Regulatory Reform in Europe Lessons for the U'S'

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Regulatory Reform in EuropeLessons for the U.S.?

• Johannes M. Bauer
• Michigan State University
• PURC Annual Conference
• February 21-22, 2002

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Why comparative analysis?

• Performance is the outcome of complex interplay
  of factors including regulation
• Challenges facing practical policy
• Incomplete information and uncertainty
• Strategic behavior and opportunism
• Differing value systems of stakeholders
• Information and communication policy shaped by
  ideas, interests, and institutions

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Access paths 1990-2000
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National access paths (2000)
Mobile
Fixed
Source OECD, ITU.
5
Prices for voice service(in US PPP)
Business
Residential
6
Price of residential voice (US PPP)
7
Mobile prices (US PPP)
8
Overview

• Legal and regulatory background
• Fixed and mobile services
• Internet, data and information services
• New regulatory framework and eEurope
• Comparative analysis and lessons

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Legal and regulatory background
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EU governance
Commission
Court of Justice
European Level
European Parliament
Council
Binding Directives (Art. 86, 96 EU Treaty)
Non-binding Recommendations
National Level
.. 15 member states ..
Voting
Representation
NRAs
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Inherited sector organization

• Government monopoly
• PTTs (Posts, Telegraph, and Telephone) integrated
  operational and regulatory functions
• Public service mandate and expectation to act in
  national interest (procurement, employment)
• National fragmentation
• Networks and standards
• Law, regulation, certification
• Business practices and performance

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Impetus and main initiatives

• Increasing attention to ICT in 70s and 80s
• Nora and Minc (1978) study The Computerization
  of Society (1978)
• ICT gradually seen as critical for European
  revival and Common Market Project
• Main thrust at EU and national levels
• Harmonization and standardization
• Liberalization and regulatory reform
• Supplementary industrial policy initiatives

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Stages of regulation
Source M. Cave L. Prosperetti (2000).
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Transition legislation

• Series of Directives by the European Commission
  and/or Council with the goal of gradual full
  liberalization
• Terminal equipment (1989)
• Non-reserved services (1990)
• Satellite communications (1993)
• Cable television (1995)
• Mobile communications (1995)
• Full liberalization since 1998

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Continued state ownership
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National reform trajectories
Private
UK
E
G .. Germany E .. Spain F .. France S ..Sweden
UK
E
UK
F
G
F
F
G
PTT
Public
S
Monopoly
Competition
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Fixed services
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Market design

• Full liberalization since 1998
• Ex ante regulation only in cases of significant
  market power (gt25 of market)
• No separation of local, long distance
• Large number of new service providers
• Incumbents continue to dominate
• Local markets (0 in LUX to 16 in UK)
• National long distance (5 to 62 in FIN)
• International long distance (5 to 55 in UK)

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Interconnection and access

• Interconnection obligation only for SMP operators
  (reference interconnection offer, accounting
  separation of network activity)
• Transparency and cost orientation but unclear
  cost standard in IC Directive (FDC, LRIC,
  stand-alone, embedded)
• Commission recommended LRIC and best practice
  benchmarks
• New framework provides menu of choice

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Unbundling

• Unbundling required for dominant service
  providers since 1/2001
• Unbundled access to twisted copper pair
• Shared use of copper line
• High-speed bit-stream access
• Prices for unbundled loops based on variety of
  cost standards
• Forward-looking LRAIC (Germany, France)
• Current costs (Austria, Denmark, Sweden)

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Price rebalancing (residential voice)
1994
2000
US-M measured local service, US-F flat local
service, source Cherry Bauer (forthcoming).
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Universal service

• Universal service minimum set of services to be
  available independent of location at affordable
  price
• Fixed network voice, fax, data connection
• Operator, emergency, directory services
• Public pay phones and handicapper facilities
• Universal service fund in two countries
• Encouragement of support for advanced telecom
  services to schools/libraries

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Mobile services
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Market design

• Analog systems
• No pan-European standard but some regional
  coordination (e.g., NMT in Scandinavia)
• Fragmentation, slow diffusion (except NMT)
• Digital second generation
• EU-enforced GSM standard
• Facilitated cost decreases and fast diffusion
• Duopoly in GSM 900 (PTT and new entrant)
• Oligopoly since GSM 1800 (DCS) licenses

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Success of GSM
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2.5 G and 3G

• 2.5 G networks and services
• General Packet Radio Service (GPRS)
• EDGE (Enhanced Data Rates for Global Evolution)
• 3G (IMT-2000, UMTS in Europe)
• Trade dispute with U.S. forced EU to adopt
  coherent rather than single standard
• Spectrum auctions and fragmented policy have left
  key service providers with huge debt
• Technological and business risks high
• New value chain poses significant challenges

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2G and 3G license fees
License fee per subscriber (US )
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Future of mobile in the EU

• Policy adjustments after 3G auctions
• Network sharing as long as networks remain
  logically separate
• Shared antenna sites and structures
• Separation at Node B
• Expected savings of up to 60 of radio access
  network
• Modifications in licensing conditions
• Spectrum management directive
• Can GSM success be repeated?

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Internet, data and information services
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Market design

• Liberalized market for data services and Internet
  access
• Large variation in leased line prices
• 2000 EU average 20 above U.S.
• Range from 70 below to 140 above U.S.
• Dominance of measured pricing for local access
  service slowed Internet diffusion
• Classification of Internet-based services

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Internet access (2001, in )
Source EU, U.S. DOC.
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Broadband information services
Per 100,000 inhabitants
Source OECD.
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New regulatory framework and eEurope
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The future framework
Services provided over networks (e.g.,
broadcasting services, electronic banking,
e-commerce)
Regulated by other measures at EU and national
level
Associate services (communications services and
access services, e.g., telecom services, CAS)
Regulated under new framework for communications
infrastructure and associated services
Communications infrastructure (networks and
associated facilities, e.g. cable TV networks,
APIs)
Source EC, 1999 Communications Review.
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Overall objectives

• Promote open and competitive market for
  electronic communications networks, services, and
  associated facilities
• Contribute to the further development of the
  internal market (e.g., by reducing barriers to
  trans-European networks)
• Promote interests of European consumers (e.g.,
  through universal service, data protection and
  privacy, transparency)

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Main implications

• Roll back of ex ante regulation, increased
  reliance on competition guidelines
• Ex ante regulation only in cases of market
  dominance (market share gt50 plus entry barriers)
• EU and NRAs will determine markets in which
  dominance exists
• Stronger coordination between EU and NRAs with
  increased EC powers of oversight and control

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Main implications ...

• Simplified market entry through general rather
  than individual authorizations
• Closer coordination of spectrum policy across EU
• Maintenance of universal service goals
• Promotion of European standards (e.g. for
  interactive digital television)
• Procedural reforms at national levels

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eEurope

• Tradition of public-private sector cooperation
  and industrial policy (e.g., IST Framework
  Program for pre-competitive research and
  development in IT)
• eEurope launched by Commission in 1999
• Cheaper, faster, more secure Internet
• Investment in people and skills
• Acceleration of use of IT (e-commerce,
  e-government, health, intelligent transport,
  content)

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Comparative analysis and lessons for the U.S.
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What worked

• European Union could act as a change agent by
  initiating or issuing Directives
• Absence of historical tradition of external
  regulation resulted in initial pragmatism
• After initial resistance, state-ownership of PTOs
  gave government broader range of feasible policy
  options
• Most success in countries with highly
  professional public sector management and
  public-private sector cooperation

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What worked ...

• Statistical analyses indicate
• Highest contribution to improved sector
  efficiency comes from sector liberalization
• Privatization only weak impact on efficiency
• Paradox of mixed PTOs subject to more stringent
  regulation
• Positive contribution of unbundling to diffusion
  of Internet services
• Positive contribution of standardization to
  diffusion of mobile services

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Problems

• Implementation and enforcement has often been a
  slow process
• Lack of coordination in areas of high national
  sensitivity with potential serious long-term
  effects (e.g., 3G licensing)
• As NRAs mature, lobbying efforts will likely
  increase and regulatory stalemate become more
  widespread
• Real test will be provided by next decade

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Lessons for the U.S.?

• EU has managed well to close gap to U.S. in all
  but most advanced ICT areas
• EU success related to higher degree of regulatory
  centralization
• Pragmatic regulation rather than micro-management
  seem to have worked well
• Development of a technologically neutral
  framework for converging ICT sector is a
  promising approach

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References

• Bauer, J. M. (2002). Normative foundations of
  information policy in the European Union, in J.
  Jordana (ed.) Governing telecommunications and
  the new information society in Europe, Aldershot,
  UK Edward Elgar.
• Bauer, J. M. (2002). Regulated mixed firms the
  continuing role of state ownership in European
  telecommunications, manuscript, Department of
  Telecommunication, Michigan State University.
• Boylaud, O. Nicoletti, G. (2000). Regulation,
  market structure and performance in
  telecommunications, Economics Department Working
  Paper 237, Paris OECD.
• Cave, M. Prosperetti, L. (forthcoming). The
  liberalisation of European telecommunications
  critical review and future prospect, Brookings
  Papers.

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References

• Cherry, B. Bauer, J. M. (forthcoming),
  Institutional arrangements and price rebalancing,
  Information Economics and Policy.
• http//europa.eu.int/information_society/index_en.
  htm
• Gruber, H. Verboven, F. (2001). The evolution
  of markets under entry and standards regulation
  the case of global mobile communications,
  International Journal of Industrial Organization,
  19(7), 1189-1212.
• NTIA. A Nation Online How Americans are
  Expanding their Use of the Internet. Washington,
  D.C., 2002.