1. NEXT-GENERATION REGULATION OF ELECTRONIC COMMUNICATIONS
Prof. Jens Arnbak, Chairman OPTA
Global Communications Consortium @
London Business School
February 1, 2001

2. OUTLINE OF LECTURE
1999 ONP Review and Competition Law: convergence or not?
Open access in different network sectors
Special features of ICT-based networks
dynamics of costs (of access, etc.) =>
dynamics of markets (e.g., internet access!)
Institutional issues:
merging regulators vs. concurrent powers
harmonisation of internal market

3. 1999 ONP Review & Competition Law
ONP Review adopts market definitions of CL
ONP Review maintains ex-ante interventions: need for
market predictability
stability in capital-intensive network markets
However,
intervention trigger levels at issue (<50%?)
joint dominance still uncertain concept
communication markets vertically integrated

4. REGULATION REFLECTS DIFFERENT NETWORK SECTORS!1
COMPETITION
BETWEEN NETWORKS? 2
COMPETITION ON THE NETWORK? 3
SEPARATION OF NETWORK ANDSERVICE PROVISION? 4
IS ACCESS
TO NETWORK
SIMPLE? Y N Y Y
Account. separat. fuel/gas/CATV
Yes No No No
Competition for licence & regulation: railways
Regulation of access & interconnection: telecoms/ airlines
Legal separation: electric power
No problems: Internet & mobile telephony

5. ULL: OUTLINE OF SITUATION IN EU
ULL was not mandated in ONP-directives till 2001
Competition law does not reach far enough: The ‘essential facilities doctrine’ is
a restrictive notion imported from American case law
not tested succesfully before the EU Court of Justice in cases of emerging markets
Bronner case (ECJ case C-7/97) distinguished long-term and short-term access to incumbent’s facilities, similar to temporary use of ONP-rules to open markets =>
OPTA proposed dynamic ULL pricing rule in 1998

6. GENERAL DISCUSSION OF ULL REGULATION
Economic effects of ULL on network investments are a valid concern
Issues concerning impact of ULL on the balance of service- and infrastructure-type competition
focus on issues of market dynamics (price and time)

7. NRA CHALLENGES IN SETTING ULL PRICE
Economic impact on (potential) alternative infrastructure?
Relationship with retail phone tariffs: has rebalancing been completed?
Are cost allocation systems & methods to determine valuation of assets and rate of return available in all NRAs?
Convergent view of EU NRAs: cost-orientated wholesale tariffs are to be based on forward-looking, long run average incremental cost =>
NRAs in Independent Regulators Group (IRG) work together on Principles of Implementation and Best Practice in unbundling and MDF access

8. REBALANCED RETAIL TARIFFS?
Start-up phase necessary for competitors to acquire customer base (market entry)
In the start-up phase, business case for ULL only makes economic sense if cost-competitive with retail subscription fee =>
Cost-orientated fee for ULL makes sense only where retail subscription fee is also cost-orientated (and hence rebalanced!), to avoid price squeeze by incumbent.
Rebalancing not achieved yet in many member states!

9. REBALANCING KPN RETAIL TARIFFS, 1998
BELBASIS
Costs,
fl/mth.
before 1/7 1998
BELBUDGET (USO-offer)
after 1/7 1998
34.60
cheaper
27.20
Dearer!
19.95
# call minutes

10. WIRELESS NETWORKS (GSM) IMPROVE USO!
BELBASIS
Costs,
fl/mth
USO offer (fixed)
before 1/7 1998
Mobile, prepaid
after 1/7 1998
34.60
27.20
19.95
# call minutes

11. COST ALLOCATION SYSTEMS /COST METHODS?
Cost allocation principles and systems should now be in place in EU member states for interconnection and special-access services (Interconnection & Voice-Telephone directives)
Valuation of assets: historical cost or current cost?
Reasonable rate of return: link with risk profile of assets/investments (WACC method)

12. REGULATORY POLICY: ANTICIPATORY OR BASED ON CURRENT MARKET?
Risk of anticipating developments that may never be realised
Risk of replacing market forces by regulatory intervention
Risk of relying solely on assessment of current market circumstances, in view of market infancy
=> Combine policies (current market assessment and anticipating elements) to allow
first: market entry
subsequently: market forces

13. COMBINING ANTICIPATORY AND EMPIRICAL PRICING POLICY BY TIMING:
Based on current market assessment: start with price at historical cost to remove barrier to entry
Anticipate maturing of market: end with price at current cost to reflect ‘normal’ market conditions (price may be left to market after that)
Transition period for gradual approach to end-goal

14. ULL transition pricing by OPTA: From historical cost base to LRIC

15. Institutional convergence: 1. The national options
3 different approaches to convergence of com-regulator and competition authority
do not introduce NRA in the first place (N.Z.)!
merge NRA and NCA (if independent): Australia, possibly Netherlands
concurrent powers of NRA to apply CL (UK and followers)

16. Institutional convergence: 2. EU harmonisation options
Bottom-up: Develop EU-wide Principles of Implementation and Best Practice through co-operation by NRAs in the IRG
Top-down:
strong form: The Euro-regulator
weaker form: Commission reviews NRA decisions, if necessary (similar to proposal for applying EU competition law in member states)