JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY

UNIT TITLE: TELECOMMUNICATION POLICY AND REGULATION CODE: EEE3113

ASSIGNMENT (Qns 1&2)

NAME: OYIE NICHOLAS OTIENO REG. No. EN373-0792/2011

LECTURER: Dr. H. Tarus.

DATE: 09/7/2011

Question 1 Telecommunication regulators usually have sector specific regulatory functions. In most cases, they are responsible for regulating only telecommunication markets and in some cases regulate also broadcasting and maybe postal services. However, in some countries, multi sector regulators have been established to regulate such arrays of utilities as telecommunication, electrical power generation and distribution, oil and gas pipelines, postal services, transportation and water utilizes. Discuss giving relevant examples the advantages and disadvantages of single and multi sector regulators. Single sector regulators The organizational structure of single sector regulators focuses mainly on the telecommunications (and sometimes postal) sector, with other government entities responsible for broadcasting and information technology issues. Prior to liberalization of telecommunication market, state-owned operator was common to be responsible for regulating the post and telecommunications industries as well as for radio communications issues. State owned operator in some cases, served as international representatives of their respective countries with regard to their operations. After liberalization, this structure was not possible under most countries legislation. Thus, independent regulators were established, and operation and regulation functions were separated. In many countries, when telecommunications regulators were initially established, their mandate almost automatically included the administration of radio communications and postal services in addition to telecommunications. For example, Europe, once the PTTs were separated and privatized, the regulation of telecommunications, radio and the postal sector often was assigned to one agency. A single-sector regulators justification is based on the perception that the telecommunications sector includes specific technical issues that differentiate it from other industries, such as numbering, that are unique to the telecommunications sector. In telecommunications policy, decision-making is based on the expertise of the regulators. Experts participate in drafting laws and act as advisors to the line ministry or other authorities when necessary. Regulators require not only expertise in the technical, financial, and legal aspects of communications, they also need

to systematically analyze present and future developments in the sector, and be able to cooperate with other countries on sector issues at the international level. Therefore, it is important that staff is sufficient in number and suitably qualified to be able to perform such a task. The perceived need for a specialized skill-set of staff led the Cape Verde Government to establish a separate ICT specific regulator in 2004 (Institute of Communications and Information Technology ICTI) in parallel with a multi-sector (economic) regulator (Autoridade de Regulamentao Economica ARE) which also has a mandate to regulate telecommunications. ICTI has since undertaken both the technical and economic responsibilities in the ICT sector, with ARE focusing on the other sectors. This been partially because ICTI has the capacity and desire to review a wide range of telecommunications issues, including tariffs, that would normally be within the purview of ARE, and because the two institutions have come to an agreement allowing ICTI to take the lead role on telecommunications issues. The major concern with the single-sector model is the possibility of institutional rigidity. Since a single-sector regulator is restricted to telecommunications, the effectiveness of the agency and its staff members as it faces the issues raised by convergence can be limited by this type of structure. Given that regulatory authority has historically focused on a narrow sector, the regulatory authority may become nearly frozen in time in terms of defining the sector it is regulating. As a consequence, it may not necessarily draw the appropriate staff from across the broader communications sector necessary to be flexible and, therefore, is unable to adapt to the continuous changes in the communications sector. A practical example of such difficulties has been the case of single-sector telecommunications regulators having difficulties when incorporating next generation technologies and services into the regulatory framework. In near past and especially with convergence in the communications sector blurring the boundaries between industries, overlapping responsibilities between sectoral regulators has also become an issue, leading sometimes to duplication of regulations and authorizations for essentially similar services being offered to the public. Therefore, can cause conflicting decisions across sectors, or indeed lack of decisions where overlapping mandates cannot be resolved on a political level. These challenges of convergence have led several countries such as South Africa and the United Kingdom, shift from single-sector regulators and evolve towards a converged

regulator, hence merging agencies in charge of the various aspects of the telecommunications sector. The emergence of telecommunications regulators was first witnessed in the US and Canada at the end of the 19th Century. These regulators were structured as quasi-judicial boards or commissions. These regulators were essentially collegial organizations led by a chairperson. Decisions were typically made by consensus or, in case of controversy, by a majority vote and as the complexity of regulation increased, these regulators eliminated some of their judicial trappings. They hired an increasing number of technical, professional and support staff. In the 1990s when new telecommunications regulators were established around the world, many were headed by a single director general or other official. An early example was Oftel, the UK regulator, which was established in 1984, when British Telecommunications was privatized. New regulators established in Albania, Bulgaria, Egypt, Greece, Kenya, Malawi and Malaysia are all collegial bodies. Many countries around the world still use the single-sector regulatory authority approach, including Algeria (Regulatory Authority for Post and Telecommunications), the Comoros (National Society of Postal Services and Telecommunications), Jordan (Telecommunications Regulatory Commission, which includes postal oversight), Egypt (National Telecommunications Regulatory Authority), and Oman (Telecommunications Regulatory Authority).1 The singlesector regulator also includes organizational structures where the ministry is a regulator, such as the Ministry of Internal Affairs and Communications in Japan.2

Advantages of a single-sector regulator

1. Single-sector regulator it can be focused on the complex technical challenges of the

telecommunications sector, including network and service development. The

1

See ARPT (Algeria) www.rpt.dz; TRC (Jordan) www.trc.gov.jo; NTRA (Egypt) www.tra.gov.eg; SNPT (Comoros) www.snpt.km; and TRA (Oman) http://www.tra.gov.om/test1/index.htm
2

http://es.wikitel.info/wiki/Comparativa_de_los_Diferentes_Dise%C3%B1os_de_Instituci%C3%B3n#cite_note-1

telecommunications sector tends to be more dynamic than other utilities and a singlesector regulator can often adapt to this more easily. 2. In many cases, single-sector regulators tend to inherit staff from the former PTT and therefore have a core of specialized professionals from the start with a thorough understanding of the technical issues and strong engineering skills, a key advantage when dealing with complex network issues. Disadvantages of single-sector regulator
1. Sufficient resources may not be available to staff the different regulator agencies and

there may be duplication for regulatory activities that are common to different industries. 2. Staff is focused on telecommunications and not always able to adapt to the continuous changes in the broader communications sector. 3. Staff often originates from the only source of telecommunications experience the incumbent and is often seen to be biased in favour of the incumbent and more subject to capture by such dominant forces.
4. Staff can also be seconded from government, which in the case of government still being

a majority owner of the incumbent can lead to conflicts of interest, especially if staff is seconded from line ministry or Ministry of Finance. Where the Law foresees reporting to the line ministry (e.g., Ministry of Communications), a greater risk of political capture exists. 5. One disadvantage of having a regulator focused on the telecommunications sector alone (or for any other single sector) is that too many regulators are created for different sectors, thus leading to a higher cost of regulation.
6. With too many regulators for the different sectors (e.g., telecommunications and

broadcasting) overlap of responsibilities between agencies is possible.

7. More uncertainty for investors because of inconsistent decisions in the various sectors

(included in a multi-sector regulator) on regulatory issues common to other sectors (e.g., the application of price cap regulation or cost accounting rules across the utilities sectors)

 if such decisions were more consistent across the various utilities sectors, it could set a precedent that is valuable to potential investors in those other sectors.
8. Single-sector regulator faces institutional rigidity. By focusing too much on a one-time

snap-shot of the sector to be regulated, the mandate of the regulator can quickly become obsolete and out of touch with market realities. Opponents of the single-sector regulatory structure argue that the origin of this specific skill set is, in fact, one of the key disadvantages of establishing a single-sector regulator. These critics argue that staff could be biased in favour of the incumbent, and thus more subject to capture by dominant forces. While this is an issue to be considered, it is not unique to the single-sector regulator. Whatever the option chosen, there must be a series of checks and balances to ensure that the regulator can perform its mandate independently. Multi-sector regulator Multi-sector regulators oversee not only the telecommunications sector, but other industry sectors with common economic and legal characteristics (e.g., telecommunications, water, energy, and transportation). Costa Rica, the Gambia, Jamaica, Latvia, Luxembourg, Niger and Panama, as well as state public utility commissions in individual states in the United States, have chosen this type of organizational structure.3 Supporters of this model argue that having a multi-sector regulator can reduce political and other influences regarding the decision-making process as opposed to, for example, the single-sector regulator. Despite such claims concerning capture (meaning undue influence by politicians and/or dominant players), this does not necessarily seem linked to the institutional design option per se but is more a product of whether a clear set of checks and balances is incorporated in the design of the regulator. Indeed, a risk of the multi-sector regulator could even be that capture by a dominant ministry or entity not only affects a single sector but all sectors regulated by the multi-sector regulator. In addition, there may be greater complexity in establishing the legal framework for the multi-sector regulator, including the level of independence and allocation of

See ARESEP (Costa Rica) http://www.aresep.go.cr/cgi-bin/menu.fwx; OUR (Jamaica) http://www.our.org.jm/; Ente Regulador de los Servicios Publicos (Panama) http://www.ersp.gob.pa/default.asp. Links to U.S. State PUCs can be found at http://www.dps.state.ny.us/stateweb.htm

functions as between the minister and the regulator.4 Furthermore, potential delays in instituting necessary reforms may result due to the disadvantages mentioned above. Some argue that using cross-sector institutions to regulate telecommunications is justified in light of the growing convergence between telecommunications and other sectors. Ensuring that crosssector rules and institutions are used to regulate telecommunications as well as other similar (utility) sectors may bring benefits, such as greater regulatory certainty (as operators may better forecast what to expect by observing how the regulatory framework is applied in other sectors) and lower risks of distortion between different activities. A counterargument is that the rationale behind establishing a multi-sector regulator is more a question of regulatory efficiency than of dealing with convergence in the communications sector. Even within this model it really depends on the mandate of the multi-sector regulator (i.e., whether it deals with just telecommunications or with communications as well as water, electricity, and transport) to determine whether a utilities-based regulator has the staff and internal administration that allows it to effectively cope with the challenges posed by ICT convergence. An important question within this context, however, is to what extent staff can actually be used across the sectors. Our experience shows that staff within this model is generally recruited in terms of the sector they are regulating and only legal and occasionally economic staff is pooled to deal with specific issues that occur across the sectors. Luxembourg, for example, has organized its agency according to industries/services: telecommunications, electricity, gas, postal and spectrum management issues these are then divided into smaller issue-specific units.5This can also be seen in Belize and Niger. An interesting discussion of this issue is presented in the WDR Discussion Paper # 0204 of March 2002 which claims that: Examination of the actual organization of U.S. state-level multi-sector regulatory agencies, the Public Utility Commissions (PUCs), does not provide much evidence of economies of regulation, except at the level of the decision-makers, or Commissioners. Generally, staff members specialize in a particular sector such as telecommunications or water and work within distinct divisions that are devoted to sector-specific regulation. Resources are shared at the levels of
4

Tim Schwartz and David Satola, Telecommunications legislation in transitional and developing economies, World Bank Technical Paper No. 489, The World Bank Group, 2000, at http://global011.worldbank.org/site/products.nsf
5

Institut Luxembourgeois de Rgulation (ILR), Annual Report 2003, at 18.

commissioners, who hear cases pertaining to all sectors, the senior staff who manage the agency as a whole, and the legal staff responsible for hearings and related procedural matters. Generally, the different divisions are located in common facilities and use common amenities such as libraries, which may yield certain savings. It must also be noted that U.S. PUCs do not have jurisdiction over frequency management, cable and broadcasting. The U.S. PUC experience shows that there may be significant economies in areas such as use of buildings, libraries, and training facilities in common. This does not, however, justify multi-sector regulation as such; only close collaboration among sectoral regulatory agencies.6 It is also often the case that a multi-sector regulatory authority is not created from scratch, but is the result of merging several existing agencies. In most countries it is not possible to dismiss employees in the course of such a merger, negating the realization of the hoped-for economies of regulation. In addition, a merger of two going concerns often creates significant morale problems and results in increased expenditures.7 As the market develops, and convergence affects the way in which communications is offered to the people, regulators not only are expected to possess high technical expertise, but to have an understanding of the structure and development trends of the communications market. Furthermore, regulators should be able to anticipate potential situations that could threaten or interfere with the development of the electronic communications industry. The concern that staff in a single-sector telecommunications regulator may face difficulties when incorporating next generation technologies and services into the regulatory framework is heightened with a multisector regulator since the staff of a multi-sector regulator would not necessarily be as technically focused on the communications sector. Obviously, a multi-sector regulator could recruit staff suited to the task of regulating the communications market, but the risk, especially where economists and legal experts are shared across the utilities sector, is that the pool of expertise becomes more diluted, thus compromising the capability and ultimately the credibility of the regulator.
6

Rohan Samarajiva and Anders Henten, Rationales for Convergence and Multisector Regulation, World Dialogue on Regulation for Network Economies, WDR Discussion Paper 0204, March 2002, at 13-14, available at http://www.regulateonline.org/2003/2002/dp/dp0204.htm
7

The merger of the U.K. regulatory authority Office of Gas and Electricity Markets (Ofgem), which combined the former Office of Electricity Regulation (Offer) and the Office of Gas Regulation, resulted in significant expenditures for the United Kingdom. WS Atkins Management Consultants, External Efficiency Review of Utility Regulators: Final report, February 2001, available at http://archive.treasury.gov.uk/pdf/2001/regulators_1902.pdf

Advantages of Multi-sector regulator

1. With Multi-sector regulator type of structural organization, one set of staff can be used to

oversee a variety of industries. The rationale is that telecommunications is considered to form part of the overall infrastructure sector along with other utilities, such as electricity and water, and that infrastructure services share certain aspects: they are aimed at providing basic needs to the public; they often use similar rights-of-way; and they typically involve the economic regulation of large monopolies with network economic characteristics (i.e., high sunk and fixed costs). However, experience in some countries, such as Latvia, has shown that existing multi-sector regulators are performing poorly. The answer to the staffing question is straightforward on the one hand and more complex on the other. Looking at the question in the strictest sense, single-sector regulators will look for highly technical staff focused on the telecommunications sector and generally organize their staff in industry-based units (e.g., post, telecommunications, radiocommunications). Converged regulators will look for staff that can bring in the expertise and know-how from the different sectors they are regulating. Generally these regulators are organized in functional units or indeed in horizontal, project-based units. Multi-sector regulators will recruit staff specialized in the different sectors, and are generally organized in terms of the sectors within their mandate although some pool legal and economic resources to deal with, for example, tariffing issues that may be common across the different sectors. 2. Reduce risk of industry capture because the creation of a regulator with responsibility for more than one sector can help avoid the rule-making process being captured by industry-specific groups. 3. Reduce risk of political capture because a regulator with responsibility for more than one sector will necessarily be more independent of the relevant line ministries. The broader range of entities regulated by such a regulator will be more likely to resist political interference in a decision on, say, price regulation in one sector since that could set a precedent for other sectors.
4. Create more precedents, and therefore less uncertainty, for investors because a decision

by an MSR in relation to one sector on a regulatory issue common to other sectors (e.g.,

the application of price cap regulation or cost accounting rules) will set a precedent that is valuable to potential investors in those other sectors.
5. Economies of scale in use of one set of high-caliber professionals (e.g., economists,

lawyers, financial analysts). Such economies are particularly important during the early stages of liberalization and privatization in a transitional and developing country (TDC) when there is likely to be a scarcity of regulatory experience.
6. Economies of scale in administrative and support services (e.g., computers, office space,

support staff), particularly important where the costs of regulation can have a real impact on the affordability of basic services. 7. Flexibility in dealing with peak load periods, such as periodic prices reviews, where intensive regulatory expertise is needed which may spread across sectors if a multisectoral approach is adopted. 8. Economies of scale in the development and implementation of the regulatory authority whereby, for example, uniform rules on licence award or dispute settlement procedures can extend to more than one sector and, therefore, avoid the need to reinvent the wheel for each sector. 9. Transfer of regulatory know-how between regulators responsible for different sectors; again, this is particularly important when a country has limited experience in regulation.
10. Effective means of dealing with converging sectors (e.g., telecommunications and

broadcasting where it is increasingly difficult to decide what is telecoms and what is a broadcasting service, for example video-on-demand, or telecommunications and posts, for example e-mail and fax re-mailing.
11. Effective means of dealing with the bundled provision of services (e.g., provision of both

telecommunications and electricity by the same company) and with the coordination requirements between sectors (e.g., where companies from number of different sectors all need to dig up the same roads to construct their networks.

12. Avoidance of market distortions due to the application of different rules to competing

sectors (e.g., electricity and gas, or road and rail). Disadvantages of Multi-sector regulator
1. Telecommunications sector is the most liberalized sector under the auspices of the multi-

sector regulator and therefore can be negatively affected if the telecommunications regulator is merged with other more highly regulated and less agile industries. Indeed, it may make matters worse by having telecommunications regulated in an environment with utilities that are progressing at a different pace where the needs and priorities are different, or where resources are practically non-existent. Moreover, by adding sectors, such as electricity and gas, that do not always produce revenues for the regulator, the telecommunications sector may bear a disproportionate share of the costs of regulation, potentially driving up regulatory costs for telecommunications providers. 2. Increase risk of industry capture by a dominant industry player not only of the singlesector regulator but of the entire MSR body. 3. Increase risk of political capture by a dominant ministry of not only the single-sector regulator but of the entire MSR body. 4. Increase the risk that a precedent set in relation to one sector could be applied inappropriately in another sector (although this can also be mitigated by creating strong sector-specific departments underneath a central cross-sectoral decision-making body). 5. Dilution of sector-specific technical expertise required where, for example, the skills of a tariff expert for one sector are not transferable to similar tariffing issues in another sector, or, for example, of a frequency engineer. 6. Failure by the regulator cascades to other sectors. 7. Difficulty in achieving acceptance by relevant line Ministries of the concept of having an MSR. 8. Subsequent difficulty in achieving consensus from the relevant line Ministries on the type of MSR to be established.

9. Greater complexity in establishing the legal framework for the MSR, including the level of independence and allocation of functions as between the Minister and the regulator. 10. Potential delays in the reform process due to the disadvantages mentioned above. 11. Merging existing agencies may be problematic. Conclusion The evidence suggests that there is no convergence in the making on a common or ideal design for regulatory institutions. Countries establishing new regulatory institutions or seeking to reform existing arrangements will therefore have to do their own analysis of what best suits their circumstances and objectives. To the extent that the choice is narrowed down to selecting between the multi-sector and the single-sector approaches this presentation suggest that the choice should turn on which of the approaches best achieves the objectives of efficiency, effectiveness, legitimacy and certainty. It is further submitted that the OURs experience to date bears out a number of the claims that have been made concerning the benefit of multi-sector regulation. It is also suggested that to the extent that is possible to generalise from this experience, countries sharing similar resource constraints, population size and uncertainties in respect of the potential for capture may want to adopt this model. Notably, the discussion also treat with some of the perceived shortcomings of the OUR but makes the point that these are largely unrelated to the structure of the institution. Moreover, even in instances in which there is a relationship with structure it is submitted that the problem can be solved by internal reorganization and management changes. It is also suggested that on the face of it, the decision taken by Anguilla, a British dependency, to establish a multi-sector regulator, which also has responsibility for regulating convergence, is instructive in two respects. Firstly, because it goes against the British tradition of single sector regulation and therefore suggests that this is an instance in which considerations of scale, economies and pragmatism might have been regarded as more important than regulatory tradition. Secondly, it lends support to the view that the regulation of convergence can still take place within a multi-sector regulatory structure.8
8

THE SEARCH FOR OPTIMAL INSTITUTIONAL DESIGN FOR UTILITIES REGULATION: Is the Multi-Sector Model Still Viable? Paper to the 2nd. Organization of Caribbean Utility Regulator Conference, 15-17, September 2004, Montego Bay, Jamaica. Ansord E. Hewitt Office of Utilities Regulation, Third Floor, PCJ Resource Centre, 36 Trafalgar Road, Kingston, Jamaica E-Mail: ahewitt@our.org.jm

Question 2 The telecommunication industry has witnessed a lot of liberalization and privatization, which consequently is removing the existing concept of the provision of telecommunications as a natural monopoly. However, it is ironic that with increased competition, there is an increase in the number of regulators worldwide. Discuss. Government regulation of private sector telecommunications operators began in the US and Canada in the late 19th Century. However, in most of the world, telecommunications networks were operated by government administrations for most of the 20th Century. In most countries, governments ran telecommunications operations in the same way as government postal, rail or highway transportation services. This situation changed dramatically over the past ten years, as dozens of countries privatized their telecommunications operations. The number of telecommunications regulators has increased rapidly over the past few years. Several factors precipitated this growth in regulation. The major factor is the implementation of telecommunications reforms that led to the separation of the policy, regulatory and operational functions of telecommunications. Regulatory agencies were established at the same time that

many government telecommunications administrations were privatized. The overall objective of these new regulators was to ensure that public policy objectives for the sector continued to be met. While government monopolies are not perceived to require regulation, private monopolies generally are. Introduction of competitors in many newly privatized markets also increased the need for new regulators, to act as referees between the new entrants and incumbent operators. ITU data indicate that in 1990, 12 countries had telecommunications regulatory agencies that functioned separately from telecommunications operators. The term separate regulators generally refers to agencies that operate separately from government ministries or PTTs that are also responsible for the provision of telecommunications services. By August 1999, that number had increased to 84. Nine new regulators were established between mid-1998 and mid-1999. In late 2000, the number was around 96 and increasing.9 In the 1980s, countries began to recognize the increasingly important role of the telecommunications sector for economic growth. As a result, in primarily developed nations, policies evolved to introduce competition albeit, often limited in scope, in an effort to inject dynamism into the sector, spur innovation, increase choice, enhance availability, and lower tariffs. In the 1990s, partly as a result of national, regional and multilateral efforts, many countries introduced the first wave of reform by privatizing their national operators. In the second wave of liberalization, which sometimes occurred simultaneous with the privatization or followed soon thereafter, governments began allowing the introduction of new services (e.g., mobile services and value-added services) into the market. These new services generally did not compete directly with the privatized basic telecommunications operator, which often had been granted an exclusivity period, or the non-privatized government-owned incumbent operator. The third wave of liberalization occurred once the incumbent operator's exclusivity period was over and full competition could be introduced. In a fully competitive environment, there is a more limited need for regulation. However, regulatory authorities still have a critical role to play, particularly given the dynamic role of the sector and the unsettled issues that new technologies may introduce into the regulatory environment. Moreover, in certain areas, regulators need to maintain a prominent role because

Telecommunication regulation handbook module1 overview of telecommunication regulation edited by H. Intven

market forces often fall short of creating the conditions necessary to satisfy public interest objectives such as universal access and service. Universal service/access policies are generally directed at achieving objectives such as the promotion of economic productivity and growth; the promotion of political and social cohesion through the integration of isolated communities into mainstream society; the improvement of delivery of government services; and the elimination of economic and social disparities between the information rich and the information poor. In certain areas of a country, however, significant upfront investments, high operating costs, and uncertain demand make the satisfaction of these objectives unjustifiable on commercial grounds. Thus, government initiatives directed at providing telecommunications access and services to generally remote, unserved areas may need to be adopted. In such cases, regulators should narrowly define and identify the areas and services that will benefit from government subsidies or incentive programs so as to avoid closing the door to private investments in areas where market forces alone do not provide an incentive to offer services in such areas. Similarly, despite the increased reliance on market forces in the telecommunication sector regulatory agencies must ensure that spectrum use is properly managed and allocated. This role cannot be left solely to market forces, since the introduction of new technologies may be limited by interference, inefficient spectrum use, or lack of access to spectrum (e.g. , introduction of digital television). Despite the benefits of new technologies, regulators also must be attentive and responsive to the regulatory issues that arise from the implementation of these new technologies and their related services. For example, in today's environment, regulators are grappling with how to address issues such as spam and consumer concerns regarding privacy, which were not issues of concern to regulators ten years ago. In addition, while new technologies often offer consumers greater choices at lower prices, regulators have a responsibility to ensure that consumers are aware of the potential limitations that may exist with these lower-price offerings ( e.g. , emergency services may not available through such services; services offered may be of a lower quality of service). Moreover, as these new services gain prominence regulators also will need to consider whether they should be subject to obligations imposed on other providers (e.g., universal service).

The benefits of competition in the supply of telecommunications services and facilities have been widely recognized to far outweigh any disadvantages. Today, telecommunications markets have been liberalized to varying degrees of competition in most countries around the world. Over the last decade, the most dramatic progress in liberalizing telecommunications markets occurred in Europe and other Organisation for Economic Co-operation and Development (OECD) countries. At the beginning of the decade, most telecommunications services in Europe were provided on a monopoly basis. Over 96 per cent of the OECD market, measured by total telecommunications revenues, was open to competition by the end of the decade. Liberalization has also occurred significantly in telecommunications markets in other economies throughout the Americas, Eastern Europe and the FSU, Africa and the Asia-Pacific region. Based on ITU data for 1999, the most open telecommunications markets globally were in cellular services (67 per cent) and Internet services (72 per cent). Basic telecommunications services markets remained fairly closed to new entrants. At the beginning of 1999, about 73 per cent of global basic telecommunications markets continued to have monopolies. However, there is no doubt about the trend in basic telecommunications markets because they were being opened to competition in all regions. It is in competitive telecommunications markets that regulators will face the greatest challenges. Objectives of regulation in competitive markets
1. To license new competitors and existing operators on terms and conditions that will

provide a clear and certain basis for both to attract investment. In a competitive market, the threat of potential entry is an important constraint on firms already in the market. Should an incumbent firm increase its price above competitive levels, potential competitors would respond to this opportunity for profit by entering. Competitive entry would force prices down again. High barriers to entry prevent such competitive entry, and so increase incumbent firms market power.10
2. To ensure interconnection of networks and services, and to resolve interconnection

disputes.
10

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Telecommunications operators will interconnect voluntarily in some circumstances. If two operators are not in direct competition with each other, then generally they will have an incentive to interconnect. This is because interconnection increases the value of a network to its subscribers; by increasing the number of people they can call and the range of ICT services they can access (network externalities). Sometimes incumbent operators will have little incentive to allow access to their network, or to allow access on reasonable terms. Where the interconnection seeker is a potential competitor, an incumbent may seek to limit competition, and preserve its market power, by: Refusing to interconnect Offering interconnection at a price, or on other terms, that make it difficult for an efficient entrant to compete, or Seeking to sabotage the entrant by providing a lower quality interconnection service to the entrant than the incumbent provides itself. In these cases regulatory intervention can lead to a more efficient outcome. The motivation for interconnection regulation is that efficient competition in downstream markets would be difficult, or even impossible, unless entrants can access the incumbents network at appropriate prices, terms and conditions.11
3. To prevent incumbent operators from abusing their dominant position to drive new

competitors out of telecommunications markets. Abuse of dominance occurs when a dominant firm adopts predatory or exclusionary business practices with the aim of eliminating or substantially lessening competition and excluding competitors. Abuse of dominance may entail: Refusals to deal, for example a refusal to supply an essential facility to a competitor,
11

Exclusive dealing arrangements, in which a seller prevents its distributors from selling competing products or services,

ict regulation toolkit module 2: competition and price regulation. www.ictregulationtoolkit.org/en/Section.1560.html

Tying and bundling, where a firm sells makes the purchase of one product or service conditional on the purchase of a second product or service,

Predatory pricing, where a firm sets prices below cost in order to force a competitor out of the market,

Non-price predation, where a firm adjusts the quality of its product offering to customers with the aim of harming its competitor. For example, an incumbent might offer an improved level of service to just those customers served by a new entrant.

In 2003, Deutsche Telekom (DT) was found to have abused its dominant position by committing a price squeeze, contrary to Article 82 of the European Commission Treaty. DT offered local access services at the retail level to end-users and at the wholesale level on an unbundled basis to competitors. DT was thus active in both upstream and downstream markets. Beginning in 1998, DT had been legally obligated to provide competitors with wholesale access to its local loops. In its decision finding that DT had abused its dominant position, the European Commission found that DT charged new entrants higher fees for wholesale access to the local loop than what DT charged its retail subscribers for fixed line subscriptions. The Commission assessed the margin between DTs wholesale access prices and the weighted average price of its corresponding retail services for access (analog, ISDN, and ADSL). Given that wholesale access prices were higher than the weighted average of the corresponding retail prices charged to end-users, the Commission determined that the price margin was insufficient for new entrants to compete with DT. The Commission concluded that DTs pricing practices constituted a price squeeze. The Commission further concluded that DTs pricing for local access services deterred new competitors from entering the local access market and reduced the choice of telecommunications service providers for consumers and suppressed price competition. DT unsuccessfully appealed this decision to the European Court of First Instance (CFI). For more details about the DT abuse of dominance case, please see the Practice Note "Vertical Price Squeeze Charge against Deutsche Telekom".12

12

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4. To prevent dominant operators from charging excessive prices for services over which

they have market power, and using the proceeds to cross-subsidize their services in competitive markets.

Market power is: The ability of a firm to raise prices above competitive levels, without promptly losing a substantial portion of its business to existing rivals or firms that become rivals as a result of the price increase.13 Market power is only damaging if the firm concerned abuses its power. Should a firm with market power raise prices above competitive levels, this can dampen consumer demand, generate efficiency losses, and harm the public interest. In addition, firms with significant market power or dominance may be able to implement a range of strategies to reduce competition, and enhance their position in the market.
5. To ensure universality objectives are achieved in a competitive environment.

Incumbent firms often control access to facilities that are essential inputs in the supply of services at the retail level. Competing retailers depend on the incumbent for access to the essential facility. In the telecommunications sector, for example, the local loop connecting end customers to the network is often regarded as an essential facility. Incumbent firms may attempt to prevent competitors from entering the market by refusing to provide access to an essential facility. To encourage competition, many jurisdictions require firms with control over essential facilities to provide access to retail competitors. Rules may also determine the way in which access prices will be agreed, and procedures for resolving any disputes. The incumbent firm controls an essential input, on which the downstream entrant depends in order to provide services to its customers. The incumbent also competes with the downstream entrant at the retail level. By

13

See Robert Pitofsky, "New Definitions of Relevant Market and the Assault on Antitrust", Columbia Law Review, 90(7), 1990. Having a dominant market share, however, is not sufficient for being able to exercise market power.

refusing to supply the essential input, the incumbent can prevent the downstream entrant from competing.14 Without regulatory intervention to achieve such objectives, there is a good prospect that competition will fail to produce the benefits that have been achieved in the worlds more competitive markets. This model worked well for many years in the more developed economies, where long-distance and international tariffs, which stayed high despite significant decreases in costs due to technological change, basically subsidized local services and led to relatively high levels of universal service. However, the model did not work as well in developing countries where networks were generally restricted to urban areas and more accessible to middle/high income consumers. Cross-subsidization kept local prices low for the wealthy, but did not generate sufficient income for infrastructure investment, and low-income consumers were subject to long waiting lists and poor quality of service. Conclusion Effective regulation has proven to result in greater economic growth, increased investment, lower prices, and better quality of service, higher penetration, and more rapid technological innovation in the sector.

References
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ict regulation toolkit module 2: competition and price regulation. www.ictregulationtoolkit.org/en/Section.1560.html

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