Реферат: 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 EnterpriseREGULATION IN TELECOMMUNICATIONS INDUSTRIES:

Why,What and How to Regulate?

                                                                                    Bakhodir Mardonov IM0313

February20, 2001

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Recent empiricalstudies have showed that national indicators correspond closely to the degreeof competition in telecommunications markets. Greater competition has generatedgreater innovation, investment and spin-offs for the economy as a whole.However, many governments have found that competition in telecommunications canbear good results only if appropriate regulatory institutions are functioningeffectively. Consideration of advantages and disadvantages of specificregulatory policies raises questions on why regulate, what to regulate and howto regulate.

Why RegulateTelecommunications?

There aredifferent approaches trying to answer this question, but basically they aresplit into two views: whether government should regulate actively or interveneonly in case of “market failure”.

Publicpolicy goals:Even though the ultimate goals arethe same, the relative priority given to different goals may vary. For example,in developing countries with a limited access to telecommunications services,the policy goal to make them universally accessible is especially important.While, in developed countries, the priority goals may be to raise theefficiency of telecommunications and maintain a basic telephone service.

Marketfailure:General goals such as “universalaccessibility” cannot be enough to justify regulatory intervention when theprevailing view relies on market forces to promote efficiency and innovations.In this case, the strongest justification takes the form of “market failures”and the regulator may intervene in order to facilitate competitive entry,combat abuse of market power and redistribute benefit.

Actually, thenature of the problems addressed depends on the structure of the telecomservices industry, the general economic, political and social situation and theprevailing set of fundamental telecommunications policies, particularly thoseconcerning the roles of monopoly and competition. Accordingly, we may consider threegroups of countries: (i) full monopoly, (ii) partial monopoly and (ii) fullmarket system.

As somecountries have moved from one of these groups into another, the major problemsto be solved by regulators have changed. For example, as Mexico introducedcompetition in cellular services and privatised its former state telephonemonopoly, Telmex, it has faced controversial issues concerning theinterconnection of different carriers' networks. In the United States, theevolution of the telecommunication industry since the 1950s illustrates a gradualtransition from the first group via second to the last one: if in the beginning,the regulatory policy concern was to assure the universal availability oftelecommunications services with reasonable rates, over the years, ascompetition has developed, regulators become more confident about the provisionof different telecommunications services. Thus, a gradual relaxation and withdrawalof some forms of regulation (notably controls on the pricing of services toend-users) has been introduced. At the same time, new forms of regulation havearisen from the need to solve new kinds of problems, concerning for example,the terms of interconnection between different carriers' networks, or controlof the numbering plan in a multi-carrier environment.

In spite of variations of the regulator’smandate across each group of countries, some of his basic missions can bedefined as following:

1)<span Times New Roman"">   

Promotion of “universal service”targeting low-income households, users in remote geographical areas, ordisabled persons. For example, in Argentina, this was done through settinggoals for the expansion of PTO networks; in the United Kingdom and U.S.,through imposing “lifeline” tariffs for low-income users.

2)<span Times New Roman"">   

Protection of user interests.

3)<span Times New Roman"">   

Change in the industry structure.Thedesired change is usually towards a more competitive industry structure, butthis mission can be far from «deregulation». For example, in Japan, theMinistry of Posts and Telecommunications caused NTT to maintain high chargesbetween Tokyo, Osaka and some other major locations for the initial period ofcompetitive entry, to help new entrants gain a foothold.

4)<span Times New Roman"">   

Movement towards a “no discrimination policy” or “level playingfield”.However, in this case, the concern on theneed to discriminate in favor of new entrants has to be addressed (mission 3).

5)<span Times New Roman"">   

Supervision of the dominant PTO in caseof limited or absent competition. This can be done, for example, throughapplying price-cap regulation like in Mexico.

6)<span Times New Roman"">   

Stimulation of innovations. In manycountries, the regulator is seen to anticipate opportunities for innovationsand creating a favourable environment for their timely exploitation. Forexample, in the United Kingdom the pioneering action of OFTEL in grantinglicenses 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 tocompanies pioneering new service concepts and technologies.

7)<span Times New Roman"">   

Management of common resources effectively.

8)<span Times New Roman"">   

Stimulation of investments in the public network.

9)<span Times New Roman"">   

Network interconnection. Open entry requires interconnection. It is important to create favourableenvironment for interconnection of new network operators and other providers oftelecom services. However, the more innovative the services of the new entrant,the tougher the problem may become for the dominant carrier. This subjectrequires considerable study and analysis, since it lies at the heart of thechallenge of finding economically efficient means of facilitating entry andpromoting competition.

In practice, the regulator’s mandate representsa mixture of these different concepts. Not only does the «mix» varyfrom country to country, it also evolves over time. For example, in Canada,telecom regulation has traditionally followed the mission of supervising thedominant PTO. More recently, the mission of changing the industrystructure has emerged as a major thrust of Canadian telecom regulationpolicies. A cellular duopoly was established and a second long-distance carrier,now known as Unitel, was granted operating and interconnection rights to thelocal telephone companies' networks. This consent was initially given only forleased-line and packet-switched service, and not for switched telephony, butUnitel is now licensed to provide a full range of long-distance services,including voice services.

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What to regulate?

The provision and use of telecommunicationsservices may be regulated in the following ways:

1)<span Times New Roman"">   

licensing carriers;

2)<span Times New Roman"">   

establishing and supervising technical and operational standards andpractices for network operations by carriers;

3)<span Times New Roman"">   

overseeing the quality of service provided by carriers;

4)<span Times New Roman"">   

regulating the pricing of telecom services, either by controllingtelecom operators' rates (tariffs) in detail or by applying some more generalform of control such as a price-cap;

5)<span Times New Roman"">   

setting the terms (administrative, financial and technical) for theinterconnection of different carriers' networks, including the«access» pricing charged by one carrier to another, where there aremultiple carriers and one carrier needs to interconnect with another's network;

6)<span Times New Roman"">   

controlling type approval of customer premises equipment (CPE) andits attachment to the public network;

7)<span Times New Roman"">   

controlling the numbering plan and related matters.

The decision on «what toregulate» has substantially varied in various countries since it dependson what outcomes are to be achieved. For example, in “full monopoly group”countries (e.g. Spain, Italy and the majority of developing countries), theregulator's goals will imply that:

·<span Times New Roman"">          

supervision of the monopolyPTO's technical standards and practices may be unnecessary;

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price regulation will benecessary and important;

·<span Times New Roman"">          

licensing new carriers andregulation of network interconnection is not relevant.

At the other extreme, in a highlycompetitive group countries (e.g. U.S. long-distance telephone service), theregulator’s goals will imply:

·<span Times New Roman"">          

regulatory control of sometechnical and operational matters is essential since effective competitionrequires extensive interconnection of different carriers' networks;

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price regulation may becomeunnecessary, at least in some segments of the industry;

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licensing function may beunnecessary or minimal;

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rules concerning theinterconnection of different carriers' networks are of critical importance.

But what if agovernment chooses not to regulate at all? Experience suggests that thisdecision is too illusory: in the unregulated or self-regulated monopoly,someone must determine whether or not the monopoly is acting in the publicinterest, and intervene if it is not.

Theseconsiderations, among others, have led the countries of the European Communityto collectively enact EC legislation requiring the establishment in eachcountry of an explicit regulatory process for telecommunications and aregulatory body to implement that process which is separate from operationalPTO organisations, even in those countries where national legislators havechosen to maintain a monopoly of basic fixed voice services.

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How to regulate?

Regulator with a defined mission can fulfilit using widely differing regulatory approaches. Actually, there are basically twokinds of choices that must be made to define regulatory approaches:

1.<span Times New Roman"">     

How far the regulator will exercise control, and how far theregulator will act «by exception.»Towhat extent will certain matters (e.g. «access charges» forinterconnecting) be controlled by the regulator, or will the regulator onlyintervene «by exception» when a particular regulatory case requiresthis? In the case of access charges, for example, U.S. practice involvescontinuous and mandatory control of access charges for fixed-service carriers.In the United Kingdom, by contrast, the regulator does not automaticallyexercise control over these charges, but may exercise the power to determinethe charges if the various carriers fail to reach agreement.

2.<span Times New Roman"">     

How far the regulator controls outcomes directly, or indirectly.For example, if one goal of regulation is low prices for service, willthe regulator control prices directly, or seek to influence prices indirectlyby promoting an industry structure that is considered to be favourable toachieving low prices? Or, to take another example, will the regulator directlyimpose particular targets for network expansion and modernisation, or rely onthe effect of a general framework of incentives designed to encourage carriersto pursue these goals?

In this context, let’s consider one of themost fundamental issues about whether or not the regulator should intervene topromote innovation. There are three different views on this matter:

1.<span Times New Roman"">   

“Regulator as Patron”: the regulatoridentifies the promising innovation, and takes steps to ensure that theorganisation most likely to implement it is not only authorised, but havepriority access to the resources necessary to implement the innovation.

2.<span Times New Roman"">   

«Pro-active Removing of Obstacles»:the regulator does not «pick winners» in this way, butnevertheless actively seeks to ensure that regulation itself does not impedepromising innovations and to act pro-actively to provide an environment that isfavourable for innovation.

3.<span Times New Roman"">   

“Arm's Length Approach”:the regulator’srole is minimised in decision-making about innovation, and the regulator willrespond to innovation initiatives from the PTO or other interested parties(e.g. telecommunications users, resellers or providers of value-addedservices). This may occur if the innovation needs the regulator to takespecific actions before it can proceed.

Although theseapproaches are different, they are not clear-cut alternatives. There are manyintermediate approaches between them. In table 1, the main advantages anddisadvantages of these tree alternatives are presented.

Concluding allabove, we can say that establishing proper regulatory institutions is animportant precondition for successfully restructuring the telecommunicationssector and increasing the involvement of private initiatives and market forces.Three basic questions are to be addressed at the outset — why, what and how toregulate – in order to settle the main two principal issues: how to ensure aproper interface between the regulated and competitive parts of thetelecommunications, and how to encourage the innovative forces in the sector.

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Table 1   Advantagesand Disadvantages of the Broad Regulatory Alternatives Concerning Innovation

Advantages

Disadvantages

Regulator as Patron

·<span Times New Roman"">  

<span Arial",«sans-serif»;mso-bidi-font-family:«Times New Roman»; mso-font-kerning:1.0pt;mso-ansi-language:EN-GB">May stimulate important innovations not previously foreseen.

·<span Times New Roman"">  

<span Arial",«sans-serif»;mso-bidi-font-family:«Times New Roman»; mso-font-kerning:1.0pt;mso-ansi-language:EN-GB">May significantly increase the rate of innovation.

·<span Times New Roman"">  

<span Arial",«sans-serif»;mso-font-kerning:1.0pt;mso-ansi-language: EN-GB">Regulatory complexity and cost.

·<span Times New Roman"">  

<span Arial",«sans-serif»; mso-font-kerning:1.0pt">Blurs the line between regulatory and commercial decision-making.<span Arial",«sans-serif»">

Pro-Active Removal of Obstacles

·<span Times New Roman"">  

<span Arial",«sans-serif»;mso-bidi-font-family:«Times New Roman»; mso-font-kerning:1.0pt;mso-ansi-language:EN-GB">Maintains dividing line between regulatory and commercial decision-making.

·<span Times New Roman"">  

<span Arial",«sans-serif»;mso-bidi-font-family:«Times New Roman»; mso-font-kerning:1.0pt;mso-ansi-language:EN-GB">May still significantly increase the rate of innovation.

·<span Times New Roman"">  

<span Arial",«sans-serif»; mso-font-kerning:1.0pt;mso-ansi-language:EN-GB">A country with this approach may in some cases become follower of a country with the “regulator as patron” model.<span Arial",«sans-serif»">

Arm's Length Approach

·<span Times New Roman"">  

<span Arial",«sans-serif»">Simplicity and low cost for the regulator.

·<span Times New Roman"">  

<span Arial",«sans-serif»">Maximises the clarity of the dividing line between regulatory and commercial decision-making.

·<span Times New Roman"">  

<span Arial",«sans-serif»;mso-font-kerning:1.0pt;mso-ansi-language: EN-GB">May result in slower rate of innovation.

·<span Times New Roman"">  

<span Arial",«sans-serif»; mso-font-kerning:1.0pt">May entail significant delays since the regulator needs to undertake new policy development efforts, after initiatives are received, before he can respond.<span Arial",«sans-serif»"> <span Arial",«sans-serif»;mso-fareast-font-family:«MS Mincho»; mso-bidi-font-family:«Times New Roman»;mso-font-kerning:1.0pt;mso-ansi-language: EN-GB;mso-fareast-language:JA;mso-bidi-language:AR-SA">
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