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 • AT&T 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.