Making and keeping regulatory promises.

AuthorLavey, Warren G.
PositionMultiyear telcommunications regulatory changes
  1. INTRODUCTION

    Multiyear regulatory commitments, or their absence, are an important part of the functioning of the telecommunications services and products industries. Most regulators were probably taught by their parents to promise only what they intend to do and to do what they promise. Perhaps these parents did not discuss the economic efficiency of reducing uncertainty for companies and investors by committing to and complying with multiyear plans. Regulators are seldom forced to address the opportunity costs of not making or not complying with multiyear promises in issuing orders, in discussing their agendas with the industries and legislators, or in talking with their parents.

    Any significant regulatory change requires regulators to weigh a variety of complex economic and political considerations. While focusing on multiyear plans for regulatory changes, this Article is not intended to belittle the difficulty of deciding on and implementing any significant regulatory change, even on an incremental basis. The point of this Article is that, under some conditions, it is both possible and beneficial for regulators to commit to a well-defined, multiyear sequence of regulatory changes. As the Organisation for Economic Co-operation and Development ("OECD") observed in 1997:

    Comprehensive reform is based on a complete and transparent package of reforms (aimed at a single policy area, sector or multiple sectors) designed to achieve specific goals on a well-defined timetable. Comprehensive reform does not mean that all changes occur immediately; rather, it is consistent with sequencing strategies and transitional steps as long as they are temporary and steps and timing are clear. There are several advantages to comprehensive reform: benefits appear faster (which means that pro-reform interests are created sooner); affected parties have more warning of the need to adapt; vested interests have less opportunity to block change; and reform enjoys higher political profile and commitment. (1) This Article examines several examples of how efforts for comprehensive reform fared in real multiyear implementations. It also explores how some piecemeal regulatory changes evolved into efforts for comprehensive reform based on a well-defined sequence.

    Although regulators can sometimes choose between short-term and long-term approaches, most telecommunications carriers must operate on the basis of assumptions about long-term industry conditions. Generally, telecommunications carriers make large investments in long-lived assets and face long cycles for product/service development and competitive positioning.

    Both regulated and unregulated businesses face uncertainties about factors such as market demand, technology changes, supply costs, and competitors' strategies. For businesses in regulated industries, uncertainty about future regulations can add to difficulties of companies in attracting capital and making investments in infrastructure, products, and services. Business plans are developed with long-term assumptions about a wide range of factors, some of which are heavily influenced by regulators. While regulators require or induce carriers to spend billions of dollars annually on networks and offerings, regulators also often preserve the flexibility of present and future commissioners to shape future regulations, which will determine in substantial part the carriers' returns on these investments. The business uncertainty for carriers resulting from such regulatory flexibility can impose costs on carriers in terms of less productive use of resources and lost opportunities. Costs can be imposed on consumers in terms of higher prices and lower service quality.

    This Article considers the effects of multiyear regulatory promises through analysis of several regulatory actions involving telecommunications carriers in Mexico, Venezuela, Hungary, and the United States. Regulators have made and kept bold multiyear promises under some conditions. This analysis considers the conditions leading to the making of these promises and the decisions to comply with them, often under market and political conditions substantially different from what was expected when the promises were made. While multiyear plans may contain clear adjustment mechanisms for some possible future conditions, major macroeconomic downturns can swamp some of the rate and service commitments by both regulators and carriers. This Article also discusses attempts to make midterm changes to some elements of a multiyear promise; the balance of various interests through one set of regulations can be replaced by another plan which rebalances these interests through a different set of regulations as long as there is a net gain to distribute.

    There appear to be substantial efficiency benefits from multiyear regulatory promises compared to ad hoc, piecemeal, short-term regulatory decisions whose timing and important details have large uncertainties for the telecommunications industry. Although conditions may not be conducive to multiyear promises in some areas, clarity in the standards and timing for some future regulatory actions can enhance the efficiency gains.

    The remaining analysis of this Article is divided into four Sections: Section II presents the framework for analysis based on several economic perspectives and an overview of piecemeal regulatory decision making. Section III discusses examples of multiyear regulatory promises in four countries. The first part of this Section deals with three examples of the fairly unusual conditions surrounding the privatization of national telecommunications carriers; the second part deals with two areas of sequenced regulatory changes by the United States Federal Communications Commission ("FCC"). Section IV presents two conclusions about making and keeping regulatory promises, regarding procedures and benefits, and analyzes an example of a multiyear promise in the United States with too much uncertainty about timing, carriers' obligations, and regulatory standards. Finally, Section V summarizes the conclusions and recommendations for promoting greater use of multiyear regulatory plans.

  2. FRAMEWORK FOR ANALYSIS

    Regulatory decisions develop through a complex evaluation of various statutory, political, technological, economic, and other considerations falling within the "public interest." Legislative directions (or their absence) often give regulators substantial discretion to fashion the scope and timing of their decisions. Many factors drive regulators to adopt decisions explicitly intended to address only a short time period. These factors include: obtaining information on and analyzing the market effects of the short-term rules before implementing rules for later time periods; testing the political waters before committing to multiyear regulations; allowing for judicial review before setting long-term expectations; reflecting the agendas of current commissioners without binding their successors; and developing a more complete record on options and their costs and benefits.

    On the other hand, some short-term regulatory decisions can be costly in many ways, including in the productive use of economic resources. Telecommunications carriers and their suppliers run their businesses based on multiyear business plans. Predictable future regulations can help them plan their investments and operations, with benefits to competition, consumers, and investors.

    The following framework for analysis of multiyear regulatory plans has two parts--an explanation of several economic perspectives, and a discussion of legal and political considerations in piecemeal regulatory decisions.

    1. Economic Perspectives

      Economists have focused on many principles and tools to improve the contributions of telecommunications regulations to enhancing consumer welfare and "efficiency." (2) Economists argue, for example, that the concepts of cross-subsidies and predatory pricing should be based on marginal costs rather than fully distributed or embedded costs. Spectrum should be allocated through auctions with flexible uses rather than through comparative hearings based on vague "public interest" criteria and with restricted, government-mandated uses Moreover, maximum rates should be determined through incentive-based price caps rather than through rate-of-return, cost-based regulation. Economists argue that the application of these and other economic principles have added to the competitiveness, price decreases, and service improvements of telecommunications markets.

      Many economists have addressed the importance of information on future market conditions in maximizing the efficiency of business operations. (3) In the world of standard economic theory, perfectly competitive markets occur when all actors have perfect information about current and future conditions affecting supply and demand, or when efficient markets exist for dealing with uncertainties, such as insurance or contingent contracts. The importance of clear information about future conditions, however, is not a principle that economists have emphasized in their writings on regulation. (4) Moreover, while risk arbitrageurs are active on some regulatory issues, such as whether a specific proposed merger will be approved by regulators, there are no organized markets to hedge, insure against, or trade contingent contracts for most regulatory uncertainties.

      The principal concern of this Article is that telecommunications carriers make less productive decisions on uses of resources because of uncertainties about future regulation Professor Michael Porter's analysis of competitive strategies for businesses under uncertainty describes the framework for this concern, without specifically addressing a long-term approach to regulatory decision making:

      Uncertainty is not often addressed very well in competitive strategy formation.... When facing considerable uncertainty, firms tend to select strategies...

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