TELECOMMUNICATIONS t REFORM IN GERMANY: LESSONS AND PRIORITIES Bonn, Germany Conference Repor 20 November 1997 American Institute for Contemporary German Studies The Johns Hopkins University Conference Report TELECOMMUNICATIONS REFORM IN GERMANY: LESSONS AND PRIORITIES Bonn, Germany 20 November 1997 American Institute for Contemporary German Studies The Johns Hopkins University The American Institute for Contemporary German Studies (AICGS) is a center for advanced research, study, and discussion on the politics, culture, and society of the Federal Republic of Germany. Established in 1983 and affiliated with The Johns Hopkins University but governed by its own Board of Trustees, AICGS is a privately incorporated institute dedicated to independent, critical, and comprehensive analysis and assessment of current German issues. Its goals are to help develop a new generation of American scholars with a thorough understanding of contemporary Germany, deepen American knowledge and understanding of current German developments, contribute to American policy analysis of problems relating to Germany, and promote interdisciplinary and comparative research on Germany. Executive Director: Jackson Janes Research Director: Carl Lankowski Board of Trustees, Cochair: Steven Muller Board of Trustees, Cochair: Harry J. Gray The views expressed in this publication are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies. ©1998 by the American Institute for Contemporary German Studies ISBN 0-941441-37-7 This AICGS Conference Report paper is made possible through grants from the German Program for Transatlantic Relations, AT&T and o.tel.o communications GmbH. Additional copies are available at $5.00 each to cover postage and processing from the American Institute for Contemporary German Studies, Suite 420, 1400 16th Street, NW, Washington, D.C. 20036-2217. Telephone 202/332-9312, Fax 202/265-9531, E-mail: [email protected], Web: http://www.jhu.edu/~aicgsdoc ii C O N T E N T S Foreword..................................................................................................v INTERCONNECTION AND UNBUNDLING POLICY IN NORTH AMERICA Richard Simnett..........................................................................1 INDEPENDENCE AND THE REGULATORY ARRANGEMENT ISSUES IN INSTITUTIONAL DESIGN Richard J. Schultz......................................................................12 LONG RUN INCREMENTAL COSTS AND THE REGULATION OF INTERCONNECTION CHARGES IN THE UK Geoffrey Myers..........................................................................22 COSTING AND PRICING OF INTERCONNECTION SERVICES IN A LIBERALIZED EUROPEAN TELECOMMUNICATIONS MARKET Günter Knieps ..........................................................................51 COSTING AND PRICING OF INTERCONNECTION CHARGES IN THE U.S.: LESSONS FOR GERMANY? Ingo Vogelsang...........................................................................74 INFRASTRUCTURE COMPETITION AND LOCAL-LOOP UNBUNDLING Martin Cave & Peter Crowther................................................102 UNIVERSAL SERVICE OBLIGATIONS: COMPARISON OF THE UNITED STATES WITH THE EUROPEAN UNION Dr. Barbara A. Cherry............................................................113 iii RECENT DEVELOPMENTS IN THE REGULATION OF INTERNATIONAL TELECOMMUNICATIONS Dr. Andrea Huber..................................................................130 Conference Agenda............................................................................150 iv F O R E W O R D As part of its focus on comparative public policy issues of importance to the United States and Germany, AICGS has been monitoring the development of telecommunications reform in Germany before and after the passing of new telecommunication legislation in the summer of 1996 and continuing through the establishment of the Regulatory Authority on Telecommunications, effective January of 1998. While the challenges Germany has faced in this fast-changing sector have been significant, the telecommunications maker in Germany has adapted quickly to globalized competition, assessing experiences of other countries, including the United States. In order to shed light on the lessons of telecommunications reform, AICGS organized a conference on November 20, 1997 in Bonn during which several presentations were made on the central issues revolving around telecommunication regulatory arrangements on both sides of the Atlantic. The conference was attended by telecommunications policy officials and industry executives as well as research experts from the United States and Europe. The result of this conference were incorporated into this publication. We are grateful to the eight authors who provided us with their assessments of the agenda in the ongoing developments in telecommunications reform. We also wish to express our deep appreciation to Prof. Juergen Mueller of the Berlin School of Economics (FHW) who provided both the intellectual leadership and the organizational assistance in making both the conference and the publication possible. This publication was supported by a grant from the German Program for Transatlantic Relations and the German Marshall Fund of the United States. Jackson Janes Executive Director December 1998 v vi INTERCONNECTION AND UNBUNDLING POLICY IN NORTH AMERICA Richard Simnett 1. INTRODUCTION This short paper is intended to highlight some of the key elements of regulatory policy in the U.S. and Canada in order to provide a perspective for European regulators and other interested parties. I have drawn upon several regulatory documents and rate filings to show that the context of rate setting in both the U.S. and Canada is quite different from that in Europe, and that, unless the differences are understood, apparently similar policies (from verbal descriptions) can turn out to have radically different consequences. 2. THE POLICY CONTEXT IN U.S. AND CANADA The U.S. and Canadian telecommunications markets have been dominated by government-regulated private monopolies for nearly all of the twentieth century. Similar regulated rate structures evolved, with long distance charges substantially higher than costs providing the funds for carriers to sustain residential basic service rates at rates below their accounting costs, in many cases including unlimited free local calling. Business rates are higher, generally covering their accounting costs. Both the U.S. and Canadian authorities have introduced competition into the telephone industry, and have responded in different ways to the needs for reform. Both sets of regulators recognize the need to reform the distorted price structure so that efficient price signals are sent to entrants, and incumbents have a chance to compete. Residential rate rebalancing to bring rates more into line with economic costs (as required for equitable treatment of the regulated firm in a competitive market) has been very cautiously approached with extended (five years or more) transition periods for any substantial change in residential line rates. The policy context also differs from what Europeans might assume. The U.S. Telecommunications Act of 1996 imposes obligations on incumbent local exchange carriers (ILECs) specifically, and on Bell Operating Companies (BOCs) as a special class within the ILECs. ILECs must offer unbundled network elements, wholesale services for reseller competitors to use, and ordinary retail and long distance carrier access services. Currently there are several different costing and pricing standards in effect for these different services, creating potential arbitrage opportunities. The U.S. legislative focus on ILECs is different from one focusing on dominant firms with market power Telecommunications Reform in Germany and the ability to abuse it, and Federal Communications Commission (FCC) proceedings have not yet reached the issue of under what conditions ILECs might be deregulated. One state commission (Colorado) notified entrants that they too would become incumbents a number of years after they commenced service. Entrants are almost wholly unregulated. In Canada regulators have focused instead on the essential facilities doctrine, drawn from antitrust law, and have decided to impose only those requirements which they believe will encourage long term facilities-based competition and whose benefits will outweigh their costs. Some of these obligations are to be applied to entrants too, since they may attain local dominance or might be able to leverage dominance of one relationship into excess profits in another. In particular, a customer selecting carrier A as his provider of access lines and local calling gives Carrier A the opportunity to set high call termination charges for callers (and their carriers) trying to reach that customer. The Canadian Radio-Television and Telecommunications Commission (CRTC) has imposed interconnection obligations on entrants, and also retained its powers to regulate these rates, terms and conditions. Canadian entrants are also required not to discriminate among other carriers for interconnection and long distance services. 3. UNBUNDLED RATE STRUCTURES In both the U.S. and Canada there is a substantial degree of geographical rate variation, with access line charges varying inversely to the density of the area in which the service is provided. It costs much more to serve areas with low numbers of access lines per square mile than dense urban and suburban areas or high density buildings