Friday, April 29, 2016

An example of the difficulties of regulatory independence

Four years ago I started a research about the reform of regulatory institutions in Spain. Finally, the result has been a paper with Ramon Xifré from Pompeu Fabra University that has been accepted by the journal Utilities Policy (hopefully, they will upload an electronic version in the next few weeks). We argue there that there are concerns that the Spanish reform (the merger of the antitrust agency and sector regulators) imposed a homogeneous level of independence for different sectors, reduced the overall level of regulatory independence, and by unilaterally changing legislation, de facto reneged on regulatory independence by taking advantage of the legislative change to remove from office the regulators appointed by the previous political majority.
Regulatory agencies are influenced in their evolution by the pressures of interest groups and political principals. This has indeed been the case in the Spanish reform.

Consolidation can be justified in industries where there is technological convergence; coordination between regulation and competition policy also makes sense when liberalizing industries. But this does not justify the extreme position of integrating almost all regulation and competition policy in a single agency, especially when the integration is not designed with consumer welfare as the main objective. This extreme position is not justified either by reasons of productivity or competitiveness, as the relationship between the institutions of regulation and competition policy (microeconomic tools) with stabilization or macroeconomic growth objectives is not well established. This does not mean that efficient network industries and competition are not important in the long run, but there is little reason to believe that the institutional details of policy have macro implications.

In contrast with the model of maximal integration adopted in Spain, the case for a certain degree of institutional diversity appears to be justified because, although some consolidation and coordination may be beneficial, diversity creates the conditions for accountability and sound decisions for consumers in markets that are complex, subject to the pressure of interest groups, and uncertain.
Good board members and officials may over time overcome the institutional deficiencies that we have noted with regard to this reform. But the reform itself reveals interesting issues about the difficulties of regulatory independence in practice. If fairness in the process of reform is as important as the outcome (as argued in the behavioral literature), then the institutions of regulation and competition policy have not become more robust as a result of integration, because these institutions remain vulnerable to the changing opinions of the public, stakeholders, and potential new political majorities, who have not been involved in the reform process. 

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