In recent years, EU has tried to promote competition through deregulation and the establishment of the single market. As a consequence, network industries like telecoms, energy (electricity and natural gas), transport (air, maritime and rail) and water, which have traditionally been sheltered from competition and operated within national or regional boundaries, have experienced great change. Whereas at one time, most European consumers had little or no choice over the supplier of a network service, today an increasing number of firms operate in these industries, notably in airlines and telecoms.

Although deregulation has brought competition to Europe's network industries, regulation still remains a central element of economic policy. Indeed, the conflicts between competition and monopoly and between market forces and regulation give rise to many challenging policy problems. In a new CEPR Report, the first of a series on Monitoring European Deregulation, these problems are addressed by exploring ten conflicting priorities that European policy-makers face in defining an appropriate competition and regulatory policy framework for the newly liberalized network industries:

• short-term versus longer term objectives
• efficiency versus equity objectives
• competition versus monopoly
• slow versus fast liberalization
• public versus private ownership
• sector-specific regulation versus general competition law
• rules versus discretion
• permanent versus temporary regulation
• centralized versus decentralized regulation
• light-handed versus heavy-handed regulation.

While competition is being introduced into most of Europe’s network industries, several factors constrain its effectiveness: a history of monopoly control, widespread public ownership and state aids; political and institutional diversity; public service obligations; and the need for network interconnection between rival firms. For these reasons, regulatory scrutiny is needed more in the network industries than in most other European industries. At the same time, careful policy design must be careful to take account of dynamic and long-term incentive considerations. Otherwise, investment and innovation may be adversely affected, which will in turn have negative implications for consumer well-being and employment.

The first part of the Report discusses the general principles governing competition and regulatory policy for network industries. The report three phases of market structure. In this framework, deregulation means that the industries are evolving along a path from monopoly (phase 1) to monopoly and competition (phase 2), and possibly on to full competition (phase 3).

The accompanying figure indicates the key policy concerns that arise each phase, as well as where particular European industries are currently located. Most lie in phases 1 or 2, and many of the policy issues arise from the fact that monopoly and competition coexist in the latter phase. Certainly, this is the point at which conflicts between policy priorities are most evident. Somewhat paradoxically, at the beginning of phase 2 when a network industry is opened up to competition, more rather than less regulation is required. Of central importance are policies designed to prevent monopoly abuse in both retail and interconnection markets. Over time, however, competition should become more effective during phase 2 and the need for regulation should diminish.

The second part of the Report focuses on the telecoms industry, a sector where shifting patterns of ownership and market structure in combination with extraordinary technological change are creating enormous challenges for regulators at both the EU and national level. The industry is becoming increasingly difficult to define as convergence with broadcasting and the information technology industries blurs traditional market boundaries. At the same time, telecoms in Europe does not yet comprise a single market as there is much diversity in policy implementation among EU members.

The Report examines the risk that, as the industry moves into a phase 2 market structure, new national or Europe-wide regulation will tilt the playing field in favour of some competitors with potentially detrimental consequences both for the ultimate consumers of telecoms services and for the long-term development of the industry. Of great importance is a question likely to be high on the agenda of the commissions 1999 review of EU telecoms policy: should there be more centralized regulation of the industry, perhaps via the establishment of European Communications Commission?

Certainly, the report argues, there is a need for more central authority in some areas of competition and regulatory policy. But a new body of this kind would face serious informational disadvantages compared to national regulatory authorities; it would be large cumbersome and costly; and most importantly, it would be 'political' and there would inevitably be tensions with national governments.

In the spirit of the principle of subsidiarity, the Report concludes that across all the network industries, a strengthened two-tier regulatory structure, which builds on existing practice in Europe, would yield a more robust regulatory environment than the establishment of new pan-European authorities. As the centralized upper tier, the commission should oversee general principles, aiming to bring about greater consistency in regulatory enforcement across the EU. He lower tier of national regulators, which is better placed to deal with detail, should implement those general principles.