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International Affairs Committee Universal service / Regulation Is it a Burden or a Way to Sustainability João Confraria 1. 2. 3. 4. The role of the state and liberalization Liberalization and Universal Service Liberalization and market regulation Regulatory independence 1 September 2006 IAC Forum Kiev 1. The Role of the State and Liberalization 1 September 2006 IAC Forum Kiev Directive 97/67 The role of the state Sources of regulation • No natural monopoly / essential facilities argument for regulation • Political objectives: Universal Service • Possibility of reserved area to finance USO (until…) • Regulation – Price – QoS – Possibility of uniform tariffs – Quality of service obligations (QoS) 1 September 2006 IAC Forum Kiev Liberalization Rationale • • Electronic communications development • – Threats – Opportunities • Competition as source of – Efficiency – Innovation – New services 1 September 2006 • • Conditions Stagnant (declining?) postal markets Technology and labor intensity in postal markets Public firms Non economic objectives IAC Forum Kiev 2. Liberalization and Universal Service 1 September 2006 IAC Forum Kiev Liberalization and Universal Service 2 base scenarios? USP bankruptcy USP survival (growth?) • • • • • • • • • • • Entry Cream skimming Losses of USP Price increases of USP Entrant’s growth … 1 September 2006 Economies of scale Strong brand Increased efficiency New postal services New services IAC Forum Kiev Liberalization and Universal Service Political and regulatory options i. ii. iii. iv. Postpone market opening + wait and see Full market opening + wait and see End of Universal Service Introduction of greater flexibility in price and QoS regulation v. Introduction of greater flexibility in USO concepts vi. Change the concept of Universal Service 1 September 2006 IAC Forum Kiev Avoid market opening + wait and see • Political and regulatory inertia • Short run policy • Bureaucratic behavior may lend plausibility to this (dangerous) scenario 1 September 2006 IAC Forum Kiev Promote market opening + wait and see • Political and regulatory inertia • Short run policy may lend plausibility to this (dangerous) scenario 1 September 2006 IAC Forum Kiev End Universal Service • Scenario politically unlikely • Probably against the will of the population 1 September 2006 IAC Forum Kiev Flexibility in price regulation Current situation Distortions Rigidity • Cost oriented prices for each service • Is it reasonable? 1 September 2006 • Allocation of common costs • Insensitivity of prices to demand • Miscalculation of costs (regulatory lag) IAC Forum Kiev Increased flexibility in price regulation • Global price cap • Ramsey prices 1 September 2006 Disadvantages of Ramsey prices are not likely to happen Knowledge of price elasticity Redistributive effects IAC Forum Kiev What is the relevant public interest? • Traditional USO? • Other… 1 September 2006 IAC Forum Kiev 3. Liberalization and market regulation 1 September 2006 IAC Forum Kiev Regulation may be a source of competitive distortions? • Price oriented costs on an individual basis in the reserved area may impose undue restrictions on competitive strategy in the liberalized area 1 September 2006 IAC Forum Kiev Competitors’ access to USP networks • A regulatory restriction? • An opportunity? 1 September 2006 IAC Forum Kiev 17 Competitors’ access to USP networks Possibilities? • No mandatory access • Mandatory access at negotiated prices • Mandatory access at regulated prices 1 September 2006 • The danger of ever widening regulation as a result of – Political pressure at EU and national levels – Internal dynamics of regulatory organizations IAC Forum Kiev 4. Regulatory independence 1 September 2006 IAC Forum Kiev Regulation and the National Regulatory Authority in Directive 97/67 Article 22 Each Member State shall designate one or more national regulatory authorities for the postal sector that are legally separate from and operationally independent of the postal operators. Member States shall inform the Commission which national regulatory authorities they have designated to carry out the tasks arising from this Directive. The national regulatory authorities shall have as a particular task ensuring compliance with the obligations arising from this Directive. They may also be charged with ensuring compliance with competition rules in the postal sector. IAC Forum Kiev 20 Regulation and the National Regulatory Authority in Directive 97/67 Independence from the operator… ..why? 1 September 2006 • Liberalization • A matter of institutional governance • Privatization IAC Forum Kiev Regulation and the National Regulatory Authority in Directive 97/67 from independence from the operator to independence from the government 1 September 2006 • State failure • Public demand IAC Forum Kiev Regulation under Directive 97/67? Informed decisions on a technical basis… …given politically and clearly defined objectives 1 September 2006 IAC Forum Kiev Problems: information asymmetries + … • Government dependent regulation – Regulation and government policy – Potential for government failure – Market control 1 September 2006 • Regulation independent from the government – Discretionary power and regulatory objectives – Credibility of the regulator – Market control IAC Forum Kiev But there are potential gains… – Cost accounting (if appropriate…) – Simulation of competition • Efficiency gains under proper regulation 1 September 2006 IAC Forum Kiev