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 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