Michael Griffin, who comments on Fourth Generation economic regulation

Michael Griffin is a Senior Director with Jacobs Cordova & Associates Dublin and a former Director Value for Money in the Office of the Comptroller and Auditor General in Ireland. Contributions from Cesar Cordova Novion, Senior Director, Jacobs Cordova & Associates Paris and Jorge Velasquez Roa, Senior Associate, Jacobs Cordova & Asociados Mexico.

The focus of this blog is on the changing nature of economic regulation referring to market interventions that can affect pricing, competition, market entry and market exit in economic sectors. Economic regulation is not a static phenomenon. It changes over time as the understanding and experience of changing regulatory environments unfolds. Technology, in particular through the introduction of new services, disruption of traditional services and the lowering of the costs of transactions and information, has a significant influence on the complexity and scope of the regulatory task. With increased market globalisation and technological advances, the mission, structures and resources of economic regulators must also adapt. Regarding economic regulation, there has been some evidence of a move away from sector-specific regulation and toward supra-sectoral regulation usually accompanied by a move toward greater reliance on competition law.

The discussion relates mainly to the ICT sector but the principles relate equally to other regulated sectors undergoing significant environmental and technological change.

 

 

Economic Regulation in recent years

Purpose of Economic Regulation

It is useful to recall that the primary purpose of economic regulation is

“… to facilitate, imitate or enhance markets by correcting for entry imperfections and dealing with price, quality and reliability of service, supplier market entry and exit, and infrastructure investment.”

[i].

While the boundaries may be relatively fixed, economic regulation is not a static phenomenon. Developed and developing economies have seen considerable change in recent decades. Part of the change has occurred in the regulatory arena, particularly where governance mechanisms – the set of systems, structures and processes by which regulation is carried out – are concerned. In many countries this has required considerable change from what had historically been centralised arrangements. Such centrality was particularly evident in Ireland; see extract below from a Ministerial Policy Paper for Ireland from the year 2000 in BOX 1.

 

Box 1: Traditional Model for Regulatory Governance in Ireland

“In Ireland, the Minister for Public Enterprise has traditionally had a three-fold responsibility in relation to the sectors coming within the Minister’s remit.  Firstly, the Minister has held central responsibility for developing public policy for the transport, energy and communications sectors.  Secondly, the main shareholding interest in the State bodies providing the services – typically on a monopoly basis – has been held by the Minister.  Thirdly, the Minister has exercised a regulatory function by overseeing the operation of the relevant sectors, with a view to promoting the provision of services in a fair, safe and economical manner, while ensuring the effective allocation of scarce resources”. Source: Department of Public Enterprise (2000), ‘Governance and Accountability in the Regulatory Process’, Dublin;

 

A common approach to economic regulation has been for countries to separate regulatory functions from the other duties of government and to transfer them to independent statutory bodies, involving a delegation of power from the centre.  However, in the interest of democracy, such delegation of responsibility to non-elected regulators that are outside ministerial responsibility needs to be accompanied by clearly-defined accountability mechanisms. Moreover, good regulatory practice requires the mandates of sectoral regulators to be clear, consistent and transparent, while at the same time providing as much certainty as possible. This helps to improve the investment climate for large-scale private investment by moving the regulatory process outside the political sphere of influence.

 

michael griffin img1

Influence of EU

While, in general, regulatory governance is driven by domestic policy requirements, EU Member States must also have regard to EU policy initiatives. During recent decades, EU Member States have been significantly influenced by policies and legislation adopted at EU level. The liberalisation of utility sectors traditionally dominated by monopoly State-controlled entities has been a key element of EU competition, economic and internal market policy since the 1980s. The EU has, since that time, developed programmes of staged liberalisation designed to bring about the benefits of competition in a planned way. These programmes have included provisions for the establishment of national regulatory authorities whose functions are required to ensure that all users have access to a minimum standard of services at affordable prices and the intervention powers available to them.

In the move from monopoly supply to more competition and more competitive markets, further intervention has been required to facilitate new market entrants, ensure customer protection and also ensure that all users have access to a basic level of services at reasonable prices. This has required a range of pro-active interventions that differ from the range of tasks undertaken in regulating traditional monopoly markets. Such markets in their transition phases are dynamic, require various forms of ex-ante intervention, i.e. preventative rather than corrective measures, and demand a dedicated and expert focus. Communications is one market where technological development has been rapid and extensive. As a consequence, regulators are today required to carry out regulatory tasks that are significantly different and more complex than those that they were carrying out previously.

 

Fourth Generation Regulation

A trend identified in a 2013 ITU report[ii] suggested a framework for understanding the evolution of telecommunication regulation, postulating three different “generations” of regulatory practice. A later ITU report[iii], Trends in Telecommunications Reform, added a fourth generation, as follows:

  • First generation: Monopoly (either public or privately owned) utilities were closely managed, with the intent to encourage improvements in efficiency and service. In effect, regulation simulated the desired effects of competition.
  • Second generation: Characterized by partial privatization and licensing of competing infrastructure providers, this phase of regulation focused on balancing the goal of opening up access to incumbents’ networks with the need to protect government infrastructure investments and ongoing shareholdings.
  • Third generation: With full privatization, regulation shifted toward a focus on protecting competition in service and content delivery, with an increasing perception of the need for consumer protection.
  • The full development of digital communications is now heralding a fourth generation of regulation. Prompted by recent market and technology developments, government policy-makers face even greater calls to ensure access to digital infrastructures –particularly fixed and mobile access networks. Broadband networks and Internet services are increasingly viewed as non-optional utilities (or “rights”) whose availability and performance impact every aspect of the economy and societal development.

The Foreword to the ITU report sets out the key issue and asks the key question as follows:

“As the ICT sector transforms, converges and evolves, the role of the regulator is itself subject to redefinition and evolution. Spectrum managers must contemplate new ways to realize the value of spectrum as a resource, including new ways to share spectrum among multiple, competing uses. Telecommunication regulators must confront new disciplines – content and financial services regulation, for example – or determine how to coordinate their efforts with existing broadcasting and banking regulators. Do existing statutory and regulatory frameworks continue to serve a converged and rapidly evolving ICT ecosystem, or are they too static and frozen in time?” (Emphasis added)

 

Regulatory Tools

Regulatory tools play an important role in regulatory governance. The essential tools include market analysis, regulatory impact analysis (RIA) and cost-benefit analysis. Other tools available include administrative simplification, regulatory alternatives, and ex-post evaluations of existing regulation. In addition, regulators have increased the use and refined the ways and means of public consultation and communication as part of the modernisation of their toolkit.

As regards RIA, the OECD in a report on ‘regulatory policy and governance’ (OECD, 2012) recommended integrating

“ … Regulatory Impact Assessment (RIA) into the early stages of the policy process for the formulation of new regulatory proposals. Clearly identified policy goals and evaluation of regulation is necessary and how it can be most effective and efficient in achieving those goals. Consider means other than regulation and identify the trade-offs of the different approaches analysed to identify the best approach”[iv].

And, in addition, the OECD argues that RIAs should be supported with clear policies, training programmes, guidance and quality-control mechanisms for data collection and use. These should be integrated early in the processes of developing policy.

On 19 May 2015, the EU enhanced its regulatory requirements, including impact assessment requirements, when it unveiled plans to provide for Better Regulation in the EU[v]. The First Vice-President of the European Commission, Frans Timmermans, announced a package of reforms that cover the entire policy cycle. The package has been designed to:

  • increase openness and transparency in the EU decision-making process;
  • improve the quality of new laws through better impact assessments of draft legislation and amendments; and
  • promote constant and consistent review of existing EU laws, so that EU policies achieve their objectives in the most effective and efficient way.

It should be noted in particular that the European Commission will be strengthening its approach to impact assessment and evaluations to improve the evidence-base that underpins all legislative proposals, without prejudice to political decisions. As part of that enhancement, the Commission’s Impact Assessment Board, which was set-up in 2006, has been transformed into an independent Regulatory Scrutiny Board.

Of course, there is little point in having RIAs done merely as box-ticking exercises. Their true value lies in helping government to make decisions by providing evidence of the positive and negative effects of different options for regulatory change. In this regard, Ferris has argued recently for a more robust system of RIA in Ireland[vi]. More recently, the Fine Gael political party set out in its election manifesto a commitment to

“ … step up the use of impact assessments across Government. We will publish new guidelines taking account of the latest EU and OECD smart regulation practices. A screening impact assessment, at a minimum, will have to accompany all primary legislation and significant secondary legislation.”

In a 2014 Paper for the UNDP Global Centre for Public Service Excellence, Lorenzo Allio argued that RIAs should be conducted

“…at the very outset of the policy planning and formulation process, not as an ex post justification of a decision already taken. Assessments should be comprehensive and consider all dimensions and types of impacts – economic, social and environmental. When conceived as a ‘process’, RIA analytical steps bear the potential to significantly inform all stages of decision-making”[vii].

He went on to argue that “ … conceptual elements introduced through RIA prompt regulators to consider problems more systematically and to embrace a wide perspective in impact analysis”.

From a fourth generation regulation perspective, these tools all remain valid but the application of the tools becomes more complex and the skills required to implement them in a converged digital economy are not readily-available. It is becoming clear that RIA is extremely difficult to do when preparing or reviewing a policy intervention or regulation particularly in the context of issues such as privacy and security, data ownership, speed-of-light communications and data transfer and is becoming a philosophical issue as much as, or more so than, a technical issue.

However, help is available and many organisations provide advice. For example, the ICT Regulation Toolkit, produced by the Information for Development Program (infoDev) and the International Telecommunication Union (ITU), provides a practical, up-to-date web-based tool intended for ICT policymakers and regulators around the world. This toolkit covers a number of specific topics including competition and pricing, authorisation, universal access, radio spectrum management, legal and institutional frameworks, and new technologies. The toolkit also contains extensive practice notes and reference materials[viii].

Tools, such as those listed above, help to maintain the quality of the regulatory framework. However, regular reviews are needed to avoid problems such as duplication of rules, un-intentioned overlapping of regulatory agencies, low-quality regulation, or uneven enforcement. Further difficulties can arise where a regulatory framework has not adapted to a converged environment. Difficulties include a lack of regulatory certainty leading to under-investment, delayed decision-making and additional regulatory costs borne by industry.

Where the markets and services provided are converging, the regulatory framework also needs to converge in order to align the regulatory body with the environment. In practice this means, at the very least, reassessing any memoranda of understanding between, for example, a communications regulator, a broadcasting regulator, a spectrum agency and the competition agency. Restructuring the regulatory agencies is also possible if clear coordination mechanisms cannot be put in place.

For example, the Government of Jamaica requested Jacobs Cordova & Associates to review the administrative and regulatory framework and governance model for the ICT sector and provide specific recommendations for drafting appropriate strategic legislation for the establishment of a converged stand-alone ICT regulator. The work also sought proposals for an organisational structure for the establishment and implementation of a converged stand-alone ICT regulator. Jamaica is adapting its legal and institutional regulatory framework to ensure that its regulatory function keeps in touch with converging service platforms and delivery mechanisms.

 

Ireland’s Reappraisal of Economic Regulation

Forfás’ Report, 2004

In Ireland, Forfás[ix] produced a report in 2004 that raised a number of issues associated with sectoral regulation. Specifically, it noted

  • the proliferation, cost and lifespan of regulators;
  • the lack of co-ordination between regulators and the Competition Authority, despite the existence of a range of bilateral cooperation agreements;
  • the continued dominance of single companies in most sectors;
  • the increases in prices of regulated services;
  • the perceived inability of the regulatory regime to achieve national development objectives, such as broadband usage in telecommunications;
  • Ireland’s small market size and geographical location;
  • Effective barriers to trade in many of the sectors in question, and
  • Rapid technological change.

Forfás went on to recommend to Government that the existing regulators for networked sectors (for example, electricity, gas, telecommunications and broadcasting) should be replaced by a new regulatory body covering all networked sectors. In addition, Forfás went on to argue for the merging of a number of regulators to create a larger multi-sectoral regulatory body, as it could yield significant benefits, including:

  • The development and utilisation of more specialised resources and skills; (legal, economic, etc.) to promote competition and an ability to shift resources more easily away from sectors declining in importance;
  • A greater ability to identify and deal with convergence in technologies, markets and other cross-sectoral regulatory issues more effectively;
  • The development of a common approach and consistency of regulation across sectors;
  • A reduction of costs to regulated sectors, as larger agencies can be more efficient through economies of scale, especially in advocacy, legal work and back office functions, and
  • An enhanced ability to deal with legal or political challenges to the independence of the regulators.

In response, the Government implemented, in part, the main Forfás recommendation. Accordingly, there are now two regulatory organisations that are responsible for a number of individual sectors:

  • The Commission for Energy Regulation (CER) is Ireland’s independent energy (gas and electricity) and water regulator, and
  • The Commission for Communications Regulation is Ireland’s statutory body responsible for the regulation of the electronic communications sector (telecommunications, radiocommunications and broadcasting transmission) and the postal sector.

 

Forfás’ Report, 2012-2103 and Irish Government’s Economic Statement, 2013

During 2012-2013, Forfás undertook a further review of regulation to identify changes in the operation of sectoral regulators that would enhance cost competitiveness and provide more generally a base of evidence and input into work on the effectiveness of economic regulation[x]. As well as engaging in two in-depth rounds of consultation with regulators, relevant Government departments, regulated firms (both incumbents and other market players), representative organisations, academics, and the European Commission, Forfás also undertook an extensive analysis and literature review of sectoral and economic regulation in Ireland.

The Forfás review fed into the Irish Government’s Economic Statement of July 2013[xi]. That statement developed a hierarchy of objectives to allow Ministers to articulate national and sectoral outcomes while allowing regulators to achieve these outcomes in an independent manner. The Statement included a requirement for Ministries to draft sectoral legislation whereby Ministers can issue policy direction and guidance as appropriate to the economic regulators within the context of overriding national objectives. In addition, the Statement established that the model of expanding the mandates of existing regulatory bodies will be used by Government when establishing any new regulatory functions in the various sectors[xii]. In tandem with that policy, the Statement decided to have a policy of shared services as a method to achieve cost-savings. Accordingly, Departments are now required to develop a shared services approach to regulation.

This involves:

  • The identification of which regulators will share front and back office administrative functions;
  • Departments facilitating the development of memoranda of understanding between the regulatory organisations to establish common front and back office administrative functions and putting in place transition teams to manage the process, and
  • As part of the shared services approach, incorporate a combined Employment Control Framework (ECF) for reductions in staff, and target reductions in administrative costs where feasible.

Finally, the Statement included a list of economic regulation related commitments either completed or then underway. The list is reproduced in Box 2.

 

Box 2: Irish Government’s Policy Statement on Sectoral Economic Regulation 2013

Selected Extracts:

1.    The merging of the Commission for Taxi Regulation into the National Transport Authority;

2.    Restructuring of the Irish Aviation Authority and the Commission for Aviation Regulation;

3.    The drafting of legislation for the merger of the Competition Authority and the National Consumer Agency;

4.    Broadcasting Authority of Ireland and the Commission for Communications Regulation merger review;

5.    Assignment of an independent economic regulatory function for water services to the Commission for Energy Regulation

6.    The completion of the Forfás review on sectoral regulation;

7.    The development of a National Aviation Policy and conduct of a regulatory mandate review; and

8.    The development of a new Energy Policy framework.

Source: Regulating for a Better Future: A Government Policy Statement on Sectoral Economic Regulation July 2013

 

Move towards Supra-sectoral regulation

Recent OECD research tracks evidence of a move towards supra-sectoral regulation and the expansion of the remit of competition authorities. These developments reflect a new focus on ensuring consistent, best practice regulatory approaches across different industries. According to the OECD, three Member States of the EU – Germany, Latvia and Luxembourg – have established wider-ranging multi-sectoral agencies that are responsible for regulating a number of unconnected industries[xiii]. The positive experience of Latvia is recorded in Box 3.

 

Box 3: Conclusion from Report on Latvia’s Multi-sectoral regulation of services of general economic interest; ten years’ experience

“In total one can see that it would be impossible to achieve current efficiency of regulation, to manage all processes and to perform all activities having a number of sectoral regulatory bodies. Although a comprehensive evaluation of the influence of this regulatory model on general development of Latvia is before us, the multi-sectoral model can be appraised as the most advanced and preferable one, especially for small countries (i.e., for majority of European countries)”.

Source: Karnitis, Edvins and Virtmanis, Andris, http://www.sprk.gov.lv/uploads/doc/Multiregulator.pdf

The Netherlands recently (2013) established a multi-purpose regulator by merging the Netherlands Consumer Authority, the Netherlands Competition Authority (NMa) and the Netherlands Independent Post and Telecommunications Authority (OPTA), creating the Netherlands Authority for Consumers and Markets (ACM). The ACM is an independent authority that creates opportunities and options for businesses and consumers alike. It is responsible for the economic regulation of water, energy, telecommunications and transport, and competition and consumer protection.

In Ireland, the Competition and Consumer Protection Commission was established on 31 October 2014 and is the statutory body responsible for enforcing consumer protection and competition law in Ireland. It brings together the former Competition Authority and the National Consumer Agency. The Commission investigates and challenges practices that are damaging to consumers and/or the wider economy and stops anti-competitive behaviour and practices that are harmful to consumers. It also provides information to consumers and examines certain mergers and acquisitions to ensure that there is not a substantial lessening of competition in Ireland. The Commission also advises policy makers and has a role in product safety

In New Zealand, the Commerce Commission is New Zealand’s primary competition regulatory agency. It is responsible for promoting competition in New Zealand markets and prohibits misleading and deceptive conduct by traders. The Commission also enforces a number of pieces of legislation that, through regulation, aim to provide the benefits of competition in markets where effective competition does not exist. This includes the telecommunications, dairy, electricity, gas pipelines and airport sectors.

In Mexico, a Constitutional reform in 2013, whose implementation is still under way, overhauled the regulatory and institutional framework of the telecommunications sector. A new telecommunications regulator with extended powers – the Federal Telecommunications Institute (IFETEL) – was created. Among the most important changes, the IFETEL was given full constitutional autonomy (at the same level as the Central Bank) to reinforce its independence, its regulatory and enforcement authority in the telecommunications sector was expanded to the broadcasting sector (TV and radio), and it was vested with powers to act as the competition regulatory agency for the telecommunications and broadcasting industries.

Before this reform, the competition regulator was the only authority in Mexico responsible for promoting competition and enforcing competition law across all sectors of the economy, including telecommunications. As part of the constitutional reform, the new Federal Economic Competition Commission (CFCE) was also given full constitutional autonomy, new tools to implement competition policy, but its authority over the telecommunications and broadcasting sectors was transferred to the IFETEL.

 

BOX 4:  EXTRACT FROM OECD REPORT ON VALUE FOR MONEY – BUILDING ON BASICS

Multi-sectoral agencies can provide regulatory consistency, particularly where there is technological convergence or product bundling, economies of scale and scope in regulation and reduced risk of regulatory capture. The trend toward maximising the use of the general competition law as the basis for regulating network based industries will necessarily also have implications for the structure of regulatory institutions. Specifically, it will tend to expand the remit of the competition authority itself, while it is also logical to expect an accompanying trend away from the use of sector-specific economic regulatory agencies, for four reasons.

1. First, if enforcement action under the general competition law is generally undertaken by the competition authority, the scope of action of sector-specific regulators may tend to decline over time making the maintenance of a “critical mass” in terms of human resources and expertise a progressively more difficult task.

2. Second, given that moves toward the use of the general competition law are substantially predicated on seeking to maximise consistency of approach to interpretation and implementation, the same pressures will tend to promote the case for multi-sectoral regulators to be used in preference to sector-specific regulators to the extent that the competition authority does not, itself, take on the regulatory role.

3. Third, cross sectoral regulators generally provide a more attractive working environment for special staff, including greater career development opportunities.

4. Fourth, as argued by Sommer (2001), technological convergence between some sectors, as well as the commercially driven development of multi-sectoral utility companies, would require, at a minimum, effective co-ordination between sectoral regulators and may thereby create pressure toward the further development of multi-sectoral regulators.

Within the context of the objectives of the OECD Value for Money study, it appears that the multi-sectoral regulator model has significant potential to yield both regulatory cost savings and improvements in regulatory effectiveness.

 

The OECD[xiv] notes that there is a trend away from sector-specific regulators to multi-sectoral regulators reflecting the accumulation of individual policy choices, rather than being driven by conscious policy and without a clear policy position. Most of the research in the area highlights a range of benefits and drawbacks of the two competing models and suggests that the balance between these is likely to differ in individual circumstances.

 

Conclusion

The need for economic regulation continues but in some sectors rapid technological advances are taking place and regulators need to address more and more complex issues. In addition, the traditional boundaries of many sectors are no longer clearly defined. For example, energy companies now sell broadband telecommunications services, waste companies sell energy and supermarkets sell mobile telephony services. In the context of communications services, the market is now far more developed and mature than it was when most regulators were established, although issues still remain in areas such as broadband availability. Other countries are now moving towards the establishment of multi- sector regulatory agencies.

These and other change-drivers lead to a need to re-examine the institutional framework in order to ensure that economic regulation continues to meet the needs of all stakeholders. The institutional framework in Ireland has been examined before – in 2004 when the creation of a regulatory body for all networked sectors was recommended and more recently, in 2013, when a shared services model for regulators was recommended. It is now almost 20 years since ComReg, and its predecessor the Office of the Director of Telecommunications Regulation, was established. As part of the ongoing development of economic regulation, a new institutional framework to address converged markets and technologies should now be considered which we refer to as 4G regulation. To quote from the recent 2015 OECD report on Value for Money “the multi-sectoral regulator model has significant potential to yield both regulatory cost savings and improvements in regulatory effectiveness.”

 

 

Notes

[i] César Cordova-Novion and Deirdre Hanlon (2002), ‘Regulatory Governance: Improving the Institutional Basis for Sectoral Regulators’,  OECD Journal on Budgeting, Vol. 2, No. 3, Paris;  www.oecd.org/gov/budgeting/43505850.pdf

 

[ii] ITU Trends in telecommunication reform 2013: http://www.itu.int/dms_pub/itu-d/opb/reg/D-REG-TTR.14-2013-SUM-PDF-E.pdf

 

[iii] ITU Trends in Telecommunication Reform Special Edition – Fourth-generation regulation: Driving digital communications ahead 2014 http://www.itu.int/dms_pub/itu-d/opb/pref/D-PREF-TTR.15-2014-PDF-E.pdf

 

[iv] OECD (2012), ‘Recommendation of the Council on Regulatory Policy and Governance’, Paris: www.oecd.org/governance/regulatory-policy/49990817.pdf

 

[v] European Commission (2015), ‘Better regulation for better results – An EU agenda’, 19 May 2015, Strasbourg:http://ec.europa.eu/smart-regulation/better_regulation/documents/com_2015_215_en.pdf

 

[vi] Ferris, Tom (2015), ‘It’s all change analysis-wise in corridors of power’, 5 June 2015, Irish Independent, Dublin:  http://www.independent.ie/opinion/comment/its-all-change-analysiswise-in-corridors-of-power-31278891.html

 

[vii] Allio, Lorenzo (2014), ‘Design Thinking for Public Service Excellence’, UNDP Global Centre for Public Service Excellence, Singapore, http://www.undp.org/content/dam/uspc/docs/GPCSE_Design%20Thinking.pdf

 

[viii] International Telecommunication Union (2015), ‘Regulation Toolkit’, website: www.ictregulationtoolkit.org/1

 

[ix] Forfás was Ireland’s policy advisory board for enterprise, trade, science, technology and innovation. On 1 August 2014, the policy functions of Forfás were integrated with the Department of Jobs, Enterprise and Innovation.

 

[x] Forfas (2012-2013), ‘Sectoral Regulation’, Dublin:

https://djei.ie/en/Publications/Publication-files/Forf%C3%A1s/Sectoral-Regulation.pdf

 

[xi] Department of the Taoiseach (2013),  ‘Regulating for a Better Future: A Government Policy Statement on Sectoral Economic Regulation’, Dublin: www.taoiseach.gov.ie/eng/Publications/Publications_2013/Policy_Statement_on_Economic_Regulation_2013.pdf

 

[xii] In this context, it should be noted that responsibility for water regulation has been assigned to the Commission for Energy Regulation (CER), rather than setting-up a new regulatory body.

 

[xiii] OECD (2015), Building on Basics; Value for Money in Government, OECD Publishing, Paris: http://www.ifuturo.org/documentacion/Value%20for%20money%20in%20government.pdf

 

[xiv] Value for Money in Government – Building on Basics OECD 2015