Competition and Regulation in the Telecommunications Industry in ...

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Competition and Regulation in Telecommunications5. Regulatory issues for the SA telecommunicationsindustry and their potential efficiency/public interestimpactThe current regulatory regime in telecommunications has to change by theend of 2003 in compliance with South Africa’s commitment to the WTO. Indeciding how the regulatory regime will change, one needs to take account ofthe range of objectives laid out for telecommunications policy and not justfocus on regulating for efficiency only. The full list of objectives werediscussed in section 3, but are repeated here. They include• promote the universal and affordable provision of telecommunicationservices;• ensure that, in relation to the provision of telecommunication services, theneeds of the local communities and areas are duly taken into account;• encourage ownership and control of telecommunication services bypersons from historically disadvantaged groups;• encourage the development of human resources in thetelecommunications industry;• promote small, medium and micro-enterprises within thetelecommunications industry;• promote the provision of a wide range of telecommunication services inthe interest of the economic growth and development of the Republic;• encourage investment and innovation in the telecommunications industry;• encourage the development of a competitive and effectivetelecommunications manufacturing and supply sector;• ensure fair competition within the telecommunications industry;• ensure efficient use of the radio frequency spectrum;There is no specific priority ordering of objectives and different interest groupswill rank them differently. The regulatory outcome will depend on thebargaining process amongst the different interest groups.This section examines the various regulatory options on the table. Rather thanput down various possible models, the discussion is structured around fourcritical components of the regulatory regime – namely structure, entry, pricingand quality. The interconnection between policies on each component will bemade clear.5.1 StructureThe key structural questions in telecommunications deregulation are:• Whether to separate the natural monopoly component (or essentialfacilities) – fixed local access – from the parts of the networks that offerpotential for competition – CPE supply, long distance (vertical separation)• Whether network provision as a whole should be separated from serviceprovision - VANS or even basic voice (vertical separation)50
Competition and Regulation in Telecommunications• Whether mobile networks should be separated from fixed networks(horizontal separation)5.1.1 Vertical separation of networksThe issues around vertical separation of local access to other parts of thenetwork are relatively straightforward. The case for vertical separationessentially rests on reducing the opportunities for anti-competitive behaviourand so reducing the complexity of regulation. If a firm with essential facilities isvertically integrated (like Telkom), then they have tremendous scope forbehaving anti-competitively. This could occur by either granting lessfavourable access to competitors than to their own downstream service(different price, quality or customer access dialing 5 ) or overpricing themonopoly component (local access) and cross-subsidising the long-distancenetwork to the detriment of competitors. If there is vertical separation, thenthere is little incentive for discriminatory access provision or crosssubsidisation,which leaves the regulator to concentrate on ensuring that thereis no monopoly pricing of access only. The cost saving in this case is aregulatory one.The economic argument against vertical separation is that it will destroy anyeconomies of scope that may exist between the two networks. If these aresignificant, then the potential efficiency cost may well outweigh the regulatorycost of closer supervision of the incumbent. An equally powerful argumentagainst vertical separation is the cost of undertaking the exercise when theincumbent is already integrated. The cost is not only the internal restructuringcost but also the time delays in the deregulation process.There is no clear side on which the decision of vertical separation should fall.In the case of the UK, the desire to have a rapid privatisation intelecommunications led them to reject the vertical separation model 6(Armstrong et al 1995:215). In contrast, the USA adopted the verticalseparation model when they brought an antitrust case against AT&T in1974alleging anti-competitive behaviour against other long distance networks. Thecase was finally settled 8 years later and resulted in the separation of localaccess in 1984. More recently there have been attempts by some of theRBOCs (Regional Bell Operating Companies) to get permission to move intolong distance, which have been resisted by the regulator with the conditionthat greater local access competition must proceed it.Considering that South Africa has already gone some way down thederegulation path without breaking up Telkom, suggests that it would bedifficult to do it at this point. It would also be difficult to get equity partnerconsent for the process, with the likely result that they will pursue the matter incourt causing further delays to the deregulation process. This reasoning islikely to rule the day, making it largely unnecessary to really evaluate thecosts and benefits of each policy in South Africa. The fact that this is not on5 Forcing customers to dial an access code to use the competing long distance networks, therebyraising switching costs.6 Armstrong et al (1995) note that another reason for avoiding the breakup was that BT managementwas opposed to the idea and the regulator needed their support for a rapid privatisation.51
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