Focusing in particular on the question of whether the telecoms industry should be regulated by an overarching ‘European Communications Commission’, the Report concludes that regulatory enforcement should remain at the national level but that policy should be harmonized in a strengthened two-tier regulatory structure. However, given ‘convergence’ between the telecoms and broadcasting industries, there should be a single national authority in each EU country for network regulation of both industries.

The Report emphasizes four key issues that must be considered in formulating policy for the network industries:

• the need to foster innovation
• the need to prevent anti-competitive behaviour and create incentives for entry
• the need to ensure that services are widely distributed across society
• the need to balance subsidiarity, diversity and achievement of a single market

Conflicts between competition and monopoly and between market forces and regulation give rise to many challenging policy problems for the newly liberalized network industries. The Report explores ten conflicting priorities that European policy-makers face in defining an appropriate competition and regulatory policy framework:

• short- versus longer-term objectives
• efficiency versus equity objectives
• competition versus monopoly
• slow versus fast liberalization
• public versus private ownership
• sector-specific regulation versus general competition law
• rules versus discretion
• permanent versus temporary regulation
• centralized versus decentralized regulation
• light- versus heavy-handed regulation

The first part of the Report discusses general principles governing competition and regulatory policy for network industries. The Report identifies three phases of market structure. In this framework, deregulation mean that the industries are evolving along a path from monopoly (phase 1) to monopoly and competition (phase 2) and possibly on to full competition (phase 3).

The attached figure indicates the policy concerns that arise in each phase, as well as where particular European industries are currently located. Most lie in phases 1 or 2, and many of the policy issues arise from the fact that monopoly and competition co-exist in phase 2. Certainly, this is the point at which the conflicts between policy priorities are most evident. Somewhat paradoxically, at the beginning of phase 2 when a network industry is opened up to competition, more rather than less regulation is required. Of central importance are policies designed to prevent monopoly abuse in both retail and interconnection markets. Over time, however, competition should become more effective during phase 2 and the need for regulation should diminish.

The second part of the Report focuses on the telecoms industry, a sector where shifting patterns of ownership and market structure in combination with extraordinary and rapid technological change are creating enormous challenges for regulators at both the EU and national level. The industry is becoming increasingly difficult to define as convergence with broadcasting and the information technology industries blurs traditional market boundaries. At the same time, telecoms in Europe do not yet comprise a single market as there is much diversity in policy implementation.

The Report examines the key policy choices facing regulators:

• Derogations from Commission timetables for implementing competition have been agreed for countries with poorer networks. It is unfortunate that this has happened since it would have been better for those countries if they had followed the same timetable as everyone else. Liberalization has proved to be the most effective instrument for efficient infrastructure development and upgrading. Indeed, Ireland has now opted for a shorter derogation period for this reason.
• The convergence of technologies between telecoms and broadcasting probably requires a single approach with regard to network regulation. There would be some merit in creating a single national authority to oversee telecoms and broadcasting.

• Structural policy should ensure that there is no control of essential facilities by a very limited number of competitors. In the long run, this can be left to competition policy, but at the current stage of market developments in many countries, it is important to ensure that the incumbent operators do not control the alternative means by which technology is providing access to the final customer – such as cable, mobile, boxes for digital TV, etc.
• Fostering competition with unbalanced rates is unwise since they provide poor investment signals and lead to inefficient entry. It is therefore important to rebalance rates as speedily as possible. The Commission indirectly requires rate rebalancing by 2001 through its limitations on how access deficits can be recovered.
• To ensure fair competition, it is good policy for the national regulatory authorities (NRAs) and the Commission to examine the profitability of majority state-owned telecoms firms to ensure that adequate returns are being earned. Where returns are below private sector standards, the Commission should analyse whether these low returns constitute state aid in contravention of EU regulations. As the Commission requires, NRAs must be independent of the incumbent and ownership interests, being more vigilant when the incumbent is state-owned and enforcing stringent accounting and reporting to ensure that prices fully reflect costs. Predation (pricing below relevant costs) is not a major force in most industries, but state-owned enterprises do meet the theoretical criteria for when predation may be a strategy for the incumbent.
• Competition policy at the beginning of liberalization of telecoms or any former monopoly sector is not sufficient. A general competition authority has insufficient expertise or abilities to examine complex interconnection issues. A mandatory non-discriminatory interconnection regime and/or an industry-wide technical standard regime is required. Sector-specific regulation is needed at the beginning of liberalization, though not at its end.
• The move towards open auction mechanisms to allocate new licenses/spectrum is to be welcomed since it allows a more effective use of signals. This does not necessarily mean that spectrum should be auctioned for the highest prices: the regulator can establish criteria and multiple objectives, not simply price, but must use a transparent market mechanism.

• Before expanding or continuing universal service subsidies, it is important to evaluate the extent to which the goals of universal service are being achieved by the markets. As part of its 1999 review of EU telecoms policy, the Commission should re-examine the financing part of its universal service policy and that part of the recommendation comprising universal service obligations on interconnection prices should be abandoned.

• Different national traditions explain the very distinct approaches adopted by different EU members to telecoms regulation. Nevertheless, it seems clear that in many countries, too much authority is still held by governments rather than NRAs. This should be discouraged and more decision-making power given to the NRAs. For example, if prices were to be regulated, this should be done by the NRA not the government. Similarly, all major market conditions should be examined, if required, by the NRA not the government.
• A number of governments have not yet implemented all Commission directives related to the telecoms sector. Clearly, in order to ensure comparable treatment across the EU, they must.
• It is important to achieve similar levels of regulatory enforcement across the EU. Lax enforcement will lead to suggestions for an EU-wide regulator, an option for regulating the industry that is inappropriate. Hence, as far as different national traditions allow, NRAs’ powers and degrees of enforcement should be made more consistent across Europe. At the same time, the EU should tighten its constraints on the powers and role of NRAs. A strengthening of the current two-tier system of regulation is therefore needed.

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Studieförbundet Näringsliv och Samhälle (SNS) was established in 1948 as an independent forum for the free exchange of ideas on economic and social issues among individuals in the private sector, policy community and the media in Sweden. it currently has approximately 4,000 individual members and 150 corporate subscribers, including most of Sweden’s largest corporations in the private and public sectors. SNS is not affiliated with any political parties or interest groups, but maintains a close relationship with the Swedish academic community and with organizations and research institutes in other countries. SNS carries out academic research, issues a variety of policy studies and other publications and organizes seminars and conferences.

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Europe’s Network Industries: Conflicting Priorities
Monitoring European Deregulation No. 1
Lars Bergman, Chris Doyle, Jordi Gual, Lars Hultkrantz, Damien Neven,
Lars-Hendrik Röller and Leonard Waverman

ISBN 1 898128 37 5 – £50/ $80/€75 [£15/ $24/€22.50 (academics only)]

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