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David Coen and Mark Thatcher Network governance and multi-level delegation: European networks of regulatory agencies Article (Published version) (Refereed) Original citation:

Coen, David and Thatcher, Mark (2008) Network governance and multi-level delegation: European networks of regulatory agencies. Journal of Public Policy, 28 (1). pp. 49-71. ISSN 0143-814X DOI: 10.1017/S0143814X08000779 © 2008 Cambridge University Press This version available at: http://eprints.lse.ac.uk/21588/ Available in LSE Research Online: August 2012 LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.

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Network Governance and Multi-level Delegation:European Networks of Regulatory Agencies

DAVID COEN Public Policy, University College London

MARK THATCHER Public Administration and Policy, London School

of Economics

ABSTRACT

European networks of regulators in industries such as telecommunications,securities, energy and transport have been cited as important examples ofthe growth of network governance in Europe. Using a principal-agentperspective as a starting point, the article examines why a double delegationto networks of regulators has taken place. It looks at how and why theEuropean Commission, national governments and independent regulatoryagencies have driven the creation of networks, their institutional characterand their implications for regulatory governance in Europe. It argues thatproblems of co-ordination were the main factor advanced to justifyestablishing networks of regulators. The new networks have been given awide range of tasks and broad membership, but enjoy few formal powers orresources. They are highly dependent on the European Commission andface rivals for the task of co-ordinating European regulators. Thus ininstitutional terms the spread of network governance has in fact beenlimited.

Introduction

The s and s saw a widespread phenomenon in Europe ofstates switching from direct economic interventionism to delegatedgovernance – both at the national and supranational levels – to such anextent that there have been a considerable number of analyses of a‘ regulatory state’ or multiplicity of regulatory regimes (Majone ;Coen and Heritier ; Thatcher a; Levi-Faur ). A key elementwas two parallel delegations of powers by national governments tosupranational bodies such as the European Union (Pollock ; Majone) and to domestic independent regulatory agencies (IRAs) (Radaelli; Thatcher b, a; Majone ; Bartle ). However, aspolicy makers at these two levels of regulatory governance attempted toharmonise European single market issues in the late s, pressure grew

Jnl Publ. Pol., , , – � Cambridge University Pressdoi:10.1017/S0143814X08000779 Printed in the United Kingdom

for a further round of delegations of co-ordinatory functions to Europeanregulatory networks (ERNs). Here the creation of ERNs required a doubledelegation of powers and functions: one ‘ upwards’ from the newly createdIRAs and a second ‘ downwards’ from the European Commission.

The changing patterns of delegation have been seen as part of abroader move towards ‘ network governance’ in Europe (see Schout andJordan ; Sabel and Zeitlin ; Eberlein and Kerwer ; Heritierand Lehmkuhl in this issue; Christiansen ), itself linked to literatureon policy networks (see Marsh and Rhodes ; Rhodes ; Sabatier) and recent work on new forms of ‘ international market govern-ance’ (see Slaughter ; Coen and Thatcher ). In the field ofregulation, three key elements of network governance can be set out here.One is the linkage of actors from different institutional levels – national,EU and international – and both the public and the private sector in aform of sectoral governance (see Heritier and Lehmkuhl in this issue;Pierre and Peters ). A second is a shift of power from previouslywell-established levels to organisations or individuals whose main role islinking and co-ordinating actors (Schout and Jordan ; Jordan,Wurzel and Zito ; Peters ). A third element involves a change inthe mode of governance, away from hierarchy and towards consultation,negotiation and soft law (Sabel and Zeitlin ; Hudson and Maher; Eberlein and Grande ; Kaiser and Prange ). In the contextof these governance discussions, ERNs have created much excitement,with claims that they form part of moves towards ‘ network governance’in regulation (Eberlein ; Eberlein and Grande ).

This article examines why the European Commission, national gov-ernments and independent regulatory agencies have accepted or indeeddriven the creation of these networks of regulators, their institutionalcharacter and their implications for regulatory governance in Europe.Taking a principal-agent perspective as a starting point for the formalanalysis of powers and functions delegated by the European Commissionand IRAs, the central argument is that the networks represent a newround of double delegations. They are designed to respond to themultiplication of regulators and their uneven development by co-ordinating implementation of regulation by member states. But, at theformal level, the new European networks of regulators remain highlyconstrained by existing actors. In particular, the European Commissionand national regulators maintain many controls over the networks, whichlack resources and rights of initiative. Such shadows of governmentpotentially limit the innovative scope of ERNs (Heritier and Lehmkuhl,in this issue) and raise important questions about their ability to evolveinto strong regulatory bodies (Sabel and Zeitlin ). The weakness ofthe networks and the controls of their principals help to explain why

David Coen and Mark Thatcher

double delegation was agreed to by both national and EU actors: theytransferred only limited powers and retained many controls over ERNs.It also suggests that, since their formal institutional position is weak, if thenetworks are to have an impact on regulatory governance in Europe,they must either develop informal resources and influence after formaldelegation has taken place (Sabel and Zeitlin ; Coen and Doyle )and/or gain new powers through new delegations in order to evolveinto more powerful regulatory bodies (Majone ; Thatcher andCoen ). In formal terms, analysis of European regulatory networksshows that ‘ network governance’ remains very limited in EU economicregulation.

The article begins with traditional analyses of delegation in Europeand then sets out the principal-agent framework that will be applied bythe empirical work on ERNs. Thereafter it examines the pressures andproblems that led to the creation of ERNs, before using principal-agenttheory to chart the double delegation to ERNs and offering a systematicanalysis of their functions, powers, resources and rivals. The conclusionlinks the findings back to arguments about network governance inEurope, as well as pointing to further research that is needed given thelimits of the principal-agent framework. The article uses detailed casestudies of the two most powerful and well-established ERNs, since theyoffer the maximum degree of delegation: the European RegulatorsGroup for telecommunications and CESR (the Committee of EuropeanSecurities Regulators) for securities. Similar developments have beenobserved in energy and data protection (Eberlein and Newman ), butthese are weaker ERNs than our two cases, which therefore offer a goodtest for the position of such networks.

The logic of double delegation in European regulation

European regulation has been transformed by a series of delegations. Atthe supranational level, European states have given the EU progressivelygreater powers to extend its regulatory activities (Majone ;Franchino ). Using these powers, EU sectoral regulatory regimeshave grown in major markets previously largely immune from EU action,such as telecommunications, financial services, electricity, gas, railways,postal services and food safety (see Humphreys and Simpson ;Bulmer et al. ). EU regimes involve detailed EU regulation, notably:liberalisation through ending the right of member states to maintain‘ special and exclusive rights’ for certain suppliers; and ‘ re-regulation’, i.e.EU rules governing competition, ranging over a vast array of matters,such as interconnection of networks, access to infrastructure and univer-sal service. At the national level, governments have created new IRAs,

Network Governance and Multi-level Delegation

both sectoral bodies and general authorities, and/or have strengthenedexisting IRAs (Thatcher b, a; Coen and Heritier ; Gilardi, ; Levi-Faur ). IRAs are legally and organisationallyseparated from government departments and suppliers, are headed byappointed members who cannot be easily dismissed before the end oftheir terms and have their own staff, budgets and internal organisationalrules (Thatcher ).

In such a context of delegation to both the EU and IRAs, from the lates onwards a further set of double delegations has taken place toEuropean regulatory networks (ERNs). As will be described in greaterdetail below, these networks straddle national and supranational levels ofregulation, since they comprise national IRAs from all EU memberstates, as well as the European Commission. Established through EU lawthat gives them functions, they are hybrid bodies that link the EU andnational levels, and indeed bring together two sets of agents fromprevious delegations, namely IRAs and the Commission. They are giventhe task of co-ordinating regulators and increasing consistency ofregulation across the EU. They appear to offer an important movetowards formal network governance, one that goes beyond pre-existingdelegations and/or the reliance on soft law in informal Europeannetworks.

How can delegation in European governance, including to ERNs, beanalysed? One approach is to use principal-agent theories. These explaindelegation by elected politicians to non-majoritarian institutions in termsof the advantages gained by insulating IRAs from political pressures andtheir ability to perform functions for elected politicians (Thatcherand Stone Sweet ; Bendor, Glazer and Hammond ; Weingastand Moran ). Principal-agent theory has been applied to delegationto regulatory bodies in Europe (Thatcher b, ; Pollack ;Gilardi ; Majone ). It is argued that governments have delegatedboth to IRAs nationally and to the EU to enhance credible commitment,especially in sectors such as utilities, where governments seek outsideinvestment or other long-term commitments but where other actors suchas investors fear that governments will renege on promises (see Levy andSpiller ). Another reason has been to shift blame for unpopular ordifficult decisions (Egan ). A third factor has been to increaseefficiency, especially in domains that are complex and technical (Majone). All of the above have at various times been used as rationales fordelegation to EU agencies (Pollack ; Franchino ) and haveemerged to a greater or lesser extent in the recent debates surroundingERNs.

However, principal-agent theory points out that delegation is avariable. Principals choose the extent of delegation and which specific


powers are given to their agents. Equally, they maintain controls over theagent, such as appointments, budgetary and staffing resources and theability to overturn agents’ decisions. Indeed, principals will be highlyconcerned to minimise ‘ agency loss’ (i.e. agents acting against thepreferences of the principal) through ‘ shirking’ and ‘ slippage’. They willseek to design institutions to minimise such agency losses.

In light of the above, we see that principal-agent theory is a useful toolwith which to perform an initial analysis of the rise of ERNs for fourreasons. Firstly, ERNs were created explicitly by IRAs and the EuropeanCommission. Principal-agent theory’s interest-based approach directs usto examine why these actors have chosen to delegate and offers a rangeof possible reasons to explain delegation. Secondly, the EU’s legalisednature means that delegation of powers requires a legal basis. Since theformal institutional position of ERNs is set out, including their powersand the controls over them, principal-agent analysis can be used toexamine their formal independence. Thirdly, application of principal-agent theory requires definition of principals and agents. Hence itnecessitates a careful study of who is delegating and who wields controls,a central issue in a complex polity such as the EU, especially for ERNs,which are children of multiple parents (governments, IRAs and theEuropean Commission). Finally, the principal-agent framework under-lines the importance of institutional design since principals will be highlyconcerned with post-delegation events and are expected to mould theirinitial choices accordingly.

But principal-agent tools must be wielded with care, and the limita-tions of the approach understood in analysing delegation (see Coen andThatcher ). In particular, it is based on a rational choice conceptionof institutions, which it presents as consciously and explicitly designed;hence it excludes non-rational strategies such as copying or the evolutionof institutions (see McNamara ). Secondly, and closely linked, itfocuses on the formal structure of delegation, leaving aside informalresources and controls. Thirdly, it examines post-delegation behaviourthrough the rather narrow prism of formal principals and agents andagency loss. It omits other actors in the ‘ regulatory space’ who may be ofgreat importance in the governance structures of the ERNs (Scott )and may fail to allow for the fact that delegating actors are also activemembers of the newly created bodies. It also downplays post-delegationbehaviour that may alter the original delegation (Coen and Thatcher). One example of such behaviour is the alteration of formaldelegation driven by endogenous factors such as learning or thedevelopment of expertise, or exogenous factors such as technologicaland economic developments or external coercion (Sabel and Zeitlin). Finally, formal institutions are overlaid with informal linkages,


such as policy or epistemic communities/networks. These may modifybehaviour within a given formal institutional framework, due to factorssuch as learning or new resources, representing a form of renegotiationof the original ‘ contract’ or formal delegation (Coen and Heritier).

All of the above caveats are important if we are to understand thepost-delegation phase of the ERNs and potential evolutionary trajectoriesof new market governance. Hence principal-agent analyses can offer astarting point, not an end point, for analysis. However, it is difficult toanalyse post-delegation factors such as learning or the impact ofexogenous changes without a sound understanding of the initial delega-tion. Equally, policy communities or networks operate within formalinstitutional frameworks or under the ‘ shadow of hierarchy’ that sets theallocation of powers and sanctions (Heritier and Lehmkuhl, in this issue).Thus, understanding developments in delegation involves starting withthe reasons for institutional changes and the formal framework that is putin place.

The spread of regulatory networks in Europe

EU regulation is implemented at the national level, not by the EuropeanCommission which has low numbers of staff and little in the way offinancial resources. National regulatory authorities (NRAs) are respon-sible for implementing EU legislation at the national level. NRAs can begovernments or independent sectoral regulators (the IRAs). Since muchregulation concerning liberalisation and re-regulation is based on EUlegislation (albeit transposed into national law), NRAs in practice end upimplementing and interpreting much EU regulation.

However, EU regulation has said relatively little about the institutionalframework for the implementation of regulation within member states.It has not insisted that NRAs be IRAs and hence independent ofgovernment, nor has it laid down rules for the institutional form orpowers of NRAs. Instead, it has confined itself to insisting that regulatoryorganisations be separate from suppliers, that they follow certaindecision-making principles such as ‘ fairness’ and transparency and thatthey have adequate resources to fulfil their EU-created legal duties.

This initial European regulatory regime contained two batches ofdelegation. One involved national governments delegating responsibili-ties to the EU which then delegated implementation to NRAs, notablyIRAs. The other involved national governments delegating to IRAs(Thatcher b). However, IRAs now have two sources of delegatedtasks – both from the EU, since they are NRAs responsible forimplementing EU legislation, and from national governments – and


hence two principals (of Egeberg ). Principal-agent analysis under-lines that this situation could create problems for these two principals incontrolling their common agent (IRAs). Since it emphasises the impor-tance of institutional design for IRA behaviour, it also points to the likelycross-national differences in implementation arising from the lack of EUregulation on the institutional form of NRAs.

Indeed, the evidence points to the existence of such difficulties.Co-ordination of different national regulators in implementing EUregulation was encouraged via informal agreements and working groupsat the EU level, but the Commission struggled to establish regulatorynorms and best practice. Moreover, IRAs differed in terms of their age,powers, autonomy, finances and staffing (Coen ; Thatcher ;Coen and Heritier ; Bollhoff ), as their institutional design andcreation varied from one country to another. In fact, after twenty yearsof deregulation and liberalisation, we still observe diverse regulatoryprinciples and different relationships between IRAs, elected politiciansand suppliers (Thatcher a b). Implementation of all publicpolicies faces problems of agency loss, as IRAs and governments puttingpolicies into practice enjoy discretion and the ability to alter a policy’soriginal aims, but these features were magnified in the case of the EU,because legislation is broad and EU directives are binding on memberstates as to their aims but not the means of achieving them. In addition,the Commission’s limited resources make oversight of IRAs difficult,indeed largely ruling out any ‘ police patrol’ strategy (McCubbins andSchwartz ).

Given difficulties in implementing EU regulation, calls were made inthe s for independent ‘ Euro-regulators’ – i.e. EU-level bodies insu-lated from member states and separate from the Commission (Majone, ; Dehousse ). While arguments based on co-ordinating theEuropean single market, international competitiveness and increasingintegration encouraged many economists to call for a single Europeanregulator, the political reality meant that it was unlikely to occur. Firstlyand most importantly, national governments were reluctant to createsuch a body, even in telecommunications, the sector with the mostadvanced ‘ partnership’ between member states and the EuropeanCommission. Their opposition was firmly rooted in questions of sover-eignty and control of political economy issues such as universal serviceand national champions. However, equally significant was the unwilling-ness on the part of politicians to open up the single market andMaastricht treaties – with the very real risk of the treaties unravelling.Finally, on the practical side, and at a time of smaller government andworries about the creeping competences of the European Commission,member states were unwilling to fund and staff an EU regulator. Running


parallel with this lack of ‘ political will’ was the fear of most suppliersabout the remoteness of a Euro-regulator and about losing a local IRA(Coen and Heritier ). Equally, the Commission was concerned abouta transfer of powers to a Euro-regulator, and the powers that it coulddelegate were limited by the legal doctrine of ‘ non-delegation’ (the‘ Meroni Doctrine’; see Majone ).

As an alternative to Euro-regulators and in line with broader movesto encourage ‘ the open method of co-ordination’ and subsidiarity (seeEuropean Commission b), European regulatory co-ordination hasbeen encouraged and fostered through the formation of formal andinformal horizontal networks of regulators (Coen and Doyle ;Eberlein and Newman ). Initially, these involved informal fora ofsectoral public and private actors, who met infrequently and had noformal powers or organisation. Examples include the European ElectricityRegulation Forum (the Florence Forum, started ), and one year laterthe European Gas Regulation Forum (the Madrid Forum) (see Eberlein). Thereafter, informal groups of national IRAs (NIRAs) wereestablished, such as the Independent Regulators Group (IRG) for tele-communications in , FESCO (the Forum of European SecuritiesCommissions ) and the CEER (Council of European Energy Regula-tors ). Both types of network were groups set up by national IRAsthrough memoranda of understanding; they lacked legal powers orfunctions. They were added to highly intergovernmental bodies such asthe CEPT (Conference of European Postal and TelecommunicationsAdministrations), established in , whose membership goes beyondthat of the EU.

However, the early s saw further moves that involved greaterformalisation of networks and a further set of delegations through theestablishment of ERNs. The ERNs are considerably more formalised andinvolve greater delegation than the other networks (many of whichcontinue to exist alongside them). They were set up by EU legislation(usually decisions) in key sectors such as telecommunications, financialservices and energy. Their legal basis sets out their functions, compositionand powers. They are composed of public officials from member states,in contrast to the fora. Equally, the Commission has a significant role,with rights to attend meetings, unlike groups of NIRAs such as the IRGand CEER. They are given tasks of co-ordinating national regulatoryauthorities through functions such as providing ‘ technical’ advice to theCommission, consulting the industry monitoring compliance with EUregulation, and establishing norms and benchmarks, which are formsof soft law. However, in pushing for the creation of the ERN, theCommission, under pressure from the IRAs and the European Parlia-ment, made a number of important concessions on its right of veto over


the decisions of IRAs concerning regulatory harmonisation remedies(Coen and Doyle ).

Figure summarises major networks in a ‘ hard’ to ‘ soft’ continuum,where ‘ hard’ refers to greater powers and formalisation of position. Ascan be seen, ERNs represent a considerable move away from inter-governmental bodies such as the CEPT. Moreover, in the past ten yearsseveral ERNs were created; Table summarises the key developments.

It should be noted that there are continuing debates about theevolution of institutions for regulatory co-ordination (see Thatcher andCoen ). In particular, in attempting to co-ordinate the single market,ERNs have found themselves caught between the objectives of their twoprincipals. At the European level we have the Commission pushing forgreater consistency of interpretation, greater harmonisation and moremonitoring of regulatory activity proposals. Conversely, the IRAs, whilerecognising the benefits of regulatory convergence and best practicewithin the single market, have tended to look to their domestic constitu-encies and have in the past sought to limit their involvement in theERNs. The above tension illustrates the risks involve in this double

F . Classification of networks from ‘ hard’ to ‘ soft’


T . European regulatory networks

CESR ERG ERGEG CEOPS CEBS EPRAName Committee of European

Securities RegulatorsEuropean RegulatorsGroup (for Telecom-munications)

European Regula-tors Group for Elec-tricity and Gas

Committee of Euro-pean Insurance andOccupational Pen-sions’ Supervisors

Committee ofEuropean Bank-ing Supervisors

European Platformof RegulatoryAuthorities (broad-casting)

Creation Created in June as a ‘ less bad option’than a European securitiesregulator, as part of theLamfalussy process.

Created in July tobalance the increaseddelegation of decision-making to NRAs, andensure implementationas close as possible tothe market in the mem-ber states.

Created in Novem-ber to adviseand consult on theachievement of thesingle market inenergy.

Created in late after the extensionof the Lamfalussyprocess to bankingand insurance.

Created in late after theextension of theLamfalussy pro-cess to bankingand insurance.

Created in April for discussionbetween regulatoryauthorities especiallybroadcasting.

Role To improve co-ordinationamong European securitiesregulators, act as an advi-sory group to assist theCommission and work toensure better implementa-tion of community legis-lation in the Members’States; includes a role inhelping draft secondarylegislation.

To improve co-ordination betweenNRAs in electroniccommunications and toadvise the Commissionon related matters.

Similar to ERG butfor electricity andgas.

Same as CESRexcept for insuranceregulators.

Same as CESRexcept for bank-ing regulators.

To act as a forumfor regulators.mainly broadcasting;no binding powers.

Relationship withEuropeanCommission

A representative of theCommission attends meet-ings except where they aredeemed confidential bymembers.

Creation of ERG wasfirst time EC had for-mal involvement withNRAs’ implementationof EU directives.

Commission canattend meetings andinform EuropeanParliament ofERGEG’s work .

As for CESR. As for CESR. The Commissionand the Council arepermanent observ-ers; European Com-mission contributessubstantially to theEPRA budget.

D

avidC

oenand

Mark

Thatcher

delegation to ERNs. As a result, discussions of Euro-regulators orstrengthened ERNs have been revived in sectors such as telecommuni-cations and energy. Thus, for instance, Information CommissionerVivien Reding stated that: ‘ For me it is clear that the most effective andleast bureaucratic way to achieve a real level playing field for telecomoperators across the EU would . . . be by an independent Europeantelecom authority’ (Financial Times, November ). Equally, theCommission in its December green paper on energy (EuropeanCommission ) put forward the idea of a Euro-regulator in thecontext of increasing fears over energy security and a desire to promotecross-border links and competition.

While justification for the creation of Euro-regulators continues tofocus on regulatory efficiency and greater top-down co-ordination, manyreal political and economic barriers to their creation continue to exist.Under such conditions the strengthening and altering of the ERNs’functions and powers remains a credible governance alternative andneeds to be better understood. Thus, the focus in this paper is on ERNsand the two most established and most important, CESR and the ERG.Looking at these two bodies in detail helps us explain who delegatedto ERNs and why, and their significance for changes in Europeanregulatory governance.

ERNs in telecommunications and securities: the establishment of CESR and theERG

CESR arose directly from the Lamfalussy commission, which was set upby the European Commission and national governments to aid thecreation of the single market in financial services and notably for the Financial Services Action Plan (European Commission b). Theinitial report suggested the creation of a ‘ regulators’ group’, which wasmore palatable for respondents to the Lamfalussy consultation than aEuropean securities regulator. The Lamfalussy report noted the draw-backs of the existing regulators’ committee, FESCO, which had noofficial status, worked by consensus, and had non-binding recommenda-tions. Interestingly, FESCO itself advocated the creation of a moreformal regulators’ committee that could be involved in the legislativeprocess, offering evidence that national IRAs were in favour of CESR(FESCO : ). The final Lamfalussy report proposed the establish-ment of CESR, which would both act as an advisory committee to theEuropean Commission and aid in bringing together IRAs and prac-titioners to ensure more consistent implementation of Community law.

The decision to establish a new body was taken by all the EUinstitutions. Thus, an ECOFIN Council communication of November


confirmed its support for the creation of a regulators’ body, but alsoasked it to perform a role when particularly sensitive issues wereconcerned (ECOFIN Council : Annex , ). A European CouncilPresidency communication of December also supported the crea-tion of a regulators’ body as a part of the Lamfalussy process, althoughit noted that harmonisation of national regulatory functions would be adesirable prerequisite (Ibid: ). The European Parliament was con-cerned about inadequate supervision of delegated legislation comitologyprocedures (European Parliament ), but did not attempt to block theestablishment of CESR. CESR was then set up as ‘ an independentadvisory group on securities in the Community’ by a Commissiondecision in (European Commission a).

Many parallels can be found between the creation of CESR and thatof the ERG. During the s, several proposals were made for aEuropean telecoms regulator, including one by the Commission. Firmswere divided: newer operators hoped for the creation of a singleregulator, but existing suppliers were concerned that centralisation ofregulation across the EU might damage their commercial prospects. Butideas of a Euro-regulator were rejected by member states.

Instead, the Commission turned to the idea of a less prominent andpowerful body. The genesis of the ERG lay in the Commission’s Communications Review, which looked at updating and unifying thevarious pieces of EU legislation in telecommunications that had accruedover the previous fifteen years. A Commission communication (EuropeanCommission a) of November mooted the idea of increasedco-ordination of NRAs’ decisions at European Union level. It claimedthat stronger EU-wide co-ordination was necessary since the NRAswould be delegated more power by the new regulatory framework. Thecommunication also noted that existing procedures for co-operation withthe CEPT had not worked satisfactorily. The CEPT was an existingorganisation run through consensus and in an intergovernmental man-ner: that is, without binding powers on its national members, and oftenconcerned with standard setting rather than liberalisation and regulationof competition. Initially, a High-Level Communications Group involvingthe Commission and NRAs was established under the telecommuni-cations Framework Directive (European Parliament and Council ) tohelp improve the consistent application of Community legislation andmaximise the uniform application of national measures. However, a shortCommission decision soon replaced it with a European regulators groupfor electronic communications networks and services in July (European Commission : ).

The history of CESR and the ERG underlines the earlier generalpoints made about ERNs. Firstly, their establishment was closely linked


to implementing EU regulation. They flowed from perceived difficultiesof introducing the single market at the national level and co-ordinatinga host of diverse NRAs. Secondly, ERNs followed the rejection of ideasof Euro regulators. They represented a response to co-ordinationproblems – i.e. delegation to increase efficiency – without creating a newsupranational body. Thirdly, they were proposed by the Commission orCommission-created bodies, accepted by national governments andIRAs, then set up formally by Commission decision. They are the fruit ofan agreement between several actors.

The institutional design of ERNs: composition, functions, powers, resources andrivals

CESR and the ERG appear to provide a good example of a movementtowards network governance. However, analysis of the institutionaldesign reveals the weaknesses of the new ERNs and the strength of theirprincipals, namely the European Commission and national governmentsand regulators. The membership of CESR and the ERG is wide andambiguous, making autonomous action difficult. The two ERNs aregiven very broad functions but few powers. Their resources are limitedand they face rival venues both for co-ordination and for more traditionalgovernmental functions of deciding through hierarchy and hard law. Adetailed analysis of the institutional design thus reveals limited delega-tion, many controls and an institutional context that allows policymakersto work through alternative organisations.

Composition of ERNs

The membership of ERNs is composed of formal representatives frommember state NRAs. It differs considerably from informal networks suchas the Florence and Madrid fora, which involve private and public actors,including experts and regulatees. The Commission has an importantposition but its role is ambiguous, something between a full member andan external ‘ overseer’. Here, we focus on the ERG and CESR.

The ERG consists of representatives of IRAs from the twenty-five EUmember States. However, eligibility soon posed difficulties with respect tothe degree of independence required for membership. The original decision stated that the ERG ‘ shall be composed of the heads of eachrelevant national regulatory authority in each Member State or theirRepresentatives’ (European Commission : Art. ) but also that itshould be a ‘ group of independent national regulatory Authorities’ (Ibid:Art. ). The preamble made reference to ensuring sufficient separation


from suppliers, especially if a member state had publicly owned suppli-ers. This raised important issues of whether an IRA was sufficientlyindependent from publicly owned suppliers. The ambiguity was ended, atleast in formal terms, by a new decision in (European Commission) that simply stated that eligible IRAs would be listed in an annexand kept under review by the Commission. Nevertheless, this decisionallowed the Commission considerable scope for further intervention todecide the ERG’s membership.

The ERG also has observers from EU accession/candidate states andEuropean Economic Area states. In , the ERG granted observerstatus to Turkey and Croatia as EU accession countries. In addition, theCommission sits as an observer at the ERG. Its representatives are ableto remain in the ERG while confidential issues are discussed. Althoughthe Commission is represented on the ERG, it also works ‘ jointly’ withthe latter, as for example when they issued a joint paper on anti-monopoly remedies. So the Commission appears to be both a partnerwith the ERG and a quasi-member, as well as being one of its formalprincipals.

CESR is composed of one senior member from each member state’scompetent authority in the securities field, with EEA representatives asobservers. The identification of ‘ competent authorities’ with the requisitedegree of independence was a problem for CESR as it was for the ERG.In , countries such as France, Finland and Ireland all lacked a singleNRA for the entire financial sector, with responsibilities being splitbetween different bodies (CESR b: ). The Commission is anobserver at CESR, but ‘ it shall be present at meetings of the Committeeand shall designate a high-level representative to participate in all itsdebates’, except when the Committee discusses confidential mattersrelating to individuals and firms in the context of improving co-operationamong European Regulators (CESR a: Art. .).

Functions and powers of ERNs

The functions given to ERNs are very broad and strongly linked to theCommission, at least according to the EU decisions that create them.Thus, for instance, the Commission decision establishing CESR definedits role as ‘ to advise the Commission, either at the Commission’s request,within a time limit which the Commission may lay down according to theurgency of the matter, or on the Committee’s own initiative, in particularfor the preparation of draft implementing measures in the field ofsecurities’ (European Commission a: Art. ). More specifically,CESR was required to consult extensively with market participants,consumers and end-users, and to present an annual report to the


Commission, which would also be sent to the Parliament and Council.This role was expanded in CESR’s Charter to cover other tasks such asreviewing the implementation and application of Community legislation,the issuing of guidelines, recommendations and standards for its mem-bers to introduce in their regulatory practices on a voluntary basis, andthe development of effective operational network mechanisms to enhanceconsistent day-to-day supervision and enforcement of the single marketfor financial services.

CESR was given roles within EU legislation on financial services. TheLamfalussy process sets out a four-level procedure which moves from thedefinition of the overarching regulatory framework through to itsenforcement. The first level follows standard EU procedure, with theCommission making legislative proposals, based on stakeholder consul-tation, which are subsequently adopted through the co-decision processby the Council and European Parliament. This stage also sets outthe implementation powers of the Commission. Level concerns theadoption of implementing legislation laying down technical details for theframework principles agreed at level . Here, the comitology procedureis used, with votes being taken by qualified majority at the EuropeanSecurities Committee (ESC). The European Parliament is also consultedon the draft implementing measures and is given one month to pass aresolution on the final legislation where it considers the Commission tohave exceeded its implementation powers. Level focuses on theconsistent implementation of Community legislation across the memberstates. Here, comparisons of national regulatory practices are made andrecommendations for common standards are proposed. The final levelconcerns the monitoring of compliance of member state laws withCommunity legislation. Where necessary, the Commission can pursuelegal action through the European Court of Justice in cases wherecompliance is lacking.

CESR’s involvement in this process relates specifically to the secondand third levels. But its roles are mainly to provide advice and help toestablish non-binding norms, a form of soft law. Moreover, its position isheavily dependent on other actors in the policy process. Thus, althoughCESR has been given a mandate by the Commission to prepare technicaladvice in the form of implementing measures, which it does based on itsown formal consultation procedure, level legislation is adopted throughformal EU comitology procedures. These involve the ESC, consisting ofrepresentatives from member states, acting through EU legal procedures.At level , CESR is responsible for leading the co-ordination activities.It can issue non-binding common guidelines and standards aimed atfacilitating the interpretation and facilitation of Community legislation.It addition, it can conduct benchmarking exercises aimed at gauging


member state compliance with such standards. This is, in many ways, anactivity that is complementary to the Commission’s compliance tests atlevel , though it is ‘ softer’. It underlines that CESR can have influencethrough the creation of norms or soft law. But, overall, while CESR hasbeen given a clear mandate within the Lamfalussy legislative process, itcan shape directives at level only in so far as it can influence theCommission, and it risks being constrained by the European SecuritiesCommittee. Thus, CESR’s major roles are advisory and involve co-ordination of implementation of Community regulation.

Similarly, the role of the ERG is to ‘ advise and assist the Commissionin consolidating the internal market for electronic communicationsnetworks and services’, and to ‘ provide an interface between nationalregulatory authorities and the Commission’ (European Commission: Art. ). It too was asked to ‘ consult extensively and at an early stagewith market participants, consumers and end-users in an open andtransparent manner’ (Ibid: Art. ). However, its mandate is even less widethan CESR’s in relation to the definition of implementing measures,as there is no well-specified equivalent to the Lamfalussy process fortelecommunications legislation.

The powers of ERNs are often limited. Thus, for instance, ERGdecisions are not binding on its members. Even deciding its own rules ofprocedure require considerable agreement among member states and itis dependent on the Commission: these are to be adopted by consensusor, in the absence of consensus, by a two-thirds’ majority vote, one voteper member state, subject to the approval of the Commission (Ibid: Art.). CESR enjoys marginally greater powers over its own internalfunctioning in that the decision creating it allowed to adopt its own rulesof procedure and organise its own operational arrangements. Neverthe-less, the Committee has advocated that CESR use a voting proceduremodelled on qualified majority voting where it was not possible to reachconsensus, and this has been adopted in CESR’s operations.

Thus, ERNs face ambitious aims and are asked to consult widely andcover broad fields. Yet they lack formal powers to impose decisions ontheir members and indeed even to organise their own internalarrangements.

Resources of ERNs

The material resources of ERNs are decided by their members and theEuropean Commission. ERNs are small organisations in terms of staffingand spending. Thus, for instance, the CESR secretariat, based in Paris,started with seven members of staff plus a secretary general, although thishad grown to fifteen by . It also has a small budget, which led to


comments from Baron Lamfalussy that CESR lacked sufficient staff tomake sure that the new regulatory framework worked properly (FinancialTimes, March ). In –, the budget for CESR was increased bya third, apparently due to a willingness by members to contribute more;by it spent .m euros (CESR : ). The ERG has even fewerresources of its own: the Commission provided its staff, which appearedto number three persons in , while from the ERG secretariatfunctions are integrated into the services of the Directorate General forInformation Society and Media (ERG , ). Hence ERNs aresmall even relative to the Commission, let alone in comparison tonational IRAs and especially regulated firms.

Alternative decision-making venues

ERNs face several rivals for the functions of decisionmaking, even at theEU level. The most important are the formally established EU commit-tees. Thus, for instance, in securities, the ESC has significant powers overEU legislation. Like CESR, it was set up by a Commission Decision(European Commission c) after lengthy discussions involvingnational governments and the European Parliament. It is composedof representative of EU member states, thereby integrating nationalgovernments. It acts as an advisory committee to the Commission onboth policy issues and draft legislation; this mandate is considerably moreprecise than CESR’s broad and undefined advisory function. In addition,in level of the Lamfalussy procedures, when broad directives are beingproposed by the Commission, it acts as a normal EU committee, that is,one that operates under the comitology procedure and whose approval isneeded for Commission proposals to be passed without going to the fullcouncil of ministers (see Varone et al. ). Thus, the ESC’s proceduresform part of well-established EU comitology, and it has legal powers overlegislation.

A similar situation exists in telecommunications, with the existence ofthe Communications Committee (Cocom), also set up by Commissiondecision (European Parliament and Council ). It is composed ofrepresentatives of member states and acts both as an advisory committeeand a regulatory committee in accordance with general comitologyprocedures. In addition, it provides a platform for the exchange ofinformation on market developments and regulatory activities.

CESR and the ERG also contend with well-established European andinternational organisations that operate through intergovernmentalprocesses, notably consensus and the absence of powers to imposedecisions on members. In telecommunications, there is the CEPT,created in , extending beyond the EU to all European states. It has


played an important role in standard setting as well as bringing togetherrepresentatives from national administrations and, traditionally, opera-tors. Then there is the International Telecommunications Union (ITU),which has members across the world. In securities trading, there is alsothe International Organization for Securities Commissions (IOSCO),founded in , which is composed of securities regulators from aroundthe world and seeks to set international standards, notably via MOUs(memoranda of understanding). Its members cover more than per centof the world’s securities markets and include the United States.

Finally, there are rival informal networks of regulators whose existencemay result in institutional competition and venue shopping by thoseregulatees that can operate in a multilevel policy process. In particular,in telecommunications, the Independent Regulators’ Group, establishedin as a group of European national telecommunications regulatoryauthorities, continues to exist alongside the ERG. It has the advantage(for IRAs) that the Commission is not a member and that it is run byIRAs themselves. Its mere presence raises questions over the level ofconfidence in the independence of the ERG with which it competes.Similarly, CESR’s power (specifically at level ) is constrained by theESC, which is legally responsible for passing delegated legislation thatdetails broad level directives. In electricity and gas, the Florence andMadrid Fora include private sector participants, although the Commis-sion is also closely involved. Moreover, the role of the CEER maypotentially be eclipsed by the European Regulators Group for Energyand Gas (ERGEG).

Thus, national governments, IRAs and the European Commission allhave venues for co-ordination that are alternatives to CESR and theERG. The two networks are in competition for resources, attention andpower with other networks or committees that have their own distinctinstitutional advantages, such as greater formal powers or the ability towork without the Commission.

Conclusion

ERNs have been established in economically and politically strategicdomains, notably network sectors. Using a principal-agent framework,the reasons both for the decision to double delegate and for the institutionaldesign of the delegation have been analysed. Delegation was undertakenby the Commission and IRAs, but after extensive discussions with themember states and European Parliament. It was justified by the need forgreater co-ordination in implementing EU regulation: i.e. by greaterefficiency. However, the creation of ERNs took place only after anothersolution, the creation of Euro-regulators, had been rejected. Whether


ERNs can indeed be seen as a ‘ second best’ method of dealing withimplementation of EU regulation or as a stable point in institutionalregulatory design is a still a moot point (see Thatcher and Coen ).They certainly appear to be a compromise between actors pressing forgreater European integration and those fearing it, especially nationalgovernments.

The institutional design of ERNs reflects their genesis. They have beengiven lofty tasks, but few powers and resources. The European Commis-sion and national actors (governments and IRAs) maintain many powersover ERNs. In addition, the existence of several other regulatorynetworks and organisations creates rivals to ERNs. This limited mandateand competitive institutional relationship have created conflict betweenthe aims and the capacities of ERNs.

What are the implications of these findings for wider claims of thedevelopment of network governance in Europe? The introduction set outthree features of network governance: it offers, firstly, a form of sectoralgovernance; secondly, a shift of power from previously well-establishedlevels to organisations or individuals whose main role is linking actors;and, thirdly, changes in the mode of governance, away from hierarchytowards more ‘ horizontal’ and co-operative forms of decisionmaking.

Our empirical findings can be set against these three key features. Inthe first instance, the analysis suggests that, in formal institutional terms,ERNs bring together national IRAs and the European Commission. Butthey do not bind together sectoral actors from private and public sectors:although ERNs are required to consult private actors, those actors arenot full members. Moreover, the ERNs’ lack of powers to imposedecisions on national IRAs and their small size and reliance on theEuropean Commission (going so far as providing the secretariat for theERG) suggest that ERNs are far from offering ‘ sectoral governance’.

With respect to the second feature, few powers have been delegated toERNs. Even worse (for claims of the spread of network governance),existing organisations – notably the European Commission, traditionalEU committees, national governments and IRAs – retain strong formalpowers. There is little sign of a major shift in the allocation of formalpowers in regulation.

This links to the third feature of network governance, which is stilllacking: in terms of the formal structure of decisionmaking, hierarchyremains strong. In particular, EU committees continue to exist and tooperate through voting and legislation. For their part, the ERNs havemany aspects of a traditional intergovernmental organisation, includingthe importance of working by consensus. Indeed, their main formalpowers are linked to that most hierarchical method of operating –passing legislation – on which they advise.


Of course, the limits of the analysis should be acknowledged. Theylargely flow from the principal-agent framework, which focuses on formalinstitutional structures and the relationship between principals andagents. ERNs suffer from severe weaknesses in their formal position, butmay be able to develop informal resources and linkages. These couldinclude information, expertise, reputation and trust (Sabel and Zeitlin; Coen ). If ERNs are able to obtain these resources, they maywield power that is out of proportion with their formal position.Moreover, as the regulatory space literature suggests (see Hancher andMoran ; Scott ), other actors may be more important to anorganisation than its formal principal. For ERNs, linkages with theindustry may supply a vital source of power. Thus, ERNs may be able toalter governance by going beyond the formal institutional framework.

Nevertheless, analysis of that framework provides good evidence forwhy ERNs are subject to criticism as inadequate: on the one hand, theyhave been given sweeping goals of co-ordinating diverse national IRAsand ensuring consistent implementation of EU law across the EuropeanUnion that relate to the heart of the single market; on the other hand,they lack the powers and resources to do so. The EU’s double delegationto IRAs and the European Commission has failed to resolve the EU’sproblems of co-ordination and implementation. As a result, the issue ofdelegation and co-ordination remains a topic of lively political debate inBrussels and national capitals, with discussion of Euro-regulators intelecommunications and energy returning to the policy table in –.But the analysis presented here certainly suggests that network govern-ance is far from the institutional position of regulation in Europe today.

NOTES

. The project ‘ After Delegation: The Evolution of European Regulatory Networks’ was funded by theEU th Framework Project as part of the EUI NewGov consortium. The authors would like to thankall the European Commission officials, national regulators and European network regulators whoparticipated in the research. A number of people have commented on this paper at conferences atECPR, EUSA, Connex meetings at ARENA, Birkbeck and Madison, NewGov conferences inFlorence, ERSC Centre for Competition Norwich and the Centre for Network Industries Lausanne,but we would especially like to thank Jonathan Zeitlin, Keith Armstrong and Andrew Tarrant fordetailed comments and Adrienne Heritier and Dirk Lehmkuhl for editing the special issue. Finally,and perhaps most importantly, we would like to give special mention to Julian Knott and AnnelieDodds for their research assistance on this project.

. However, for an alternative view of delegation based on institutional isomorphism which results innon-functional delegation, see McNamara .

. There is the important but limited exception of some aspects of competition policy, although thisitself was ‘ re-delegated’ to national regulatory authorities from May (Wilks ).

. The major exception is FESCO, whose work was taken over by CESR in .. See, for example, in telecommunications the th report on the Implementation of the Telecommunications

Regulatory Package – , March , http://ec.europa.eu/dgs/information_society/regulation/index_en.htm.

. Interviews with Commission official, NRAs and ERG .


. See the recent debates in telecommunications (the Commissioner Reding letter and ERG response(erg.eu.int/whatsnew/index_en.htm) and energy (see Thatcher and Coen ).

. European Commission : Preamble §: ‘ In accordance with the Framework Directive, MemberStates must guarantee the independence of national regulatory authorities by ensuring that they arelegally distinct from and functionally independent of all organisations providing electroniccommunications networks, equipment or services. Member States that retain ownership or controlof undertakings providing electronic communications networks and/or services must also ensureeffective structural separation of the regulatory function from activities associated with ownership orcontrol.’

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