|REGULATION IN TELECOMMUNICATIONS INDUSTRIES: Why, What and How to Regulate? |
Graduate School of International Corporate Strategy, Hitotsubashi University Asian Tax and Public Policy Program Economic Analysis of Regulation and Public Enterprise REGULATION IN TELECOMMUNICATIONS INDUSTRIES: Why, What and How to Regulate? Bakhodir Mardonov IM0313 February 20, 2001Recent empirical studies have showed that national indicators correspondclosely to the degree of competition in telecommunications markets. Greatercompetition has generated greater innovation, investment and spin-offs forthe economy as a whole. However, many governments have found thatcompetition in telecommunications can bear good results only if appropriateregulatory institutions are functioning effectively. Consideration ofadvantages and disadvantages of specific regulatory policies raisesquestions on why regulate, what to regulate and how to regulate.Why Regulate Telecommunications?There are different approaches trying to answer this question, butbasically they are split into two views: whether government should regulateactively or intervene only in case of “market failure”.Public policy goals: Even though the ultimate goals are the same, therelative priority given to different goals may vary. For example, indeveloping countries with a limited access to telecommunications services,the policy goal to make them universally accessible is especiallyimportant. While, in developed countries, the priority goals may be toraise the efficiency of telecommunications and maintain a basic telephoneservice.Market failure: General goals such as “universal accessibility” cannot beenough to justify regulatory intervention when the prevailing view relieson market forces to promote efficiency and innovations. In this case, thestrongest justification takes the form of “market failures” and theregulator may intervene in order to facilitate competitive entry, combatabuse of market power and redistribute benefit.Actually, the nature of the problems addressed depends on the structure ofthe telecom services industry, the general economic, political and socialsituation and the prevailing set of fundamental telecommunicationspolicies, particularly those concerning the roles of monopoly andcompetition. Accordingly, we may consider three groups of countries: (i)full monopoly, (ii) partial monopoly and (ii) full market system.As some countries have moved from one of these groups into another, themajor problems to be solved by regulators have changed. For example, asMexico introduced competition in cellular services and privatised itsformer state telephone monopoly, Telmex, it has faced controversial issuesconcerning the interconnection of different carriers' networks. In theUnited States, the evolution of the telecommunication industry since the1950s illustrates a gradual transition from the first group via second tothe last one: if in the beginning, the regulatory policy concern was toassure the universal availability of telecommunications services withreasonable rates, over the years, as competition has developed, regulatorsbecome more confident about the provision of different telecommunicationsservices. Thus, a gradual relaxation and withdrawal of some forms ofregulation (notably controls on the pricing of services to end-users) hasbeen introduced. At the same time, new forms of regulation have arisen fromthe need to solve new kinds of problems, concerning for example, the termsof interconnection between different carriers' networks, or control of thenumbering plan in a multi-carrier environment.In spite of variations of the regulator’s mandate across each group ofcountries, some of his basic missions can be defined as following:1) Promotion of “universal service” targeting low-income households, users in remote geographical areas, or disabled persons. For example, in Argentina, this was done through setting goals for the expansion of PTO networks; in the United Kingdom and U.S., through imposing “lifeline” tariffs for low-income users.2) Protection of user interests.3) Change in the industry structure. The desired change is usually towards a more competitive industry structure, but this mission can be far from "deregulation". For example, in Japan, the Ministry of Posts and Telecommunications caused NTT to maintain high charges between Tokyo, Osaka and some other major locations for the initial period of competitive entry, to help new entrants gain a foothold.4) Movement towards a “no discrimination policy” or “level playing field”. However, in this case, the concern on the need to discriminate in favor of new entrants has to be addressed (mission 3).5) Supervision of the dominant PTO in case of limited or absent competition. This can be done, for example, through applying price-cap regulation like in Mexico.6) Stimulation of innovations. In many countries, the regulator is seen to anticipate opportunities for innovations and creating a favourable environment for their timely exploitation. For example, in the United Kingdom the pioneering action of OFTEL in granting licenses for the Personal Communications Network (PCN) and Telepoint (CT2); in France, current activity by DRG on PCN licensing; in the U.S., policy of granting "pioneer's preference" in the licensing of radio frequencies to companies pioneering new service concepts and technologies.7) Management of common resources effectively.8) Stimulation of investments in the public network.9) Network interconnection. Open entry requires interconnection. It is important to create favourable environment for interconnection of new network operators and other providers of telecom services. However, the more innovative the services of the new entrant, the tougher the problem may become for the dominant carrier. This subject requires considerable study and analysis, since it lies at the heart of the challenge of finding economically efficient means of facilitating entry and promoting competition.In practice, the regulator’s mandate represents a mixture of thesedifferent concepts. Not only does the "mix" vary from country to country,it also evolves over time. For example, in Canada, telecom regulation hastraditionally followed the mission of supervising the dominant PTO. Morerecently, the mission of changing the industry structure has emerged as amajor thrust of Canadian telecom regulation policies. а cellular duopolywas established and a second long-distance carrier, now known as Unitel,was granted operating and interconnection rights to the local telephonecompanies' networks. This consent was initially given only for leased-lineand packet-switched service, and not for switched telephony, but Unitel isnow licensed to provide a full range of long-distance services, includingvoice services.What to regulate?The provision and use of telecommunications services may be regulated inthe following ways:1) licensing carriers;2) establishing and supervising technical and operational standards and practices for network operations by carriers;3) overseeing the quality of service provided by carriers;4) regulating the pricing of telecom services, either by controlling telecom operators' rates (tariffs) in detail or by applying some more general form of control such as a price-cap;5) setting the terms (administrative, financial and technical) for the interconnection of different carriers' networks, including the "access" pricing charged by one carrier to another, where there are multiple carriers and one carrier needs to interconnect with another's network;6) controlling type approval of customer premises equipment (CPE) and its attachment to the public network;7) controlling the numbering plan and related matters.The decision on "what to regulate" has substantially varied in variouscountries since it depends on what outcomes are to be achieved. Forexample, in “full monopoly group” countries (e.g. Spain, Italy and themajority of developing countries), the regulator's goals will imply that: . supervision of the monopoly PTO's technical standards and practices may be unnecessary; . price regulation will be necessary and important; . licensing new carriers and regulation of network interconnection is not relevant.At the other extreme, in a highly competitive group countries (e.g. U.S.long-distance telephone service), the regulator’s goals will imply: . regulatory control of some technical and operational matters is essential since effective competition requires extensive interconnection of different carriers' networks; . price regulation may become unnecessary, at least in some segments of the industry; . licensing function may be unnecessary or minimal; . rules concerning the interconnection of different carriers' networks are of critical importance.But what if a government chooses not to regulate at all? Experiencesuggests that this decision is too illusory: in the unregulated or self-regulated monopoly, someone must determine whether or not the monopoly isacting in the public interest, and intervene if it is not.These considerations, among others, have led the countries of the EuropeanCommunity to collectively enact EC legislation requiring the establishmentin each country of an explicit regulatory process for telecommunicationsand a regulatory body to implement that process which is separate fromoperational PTO organisations, even in those countries where nationallegislators have chosen to maintain a monopoly of basic fixed voiceservices.How to regulate?Regulator with a defined mission can fulfil it using widely differingregulatory approaches. Actually, there are basically two kinds of choicesthat must be made to define regulatory approaches:1. How far the regulator will exercise control, and how far the regulator will act "by exception." To what extent will certain matters (e.g. "access charges" for interconnecting) be controlled by the regulator, or will the regulator only intervene "by exception" when a particular regulatory case requires this? In the case of access charges, for example, U.S. practice involves continuous and mandatory control of access charges for fixed-service carriers. In the United Kingdom, by contrast, the regulator does not automatically exercise control over these charges, but may exercise the power to determine the charges if the various carriers fail to reach agreement.2. How far the regulator controls outcomes directly, or indirectly. For example, if one goal of regulation is low prices for service, will the regulator control prices directly, or seek to influence prices indirectly by promoting an industry structure that is considered to be favourable to achieving low prices? Or, to take another example, will the regulator directly impose particular targets for network expansion and modernisation, or rely on the effect of a general framework of incentives designed to encourage carriers to pursue these goals?In this context, let’s consider one of the most fundamental issues aboutwhether or not the regulator should intervene to promote innovation. Thereare three different views on this matter:1. “Regulator as Patron”: the regulator identifies the promising innovation, and takes steps to ensure that the organisation most likely to implement it is not only authorised, but have priority access to the resources necessary to implement the innovation.2. "Pro-active Removing of Obstacles": the regulator does not "pick winners" in this way, but nevertheless actively seeks to ensure that regulation itself does not impede promising innovations and to act pro- actively to provide an environment that is favourable for innovation.3. “Arm's Length Approach”: the regulator’s role is minimised in decision- making about innovation, and the regulator will respond to innovation initiatives from the PTO or other interested parties (e.g. telecommunications users, resellers or providers of value-added services). This may occur if the innovation needs the regulator to take specific actions before it can proceed.Although these approaches are different, they are not clear-cutalternatives. There are many intermediate approaches between them. In table1, the main advantages and disadvantages of these tree alternatives arepresented.Concluding all above, we can say that establishing proper regulatoryinstitutions is an important precondition for successfully restructuringthe telecommunications sector and increasing the involvement of privateinitiatives and market forces. Three basic questions are to be addressed atthe outset - why, what and how to regulate – in order to settle the maintwo principal issues: how to ensure a proper interface between theregulated and competitive parts of the telecommunications, and how toencourage the innovative forces in the sector. Table 1 Advantages and Disadvantages of the Broad Regulatory Alternatives Concerning Innovation| |Advantages |Disadvantages ||Regulator as |May stimulate important innovations not |Regulatory complexity and cost. ||Patron |previously foreseen. |Blurs the line between regulatory and || |May significantly increase the rate of |commercial decision-making. || |innovation. | ||Pro-Active Removal|Maintains dividing line between regulatory|аcountry with this approach may in some ||of Obstacles |and commercial decision-making. |cases become follower of a country with || |May still significantly increase the rate |the “regulator as patron” model. || |of innovation. | ||Arm's Length |Simplicity and low cost for the regulator.|May result in slower rate of innovation. ||Approach | |May entail significant delays since the || |Maximises the clarity of the dividing line|regulator needs to undertake new policy || |between regulatory and commercial |development efforts, after initiatives are|| |decision-making. |received, before he can respond. |
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