Introduction to Telecommunications

RegulationYale M. Braunstein

School of Information Management & Systems

University of CaliforniaBerkeley, CA 94720 (U.S.A.)

2002

Topics

Why regulate?Types of regulationEffects of regulationWhy deregulate?

Privatization & LiberalizationICX & universal service

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

Types of regulation

RBROR was the standard approach Averch & Johnson critiques

Price caps (CPI-x models)Basket formulasDominant carrier notification

reqts.

Effects of regulation Averch & Johnson (1962) provide

detailed analysis of unintended incentives built into RBROR approach

1. Bias toward over-use of capital2. Cross-subsidy problem leads to

predation “Capture” problem High information needs &

asymmetries Bias towards/against incumbents Perceived lack of innovation

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”?

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 (?)

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”

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.

Typical interconnection pricing philosophies

Cost-basedPrice-basedBill and keepPrivate negotiation

Additional concerns

Equal treatment and symmetry requirements Whose costs? Possible difference in technologies Legacy customers

Preferences for corporate relatives

An illustration of the lack of symmetry

Universal serviceAmong 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.

Case studies

Mobile-to-fixed, fixed-to-mobile, and mobile-to-

mobile in IsraelTable 1: Average Number of Monthly Usage Minutes, Israeli Mobile Operators

Operator 1995 1996 1997 1998 1999

Pelephone 530 430 320 300 295

Partner 427 (Q4)

Table 2: Current & Proposed Incoming Interconnection Rates, Israeli Mobile Operators

Proposed

Operator Current 2000 2001 2002 2003

Pelephone 0.17 0.13 0.12 0.11 0.10

Cellcom 0.12 “ “ “

Partner 0.13 “ “ “ “

Note: All rates are per-minute, given in U.S. dollars at US $ 1 = NIS 4.16

Free entry and negotiated interconnection in Sweden

Table 3: Fixed-to-fixed and fixed-to-mobile tariffs, Telia of Sweden

Base Plan Bonus Plan

Destination Peak Off-peak Peak Off-peak

Domestic fixed 0.023 0.012 0.021 0.011

To Telia mobile 0.275 0.153 0.250 0.138

To Other mobile 0.301 0.229 0.301 0.229

Note: All tariffs are for residential service, on a per-minute basis, include tax, given in U.S. dollars at US $ 1 = SEK 9.81

The entry of competition for international calls in Israel

Table 4: Bezeq’s Interconnection Rates

Termination Time of day

Local Urban Toll National Toll

Origination

Peak 1.4 - 2.9 1.5

Intermediate 0.9 - 0.9 0.9

Off-peak 0.6 - 0.6 0.6

EU Benchmarks

0.7-1 1-2 1.7-3

Note: All rates are per-minute, given in U.S. cents at US $ 1 = NIS 4.16

Calls to the Internet in the U.S.

Table 5: Intra- and Inter-state Carrier Common Line Rates, 1990

State 1990

Highest (Texas) 0.0611

Median of those reporting CCLRs 0.0262

Lowest (South Dakota) 0.0121

Six states 0.0000

Interstate 0.0123

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

Financing the USO and recent tariffs in India

Table 6: Selected Residential Tariffs in India, 1999

Urban Rural Registration 328.95 657.89 Installation 17.54 17.54 Monthly rentals 5.48 4.17 Per call charges

<125 calls 0.00 126-225 0.01 226-250 0.02 251-500 0.02

above 500 0.03 <75 0.00

76-200 0.02 201-500 0.02

above 500 0.03

Financing the USO and recent tariffs in India

Table 7: Trunk Call Classes and Tariffs

Call Class Tariff Manual – Standard & SVH Rs 5 plus tariff; one minute

minimum Urgent/Demand Rs. 5 plus twice ordinary tariff Lightening Rs. 5 plus 8 times ordinary tariff

Interconnection Policy in EU States

Local Access Pricing and E-Commerce DSTI/ICCP/TISP(2000)1/FINAL July 2000

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]

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

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.