Peter-John Gordon | Telecommunications and regulation
Today we continue a series of guest columns ahead of the October 26-28 regional regulation conference in Montego Bay, St James. It is being organised by the Organization of Caribbean Utility Regulators (OOCUR) and hosted by the local Office of Utility Regulation (OUR).
Normally when competition within an industry is mature, the need for a regulator recedes and the role of a competition agency comes to the fore. The competition agency, like a referee in a game is to ensure that companies do not abuse the rules of the game thus allowing society to benefit from the competitive outcomes. Within some industries, however, even when competition is established there is still need for a regulator. The telecommunications industry is one such industry.
In these industries, market forces by themselves are unable to bring about the desired social outcome. There are four main reasons why a regulator is still required in these circumstances. The first is that market forces can fail to establish a truly competitive industry. Telephone companies sell the capability for persons to communicate with each other. Communication between two persons who subscribe to the same network is easy and totally within the purview of the company owning that network. When a person who subscribes to LIME wishes to communicate with a person who subscribes to Digicel, this becomes more complicated as Digicel can affect the terms and conditions under which that connection is made, and if it wishes could make it prohibitively expensive. A company with a large network can use this strategy to frustrate other companies which operate smaller networks and create a monopoly. A regulator can prevent this from happening by dictating the price to be paid by one network to access another.
The second reason why a regulator is still desirable in the telecommunication sector is that economic efficiency does not always translate into social desirability. Economic efficiency dictates that resources should go to the persons most willing to pay. Much of telecommunication is transmitted though the radio spectrum. The radio spectrum is a limited frequency range within the electromagnetic spectrum which is able to carry radio waves. This limited frequency needs to be managed so that there is no interference between different users. Given that this spectrum is limited and there are many competing uses for it, simply allocating it according to the highest bidder is unlikely to result in the most desirable social allocation. In Jamaica the radio spectrum is regulated by the Spectrum Management Authority.
MIGHT NOT BE SUFFICIENT
The third reason is that there is a difference between social and private value of communication. Public policy might dictate that there be universal coverage of telecommunication services, even if this is privately not profitable. A regulator issuing a licence to operate may require the telecommunication company to provide all island coverage.
The usage in some areas of the country might not be sufficient to warrant the expense of building out the network to reach these areas. Having all communities connected to the rest of the country (and the world) might be desirable for economic, social and political reasons even if these communities are unable to pay the full cost of this connectivity. A regulator might also stipulate that persons be able to make calls to the emergency services when they are unable to pay (have no credit).
The fourth argument in favour of having a regulator in some industries even when there is competition is to ensure common standards in order to achieve technical compatibility and avoid fragmentation. Technically compatibility allows consumers to derive the maximum benefits in the presence of multiple networks.
If there were not compatibility a consumer would be restricted to only the benefits of the network to which she subscribes - it would be technically impossible to transmit voice or data across networks.
Regulators in the tele-communication industry face a daunting task. They are not always privy to the latest technological information. Given the rapid rate of technology change in this industry this means that the regulators are always trying to 'catch up' with the industry which they have to regulate. Rapid technological change usually results in costs falling much faster than prices. The convergence of different products which were originally separate (and often regulated separately) such as telephony, cable TV and Internet creates great challenges for the regulators. Cross border trade in telecommunication services also present new challenges as the firm may face different regulatory requirements in different countries.
- Peter-John Gordon is a lecturer in the Department of Economics at the University of the West Indies (Mona). Email feedback to email@example.com