REGULATION IN TELECOMMUNICATIONS INDUSTRIES: Why, What and How to Regulate?

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What to regulate?

The provision and use of telecommunications services may be regulated in the following ways:
1) licensing carriers;
2) establishing and supervising technical and operational standards and practices for network operations by carriers;
3) overseeing the quality of service provided by carriers;
4) regulating the pricing of telecom services, either by controlling telecom operators' rates (tariffs) in detail or by applying some more general form of control such as a price-cap;
5) setting the terms (administrative, financial and technical) for the interconnection of different carriers' networks, including the "access" pricing charged by one carrier to another, where there are multiple carriers and one carrier needs to interconnect with another's network;
6) controlling type approval of customer premises equipment (CPE) and its attachment to the public network;
7) controlling the numbering plan and related matters.

The decision on "what to regulate" has substantially varied in various countries since it depends on what outcomes are to be achieved. For example, in “full monopoly group” countries (e.g. Spain, Italy and the majority of developing countries), the regulator's goals will imply that:
. supervision of the monopoly PTO's technical standards and practices may be unnecessary;
. price regulation will be necessary and important;
. licensing new carriers and regulation of network interconnection is not relevant.
At the other extreme, in a highly competitive group countries (e.g. U.S. long-distance telephone service), the regulator’s goals will imply:
. regulatory control of some technical and operational matters is essential since effective competition requires extensive interconnection of different carriers' networks;
. price regulation may become unnecessary, at least in some segments of the industry;
. licensing function may be unnecessary or minimal;
. rules concerning the interconnection of different carriers' networks are of critical importance.

But what if a government chooses not to regulate at all? Experience suggests that this decision is too illusory: in the unregulated or self- regulated monopoly, someone must determine whether or not the monopoly is acting in the public interest, and intervene if it is not.

These considerations, among others, have led the countries of the European
Community to collectively enact EC legislation requiring the establishment in each country of an explicit regulatory process for telecommunications and a regulatory body to implement that process which is separate from operational PTO organisations, even in those countries where national legislators have chosen to maintain a monopoly of basic fixed voice services.

How to regulate?

Regulator with a defined mission can fulfil it using widely differing regulatory approaches. Actually, there are basically two kinds of choices that must be made to define regulatory approaches:
1. How far the regulator will exercise control, and how far the regulator will act "by exception." To what extent will certain matters (e.g.

"access charges" for interconnecting) be controlled by the regulator, or will the regulator only intervene "by exception" when a particular regulatory case requires this? In the case of access charges, for example, U.S. practice involves continuous and mandatory control of access charges for fixed-service carriers. In the United Kingdom, by contrast, the regulator does not automatically exercise control over these charges, but may exercise the power to determine the charges if the various carriers fail to reach agreement.
2. How far the regulator controls outcomes directly, or indirectly. For example, if one goal of regulation is low prices for service, will the regulator control prices directly, or seek to influence prices indirectly by promoting an industry structure that is considered to be favourable to achieving low prices? Or, to take another example, will the regulator directly impose particular targets for network expansion and modernisation, or rely on the effect of a general framework of incentives designed to encourage carriers to pursue these goals?

In this context, let’s consider one of the most fundamental issues about whether or not the regulator should intervene to promote innovation. There are three different views on this matter:
1. “Regulator as Patron”: the regulator identifies the promising innovation, and takes steps to ensure that the organisation most likely to implement it is not only authorised, but have priority access to the resources necessary to implement the innovation.
2. "Pro-active Removing of Obstacles": the regulator does not "pick winners" in this way, but nevertheless actively seeks to ensure that regulation itself does not impede promising innovations and to act pro- actively to provide an environment that is favourable for innovation.
3. “Arm's Length Approach”: the regulator’s role is minimised in decision- making about innovation, and the regulator will respond to innovation initiatives from the PTO or other interested parties (e.g. telecommunications users, resellers or providers of value-added services). This may occur if the innovation needs the regulator to take specific actions before it can proceed.

Although these approaches are different, they are not clear-cut alternatives. There are many intermediate approaches between them. In table
1, the main advantages and disadvantages of these tree alternatives are presented.

Concluding all above, we can say that establishing proper regulatory institutions is an important precondition for successfully restructuring the telecommunications sector and increasing the involvement of private initiatives and market forces. Three basic questions are to be addressed at the outset - why, what and how to regulate – in order to settle the main two principal issues: how to ensure a proper interface between the regulated and competitive parts of the telecommunications, and how to encourage the innovative forces in the sector.

Table 1 Advantages and Disadvantages of the Broad Regulatory Alternatives

Concerning Innovation

| |Advantages |Disadvantages |
|Regulator as |May stimulate important innovations not |Regulatory complexity and cost. |
|Patron |previously foreseen. |Blurs the line between regulatory and |
| |May significantly increase the rate of |commercial decision-making. |
| |innovation. | |
|Pro-Active Removal|Maintains dividing line between regulatory|A country with this approach may in some |
|of Obstacles |and commercial decision-making. |cases become follower of a country with |
| |May still significantly increase the rate |the “regulator as patron” model. |
| |of innovation. | |
|Arm's Length |Simplicity and low cost for the regulator.|May result in slower rate of innovation. |
|Approach | |May entail significant delays since the |
| |Maximises the clarity of the dividing line|regulator needs to undertake new policy |
| |between regulatory and commercial |development efforts, after initiatives are|
| |decision-making. |received, before he can respond. |