Jenaer Schriften zur Wirtschaftswissenschaft The Economics of Self

Jenaer Schriften zur Wirtschaftswissenschaft
The Economics of Self-regulation in
Telecommunications
under Sunset Legislation
Andreas Freytag and Klaus Winkler
17/2004
Arbeits- und Diskussionspapiere
der Wirtschaftswissenschaftlichen Fakultät
der Friedrich-Schiller-Universität Jena
ISSN 1611-1311
Herausgeber:
Wirtschaftswissenschaftliche Fakultät
Friedrich-Schiller-Universität Jena
Carl-Zeiß-Str. 3, 07743 Jena
www.wiwi.uni-jena.de
Schriftleitung:
Prof. Dr. Hans-Walter Lorenz
[email protected]
Prof. Dr. Armin Scholl
[email protected]
THE ECONOMICS OF SELF-REGULATION
IN TELECOMMUNICATIONS UNDER SUNSET LEGISLATION*
by Andreas Freytag and Klaus Winkler
Friedrich-Schiller-Universität Jena
Chair of Economic Policy II, Faculty of Economics and Business Administration,
Carl-Zeiss-Str. 3, 07743 Jena, Germany
July 2004
Abstract
Overregulation is one major obstacles to the free and innovative development of
markets, even if these markets needed regulation after the privatization of a
former monopolist. As a radical change of the regulatory regime could endanger
it as a whole, the objective is to find a transitory regime which is limiting regulatory errors. One way is combining the regulatory instruments of sunsetregulation and self-regulation. We discuss conditions for successful selfregulation under sunset legislation. We conclude that a fast moving market such
as the telecommunications sector should be subject to such an innovative regulatory regime.
JEL Classification: L 50, L 96
*
We thank Mark Oelmann and Stefan Voigt for helpful comments.
1
I. Background and problem
Overregulation is one of the major obstacles to the free and innovative development of markets, even if these markets needed regulation after the privatisation of a former monopolist. The telecommunications sector is a case in point.
Initiated as a support for the start,1 after a while regulation becomes more and
more complex: it turns out to develop its own life and thus causes more negative than positive effects for the market as a whole.2 Not only the market participants that are effected the most by such kind of (asymmetric) regulation,
namely the incumbents, but also the competing, rather new market players often ask for a radical reduction of regulation to ease off the bureaucratic burden
and to let the market forces prevail.3
A radical change from regulated markets to non-regulated markets may carry
risks with it; it is necessary not only to find the right time for, but also the exact
amount of such a reduction. Additionally there is no possible quick return, if the
lifting of a regulation fails to achieve its goals. For that reason it could be interesting to introduce a new instrument which makes it possible to initiate such a
change on a “softer” basis.4 Sunset regulation is one such approach which offers a timeline along which the actors may plan their behaviour on a (fairly) secure basis to minimise the planning risks.
The term sunset regulation is a key-term in the recent discussions on the new
telecoms laws in Europe but not much seems to be known about it.5 In a market
such as the telecommunications market, being characterised by fast changes
and many innovations, it seems reasonable to explore instruments that are
more flexible than the existing ones.
1
2
3
4
5
Waesche (2003) argues that regulation is the Achilles heel of the international development of both the telecommunications and the internet sector.
Hellwig (2003) argues that the revision of the telecoms law (TKG) in Germany leads to
more planning insecurities because of the pure extension of regulatory measures.
Holznagel (2003) discusses possible ways to reduce the length of regulatory proceedings. The duration of these proceedings was one of the major objections that most of
the market players in the process of the revision of the TKG in Germany complained
about.
Ypsilanti and Xavier (1998) note that such a smooth transition is not just a short term
goal, but that it is necessary to secure long term goals by allowing market forces to take
over again.
See as an example of the ongoing discussion on sunset regulation Deutscher
Bundestag (2004a, p. 828).
2
We will explore the objectives of sunset regulation, trying to find out of what
help such a regulatory regime could be in today’s telecommunications markets.
To minimise the possible disadvantages of such a regulatory approach we will
analyse a possible combination of a sunset approach with self-regulation.6 The
objective is to find a regime which serves the needs of both suppliers and demanders of telecommunications services better than the existing one in limiting
regulatory errors and to reduce non-intended results.
II. Sunset legislation
a) The changing benefits of regulation over time
The objective of regulation in telecommunications markets is to pave the way
from monopoly to competition. After the transformation of state-owned telecommunication monopolies into private firms, the industry has been regulated in
all developed countries to provide market access and competition with the objective of increasing consumers’ welfare. Without asymmetric regulation, markets for telecommunication services would probably not have been created, as
the barriers to entry would have prevented new market participants to enter the
market. However, it is acknowledged that with increasing competition, the need
for regulation declines.
The first problem with regulation in use is that it is not very clear and, therefore,
subject to intense discussion when the regulation should be abandoned. Empirical evidence shows that incumbent and entrants in telecommunications markets have very different perceptions about the ideal timing, obviously driven by
their individual interests. Second, it is politically difficult to reduce regulation
since the regulatory agency is likely to live a life of its own; its staff will continuously look for new fields of activity and higher budgets (Niskanen 1971). It also
can build up close links to the regulated industry and get finally captured by this
industry (Stigler 1971).
The latter problem obviously increases with the duration of the regulation and
the regulator’s existence. Currently, it seems less relevant in the telecommuni-
6
For an overview over the concept of Self-Regulation see Wentzel (2002).
3
cations industry, as there is no common interest of all market participants. Instead the incumbent’s interest deviate significantly from the new entrants’ goals.
Empirical evidence – at least in Germany – shows that capture is hardly to be
seen (RegTP 2002 and Monopolkommission 2003). However, the longer they
exist, the bigger probably the agency, the stronger its staff’s resistance to dissolve it and the closer the link to the industry. With the regulation existing for a
long time, it can be assumed that the interests of the market participants converge. The formerly new entrants get settled, they want to maintain high income
and they probably wish to deter entry of even “newer” entrants. In other words:
the danger of capture increases with the duration of the regulation.
These problems call for an ex-ante clause in the regulation framework, announcing its future dismantling given some conditions are fulfilled. Without such
a clause, it may be difficult to end or to modify regulation.
b) What is sunset legislation?
Sunset legislation is such a measure, which is introduced simultaneously with
the regulation as a means to control the necessity of ongoing regulation and
existence of the regulators on a regular basis (Harrelson 2003). The assessment is assigned to special committees, whose members have to be independent. Assessments can be made periodically, e.g. every five years, or contingent
on certain indicators, e.g. if the incumbents’ market share is below a certain
threshold or the average number of market participants in local competition exceeds a threshold. Sunset clauses thus ensure that regulation is regularly assessed, thereby asking whether or not the regulation in question and the respective agency are still necessary.
However, assessment contingent on indicators is not unproblematic, as the
concept of contestability plays an important role for the idea of sunset legislation
(Gifford and Peters 2003). Contestability is dynamic and therefore not compliant
with any concept of optimal market structure in the tradition of the HarvardSchool, which is a static reasoning. Rather, the concept is based on the idea
that regulation is not necessary, once barriers to entry have been sustainably
torn down. As soon as the regulation has lead to a dismantling of entry barriers,
it is obsolete and – following the logic of sunset – should be abandoned.
4
c) Some experiences with sunset legislation
Sunset legislation can be observed in the United States. On the Federal level,
sunset legislation as a rule is not applied. However, there is s small number of
examples for sunset clauses introduced by the time of setting up the agencies;
one example being the Resolution Trust Corporation (RTC), founded as a response to the savings and loan crisis in the late 1980s. The agency was dissolved after fulfilling its task in 1995 (McKinley 1995, pp. 6f).
By contrast, sunset legislation as discussed here can be found on State level.
Texas for instance has enacted sunset legislation with respect to government
agencies. All government agencies have been put under review regularly (every
12 years) since 1977. A special agency, the so-called Sunset Advisory Commission, consisting of 10 members plus staff, is responsible for this task. Among
others, the Public Utility Commission (Texas PUC), which is responsible for the
regulation of telecommunications services in Texas, has been subject to such
scrutiny.7 Between 1977 and 2002, no less than 44 government agencies were
closed and 11 were merged with others (Sunset Advisory Commission 2002).
This evidence is quoted as success, which is not very convincing. As closing
down government agencies as such is not a prove for economic gains, the Sunset Advisory Commission claims that its activities within 25 years have generated a net gain of 700 million US-$. This benefit does not appear as a remarkable sum for a period of 25 years at all. On the other hand, just the threat that
growing regulatory bodies are not acceptable might have had an additional
positive overall effect.
To summarise, there are only moderate experiences with sunset legislation, and
only very limited evidence for telecommunication markets. This makes it very
important to provide good arguments for this kind of legislation, if one wants to
introduce it.
7
For a discussion of the regulation of telecommunications services in Texas and different
opinions about it, see Gifford and Peters (2003). However, clear evidence of the costs
and benefits being caused by the sunset legislation and the assessment of Texas PUC
cannot be found there.
5
d) Pros and cons of sunset legislation in telecommunications regulation
Sunset legislation implies several advantages.
•
First, it takes into account the changing nature of the economic problems
related to the regulated market. The observed market failure may be no
longer existing or may have changed. The case of telecommunications
provides an enlightening example: although the claim of natural monopoly has been seriously challenged from the mid-1980s by the technical
developments,8 it took another decade and an initiative by the European
Commission to open the telecommunications markets in domestic European markets to new entrants. A regular assessment thus is a means to
adapt faster to new regulatory challenges.
•
Second and related, sunset legislation considers the possibility of inadequate regulation. This is especially important with respect to new technical developments. Governments do not necessarily know how to react to
these (fast) developments; e.g. regulation may hurt the principle of technology neutrality. This can be shown with the example of the introduction
of DSL in the German market. (Monopolkommission 2003). Knowing that
the incumbent was about to set up a new monopoly position in the DSL
market, which was just about to start growing, RegTP approved an enduser-tariff of DTAG that was priced below cost. At the same time no preproduct for the competitors based on such a low pricing of the essential
facility “access” was introduced. The idea of RegTP behind the approval
was that otherwise this new market would not develop as quickly as
hoped for at all. After having experienced that the approval kept competitors from entering this market segment, there was no way to “turn back”
this decision. Consequently, sunset clauses can be used to “try out”
regulatory regimes. Once they have proven inappropriate, governments
can learn and improve them.
•
Third, sunset clauses are likely to discipline the regulator. In particular,
the regulator has an incentive to avoid capture. This is true because
regulators are interested in developing the markets as such, but not the
8
The development from analogue to digital equipment seems to play the major role. See
for example Kahn (1988, p. 127).
6
details for which to understand they would need to invest time and knowhow.
•
Fourth, sunset legislation will enact pressure on the incumbent to treat its
competitors fairly, as the change of deregulation is promising to be beneficial for the incumbent. A frequent abuse of market power, e.g. by denying entrants access to networks, by delivering services to competitors too
late and the like, will probably reduce the contestability of markets. As a
consequence, the conditions for terminating regulations are not met
timely.
•
Fifth, sunset clauses also will rationalise the legislative process of regulation. In particular, the incumbent has an incentive to avoid demands for
too soft asymmetric regulation, which is likely to ensure its high market
share and to deter entry. For this outcome will counter the incumbent’s
preference for deregulation in the longer run.
These advantages make a strong case for the introduction of sunset clauses
into telecommunication laws. In particular, the high dynamics of this market can
be considered much better with such clauses. However, there are problems
with sunset legislation, which also should be taken into account when considering it as an addition to telecommunication regulation.
•
First, the very argument supporting sunset clauses strongly also provides
a counter argument. The limited knowledge of governments with respect
to the appropriate regulation also may prevent governments from determining the correct timing and scale of deregulation. Any quasi-automatic
sunset clause may well be chosen wrongly and lead to re-monopolisation
of the market on the one hand or to a tendency to higher regulate than
necessary on the other. This argument provides a strong case for combing sunset regulation with self-regulation or co-regulation (BRTF 2003,
pp. 41-46).
•
Second, sunset legislation in telecommunications tackles different economic problems. There may be services in telecommunications, which
can be deregulated faster than others. Many observers argue for instance that the pricing of end-user products offered by the incumbent can
already be deregulated today, whereas the same services offered to
7
competitors still need regulation (Vogelsang 2002, pp. 79f.). It seems
plausible that sunset clauses have to be very different with respect to different services. Thus, the fixing of sunset clauses is difficult.
•
Third, the introduction of sunset clauses will probably also cause new bureaucratic efforts. A new type of sunset committees has to be installed,
which can be viewed as a “sunrise” of new bureaucratic activities without
the guarantee of a “sunset” of others (McKinley 1995, pp. 7f).
Although these argument are worth mentioning, they do not outweigh the arguments in favour of sunset legislation. However, they show that the introduction
of sunset clauses in telecommunication regulation is not without risks and
needs careful consideration of the problems.
e) Normative conclusions: basic requirements of sunset legislation in telecommunications
From the previous subsections, we derive some basic normative conclusions
with respect to the form of sunset legislation. In the following section, we will
show how these requirements can be met practically and filled with content.
•
Sunset clauses should not be contingent on market structure indicators.
The goal should be contestability, which is indeed difficult to make operational.
•
The assessment of the ongoing need for regulation and the existence of
the regulatory agency should be made simultaneously.
•
The problem of different sunset clauses for different services requires a
very careful analysis. One way would be to form a few categories of
regulation ranked by the potential speed of deregulation, without setting
exact dates for their sunset.
•
The members of the “sunset committee” should be independent, implying
none of them being employed by the industry or the regulation agency.
They can be academics, consumers’ agents and government representative; it may also make sense to appoint foreigners as committee members. Rotating membership, i.e. only a fraction of the members is ap-
8
pointed simultaneously, also certainly is an advantage (McKinley 1995,
p. 3).
•
The committees meeting should be public to generate transparency and
media coverage. This certainly would minimise the incentives for “sunset
committee’s” capture. The committee should be subject to sunset after
regulation’s sunset.
III. Sunset Legislation – an efficient approach combined with
Self-Regulation?
a) Dynamics of regulation: different regulatory and “de-regulatory” regimes for
different time phases
The objective is to make sunset regulation operational to maximise the advantages and to minimise the disadvantages of such a regime. A government determined to change or even dismantle the regulatory regime faces two major
problems: the timing of the process and the necessary remaining content of
regulation are unknown. Sunset regulation allows to plan this process, at least
on the timeline, in more detail. However, the content problems persist. In addition, there are political obstacles to an adequate time path of regulation. In the
political arena, it is almost impossible to change the regulatory regime immediately after new knowledge has been accrued. Once a decision is made, it is
reasonably difficult to revoke it (Hoffmann-Riem 1989, p. VIII). This seems particularly relevant with a view to telecommunication markets being characterised
by very different market players.
Nevertheless, there are ways to smoothen the deregulation path in telecommunication services and to allow regulation adopting to the economic necessities
over time. One way we explore in the remainder of the paper is to combine sunset legislation with a more flexible approach to regulation, i.e. self-regulation9
and/or co-regulation. Both terms are sometimes interpreted differently, with self-
9
Hoffmann-Riem (1989, p. VII) sees the instrument of self-regulation as the main concept
to relieve the state of having to interfere with the market process. We were surprised to
find that the concept of self-regulation has not been described extensively in the (economic) literature; for exceptions see Miller (1985), Voigt (2000), Wegmann (2001) and
Engel (2002).
9
regulation implying no governmental backing, whereas co-regulation implies a
regulatory framework (BRTF 2003, p. 41). As it is unrealistic to assume the absence of a regulatory framework in telecommunications in the near future, we
use both terms for the same regime and call it self-regulation. This combined
approach can help to mitigate the lack of knowledge and the political obstacles
mentioned above.
Figure 1 shows the dynamics of de-regulation over time in such setting. The
maturity of certain market segments grows by the time. The time phasing in the
(telecommunications-)market seems to pursue the following picture: in phase 1,
regulation is the dominating regime in the market, no other approach seems to
be able to help. In phase 2, the deregulation process starts.10 The industry is
allowed to apply self-regulation, albeit under the umbrella of a regulatory regime. This regime is the maximum degree of regulation – it will not apply unless
self-regulation does not work. Market participants, potential entrants and customers have the opportunity to call for this regime if they are dissatisfied with
the outcome of the self-regulation process.11 We expect that this provides an
disincentive for the market participants to abuse the system and to behave collusively. It is not clear when phase 2 ends; technically speaking this is the case
as soon as contestability is met. As mentioned above, contestability does not
imply certain market shares, which under deregulation may quickly shift back.
Rather, the decision of whether or not the markets are contestable, depends on
the non-existence of natural barriers to entry. Phase 3 is the sunset period. The
fading out of government intervention comes slowly. The time phase of sunset
regulation goes along with some kind of government intervention, at least as a
fallback, if something goes wrong. Only after this regime has proven to be effective, will the market be fully de-regulated.
Still, it has to be acknowledged that not all market segments can be deregulated
with the same speed. To cover this problem, the process described in Figure 1,
can be differently fast for distinct categories of telecommunication services.12
10
11
12
Monopolkommission (2004, p.4) expresses that it was assumed that this phase would
be reached faster.
Engel (2002, p. 56) highlights that it is absolutely necessary that the state still has the
chance to intervene.
The setting of prices for essential facilities, such as interconnection pricing does not
seem to be one of the first issues that can be deregulated (Lapuerta and Tye 2003).
Phase 4:
De-regulation
Phase 3:
Sunset Regulation
Phase 2:
Self-regulation
Phase 1:
Regulation
10
Time phasing /
Maturity of the market
Figure 1: Dynamics of de-regulation in telecommunications markets
b) Cases: The mobile network-operators, AKNN and Billing
There are several cases where self-regulation is implemented in the telecommunications market.13 Almost all mobile operators in Europe have signed selfregulations containing code of conduct rules (for example: Ovum 2002 and Büllingen et al 2002). Such code of conduct rules handle pricing issues, radiation
and security standards and arbitration rules (for example: Otelo 2003). Compared to other market segments, the mobile market sector has almost escaped
classic regulation. Whether or not self-regulation is the reason for this situation,
cannot be proved easily but it could be one good reason. Obviously this kind of
self-regulation is widely accepted and appreciated by regulators and the public
(Büllingen et al 2002, p. 141.)
A well documented example of self-regulation for the German telecommunications market (Kohlstedt 2003) is the association of the German telecommunications operators (the so called AKNN), which has set most of the underlying
technical standards of processes between the operators. The history of this example shows that especially in the beginning of this self-regulation approach
13
The internet is the one example where self-regulation is already incorporated into the
“business-model” of the market. For that reason the literature on self-regulation seems
to be centered (only) around this issue. See Leib (2002) for an extensive overview on
self-regulation regarding internet-resources.
11
many futile results were accomplished, as new standards were needed to be
able to switch from a monopoly market to a competitive market. In the ongoing
process the number of participating companies rose constantly (it is around 50
today) and the voting process (unanimity vote) got a more strategic14 instead of
a pragmatic touch. Today most of the participating companies complain about
the inefficient handling of issues and the missing support by the regulator. Such
kind of associations exist in most liberalised markets.15
These examples do not incorporate sunset legislation. However, there is an example for a combination of self-regulation and sunset regulation in the telecommunications market: the recent billing contract between Deutsche Telekom
and the association of the competitive carriers, VATM. This contract is based on
the rulings of the regulator RegTP, which ruled in the past that billing services to
a certain extent have to be delivered by Deutsche Telekom for the new carriers,
but always tried to set the incentives for the competitors to set up their own billing devices. In the past these incentives always failed. Deutsche Telekom always complained about being obliged to offer a service, which no other European incumbent would offer. In addition, so the claim, the new carriers would
not even try to set up their own billing services. The VATM complained that
Deutsche Telekom were exercising their monopoly of the customer contacts
and was trying to close down a whole market segment (the so called Call-byCall market, where customers dial a 5-digit prefix, to telephone via an alternative operator, but still get the bill from Deutsche Telekom). The lawmaker
threatened to put a definite ruling on how to handle the billing issues, into the
revision of the telecoms law (TKG), which came into effect in June 2004. Since
billing is such a complex issue, such a ruling would have hurt all market participants; it would not have been able to go into the necessary details. Under such
a threat Deutsche Telekom and VATM set up a contract (self-regulation) which
describes in detail which services will be delivered for which price. It contains
the clause that billing services will no longer be regulated after 2006 (sunset
14
15
The behaviour of the market participants was probably strategic at all times. In this respect the danger of a market closure through standard setting through such associations should not be underestimated.
A straightforward example of failed self-regulation is the agreement of the German electricity suppliers, the so-called “association agreement” (“Verbändevereinbarung”). It has
obviously failed as the self-regulation is about to be taken over by a new regulator. See
Knieps (2004, p. 7).
12
regulation) (VATM 2004). The revision of the telecoms law has taken up this
clause as well (Deutscher Bundestag 2004b).
c) Conditions for successful self-regulation under sunset legislation
From the theoretical deliberations and empirical experience, one can derive
conditions for successful self-regulation under sunset legislation. Self-regulation
describes a relationship and cooperation between the market players on issues
that concern all of them. However, it is not a regime, where the government or a
regulator has no role at all. For a successful self-regulation, it is necessary to
assign the “new” roles to the players in such a regime.
For self-regulation to be effective, the relationship between the market players
has to meet the following three conditions:
1. The regulatory framework of self-regulation has to be made transparent
and accepted by all market participants. It is a regulatory regime on a
voluntary basis. Obviously, there are (positive and negative) incentives
for market players to participate, but still it is the decision of them to accept such a regime.
2. The market participants will only participate, if they find a common goal
which is worth trying to achieve. The goal for all market participants is to
create a situation where they can be innovative and which allows them to
react fast to a changing environment. By being able to act in such a way
the regulatory regime is flexible and automatically becomes more cost effective. This could also be called consensus based negotiation, which
implies the ability of actors to focus on common issues and to find common solutions that help all involved. Compared to the alternative of classic regulation such a focus is better for all.
3. The strategic incentives of the actors to close the market for potential entrants have to be effectively undermined, so that even those currently not
actively involved in finding a solution will have the chance to enter the
market later. That is where the role of the government or regulator as a
facilitator comes in. But the regulator has to be subject to sunset too.
This provides an incentive to avoid capture and not to sustain regulation
for too long.
13
The first condition describes the position of the different players in the regulated
market. Here it becomes clear that the government has a role to play in this regime. It is the market players that fill in the framework, but the framework needs
to be set and controlled by an independent third party, such as a regulator.
Looking at the first disadvantage of a sunset regulation, self-regulation allows
the actors to determine the best timing of the sunset period. The government
can provide the basis for such a decision making process, by setting these
guidelines with the help of the market players, for example via consultations that
are open to all interested parties.
The second condition describes the economics of self-regulation. Market players are constantly searching for ways to lower their transaction costs. The major
costs of regulation are probably those that were not intended but still caused
because of the non-transparency of the market developments. If the market
players have the chance to describe their problems and find their own solutions
that are suited to their special situation and regardless of the different subjects
of law and regulation that it touches (but obviously staying within the legal
framework), they get the chance to react faster and develop more innovative
solutions suited to their demands (Stefanadis 2003). By doing so self-regulation
would attack the second disadvantage of the sunset regulation, by helping to
find those segments that need to be regulated and those that do not need to be
regulated.
The third condition that needs to be met considers the possible strategic behaviour under regulation. Such reactions are visible in almost every regulated market, where some market segments only grow because regulation exists Depending on the maturity of the market, certain market players might try to lock
the market to their own comfort, closing it for (new) new-comers. A typical example from the telecommunications market was the introduction of the ‘Call by
Call feature’ in the local markets in Germany.16 The incumbent and the local
carriers thrived on the monopoly situation (the local market was not open to all)
that they were allowed for under the regulatory regime until 2003. When the
16
For a detailed discussion on the introduction of the Call by Call feature in the local market see Kirchner (2002) and Neumann (2002).
14
government started the discussion to lift this monopoly the objections by those
that had originally asked for a liberalisation of the whole telecommunications
market were huge. On the other hand new (local-) market entrants obviously
supported the government. Nevertheless, it can be shown that with the help of
the transparency supported by the regulator this problem can be limited, if selfregulation either does not work out or seems to restrict the market (Miller 1985,
p. 900). With the obligation to carry out public consultations that make the
strategies transparent and best practice comparisons available even the third
disadvantage of the set-up of a sunset committee can be solved. Thus, the
problem of self-interest of regulators and their unwillingness to end regulation
could be brought to an end as well. With respect to strategy it is important to
point out that there are instruments, which can even handle market situations
where the power is distributed in an asymmetrical way between the actors
(Stuhmcke 2002). Within a self-regulation approach, the actors can additionally
decide to call in an independent third party such as a mediator or ombudsman.17 Such a facilitator can help to disentangle strategic incentives which have
led to uncertainty for all actors.
IV. Conclusions
The possible disadvantages of self-regulation, often called toothless and anticompetitive, can be avoided by meeting the conditions for a regulatory approach of sunset regulation and self-regulation set up in this paper.
To summarise, it can be stated that the maturity of the market defines the different time phases for different regulatory instruments. It is undisputed that
regulation is necessary in the telecommunications market. It should just as well
be undisputed that a discrete change from regulation to de-regulation might be
too tough for a “young” market. A more differentiated approach seems to be
appropriate. A sunset regulation with a combination of self-regulation can help
to minimise the disadvantages of classic regulation or can even turn around to
17
European Commission (2002) makes the issue of alternative dispute resolution (ADR)
an issue of major importance in their Greenbook. On this Greenbook see also Racine
and Winkler (2002). For the concept of an ombudsman see Gadlin (2000).
15
develop as advantages of a new regulatory regime: Sunset regulation with a
self-regulatory step in between.
The framework opens multiple levels of intervention for the market players. The
lowest level should be the one where the market players try to solve most of the
problems themselves; only if this does not work, the regulator steps in.18 A
transparent framework helps to identify the cases where that is possible and
also shows the limits of such an approach: If the market participants do not
show any interest in solving their own problem, there will be no self-regulation
and possibly no sunset regulation either. Probably the market needs to have
reached a certain maturity, to show the players that it is interesting to try an
other innovative approach. It seems as if the telecommunications markets have
reached this degree of maturity.
The discussed approach is more effective and cheaper and thus more attractive
to the market participants than classic regulation approaches. Self-regulation is
more flexible and can thus be modified to fit the needs of the actors in different
market segments. That is, the actors themselves decide upon their own setting
and which market segments they can “rule” for themselves, and where they
need not only the support of a regulator but a decision. Here again the maturity
of the market plays a major role: only when a certain willingness to cooperate
exists, can the common goals be met via self-regulation and the social welfare
be increased for all and without the deep involvement of a regulator.
Probably because the telecommunications markets are very dynamic, the advantages of self-regulation are even greater: Classic regulation approaches are
mostly slow to react, often because decisions on principles take so much time
to be passed through different “hierarchies” of the legal system. A selfregulation approach can help to put the decision making onto the fast lane,
making several steps at the same time. On the other hand this is probably one
of the major disadvantages of the system. If not all those possibly affected take
part in the decision making, cartel situations where some market players secure
the market for themselves might arise.
18
Engel (2002) highlights the importance of the existence of this fallback solution.
16
Self-regulation is an innovative approach which does not work at any given time
within a market setting. For that reason we highlight a certain phase of the market where we think these disadvantages can be put to a stop if handled correctly. The general construction of a sunset legislation regime sets up a timing
for the market and thus delivers planning security with respect to time. A selfregulation approach can deliver the planning security with respect to limiting risk
on the contents of the regulation, because self-regulation regimes do not tend to
set decisions in extremes, as court or regulatory decisions might do. The combination of these two approaches helps the market development, obviously
without hurting any other market participant.
The goal of this paper is not so much to claim that either sunset or selfregulation are the solution for all regulatory problems. We argue that starting
from a certain market maturity, when de-regulation is an alternative, the combination of the two innovative regulatory instruments can shape an instrument
that helps to secure planning. Thereby, we hope to increase the general awareness of alternatives to the classic regulation approaches. Since it is on the market players to decide to implement such a regime, we can only point to the possible advantages. We think that an innovative market such as the telecommunications sector should be subject to an innovative regulatory regime. The first
examples of such an approach are stimulating.
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