Regulatory Reform in Europe Lessons for the U.S.?

1. Regulatory Reform in EuropeLessons for the U.S.? Johannes M. Bauer Michigan State University PURC Annual Conference February 21-22, 2002

2. 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

3. Access paths 1990-2000

4. 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

9. Legal and regulatory background

10. 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

11. 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

12. 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

13. Stages of regulation Source: M. Cave & L. Prosperetti (2000).

14. 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

15. Continued state ownership

16. National reform trajectories Private E UK G .. Germany E .. Spain F .. France S ..Sweden E UK UK G F F F G PTT Public S Monopoly Competition

17. Fixed services

18. Market design • Full liberalization since 1998 • Ex ante regulation only in cases of significant market power (>25% 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)

19. 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

20. 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)

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

22. 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

23. Mobile services

24. 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

25. Success of GSM

26. 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

27. 2G and 3G license fees License fee per subscriber (US $)

28. 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?

29. Internet, data and information services

30. 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

31. Internet access (2001, in %) Source: EU, U.S. DOC.

32. Broadband & information services Per 100,000 inhabitants Source: OECD.

33. New regulatory framework and eEurope

34. 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.

35. 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)

36. Main implications • Roll back of ex ante regulation, increased reliance on competition guidelines • Ex ante regulation only in cases of market dominance (market share >50% 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

37. 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

38. 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)

39. Comparative analysis and lessons for the U.S.

40. 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

41. 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

42. 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

43. 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

44. 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.

45. 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.