One way of fostering competition is to ensure that new entrants can use the infrastructure of existing operators. These new entrants, such as ISPs and other network operators, then become wholesale customers of the existing operators. The new entrants and the existing operators might compete with one another for the same retail customers, setting up a scenario where existing operators might seek to discriminate against the new entrants and act in favour of their own retail arms. The regulator needs to prevent discrimination to make service-based competition effective. This regulatory intervention is often most critical to ISPs that may feel that the incumbent is both overcharging for the national backbone and acting in an anti-competitive manner in its retail pricing for Internet customers.
Incumbent operators may lack interest in serving wholesale customers on a non-discriminatory basis and may point to the investment made in network facilities and the economies of scale and scope due to their vertically integrated operations. Incumbents may even have genuine technical difficulties in avoiding discrimination because of their vertically integrated operations.
Under good regulatory practice, operators should be prevented from discriminating against wholesale customers that are also their competitors, especially in cases where incumbents have monopoly or dominant powers or have used public funds in constructing their networks. These are the ways a regulator can ensure fair and non-discriminatory functioning of the market:
- Interconnection and price regulation – The regulator can enforce wholesale access and regulate the prices operators are able to charge (e.g., for E1 and sub-E1 transmission bandwidths, or for local loop facilities). Ideally the prices are based on costs (cost plus). However, even defining how costs should be calculated (and calculating them), e.g. using bottom-up Long Run Incremental Cost (LRIC) models, requires time and effort. Until the operator is able to demonstrate its incremental costs in an acceptable manner, the regulator must resort to other approaches. The regulator sometimes imposes international benchmarks, based on interpretation of best practice and similar country cases, or requires wholesale prices to be based on retail prices (retail price minus).
- Accounting separation – This can be used to make the operator with significant market power (SMP) identify costs and revenue streams for unbundled products and services and sell them on a non-discriminatory basis. It has been practised for many years in conjunction with interconnection and price regulation;
- Functional or operational separation – This can be used to make the wholesale arm of the operator treat the retail arm of the operator just like any other wholesale customer. The retail arm must use the same systems and processes as other wholesale customers, and the retail arm cannot receive information from the wholesale arm about other wholesale customers. This can be difficult to achieve because the operator has typically integrated systems and processes constructed over many years. Many issues need to be considered such as the impact on investment incentives, before functional or operational separation can be required and it is therefore considered a last resort [1]. Nonetheless, because separation of accounts and interconnection and price regulation are not always sufficient, functional separation is gaining some international interest The UK has adopted functional separation in the access networks for local loop unbundling, and backbone transmission, and Sweden, Italy and Poland are likely to follow. (It is sometimes also called structural separation, but here this term is used for an even more interventionist way of preventing discrimination); and
- Structural separation – This involves turning the operator’s wholesale and retail arms (or, sometimes, the network and service parts of the operator) into separate, independent companies. This scenario presents all the difficulties of functional separation as well as the problems and costs that arise when a large company demerges. Structural separation also tends to be associated with the view that the wholesale company should have a monopoly. When this happens, the wholesale company may well behave in the unresponsive manner characteristic of many incumbents. Both Mongolia and New Zealand (by the incumbent as a preferred alternative to functional separation) have proposed structural separation. The Practice Note Structural separation explained and applied
provides a useful background to recent trends towards separation in OECD countries, covering its benefits, risks and limits.
Where network operators are less powerful or privileged in relation to their wholesale customers, regulation will be less necessary.
In principle, if wholesale customers can take their business to several, equally strong, competitive network operators, wholesale customers are less likely to suffer from discrimination, and the regulator is better able to monitor the market. The regulator then needs to intervene only under exception circumstances or in cases where one or more operators appear to be abusing a dominant position.
END NOTES
- See Network separation and investment incentives in telecommunications, August 2007, Martin Cave and Chris Doyle, Warwick Business School, University of Warwick, UK