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Renda, Andrea --- "Telecommunications Regulation" [2012] ELECD 439; in Van den Bergh, J. Roger; Pacces, M. Alessio (eds), "Regulation and Economics" (Edward Elgar Publishing, 2012)

Book Title: Regulation and Economics

Editor(s): Van den Bergh, J. Roger; Pacces, M. Alessio

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781847203434

Section: Chapter 7

Section Title: Telecommunications Regulation

Author(s): Renda, Andrea

Number of pages: 36

Extract:

7 Telecommunications regulation
Andrea Renda



1. INTRODUCTION

Until the late 1980s, the telecommunications industry was dominated by fixed-
line monopolists: many countries had a single network operator and provider
of telecommunications services, most often owned by the state. These monop-
olists were typically subject to state regulation, similar to what occurs in other
network industries: accordingly, they were subject to universal service oblig-
ations, which forced them to connect every citizen at affordable retail prices,
regardless of the cost associated with reaching that customer. The two main
models used to regulate telecommunications prices in the past decade have
been Rate-of-Return (RoR) regulation, implemented for example in the United
States for AT&T since the 1970s; and price-cap regulation, developed by
Stephen Littlechild in the UK and applied to all British liberalizations of
network industries. There are several differences between the two models,
which can briefly be summarized as follows (see i.a. Johnson, 1989):

· Under a RoR regulation, monopoly firms are required to charge the price
that would prevail in a competitive market, which is equal to efficient
costs of production plus a market-determined rate of return on capital.
RoR regulation has been criticized because it encourages cost-padding,
and because, if the allowable rate is set too high, it encourages the adop-
tion of an inefficiently high capital-labour ratio. This is called the
Averch­Johnson effect (Averch and Johnson, 1962).
· Price cap regulation adjusts the operator's prices according to the price
cap index ...