
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