Pros& cons

Dr. Musab Barakat Ahmed Ali PhD.;FCCA;FCMI

Chartered Certified AccountantPracticing firm Barakat&co

Senior partner & CEOConsultant

National 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.

Agenda

BackgroundSignificant market powerPros of separationCons

* This will be the subject of separate presentations.

Pros&cons

WHY IS ACCOUNTING SEPARATION USED AS REGULATORY TOOL IN TELECOMS?

Background1

The issue of structural separationseparation has gained some prominence

in the aftermath of the competitionreforms that followed the National

Competition Policy Report by the Independent

Committee of Inquiry (1993)

Background2

in recent years, competition authorities and telecommunications regulators

have indicated an increasing willingness to consider structural separation and

divestiture of the local loop as a means of countering what is viewed as serious

anti-competitive activity by incumbent operators

Background3

The 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.

Background4

the implementation of liberalization policies in major

markets 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.

Background4

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

Background5

they 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 competition

Background6

Reliance 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 incumbents

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 solution

Significant market power1

1. Abuse of dominance2. Refusal to supply (predatory prices;tying

& bundling3. Cross subsidization4. Misuse of information5. Non discrimination &net nuetrality6. Misuse of information

Significant market power2

7. 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 , and

The firm does not charge its own downstream operations this high prices

Pros of separation1

A guarantee for nondiscriminationLeads to simplified and more effective

regulationProvide transparency the publication of

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

Pros of separation2

creation 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;

Pros 4

the 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.

Pros 4

relative 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;

Pros 5

Accounting 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

Cons1

Risk of under investment in the new access infrastructure

Degradation the service qualityDifficulty in defining demarcation lineIncrease in costDouble marginlization

Cons2

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

Cons3

Business 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.

Cons4

encouraged service providers to compete in the political and regulatory arenas.

Cons5

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

Cons6

The 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 RAS

referencesSteven Dounoukos and Angus Henderson Mark A. Jamison Director, Public Utility Research Center University of Florida