Regulation of Access to the Telecommunications Network of New Zealand: A Review of the Literature

Abstract

The rapid widespread technological change and concomitant deregulation of network industries has engendered a burgeoning demand for connection between technologically like as well as technologically unlike networks. The processes by which contracts are reached and the nature of these contracts is important for the performance of these industries.This is a review of the state of the economic literature about interconnection. While its focus is on telecommunications the principles it reviews are more or less relevant to other networks depending upon their particular characteristics. The review considers only the pricing element of an interconnection contract leaving other issues such as risk sharing transactions costs and technological agreement aside. It does not consider the direct or political economy costs of regulation. Even so it reveals that the pricing issues have not been solved.It is apparent from the review that interconnection pricing can only be appraised in the wider context of the regulation and competition of the market as a whole. For example the properties of the now-famous Baumol-Willig (ECPR) rule are different when there is a retail price cap than without it. It is critical for the special treatment of interconnection contracts that there are natural monopoly elements in the network. Where these are absent or bypass is economically viable interconnection contracts will generally not pose special competition concerns.The survey reviews the conceptual basis of proposed regulatory schema andmeasurement issues that arise in their use. In particular it considers various price-cap mechanisms. It does not systematically review the literature on industry and regulatory performance under the different regulatory regimes.Where there are natural monopoly elements the review suggests that for one-way access the two leading approaches to regulation appear to be price caps or access price caps combined with deregulated retail tariffs. These approaches would include a form of the Baumol-Willig rule. The review emphasises that two-way access is characterised by both potential exclusion and potential collusion. It suggests that a regulatory approach would seek to concentrate on keeping access charges low. Lighthanded regulation would then come in the form of deregulated retail tariffs. Taken together this suggests that in a system with both one-way and two-way access theremight be access price caps possibly with two baskets one for one-way access and one for two-way access charges. At the same time retail would be deregulated. In New Zealand the regulatory price cap has been on household access.The literature surveyed on private negotiations is quite thin. It suggests that where regulators can step in as backups if private negotiations fail it would allow regulators to concentrate on contentious issues while the "technical" issues would be resolved privately. In such circumstances regulatory determination can become the common mechanism by default.