Institutional arrangements in telecommunications regulation: an empirical analysis

3rd Workshop on Institutional Analysis

Ral Castro Universitat Pompeu Fabra

Concluding remarks
Key drivers of institutional design (jurisdiction arrangements): Government perception of AAs transparency advantages vs. ISAs expertise advantages. Safeguards against capture and competence weakness

Empirical analysis:
Institutional arrangements in key issues are consistent with the competence-transparency explanation Reduced AAs competence weakness (and larger jurisdiction) when: (i) faster procedures, (ii) market complexity is competition-based and (iii) Government can enforced ad-hoc rules on incumbent Reduced ISAs transparency weakness (and larger jurisdiction) when (i) legal and procedure safeguards against capture are in place or (ii) when the AA discretion is excessive

ISA vs. AA: reasons to choose

Why allocating regulatory jurisdiction to an Antitrust Agency (AA) in telecoms?: Transparency! Revolving door phenomenon Easier monitoring its decision due to: (i) homogeneous set of tasks, (ii) larger jurisprudence, (iii) existing know-how is more available to newcomers

Policy Consistency

Why allocating regulatory jurisdiction to an Industry-Specific Agency (AA) in telecoms?: Competence / expertise! Ongoing specific and prescriptive powers to face: (i) technology complexity, (ii) network specificities, (iii) dominant position in network access

Learning and decisions speed

Universal Social Obligations: public interests.

Empirical Analysis. Basics

26 countries of the OECD area. Period: 1997-1999.

Explained variable. Institutional arrangements among the ISA, Ministry and AA in 6 regulatory issues
Pricing Licensing Interconnection Telecom-specific merger review General antitrust enforcement: is AA alone in such enforcement? Coordination: involvement of AA in ISAs decision making?

and their consolidation in a composite index (factor analysis)

Scales of institutional arrangements increase with ISA involvement. Medium values correspond to Ministry. Regression analysis of several proxies of competence and transparency conditions associated to the AA and the ISA.

Empirical Analysis. Results

Context variable AA-type variable ISA-type variable

Composite index

Pricing

Licensing Interconnect

Telecom Gral antitrust merger enforcmnt review

Coord

Competence variables

Competition development Antitrust speed

Enforc. Procedures (Per se) unfair competition prohibition

(-) (-) (-) (-) (+) (-) (+) (+) (+) (+) (+) (+) (+) (+) (-) (-) (-)

(-)

Golden share AA discretion

(+) (+)

Transparency variables

Price info verifiability ISAs accountability

Interconnection transparency Gral corruption level

ISAs independence Restriction to ISAs discretion

(+) (-)
(+) (-)

Variable nature

Composite Index -0,034 -0,860 -0,241

Pricing

Licensing

Telecom General Interconnection merger review antitrust enforc. Coordination -0,093 -3,037 -0,786 -1,172

Competence Variables Competition development Antitrust speed:

1. Enforcement procedures 2. (Per se) unfair competition prohib.

Context

AA AA Context

Golden share Transparency Variables AA discretion Info verifiability ISA's accountability Interconnection transparency General corruption level ISA's independence Restriction to ISA's discretion
Prob > 2 Pseudo R2 Log Likelihood Adjusted R2

-1,177

AA ISA ISA Context Context ISA ISA

0,882 0,524

1,612 0,682 1,885

1,628 1,350

1,566 0,700 1,722 1,865

2,562 -1,140 -1,140 0,527

0,523 6,12 0,0468 0,1104 -24,6565 0,677 11,96 0,0025 0,1744 -28,3185 9,63 0,0022 0,177 -22,3893 16,89 0,0007 0,309 -18,8800 14,92 0,0019 0,4352 -9,6860 15,6 0,0036 0,2302 -26,0810

Building the explained variable

Institutional arrangements in...

Pricing Licensing Interconnection ...reduced to Merger review or consolidated Is AA alone in enforcing in... general comp. Law? formal advocacy role and veto power of AA in ISAs decision making?

One composite index obtained from a principal components procedure.

Explanatory variables COMPETENCE

How is AAs disadvantage reduced

Faster competition enforcement (1. per se prohibition of unfair competition; 2. procedure for enforcing mandatory orders) AA
More market competition (increment in telecoms traffic share of nonincumbent players) AA

Special mechanisms for intervening the incumbent (golden shares in place) AA

(-)
Composite index of Institutional Arrangement: Involvement degree of the ISA
More performance accountable ISA (fragementation of ISA financing sources) ISA
More verifiable information for price regulation (# of info sources) ISA

(+)

Larger AAs discretion (to authorise otherwise illegal mergers) ISA

Restrictions to ISAs discretion (explicit provisions and funding mechanisms for Universal Service) ISA

Explanatory variables TRANSPARENCY

How is ISAs disadvantage reduced

Index of Institutional Arrangement. Telecommunications regulation. New Zealand 1.324 Australia 1.785 Japan 2.525 Denmark 2.690 Turkey 2.753 Finland 2.947 Switzerland 3.011 Belgium 3.120 Korea 3.164 France 3.206 Italy 3.275 Mexico 3.296 Hungary 3.333 Czech Republic 3.723 Spain 3.778 United Kingdom 3.842 Greece 3.959 Germany 3.992 Sweden 4.002 Netherlands 4.029 Norway 4.106 Portugal 4.155 Canada 4.330 Austria 4.444 Ireland 4.444 United States 4.665

Country values of the composite index

Telecom Interconnection General Institutional Pricing Licensing merger review antitrust coordination AAs discretion Info verifiability ISA accountability Interc transparency Corruption ISA independence

2. ISA vs. AA: reasons to choose

Why choosing an Industry-Specific Agency (ISA) for regulating telecoms?:

Competence / expertise!
Ongoing specific and prescriptive powers to face: (i) technology complexity, (ii) network specificities, (iii) dominant position in network access Learning and decisions speed Universal Social Obligations: public interests.

Model.
Laffont and Tirole (1993) approach to regulatory capture 3-layer structure: Industry Regulator (ISA/AA) Government/Parliament How is the ISA?: more effective regulator, BUT... harder to be controlled ISA or AA? Regulatory complexity-capabilities vs. capture-administrative control ISA always chosen, when capabilities differences more important than capture ones. AA chosen, the smaller the sensitivity to and fewer the safeguards against capture

What about joint jurisdiction (regulatory separation)?

Duplicative regulatory costs + improved administrative controls, ISA has advantages under large cost duplication and smaller improved transparency Empirically supported: transparency improvement takes longer than coordination costs