Banded forbearance article published in International Journal of Regulation & Governance

Posted on July 13, 2009  /  0 Comments

Banded forbearance, a concept we have been working on since early 2007 which was further developed in our interactions with the Communications Authority of the Maldives, has just been published as a refereed journal article by the International Journal of Regulation and Governance.

A previous version of this article was selected for presentation at the CPRsouth 3 conference in Beijing in December 2008.

The abstract is given below:

Fast growing telecom markets, especially in the developing world, are attracting new types of users, especially those at the Bottom of the Pyramid (BOP). Innovative pricing is needed to respond to this increasingly heterogeneous demand. However, many regulators still claim to regulate prices using methods from the monopoly era, despite lacking capacity to effectively regulate proliferating tariff plans. What actually happens is that tariffs are “approved” for the most part without proper review.

One response has been asymmetric regulation/forbearance, wherein the regulator determines that certain operators do not have significant market power (SMP) and frees them from regulatory burdens, including, in many cases tariff regulation. This still leaves a few operators (possibly one each in different markets such as fixed, mobile, and broadband) under tariff regulation. They are required to file tariffs, and if not go through formal proceedings, at least go through a staff review. Given the leakiness of most regulatory agencies, this puts them at a significant disadvantage because their competitors can prepare precisely targeted and timed responses, unencumbered by regulation.

Forbearance was included in the 1997 legislation that created the Telecom Regulatory Authority of India (TRAI) (prior to the EU asymmetrical regulation model being fully developed). Possibly as a result, TRAI did not forbear from tariff regulation on the basis of SMP: all tariffs in urban areas were forborne, with some limited regulatory authority retained in rural areas. The results were some of the lowest tariffs in the world (Samarajiva, 2008).

Based on this lesson, it is proposed that “banded forbearance” be introduced, even in countries with far fewer competitors than in Indian circles (licensing areas). In this form of benchmark regulation, the regulator will: define a benchmarking methodology such as an adaptation of the OECD basket methodology, including peer countries and weights; define a band of allowed variance above and below, what is likely to be a moving benchmark, within which prices will be fully forborne; and specify competition-related criteria that will be used to evaluate price movements below the lower band (e.g., limited to tests on predation and price squeeze). Time limits and default outcomes can also be specified.

The introduction of bands and specified criteria will allow operators to use innovative marketing strategies, while retaining safeguards that may be important in markets with few competitors and possibly significant control over essential facilities by incumbents. It will also result in refocusing regulatory energies on creating the conditions for competition rather than sterile calculations of the X in RPI-X. The production and timely dissemination of standard price, minutes-of-use, and call-distribution data needed for OECD type benchmarking will also result in reducing the opacity of pricing for consumers, thus sharpening competitive pressures and improving the customer experience.

IJRG is a relatively new (2000 on) international journal based in New Delhi. We encourage authors to submit articles to IJRG and those working on regulation topics to subscribe.

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