Regulation of Telecom: What Works & Why? Lessons of Independent Central Banks

Regulation Initiative Working Paper Series No. 47

23 Pages Posted: 3 Oct 2002

See all articles by Jon Stern

Jon Stern

City, University of London - Centre for Competition and Regulatory Policy - Department of Economics

Francesc Trillas

Autonomous University of Barcelona - Department of Economics; University of Navarra - IESE Business School

Date Written: February 2002

Abstract

Oftel has now been the regulatory agency for UK telecommunications for over 15 years. The FCC has regulated US telecoms for 67 years. Within the EU, regulatory agencies for telecoms now exist in all 15 EU member states.

Over the last 15 years, the UK has seen an increase in the number of licensed fixed line operators from two (BT and Mercury) to more than one hundred and fifty. Mobile telecoms has grown from a glint in the eye to the point where Vodafone was the largest quoted company on the London Stock Exchange and the 3G license auctions raised GBP 22.5 billion for the UK Exchequer.

According to OECD statistics, between 1985 and 1999, the number of fixed lines in the UK rose by over 50% from 21 million to over 31 million with a growth in mobile subscribers from zero to 24 million. Over the same period, telecommunications revenue as a percentage of GDP increased from 2.45 of GDP to 3.5%. By 1999, the penetration rate (fixed and mobile) was 56.5 per 100 inhabitants, compared to 36 per 100 inhabitants in 1985. In addition, OECD Working Papers report estimates that (i) telecom prices in the UK are 40% lower than the OECD average; and (ii) the UK had made more progress by 1998 in aligning tariffs to costs (price rebalancing) than any other OECD country.

Oftel has presided over over - and provided - an orderly regulatory framework for all of these changes with a view to making markets work effectively for consumers. That has meant:

- Protecting consumers from unreasonably high prices and poor quality;

- Providing the framework for very large investments by the licensed companies; and

- Ensuring fair competition - a level playing field for all operators, incumbents and new entrants.

Ensuring fair competition raises the most difficult questions and has probably been the hardest. Given the decision by the Thatcher Government to privatise BT as a single company, a very large part of Oftel's work has focused on regulating BT and, in particular on pricing access to BT's network.

Oftel, like most other telecom regulators, has encouraged the voluntary negotiation of interconnection terms and prices. However, whether it is for trunk networks, mobile inter-fixed interconnection and more recently at the local exchange level, for good economic reasons, BT and its competitors have not been able to reach voluntary agreements without Oftel intervening significantly either in laying down interconnection pricing rules or in setting these key prices. The same is true in the US, where the FCC has had to specify detailed principles for setting interconnection prices, and similarly for other EU states. However much some observers may argue that telecoms can be handled entirely via a competition policy regime and that there is no need for a specialist industry regulator, we have yet to see any established telecom regulatory regime be abolished. Indeed, the increasing importance of the local-loop for accessing consumers if competition is to work - and to deliver to homes the growing array of new services such as films, E-commerce, internet and computing - arguably increases the need for and the complexity of regulation. This is not least because of the need to cover network access issues in broadcasting along with telecoms and the "convergence" agenda. So, it's "Goodbye Oftel. Hello OFCOM".

In the same way that developed and developing countries have increasingly been unbundling, liberalising and privatising their telecom industries over the last 15 years, so countries have increasingly decided to assign the control of monetary policy instruments such as interest rates and/or monetary growth rates to an independent central bank rather than leave monetary policy instruments in the hands of the government.

The conventional economic argument for an independent central bank is that it reduces (and is perceived to reduce) the average rate of inflation and its variance by taking monetary policy out of the hands of politicians. Proponents of this view argue that this allows not just a lower rate of inflation but also a steadier and possibly higher rate of growth of output, lower unemployment (at least on average) and the avoidance of a "boom-bust economy". The independent central bank, in its operation of monetary policy, has a strong incentive - and is usually given a legal remit - to achieve low inflation.

But, this argument is very similar to the claim that independent regulation of telecoms is necessary to facilitate and promote commercialisation, liberalisation and privatisation of telecom industries. Again, for telecoms, like other regulated and privatised utilities, a key issue is to ensure that short-run policy considerations are not allowed to damage the investment climate for the industry. Investment considerations are particularly important in telecoms with its capital intensity and rapid rate of growth of technical progress.

In the monetary policy case, the issue is the establishment of effective institutions to ensure a credible macro-economic and monetary policy framework, particularly for investment. In the telecommunications case, it is the establishment of effective institutions to ensure a credible micro-economic framework to support private investment and competition in telecoms. Moreover, the issues of what institutional design characteristics lead to effective operation are very similar in both cases, with independence from short-term political pressures as a common concern.

In both cases, the question of introducing an institution separate and independent of government is intimately related to the questions of the role of (a) rules relative to discretion and (b) the degree and nature of the accountability of the institutions. These are still contentious issues both for central banks and for the development of telecom and other utility service regulation.

Suggested Citation

Stern, Jon and Trillas Jané, Francesc, Regulation of Telecom: What Works & Why? Lessons of Independent Central Banks (February 2002). Regulation Initiative Working Paper Series No. 47. Available at SSRN: https://ssrn.com/abstract=319364 or http://dx.doi.org/10.2139/ssrn.319364

Jon Stern

City, University of London - Centre for Competition and Regulatory Policy - Department of Economics ( email )

Northampton Square
London, EC1V 0HB
United Kingdom

Francesc Trillas Jané (Contact Author)

Autonomous University of Barcelona - Department of Economics ( email )

Avda. Diagonal 690
Barcelona, 08034
Spain

University of Navarra - IESE Business School

Avenida Pearson 21
Barcelona, 08034
Spain

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