Institutional arrangements in

telecommunications regulation:

an empirical analysis

3rd Workshop on Institutional Analysis Raúl Castro

Universitat Pompeu Fabra

Concluding remarks

• Key drivers of institutional design (jurisdiction arrangements):

Government perception of AA’s transparency advantages vs. ISA’s expertise advantages.

Safeguards against capture and competence weakness

• Empirical analysis:

Institutional arrangements in key issues are consistent with the

competence-transparency explanation

Reduced AA’s 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 ISA’s transparency weakness (and larger jurisdiction) when

(i) legal and procedure safeguards against capture are in place or (ii)

when the AA discretion is excessive

Why allocating regulatory jurisdiction to an Antitrust Agency (AA) in telecoms?:

ISA vs. AA: reasons to choose

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 ISA’s 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

Competition development (-)

Co

mp

ete

nc

e v

ari

ab

les

(-)

Tra

ns

pa

ren

cy v

ari

ab

les

Composite index

Antitrust speed

Pricing Licensing Interconnect Telecom merger review

Gral antitrust enforcmnt

Coord

Enforc. Procedures

(Per se) unfair competition prohibition

Golden share

AA discretion

Price info verifiability

ISA’s accountability

Interconnection transparency

Gral corruption level

ISA’s independence

Restriction to ISA’s discretion

(-) (-)

(-) (-) (-)

(-)

(+) (+) (+) (+) (+)

(+) (+)

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

(+)

(-)

(+)

(-)

Context variable

AA-type variable

ISA-type variable

Variable

nature

Composite

Index Pricing Licensing Interconnection

Telecom

merger review

General

antitrust enforc. Coordination

Competence Variables

Competition development Context -0,034 -0,093

Antitrust speed:

1. Enforcement procedures AA -0,860 -3,037

2. (Per se) unfair competition prohib. AA -0,241 -0,786 -1,172

Golden share Context -1,177

Transparency Variables

AA discretion AA 0,882 1,612 1,628 1,566 2,562

Info verifiability ISA 0,682 0,700

ISA's accountability ISA 0,524 1,885 1,350 1,722 -1,140

Interconnection transparency Context 1,865

General corruption level Context -1,140

ISA's independence ISA 0,527

Restriction to ISA's discretion ISA 0,523

6,12 11,96 9,63 16,89 14,92 15,6

Prob > 2

0,0468 0,0025 0,0022 0,0007 0,0019 0,0036

Pseudo R2

0,1104 0,1744 0,177 0,309 0,4352 0,2302

Log Likelihood -24,6565 -28,3185 -22,3893 -18,8800 -9,6860 -26,0810

Adjusted R2

0,677

Pricing

Licensing

Interconnection

Merger review

Is AA alone in enforcing general comp. Law?

formal advocacy role and veto power of AA in ISA’s decision making?

Inst

itu

tio

nal

arr

ang

emen

ts i

n...

One composite index

obtained from a principal components

procedure.

...reduced to

or consolidated

in...

Building the explained variable…

Explanatory

variables

COMPETENCE How is AA’s

disadvantage reduced

Explanatory

variables

TRANSPARENCY How is ISA’s disadvantage

reduced

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 AA’s discretion (to authorise otherwise illegal mergers) ISA

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 non-

incumbent players) AA

Special mechanisms for intervening the incumbent (golden shares in

place) AA

Restrictions to ISA’s discretion (explicit provisions and funding

mechanisms for Universal Service) ISA

(-)

(+)

Country values of the composite index

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

Index of Institutional Arrangement.

Telecommunications regulation.

Pricing Licensing Telecom merger review

General antitrust

Interconnection Institutional coordination

AA’s discretion Info verifiability ISA accountability Interc transparency Corruption ISA independence

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

2. ISA vs. AA: reasons to choose

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.

• 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

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