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, 2001 Recent empirical studies have showed that national indicators correspond closely to the degree of competition in telecommunications markets. Greater competition has generated greater innovation, investment and spin-offs for the economy as a whole. However, many governments have found that competition in telecommunications can bear good results only if appropriate regulatory institutions are functioning effectively. Consideration of advantages and disadvantages of specific regulatory policies raises questions on why regulate, what to regulate and how to regulate. Why Regulate Telecommunications? There are different approaches trying to answer this question, but basically they are split into two views: whether government should regulate actively or intervene only in case of "market failure". Public policy goals: Even though the ultimate goals are the 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 the efficiency of telecommunications and maintain a basic telephone service. Market failure: General goals such as "universal accessibility" cannot be enough to justify regulatory intervention when the prevailing 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, the nature of the problems addressed depends on the structure of the telecom services industry, the general economic, political and social situation and the prevailing set of fundamental telecommunications policies, particularly those concerning the roles of monopoly and competition. 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, the major problems to be solved by regulators have changed. For example, as Mexico introduced competition in cellular services and privatised its former state telephone monopoly, Telmex, it has faced controversial issues concerning the interconnection of different carriers' networks. In the United States, the evolution of the telecommunication industry since the 1950s illustrates a gradual transition from the first group via second to the last one: if in the beginning, the regulatory policy concern was to assure the universal availability of telecommunications services with reasonable rates, over the years, as competition has developed, regulators become more confident about the provision of different telecommunications services. Thus, a gradual relaxation and withdrawal of some forms of regulation (notably controls on the pricing of services to end-users) has been introduced. At the same time, new forms of regulation have arisen from the need to solve new kinds of problems, concerning for example, the terms of interconnection between different carriers' networks, or control of the numbering plan in a multi-carrier environment. In spite of variations of the regulator's mandate across each group of countries, 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. ............