The Practice of Access Pricing: Telecommunications in the United Kingdom

Abstract

How regulation has evolved in the United Kingdom, with an emphasis on how telecommunication regulators determine access (interconnection) charges. Telecommunications was the first network utility to be privatized in the United Kingdom. Drawing on 15 years' experience and discussion in the field, Valletti shows the economic principles of regulation in general and access pricing in particular that have been implemented. British Telecommunications (BT), formed as a public enterprise in 1980-81, was privatized in 1984. Since then the approaches to regulation have changed in three broad periods: the duopoly, the transition to competition, and the recently introduced normalization phase. Dealing with each period, Valletti focuses on how the actual implementation of access charges are determined, at the same time providing background needed on regulatory intervention generally. Rather than follow the model of competition for a common infrastructure, Oftel has encouraged competition between alternative networks, which benefits customers but involves duplication of fixed costs. As a result of Oftel's approach, consumers have seen their bills reduced 50 percent in real terms since privatization. It is difficult to know how much to attribute this remarkable result to technological progress (BT halved its workforce in the same period), to regulatory intervention (Oftel set string caps until 1997), or to competition (there are hundreds of players in the market). Valletti contends more weight should probably be given to the first two. Entrants have not achieved big market shares, if one considers the asymmetric regulation that has been in place for more than a decade. Indirectly, at least, competition benefited consumers by applying discipline to BT's behavior. Oftel's approach was interventionist until 1997, when it began trying to normalize the industry, as authority overseeing competition. The odds on complete deregulation are slight, and some controls on industry will remain. In the longer term, Oftel should especially monitor anticompetitive practices and collusive behavior among the bigger players (BT, CWC, and cellulator operators). The United Kingdom's interconnection experience demonstrates the complexity of the problem and its relationship to other topics, such as tariff rebalancing, access deficit, and universal service. Although a bit ad hoc, the recent incentive regulation, with a network cap based on proper accounting procedures and engineering models, may represent the best practice available today in the telecommunications industry, says Valletti. This paper - a product of the Regulatory Reform and Private Enterprise Group, Economic Development Institute - is part of a larger effort in the institute to increase understanding of infrastructure regulation.