Introduction to Telecommunications Regulation

1
Introduction to Telecommunications Regulation

• Yale M. BraunsteinSchool of Information
  Management SystemsUniversity of
  CaliforniaBerkeley, CA 94720 (U.S.A.)
• 2002

2
Topics

• Why regulate?
• Types of regulation
• Effects of regulation
• Why deregulate?
• Privatization Liberalization
• ICX universal service

3
Why regulate?

• Telecom is a natural monopoly (?)
• We know all about economies of scale and scope
• Telecom is an essential service (?)
• Government is better at setting prices than is
  the market
• Guarantee continuity of service
• Regulation is preferred to government ownership
  (?)
• Other policy objectives such as employment,
  technology, security

4
Types of regulation

• RBROR was the standard approach
• Averch Johnson critiques
• Price caps (CPI-x models)
• Basket formulas
• Dominant carrier notification reqts.

5
Effects of regulation

• Averch Johnson (1962) provide detailed analysis
  of unintended incentives built into RBROR
  approach
• Bias toward over-use of capital
• Cross-subsidy problem leads to predation
• Capture problem
• High information needs asymmetries
• Bias towards/against incumbents
• Perceived lack of innovation

6
More on cross-subsidization

• Can be difficult to detect in presence of joint
  costs historical features
• Need to make formerly implicit cross-subsidies
  become explicit
• Urban/rural
• Lifeline rates
• Burden tests may be useful
• General issue of rebalancing tariffs
• What is true picture of costs?
• Who makes up access deficit?

7
Why deregulate?

• Privatization of formerly state-owned PTTs
• Increase productivity in telecom sector
• Improve access to capital markets
• (Big World Bank push in developing nations)
• EU rules
• Changes in international telephony
• Liberalization
• Benefits of competition (perceived vs. real)
• Clearly desirable in certain sectors
• Increased FDI
• Improved regulatory structures (?)

8
ICX Universal Service

• As new entrants enter a telecommunications market
  the problem of interconnection has two
  dimensions technical and economic. My focus is
  on the latter.
• Often the view that it is in the national
  interest to encourage the widespread diffusion of
  the network and to promote access by users who
  might not be considered economically viable by
  operators.
• Interconnection and universal service are often
  linked.
• Presentation of some of the issues and four mini
  case studies

9
The dimensions of interconnection

• B.C. (before competition) it was common to see
  some or all of the following
• Local tariffs were averaged across customers. In
  addition, the non-traffic-sensitive portion of
  the tariff was often kept artificially low.
• The tariffs for trunk calls were sufficiently
  higher than costs so as to enable the costs of
  local service to be kept low.
• International rates were many times the cost of
  service.

10
Typical interconnection pricing philosophies

• Cost-based
• Price-based
• Bill and keep
• Private negotiation

11
Additional concerns

• Equal treatment and symmetry requirements
• Whose costs?
• Possible difference in technologies
• Legacy customers
• Preferences for corporate relatives

12
An illustration of the lack of symmetry
13
Universal service

• Among the possible definitions are the
  following loosely-stated concepts
• Basic residential telephone service should be
  available to all regions of a country for a
  common, reasonable monthly fee.
• Income and wealth levels should not be
  significant barriers.
• Every village of a certain size should have at
  least one public telephone.
• All local telephone providers should be able to
  interconnect to the national telephone network at
  reasonable rates.

14
Case studies
15
Mobile-to-fixed, fixed-to-mobile, and
mobile-to-mobile in Israel
16
Free entry and negotiated interconnection in
Sweden
17
The entry of competition for international calls
in Israel
18
Calls to the Internet in the U.S.
19
Financing the USO and recent tariffs in India

• The Government is committed to provide access to
  all people for basic telecom services at
  affordable and reasonable prices. The Government
  seeks to achieve the following universal service
  objectives
• Provide voice and low speed data service to the
  balance 2.9 lakh uncovered villages in the
  country by the year 2002
• Achieve Internet access to all district head
  quarters by the year 2000
• Achieve telephone on demand in urban and rural
  areas by 2002
• The resources for meeting the USO would be raised
  through a universal access levy which would be
  a percentage of the revenue earned by all the
  operators under various licenses.
• --New Telecom Policy of 1999

20
Financing the USO and recent tariffs in India
21
Financing the USO and recent tariffs in India
22
Interconnection Policy in EU States

• Local Access Pricing and E-Commerce
• DSTI/ICCP/TISP(2000)1/FINAL
• July 2000

23
Germany Getting Some Competition

• 95 of European DSL lines come straight from the
  incumbent (ECTA number), despite a strong push
  for competition throughout the E.U. Germany and
  Netherlands were the first to open, with QSC,
  Versatel, and Atlantic Telecom building early
  networks and now facing financial struggles
• Source DSL Prime - the trade paper of an
  Internet community, Oct. 14, 2001

24
Access to local loops is still very limited

• ATT second try for local customers in California
  (second half of 2002)
• Little progress in EU countries despite
  unbundling requirement
• No local lines unbundled in Ireland as of early
  2002

25
Conclusion

• The movement toward competition in
  telecommunications services has highlighted the
  linkage between those fees and the funding of
  universal service.
• Changes in one area affect the underlying
  economics of the other.
• One approach is to move interconnection fees
  toward becoming increasingly cost-based and to
  make the funding of universal service obligations
  more explicit.
• While it is important to get the prices right,
  it is probably even more important to have the
  rules clear and fairly enforced.