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- Networks and Telecommunications: Design and Operation, Second Edition.
Martin P. Clark
Copyright © 1991, 1997 John Wiley & Sons Ltd
ISBNs: 0-471-97346-7 (Hardback); 0-470-84158-3 (Electronic)
Network Regulation
and Deregulation
Sincethe 1980s, governmentsinhotpursuitofgeneraleconomicdevelopmenthavemade
dramatic changes in the regulation industry. Monopolistic public utilities have been privatized,
of
and the markets historically dominated by those utilities have been deregulated and opened to
competition. This chapter discusses the motivations behind telecommunications deregulation,
and explains some of the new regulatory measures which protect customers’ interests by ensuring
that quality services are available at a fair price.
44.1 REASONS FOR
DEREGULATION
The word deregulation is something of a misnomer because no country has completely
rescinded all the telecommunications laws and regulations. Rather, the regulations are
beingchangedto a new framework(a liberalized one) to encouragecompetition
between companies for the provision of telecommunications services. In fact the new
regulations are more voluminous than the old ones, and will require more policing to
ensure that companies are conforming with their obligations.
As with any change in the legal system, a government wants to convince itself of the
benefit of the new regulation; not only its direct effect but also the secondary effect on
other elements of the social or industrial strata. The government will wish to ensure
maximum efficiency of overall resources, but it will also be interested in the fairness a
of
new system. In addition, from an economic sense, the impact on the country’s balance
of trade will be important.
The European Economic Community, EEC (nowadays called the EuropeanUnion,
E U ) noted in 1986 that: ‘the strengthening of European telecommunications
has
become one of themajor conditions f o r promoting a harmonious development of economic
activities a
andcompetitivemarket
throughout [European]
the community and for
achievingthecompletionofthe community-widemarket for [all]goodsandservices
by 1992’.
793
- 794 REGULATION NETWORK AND DEREGULATION
As a result, the EuropeanCommission (the ‘government’of the EEC)set about estab-
lishing a European-wide network infrastructure comprising common network standards
and a more open competitive market for telecommunications terminals and services.
The pressure for reform had been building in countries worldwide for many years,
but different governments responded at different speeds and in different ways.
The United States led the way in the process of deregulation. As early as 1967, a
small company called MicrowaveCommunication Znc ( M C Z ) lodged the with US
government’s Federal CommunicationsCommission (FCC) an application toruna
common carrier (transmissioncircuit) service betweenChicago and StLouis. The
proposed quality of the service was lower than that available leased circuit service
of the
using the established large (and licensed) carriers, a market dominated by the American
Telephone and Telegraph ( A T & T ) company and theBell Operating Companies ( B O G ) .
The ‘back-up’ fortheMC1 service was to beminimal,andno subscriberterminal
equipment was to be provided (allowing the customer to connect almost anything, as
desired), but the benefit was a significantly lower price, being only half the cost of the
established service.
Encouraged by thesignificantlydifferent nature of the service, and hopeful that
competition would stimulate new activity from previously untapped markets, the FCC
gave approval for the service in 1969, and went on a year later virtually to force the
established common carriers to provideinterconnectionfacilities. A flood of other
aspirantcarriersfollowed in MCI’sfootsteps,andthe regulatoryframework for
telecommunications within the United States has been changing ever since.
A major milestone in United States deregulation was the establishment in 1986 of
equalaccess (Chapter 28) for all trunk (or toll) telephonecarriers. As thephrase
suggests, the laws of equal access are designed to promote fair and equal competition
between thelongdistance inter-exchangecarriers (IECs). They demandthat local
telephone companies connect in an equal manner with all licensed carriers who request
interconnection. The effectis that local telephone subscribers have a ‘free choice’ of
their long distance carrier.
Outside the United States, the tide of change had been slower until the 198Os, at
which time a number of factors brought pressure on many of the world’s governments
to consider deregulation. The pressures were
the convergence of computing technology and telecommunications (the Information
Technology ( I T ) explosion), and their contribution to nationalwealth and economic
growth
the reducedcosts and
much increased
service
capabilities made possible by
technological progress
the high
customer
expectations, in
andparticular demands
the of business
customers
growing customer dissatisfaction with the high prices charged and limited services
made available by public telecommunications operators (PTOs)
the willingness of private companies to invest venture capital into developing new
telecommunications business
Together these factors brought about rapid change.
- THE DILEMMA OF DEREGULATION 795
44.2 THE DILEMMA OF DEREGULATION
Deregulation poses a dilemma for the governments that consider it. Any government
will wish to decidethe optimumallocation of thecountry’soverallresources and
produce a framework of laws and regulations to encourage both public and private
companies to use those resources accordingly. A substantial proportion of a country’s
gross national product ( G N P ) may depend on telecommunications, either directly from
the sale of telecommunications services, or as a result of business conducted on the
telephone. The decisions on the regulatory framework governing telecommunications
are therefore crucial.
The main dilemma that faces governments is that shown pictorially in Figure 44.1.
The question is whether a public service need is best served by a small number of
monopolized but strongly regulated public utility companies which have an advantage in
their homogeneity of service offerings and in the prices offered over a large geographic
area, buttend to be inefficient and slow to respond to change; or whether the publicneed
is better served by a more deregulated market, with a larger number of more diverse
companies and services, competing for business. The smaller, competing companies will
tend to respond more quicklyto technological changes and fluctuationsin the demands
of the market. They will also tend to be cheaper to thecustomer, butmay be so because
of a compromise in quality. Furthermore, viewed from a government perspective, the
companies of a competitive environment may not appear touse the country’s resources
efficiently, and may not appear to have an incentive to serve the needs of some crucial
but unprofitable markets (e.g. remote rural telephone service).
The historical argument has been in favour of a small number of natural monopolies,
as we know. Candidate services for a natural monopoly are those in which
0 there is aclearlyestablishedpublicneed fora service of auniformnatureand
covering a widespread geographic area
S m a l l number o f Larger
number of
slow, butlargeand homogeneous morereactive, butmaybe
publicutilitycompanies smallanddiversecompanies
Figure 44.1 Deregulation and the monopoly dilemma
- 796 REGULATIONNETWORK AND DEREGULATION
0 there is economy in large scale operation
0 it is cheaper for one firm to serve the market than for two or more
0 the market power of a large company in competition can enable it to control prices
and make entry unattractive to rivals
0 the lack of information available to new market entrants and the limited resources
of small companies leave them at a significant disadvantage
The services which have tended to be protected by governments as natural monopolies,
are electricity supply, gas supply, water supply, sewerage, refuse and telecommunica-
tions. All have to some extent benefited from the large scale of the operation that has
resulted from monopoly. In telecommunications networks the addition of each new
customer to the early networks, sometimes disproportionate expense, brought benefit
at
to the new customerandto establishedusers, forwhomtheavailableextent of
connectivity had been increased.
Under a natural monopoly it is usual for a government to confer obligations and
rights on the companies operating public utility services. These obligations and rights
are summarized in Table 44.1.
The rights and obligations of public utility companies have historically been closely
policed by governments keen to dictate the services which may be offered, the prices whic
may be charged, and the profits which may be made. Laudable though this may seem,
it slows up the development of the public utility companies and their services and only
adds to the inefficiencies, because more bureaucracy is involved in each decision made.
The aim of improved efficiency has been a prime motivator for deregulation, the aim
being to‘shakeup’theestablishedmonopolycarrier by introducingcompetition.
However, most governments’ actions have fallen short of removing all regulations and
legal entry barriers, so that some financial protection exists for the established carriers
to go on providing unprofitable, but necessary services. The challengeto create a new
is
regulatory regime thatis simple enough to promote competition,increase efficiency and
reduce prices, but without introducing the plethora of legal and bureaucratic barriers
that seem necessary to protect unprofitable services. Ideally, the regulatory framework
should encourage a greater variety of services, a greater responsiveness to changing
customer demands, better quality, and lower costs; all made possible by more efficient
use of resources and by new private investment.
Table 44.1 The regulation of large public utility companies
Obligations
1 To provide service to all who apply, even if unprofitable
2 To provide safe, reliable and adequate service
3 To provide fair terms and prices for service provision
Rights
1 To make money and a fair return on investment
2 The right to withdraw services under given conditions
3 In a competitive environment, the freedom and scope to use initiative to create a
‘market edge’ for their services, and be fairly financed for unprofitable services
- OPTIONAL METHODS OF REGULATION 797
44.3 OPTIONALMETHODS OF REGULATION
Therearetwomainmethods by whichagovernmentmayimposeregulation on
industry. The government can control the structure of the industry, dictating either
what companies may produce or what services may be operated. Monopolies are often
structure-controlled. Alternatively, the de-regulated approach is to control the conduct
of companies laying out the actions and behaviours which are permissible.
Most regimes comprise elements of both structure and conduct regulation, and real
measures are not always easily classified into one of the two types.
Structure regulation controls which companies may operate in an industry, typically
restricting entry by licensing operators, andby having a strict monopoliesand company
merger policy.
Conduct regulation controls include those governing restrictive practices and those
prohibiting ‘anti-competitive’ acts (such as financial cross-subsidization between two
different company products).
Conduct regulation requires a ‘policing’ body ensure that companies conform
to with
their obligations. Under structure regulation, such a body is not necessary, due to the
smaller number of active companies, and also because the public utility company is
often state-owned anyway.
In countries undergoing telecommunications deregulation, the shift in the emphasis
of regulation tends to be away from structural control, towards conduct control. Many
countriesareestablishing regulatorybodies(regulators) to overseetheconduct of
companies in the industry. In addition, itis common for the government to sell off part
or all of their ownership of the established monopoly company. The main reason for
this is to put the established carrier on an equal business and commercial footing with
other new telecommunications market entrants. It affords the company more scope to
manage itself, and allows the government to handle competing companiesmore
equally.
44.4 TYPES OF REGULATORY BODIES
The regulatory bodyneededforpolicing conduct regulations can take one of three
forms
0 agovernment department
e an independent body, financed by the government or by the industry
0 a self-regulating body, composed of a council of delegates from companies active in
the industry
Central to the decision as to whichformofregulatorybody is appropriate, is the
question of how much information is available to the regulators. A regulator cannot
perform the task if unable either to collect or to comprehend information easily.
Government and independent organizations have the benefit of neutrality and their
desire to see ‘fair play’, but have less information and expertise available to them than
would be the case for a body formed of delegates from active companies. On the other
- 798 REGULATION NETWORK AND DEREGULATION
hand, self-regulating bodies (such as the U K s Law Society) have more information and
expertise available, but only work fairly when the body has an interest in preserving a
goodreputation.Customers,for example,might not respect the rulingsofa self-
regulatory body, set up to control conduct in the second hand car market.
Countries may choose different types of regulatory body to oversee telecommunica-
tions, but in the United Kingdom and the United States the regulatory bodies are
linked to the government. Oftel (the OfJice of Telecommunications) is linked to the UK
Department of Trade and Industry ( D T I ) , while intheUnitedStatesthe Federal
Communications Commission( F C C ) reports directly to the US congress. This is now the
model shared by most European countries, Australia and Japan. A notable excep-tion
is theregulatorystructurein New Zealand,wherealltelecommunications-specific
regulation was removed, leaving only the standard industry regulating bodies such as
monopolies commission, fair trade, etc. Sweden also largely emulates the New Zealand
model.
44.5 DESIGNATION OF ‘CUSTOMER PREMISES
EQUIPMENT (CPE)’
In nearly all countries, the first step in deregulation was the opening of the customer
apparatus (or customer premises equipment ( C P E ) )market to free competition. To do
so, the public telecommunication operator ( P T O )is mandated to provide aline from the
telephone exchange only as far as a standard socket in the customer’s premises and
is deprived of the exclusive right to provide the first telephone handset. The customer is
free to purchase terminal apparatus (i.e. a telephone, fax machine or other equipment)
from a high street store or some other supplier. He may connect it to the network,
provided that it is suitably approved (e.g. marked with a ‘green dot’ or labelled with an
‘approved’ sticker). In countries with open customer apparatus markets, fierce competi-
tion prevails, promoting a wide diversity of available equipment and low prices. Only a
minimum of regulation is necessary in this market. In general, governments have found
it adequate to set up approvals bodies, to verify that new terminal types conform to the
network interface and safety standards. This is done at the design and prototype stage
of terminal product development, and each manufactured then bears an ‘approved’
unit
marking, although it is not individually conformance-tested.
44.6 DEREGULATION OF VALUE-ADDED SERVICES
It is not feasible or desirable to open all parts of the market to competition, because
certainparts of it can benefit from beinga naturalmonopoly. On the other hand,
regulation must include steps to control the market power of thelargeestablished
company and its ability to prevent new companies entering the market.
In telecommunicationstheproblemhas been tackled by attemptingtoseparate
the natural monopoly segments of the market (e.g. the transmission network) from the
parts which might benefit from competition (the value-added network services ( V A N S )
and customer premises equipment ( C P E ) markets).
- SERVICES
COMPETITION IN BASIC 799
The definition of value-added services or value-added network services ( V A N S )
varies from country to country, but it is generally worded to cover any service falling
outside the definition of a ‘basic transmission service’. Thisdefinitionallowsentre-
preneurial companies to establish services at a premium price based on network and
transmission equipment leased from the PTO. Examples of value-added services include
0 entire managed networks (these are networks in which a VANS supplier contracts to
provide services akin to those on a ‘private’ or corporate network, in essence taking
over the role of the customer telecommunications manager); the added value is the
‘management’ provided
0 recorded information services (e.g. ‘speaking clock’ or share price news)
0 storeandforward message service
0 telephoneconference service
0 voicebank service (message recording service)
In nearly all deregulated countries, providers of value addedservice are not usually
permitted to provide the transmission equipment between premises, though sometimes
they are permitted to resell the ‘basic services’ (e.g. the simple telephone service), at a
straight markup. In some countries, basic services are protected as the sole province of
the public telecommunications organizations (PTOs). The situation may changein due
course. In the United States many of the long distance telephone carriers established
themselves in the mid-1980s by reselling telephone service based on their own purchase
of freephone and leased line facilities. They used the bulk traffic discount available on
the latter services as a way of creating a margin for under-cutting the normal telephone
tariffs. Unfortunately, the quality of such services was sometimes seriously impaired.
Other observing governments have steered their ‘deregulation paths’ to avoid this, but
resale is bound to be permitted when the markets are more mature. In the UK, the
government gave the PTOs British Telecom and Mercury Communications five years
respite from the simple resale of telephone service when they were first licensed in 1984,
but on 1 July 1989 decided that this protection was no longer necessary, because both
operatorshad been given plenty of time toprepareforthe greatercompetition
demanded by major users.
44.7 COMPETITION IN BASIC SERVICES
As a pre-requisite to the licensing of a new carrier, many new legal regimes demand
massive financial strength of the new entrant, since heavy capital investment is required
to establish a viable network, and the government is keen to ensure protection of both
investor and customer interests. For this reason, in the United Kingdom only one new
major PTO was initially licensed to compete with the previously established operator,
BritishTelecom ( B T ) . The first new PTO was Mercury Communications Limited.
It received a similar licence to British Telecom, enabling itto provide transmission plant
and ‘basic’ telecommunications services. It is backed by the might and telecommunica-
tions expertise of its parent, Cable and Wireless, but when originally set up it also had
- 800 REGULATION NETWORK AND DEREGULATION
the financial backing of Barclays Bank and British Petroleum ( B P ) . Since the early
1990s manymorecompanies have been licensed,butineachcaseOftelneeded to
confirm the expertise and financial credentials of each.
In the United States and Japan scores of toll (or trunk) carriers are now operating, as
well as a small number (3-10) o f international carriers. Other countries are following
suit. In the countries of the European Union (EU), for example, a council mandate
requires complete deregulation o f the public telecommunications market by 1 January
1998. The refusal of public operating licences by a national regulator is only permitted
where thecompetence or financialstrength of thecompany is in doubt or where
resources (e.g. radio bandwidth) are not available in sufficient supply to support the
proposed business concept of an applicant new operator.
44.8 THE INSTRUMENTS OF PTO REGULATION
Historically, PTOs tended to operate in all areas of the market; not justin basic service
provision, but also in the value-added service domain and in the provision of customer
apparatus. Special regulatory measures may therefore be necessary so that companies
newly entering the market are not disadvantaged because they are small, or because
they only compete in one domain of the PTO’s business. The regulations ensure that
new companies can gain a fair foothold the market. Two forms conduct regulation
in of
can have this desired effect
0 price control: to prevent cross-subsidy of PTO services
0 enforced separation of the PTO’s business units into ‘basic network services’, value-
added services, and ‘provision of CPE’: to prevent unfair advantage because of the
greater availability to the ex-monopolist of market information
An effective but flexible method of price control is based on the formula shown in
Table 44.2.
By applying the formula not just to the price of a single service, but alsoto the prices
of a ‘basket’ of basic telecommunications services, a degree of flexibility is permitted to
Table 44.2 PTO pricecontrol
Price riselimited to: RP1 -X+ Y
RP1 - Retail Price Index (Government index of inflation)
X - expected potential for PTO cost reduction from its
own improved efficiency
Y - reflects the increase expected in uncontrollable PTO
costs. (This factor is more pertinent to other public
services, e.g. electricity generation, where the cost of
oil/gas is outside the generating agency’s control.
- THE INSTRUMENTS OF PTO
REGULATION 801
the PTO, to temper price rises between a number of similar services. Thus the formula
may apply to the overall price of a number of services. One
rise service may increase in
price at a ratehigher than the RP1 provided some otherservice has little or no price rise
in compensation.
Enforced separation of the PTO’s business units into sub-organizations dealing with
‘basic network services’, ‘value added services’, and ‘provision of customer premises
equipment (CPE)’ using ‘Chinese walls’, helps to reduce the overwhelming and unfair
market power that the PTOs would otherwise have over new entrants in each of the
sub-markets. A regulated code of conduct prevents the PTO from linked sales, from
unfair cross-subsidization of services and from unfair use o information. A linked sale
f
would include a practice such as ‘preferential network charges provided that you buy
your CPE from us’ or ‘receive a large reduction on your CPE when you buy a new
ISDN linefrom us’. Cross-subsidization is where the price of one service is kept
artificially low by the profits from another service. Unfair use of information includes
‘tip-offs’ from one part of the business to another. A ‘tip-off from the part of a PTO
which supplies exchange lines to the part selling customer apparatus, would enable the
latter to cornerthemarket in CPE, largelypreventingpotentialcompetitorsfrom
bidding.
Figure 44.2 illustrates the enforced separation of a PTO’s business units. Each is
forced to operate in a manner independent of the others, with cross-subsidization and
unfair use of information being prohibited. In practice such clean breaks aredifficult to
maintain, and we can expect some arguments, not least over the funding of standards
development work (this will affect service and CPE prices) and the ownership of new
technology ideas.
Critical aspects to be covered by any new de-regulated form of market stucture are
the regulations covering
0 interconnection betweennetworksofdifferentoperators, to ensurethefullcon-
nectivity of all customers
0 pricing control, to ensure in particular that ex-monopolists are not able unfairly to
exploit their dominant market positions
PTO Corporate HQ
administrative
I resources
n
1 I
Customer Value-
telecommunications premises added
(network) equipment service
service provider provider
Figure 44.2 Enforced separation of PTO business units
- 802 REGULATION NETWORK AND DEREGULATION
the securing of universal service (‘a phone for everyone’) and its funding (e.g. by
obligating ex-monopoly operatorsto continue to provide andfinance it, to take over
the financing from the state, or to establish a universal service fund to which all
active operators are required to contribute)
fair means of ‘equal access’ to customers. Nowadays equal access is expected not
only with respectto dialled accessof long distance traffic, but also with regardthe
to
use of shared ducts and cables with the ex-monopoly operator with regard to direct
connection of customers to the network (we discussed this in Chapter 28)
the use of radio frequencies and applicable charges for their use
44.9 EUROPEAN
TELECOMMUNICATIONS DEREGULATION
As part of the EEC programme to generate asingle European market for all products
and services by 1992, removingall tradebarriersbetweenthememberstates,the
European Commission issued a green paper in 1986 laying out plans for a European-
wide network infrastructure for telecommunications services. An ambitious programme
overtheperiod up to 1992 intended to bring about a community-widemarket for
customer apparatus and ‘portability’ of equipment, by setting up a common set of
network interface standards and introducing a single approvals mechanism for CPE. In
addition, an ongoing period of long term R&D and EEC government investment will
ensure harmonization of the constituent national networks.
The green paper of 1986 laid out aframework of recommendations to the
governments of member states. The objectives were to
0 encourage the development of new services and customer apparatus, so stimulating
general economic activity in and between member states
0 encouragemarketconditionsfavouringinnovation
0 stimulate the growth of value-added and information services, as these were forecast
to have a major impact on the future speed and tradeability of other industrial
services, as well as on the potential geographic locations for economic growth
0 give widecustomerchoice
0 provide employment and economic growth
0 conform with social obligations both within and between states
The framework laid out by the EEC recommended
0 the protection from competition of a small number of licensed public telecommu-
nications operators (PTOs) to run the basic services and network infrastructure
0 regulated competition in value-added and information services
0 European-wide network interface standards and a common approvals procedure for
network attachments
- ULATION
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EUROPEAN 803
0 strict guidelines concerning the conduct and policing of these guidelines
0 an open market for customer apparatus (network attachments)
0 separation of PTO activities by ‘Chinese walls’ between those parts of the business
acting as a basicservice provider, value-added service provider, customer apparatus
provider, and any other part acting on behalf of the regulatory authority (some
PTOs have been assigned the job of performing network attachment approvals)
0 continuous review of PTO’s conduct and performance on basic service provision, to
ensure that the monopoly position is not abused
0 continuous conduct review of value-added providers
Following the green paper of 1986, the objective of a single market for telecommunica-
tions in Europe was endorsed by the Council of Ministers on 30 June 1988, and
subsequent directives (mandates to European Union states) and green papers have been
issued covering the regulation of
0 terminal
equipment
0 telecommunications services, according to open network provision ( O N P )
0 network
infrastructure
44.9.1 Regulation of TerminalEquipment
For the regulation of terminal equipment, a number of directives were issued with the
following objectives
0 the creation of an entirely open market for connection and maintenance of CPE
0 the loss of the PTO’s exclusive right to provide CPE by the end of 1990
0 the establishment of user access to public network ‘terminal/network access’ points
0 the establishment within member states of independent bodies to oversee technical
specification, licensing, type approval, etc. (approvals bodies)
0 the
right of customers dissolve term
to long contracts
concluded
during
the
monopoly era
The first terminal equipment directive was 86/361/EEC of July 1986, establishing the
mutual recognition by member states of equipment type approval.
44.9.2 Regulation of Telecommunications Services, and Open Network Provision (ONP)
In the telecommunications services field, a number of directives required
0 the removal of virtually all restrictions on competitive value-added service provision
- 804 REGULATIONNETWORK AND DEREGULATION
0 the review (in January 1992) of the need for continuing the exclusive rights of PTOs
to provide the basic network infrastructure and the basic telephone service. This
review concluded that further steps towards deregulation and further competition
even in ‘basic services’ and network infrastructure should be commenced
A code of rules known as O N P (open network provision) was established to define the
conditions under which all the basic public telecommunications in each member state
should be opened up to rival private service providers. The ONP framework is the
responsibility of asubgroup of theEuropeangovernment, called G A P (Groupe
d’Analyse et Prevision, in English the Group of Analysis and Forecasting). The goalsof
ONP (open network provision) are
0 to harmonize access to the public telecommunications networks of Europe
0 to create a common framework for open use of the networks
The first draft directive (AS ART 100A) covering ONP was agreed in principle by the
European council of ministers on 6 February 1990 and the full directive cameinto force
in mid-1990. Three main areas are proposed for harmonization
0 technical
interfaces
0 usage conditions (e.g. provision time, contract period, quality, maintenance, fault
reporting, resale, operating procedures of interconnection)
0 tariff
principles
ONP applies to all PTOs (public telecommunications operators). Ultimately ONP will
regulate all types of servicesand networks, but initial prioritywas given to leased lines,
data networks and ISDN. More recently, considerable effort has also been applied to
broadband,mobile and intelligent network ( I N ) services. ONP demandsthatPTOs
offering these services do so under published conditions which are objective, equal on
both parties and non-discriminatory. Limitations in the contract may relate only to
essential requirements such as safety and security.
44.9.3 DeregulationofTelecommunicationsInfrastructure
By the end of the 1980s, European Union (by then the European Community) directives
had already mandated the opening of the value-added service sector. This step allowed
new innovative service operators to start providing information-type services. More
significantly, however, this mandate also deregulated and opened to competition the
public data networking sector. This created scope 1989 for the appearanceof the first
by
pan-European X.25-based packet switched data networks and managed data networks.
Thepublic telephone
monopoly and transmission
the infrastructure
monopoly,
however, were allowed to be retained within individual member states, according to
national political will.
- ULATION
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EUROPEAN 805
Some European countries,notably United
the Kingdom had by
1989 already
deregulated most of the telecommunication sector. Indeed in 1989 the UK regulator
decided that further
operatorsbeyond previous
the duopoly operators should be
licenced (so-called duopoly review). Although other European states were agreeing new
proposals for deregulation, these were not so far reaching as those in the UK at the
time. The German proposals for the Post Reform 1, agreed by the Bundestag in April
1989, for example, laid out the steps for re-structuring the Deutsche Bundespost (the
post and telecommunication monopoly) and introducing service competition for data
services. The public telephone monopoly and the transmission infrastructure remained
in place, effectively even blocking corporations from the ability to operate their own
‘private’ internal company telephone networks.
Thecontinuing will of the European Commission for deregulation broughtthe
directive for Corporate Networks in 1992. This forced member state governments to
relax their telephone monopolies to allow the operation of private telephone networks
within corporation closed user groups (i.e.internalwithinthecorporationand to
suppliers and customers).
Finally,in 1995 the green paper on theliberalization oftelecommunicationsinfra-
structure and cable television networks approved. This out theprinciples, timescale
was set
and measures to be undertakenby member state governments within the European Union
for ‘complete’ deregulation their telecommunications markets. Key points the green
of of
paper were
0 requirement for the removal of the transmission infrastructure monopoly by l July
1996
0 requirement for the removal of the public telephone switching monopoly by 1 July
1998
0 specific rules regarding the regulation of communications content, specifically aimed
at controlling potential
dangerous monopoliesbeing
established
between, for
example, television programme producers and cable TV distributors; the content
rules also aim to control levels of quality and public decency
Specific details of the green paper and the directives which resulted from it over the
period up to early 1996 included
the requirement for open, non-discriminatory and transparent licencing procedures
for new operators
the requirement for the numberof licences not to be restricted, except as determined
by ‘essential requirements’
thedefinition of theselectioncriteriapermissibleintheaward of licences and
authorizations
guidelines on acceptable regulatory and financing measures for ‘safeguarding and
developing a universal service
the definition of the regulatory framework for interconnection and interoperability
between public network operators
- 806 REGULATIONNETWORK AND DEREGULATION
0 the rules of open access to infrastructure, the application of the ONP guidelines and
competition rules
0 the regulation of rights of way (for laying cables), radio frequencies and network
numbering resources
0 the maintenance of a national directory
0 the
requirements data
for protection the
and guidelines
regarding intellectual
property rights (IPRs)
0 the establishment of national regulatory authorities ( N R A ) and their responsibilities
Table 44.3 gives a brief summary of the current state of telecommunications regulation
within the European Union member states.
44.10 INSTRUMENTS OF UNITED KINGDOM REGULATION
Within the UK the following legislation applies to telecommunications.
The British Telecommunications Act, 1981, and the Telecommunications Act, 1984,
provide the main legal instruments in the UK. The 1981 act set up British Telecom
(the former monopoly network operator) as a private company separate from the Post
Office. The 1984 act introduced the framework for competition. Under section 7 of the
1984 act, whichallowsthe Secretary o State andthe DirectorGeneralofTele-
f
communications ( D G T ) to licence PTOs, British Telecom was granted the scope to act
as a public telecommunication operator for provision basic services. Under its
of licence
British Telecom (BT) is required to continue to provide service throughout the UK, to
provideruralservice,directoryenquiryservice,publiccallboxes,andemergency
services (999, Police, FireService and Ambulance). BT must publish standard terms for
the provision of service, it must wire customer premises in such a way that it does not
constrainthechoiceofCPE,and BTis not allowed toundertakeunfair cross-
subsidization of services. In addition the BT licence gives the regulator a number of
powers for undertaking quality checks and ensuring fair trading.
A number of other carriers have also been licensed as public telecommunications
operators (PTOs) under section 7 of the 1984 act. The first of these was issued to
Mecury Communications Ltd (MCL), the other initial duopoly operator. Mercury has
an equivalent license to that of British Telecom and it provides competition for basic
services, including long distance calling and international network services. Initially,
other licences were relatively restricted:
0 theTelephoneDepartment of the
city of Kingston-upon-Hull run
(who the
telephone service in that city, now called Kingston communications)
0 a number of cable television operators
0 the cellular radio telephone companies, Vodafone and Cellnet
0 the public cordless telephone operators then appearing (CT2 operators)
- INSTRUMENTS OF UNITED KINGDOM
REGULATION 807
Table 44.3 Current European Union telecommunications regulations and regulators
Legislation governing
Country telecommunications Regulatory agency Approvals body
Austria Telecoms bill due 1996
Belgium Two new laws expected Belgian Institute for Belgian Institute for
1996 to end infrastructure Telecommunications Telecommunications
monopoly and allow
operator licensing due 1996
Denmark Telephone and Telegraph Ministry of Research Telelaboratoriet
Act,1987 National Telecom Agency
Total liberalization, 1996
Finland Telecommunications Act, Ministry of Transport and Telecommunications
1987 Communications; Administration Centre
Telecommunications
Administration Centre
France New law. 1996 Direction de la CNET
Reglementation Generale
de Postes et
Ttltcommunications
DGPT)
Germany Telekommunikations- Bundesministerium fur Bundesamt fur Zulassung
gesetz, (TKG), 1996 Post und in der Telekommunikation
Telekommunikation (BZT)
(BMPT)
Bundesamt fur Post und
Telekommunikation
(BAPT)
Greece Greece granted 5 year Ministry of Transport and National
extension to 2003 to Communications Telecommunications
expand existing network Committee (NTC
infrastructure
Ireland
Italy Telecommunications law, Minister0 delle Poste e Instituto Superiore Poste e
due1996 Telecommunicazioni Telecommunicazioni
(MW
Luxembourg Deregulation delayed until
2000
Netherlands Telecommunications Ministry of Transport, Telification B.V.
Structure Reform, 1989 Public Works and Water
Telecommunications Law Management;
Norway (not Ministry of Transport and Statens Teleforvaltning
European Union) Communications; Statens (=F)
Teleforvaltning (STF)
- 808 REGULATIONNETWORK AND DEREGULATION
Table 4 . (continued)
43
Legislation governing
Country telecommunications Regulatory agency Approvals body
deregulation
Portuguese
Portugal
delayed until 2000
Spain Law organizing Ministry of Public Works, Direccion General de
Telecommunications Transport and the Telecommunicaciones
(LOT), 1987, 1990 Environment (DGT)
Direccion General de
Telecommunicaciones
(DGT)
Sweden Orientation of and Post Post and
Telecommunications Telecommunications Telecommunications
Policy,1989 Authority Authority
Switzerland (not Federal Department of Bundesamt fur
European Union) Transport, Kommunikation
Communications and (BAKOM)
Energy; Bundesamt fur
Kommunikation
(BAKOM)
Kingdom
Department
United
British of Trade and British
Approvals
Board
Telecommunications Act, Industry (DTI) for Telecommunications
1981 Telecommunications Office of (BABT)
Act, 1984 Telecommunications
(Oftel)
However, since the duopolyreview in 1989 many more operators (PTOs) have been
licensed.
The terms of each licence constrain the PTO’s operationof services and professional
conduct.
All telecommunications network and systems other than those owned by PTOs are,
by definitionof theTelecommunicationsAct, privatetelecommunicationssystems.
As such they need to be licensed and must conform with the provisions of the relevant
licence. To obviate the need for cumbersome licensing of each individual telecommu-
nication system, a number of class licences were issued. The initial class licences were
the Branch Systems General Licence ( B S G L ) and the Value-Added and Data Services
( V A D S ) licence. However, revision in November 1989 of the BSGL meant that the
VADS licence becamesuperfluous, and was thus withdrawn. Later, the BGSL was
replaced by the telecommunications services licence and the self-provision licence. The
latest versions of these licences were published on 9 September 1996.
The split into licences aimed separately at service operators and at
users meeting their
own needs (self-provision) reflects a general trend among regulators to focus on the
conduct of the different distinct types of network operator.
- ATION
UNICATIONS UNITED
STATES 809
The self-provisionlicence is the general class licence allowing any user to connect
telephones, private branch exchanges (PBXs), or any otherbranch system equipment to
the network. It is a ‘catch-all’ licence which allows every plain old telephone user useto
the phone legally. The provisions of the class licence are such that most users need not
register. Instead, the granting of a licence may be assumed unless there has been a
specialrevocation.The self-provisionlicence applies tothevastmajority of tele-
communications systems in the UK, i.e. those run in a single building, on a campus or
in a corporate network. The network code ofpractice ( N C O P )which used to regulate the
technical aspects of interconnecting private and public networks under BSGL, thereby
governing the quality of connections and disturbance to the public network caused (e.g.
by re-dialling) under the BSGL is no longer mandatory. Instead there is much greater
scope for users to decide for themselves about the quality of connections they are
prepared to live with and the reliability of the CPE they wish to connect.
The telecommunicationsservicelicence coversvalue-addedserviceproviders and
network resellers, parties using the lines of the individually licenced carriers to provide
public telecommunications services.
Under both class licences only approved apparatus may be connected to a public
network. Unapproved equipment may be connected by means of an approved barrier
box whichprovides forprotectionofthenetworkagainstspuriousmainsvoltages
generatedin error by the CPE. The technical standards for network interfaces are
lodged by PTOs with the British Approvals Boardf o r Telecommunications ( B A B T ) ,who
must approve equipment for network attachment.
Other than the need for network attachment approval and for conformance with
normal quality andsafety standards, there is little constraint on the market in customer
premises equipment (CPE).
Overall, the whole telecommunications market is regulated by the Ofice of Tele-
communications (Oftel),which is part of the UK government’s Department of Trade and
Industry ( D T I ) .
44.11 UNITEDSTATES TELECOMMUNICATIONS REGULATION
Telecommunications regulation, as all other United States law, is complicated by the
two-tier federal (interstate) and state governing bodies. Thus although federal laws and
regulations apply, these may be supplemented in each state with further local laws.
The FCC (Federal Communications Commission) is the independent United States
government agency, responsible directlyto Congress, and chargedwith regulating inter-
state and international communication by radio, television, wire, satellite and cable.
The FCC Chairman is designated by the President. The jurisdiction of the FCC covers
the 50 states plus the Islands. Its responsibilities and rulings may be categorized into
seven broad areas
0 radio regulations for commercial and amateur radio
0 broadcast services andbroadcaststations
0 other radio services (e.g. aviation, marine, public safety)
- 810 REGULATIONNETWORK AND DEREGULATION
0 common carriers (i.e. telephone and similar service companies)
0 radio licence restrictions
0 call
signs
0 international
matters
The prime instruments of federal regulation are
0 the communications act o 1934 and its amendments, notably the telecommunications
f
reform act o 1996
f
0 FCCreportsanddecisions
0 FCCannualreports
0 FCC registers (of Notices of proposed rulemaking decisions and policy statements)
0 the Code of Federal Regulations (CFR)
Copies of all these documents are available from the US Government Printing Office
(GPO) at
Address
US Government Printing Office (GPO)
Superintendent of Documents
Washington DC 20401
United States of America
Tel: (1)-202-783-3238
In particular, title 47 of the code of federal regulations (CFR) details the FCC Rules
and Regulations, as shown in Table 44.4.
The Rules and Regulations lay down the operating constraints and procedures to be
followed by companies providing inter-state and foreign communications services and
by customers using them. Applications for construction new facilities, licence of new
of
Table 44.4 The FCC Rules and Regulations (Title 47 of the Code of Federal
Regulations (CFR))
Vol. I Parts 0-19 Commission
organization, and
practice
procedure. Commercial radio service and
frequency allocations
Vol. I1 Parts 20-39 Common carrier services
Vol. I11 Parts 40-69 Common carrier services
Vol. IV Parts 70-79 Mass media services
Vol. v Parts 80-end Private radio and direct broadcast satellite
services
- TELECOMMUNICATIONS
UNITED STATES
REGULATION 811
services, discontinuance of old services, and tariff amendments for new or existing
services must be made direct to the FCC, accompanied by the relevant fee, Policies
and rule-making reflect the applications made. The address of the FCC is given in
Chapter 40.
Prior to the reform act 1996 the federal regulations governing telecommunications
of
in the United States had largely come about as the result a number of major judicial
of
rulings, each plaintiff generally seeking a relaxation in the rules add to thatachieved
to
by a predecessor.
Until the early 1950s the telephone companies in the United States, dominatedby the
Bell Telephone System, dictated the services that were available to customers, and laid
down strictconditionsabout theiruse. In general,thesewerequiterestrictive,for
example even going so far prohibiting
as subscribersfromattachingsubscriber-
provided equipment to a telephone company circuit. However, in 1956 a US circuit
court of appeals overturned an FCC ruling that had permitted the Bell Telephone
system to prevent a subscriber from attaching a non-Bell device to his telephone. The
device was the Hush-a-Phone, a mechanical device that clipped onto the handset. This
commenced a period of relatively rapid regulatory change.
In June 1968 a new ruling of the FCC prohibited the Bell System from preventing
subscribers using an acoustically-coupled (i.e. sound-interconnected) device known as
the Carterfone. The Carterfone was designed to interconnect private mobile radio units
to the fixed telephone network without special and expensive equipment. The decision
opened the way for datacommunication over the telephone network, and in 1969 the
FCC allowed independently manufactured (non-Bell) modems to be used on the public
network.
By 1976 the FCC had introduced their equipment registration program. This enables
devices produced by non-telephone company manufacturers be used on thetelephone
to
network, provided that they meet certain stipulated specifications. The specifications are
intended to ensure that terminal equipment does not cause physical or electrical damage
to the network, does not injure telephone company employees and does not impair the
service of other users.
The first real telephone network competition for the Bell System came in 1969 with
the MC1 private wire service. However, by the early 1980s competition was building
rapidly in the resale of long distance telephone service, and there was growing pressure
to reduce the monopoly privileges of the AT&T/Bell company. The pressure led to the
drawn out AT&T anti-trust suit, and finally to Judge Green’s mod$edfinal judgement
which concludedit.The mod$ed jinal judgement was the vehicle for AT&T (Bell
company) divestiture, breaking the company up into AT&T (as a long distance carrier
and equipment manufacturer) andseven Regional Bell Operating Companies (RBOCs).
The seven RBOCs (Ameritech, Bell Atlantic, Bell South, NYNEX, Pacific Bell,
Southwestern Bell and US West) were of roughly equal asset size and were established
to take over the local call transport services of the former AT&T/Bell company. The
RBOCs,however, were prohibitedfromprovidinglongdistanceservicesandfrom
manufacturing equipment. Meanwhile AT&T was prohibited from local call transport
services and from activity as a yellow pages operator.
As a toll provider, AT&T competes with a number of other licensed toll telephone
service providers, principally MC1 and US Sprint. To ensure fair competition between
them, the FCC laid down equal access regulations governing the access arrangements
- 812 REGULATION NETWORK AND DEREGULATION
with the localtelephonecompanies.Thesecameinto full forcein 1986, butpara-
doxically the framework was not seen by all as entirely equal, because AT&T as the
established and ‘dominant’ carrier was necessarily subject to greater regulation to curb
its de facto monopoly strength, but had an established customer base and considerable
assets.
The domains of toll trafJic and local call transport are defined according to whether
callspassbetween or remainwithinasmallgeographical area known as a LATA.
About 160 L A T A s (local access and transport areas) make up the United States. Toll
calls (inter-LATA) are those which cross LATA boundaries and were, until the reform
act of 1996, the sole province of inter-exchange carriers (ZECs). Meanwhile, local (intra-
LATA) calls were (until the 1996 reform act) the domainof local telephone companies.
Toll carriers come under federal jurisdiction, whereas local telephone companies are
largely governed by the regulations of the relevant state public utilities commission.
Individual state Rules and Regulations need to be interpreted separately as they affect
inter- and intra-LATA telecommunications services. Application is suggested directly
to the relevant state agency.
Federal telecommunications legislation was greatly overhauled by the telecommuni-
cations reform act of 1996. The main provisions of this legislation were
0 the first reform of United States communications law since 1934
0 the ending of the monopoly in local telephone services (the RBOC monopoly over
local lines and intra-LATA traffic)
0 the introduction of greater customer choice in selection of cable TV companies, as
both local and long distance providers can now provide these services
0 the stimulation of ‘advanced’ digital television services
0 new rulessettingout criminal and civil penalties on dissemination obscene
of
information, particularly on the Znternet
Table 44.5 Review of leading deregulated telecommunications markets outside Europe
and USA
Legislation governing
Country telecommunications Regulatory agency
Australia General policy framework, 1988 Austel
Canada RailwayAct, 1906 validuntilearly 1990s -
Competitive basis for National Common
Carriers (NCCS), 1987
Japan Telecommunications
Business Law, 1985 MPT (Ministry of Posts and
NTT Law, 1985 Telecommunications)
New Zealand Law from 1 April 1989 removed, now Normal trading regulators
subject only to normal industrial trading
laws and regulations
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