Pros& cons - PowerPoint Presentation

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Pros& cons

Dr. Musab Barakat Ahmed Ali PhD.;FCCA;FCMIChartered Certified AccountantPracticing firm Barakat&co Senior partner & CEOConsultantNational Telecommunication Corporation (Sudan

The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Kelly can be contacted at Tim.Kelly@itu.int.Slide2

Agenda

BackgroundSignificant market powerPros of separationCons * This will be the subject of separate presentations.Slide3

Pros&cons

Why is accounting separation used as Regulatory Tool in Telecoms?Slide4

Background1The issue of structural separation

separation has gained some prominence in the aftermath of the competitionreforms that followed the National Competition Policy Report by the IndependentCommittee of Inquiry (1993)Slide5

Background2in recent years, competition authorities and telecommunications regulators

have indicated an increasing willingness to consider structural separation anddivestiture of the local loop as a means of countering what is viewed as seriousanti-competitive activity by incumbent operatorsSlide6

Background3The reportquestioned the exemption of public monopolies from competition laws and favored structural separation of incumbents as a way of introducing competition in monopoly markets of state-owned utilities.Slide7

Background4the implementation of liberalization policies in majormarkets such as energy, transport and telecommunications, has been the tendency to favor the provision of access to essential infrastructure facilities owned by incumbents as a way of achieving competition in the supply of final products. Slide8

Background4This has meant that incumbent, vertically-integrated operators supply services or facilities as inputs to the production of final services by competitors with whichSlide9

Background5they compete directly with the incumbent. Consequently, by their ownership of essential facilities which they supply to competitors, incumbent operators are in a powerful position in the market and have a considerable incentive to use their market power to frustrate competition. Regulation of the behavior of incumbents, therefore, is essential for effective competitionSlide10

Background6Reliance on access regulation alone to promote competition and prevent abuses of market power by incumbents requires extensive intervention and oversight by regulators. This arises from the fact that access regulation does not alter the incentives for uncompetitive behavior by incumbentsSlide11

Clearly, as for any intervention in a market, structural separation would only be justified if its benefits outweigh its costs. In addition, it would need to be demonstrated that greater net benefits are not possible through the implementation of some other solutionSlide12

Significant market power1

Abuse of dominanceRefusal to supply (predatory prices;tying & bundlingCross subsidizationMisuse of informationNon discrimination &net nuetralityMisuse of informationSlide13

Significant market power27. vertical price squeeze

“the price the firm demands makes it impossible for an equally-efficient retail-stage competitor to operate profitably given the level of retail prices , andThe firm does not charge its own downstream operations this high pricesSlide14

Pros of separation1 A guarantee for nondiscriminationLeads to simplified and more effective regulation

Provide transparency the publication of accounts which are transparent, thereby allowing other operators to understand how the DMP operator's revenues relate to costs;Slide15

Pros of separation2creation of a ‘level playing field’ by forcing the incumbent’s wholesale arm to deal with its retail arm on the same terms that it deals with any other competitor;

allowing regulators to focus on the wholesale network to guarantee service quality, network reliability, and access to essential network facilities at cost based prices;Slide16

Pros 4the publication of detailed cost statements showing the average cost build of products and services provided by a DMP operator, thereby increasing and raising the confidence of competitors that there are no anti-competitive cross subsidizations.Slide17

Pros 4relative simplicity when compared to behavioral remedies. It is effective as it targets the very reason for the incumbent’s impact on competition within the market; that is, its vertically-integrated structure. In contrast, behavioral regulation can never be fully effective in this way as it is reactive, rather than pro-active;Slide18

Pros 5Accounting Separation is a less intrusive and much less costly REMEDY to implement

Comparison between internal transfer prices and external wholesale service charges for vertically integrated operators Slide19

Cons1Risk of under investment in the new access infrastructureDegradation the service quality

Difficulty in defining demarcation lineIncrease in costDouble marginlizationSlide20

Cons2Business separation lowers efficiency and delays innovation. The natural boundaries of businesses in telecommunications are always changing in unpredictable ways, as are the locations of bottlenecksSlide21

Cons3Business separation creates regulatory costs. The separation creates interest groups, some of whom benefit from the separation and some of whom can gain strategic advantage by changing the separation. These groups compete in the regulatory arena rather than in the marketplace, which clogs the regulatory process and decreases the resources devoted to marketplace competition. Slide22

Cons4encouraged service providers to compete in the political and regulatory arenas. Slide23

Cons5The risk that standard remedies might not be enough to prevent a discriminatory behavior by a vertically integrated operator particularly where bottleneck facilities are involvedSlide24

Cons6The RAS does not identify efficient costs or force operational efficiencies. The latter may be encouraged by price setting or from competition development – but this is not directly related to the RASSlide25

referencesSteven Dounoukos and Angus Henderson

Mark A. Jamison Director, Public Utility Research Center University of Florida