ESTABLISHING AND MAINTAINING REGULATORY INDEPENDENCE

Establishing an independent regulatory authority is a crucial factor in the success of any country's effort to introduce competition and to privatize and liberalize the telecommunications sector. Once the decision has been made to establish a pro- competitive, liberalized and privatized regime, it is essential to establish an impartial referee to create the rules and processes by which the industry is to be regulated and service to the public will be provided.

Regulatory agencies have taken many forms. Some countries have regulatory departments within a government ministry. Other countries have regulatory bodies that are separate, yet accountable to a ministry. Still others have regulatory agencies that are separate from, and not accountable to, any government ministries. A few countries have no regulatory bodies and regulate telecommunications providers through the country's antitrust or consumer-protection laws.

An effective regulator should be independent from those it regulates, protected from political pressure, and given the full ability to regulate the market by making policy and enforcement decisions. The regulator should have the authority and jurisdiction to carry out its regulatory and enforcement functions effectively and unambiguously. And the regulator must be adequately funded from reliable and predictable revenue sources.

While there may not be one regulatory framework that suits every country, some models have proven to be more successful than others in fostering liberalized, privatized, and competitive telecommunications markets.

The notion of regulatory independence encompasses at least three concepts: The separation of regulatory and operational functions Freedom from direct political pressure Fair and transparent procedures A fourth concept applies in the United States, and has been mandated by law: Delegation of broad authority to an expert agency to establish rules and adjudicate disputes, to regulate in the public interest

The defining feature of an independent regulatory body is that the regulator is separate from, and not accountable to, any provider of telecommunications services. To ensure that the regulator is, in fact, impartial, the regulatory body and its staff should not have a direct or indirect financial interest in any of the entities being regulated. Inevitable conflicts of interest arise when a government controls both the regulatory agency and the dominant players in the market.

The second component of independent regulation is the necessity to shield the regulatory agency from political pressure. Doing so ensures the integrity of the policymaking process. It also limits arbitrary changes in rules, and encourages greater confidence on the part of investors. Historically, changes in governments lead to changes in regulatory policy. If the regulator is tied closely to the incumbent government, changes in government can introduce an element of uncertainty which heightens investment risk, and can serve potentially to deter future investment.

The third component of an independent regulator is transparency in decisionmaking. Transparency means that the process of arriving at regulatory policies and specific rulings is open, consistent and predictable. In the United States, for example, the FCC publishes its rules in the Code of Federal Regulations, which is publicly available. The agency announces proposed decisions in public memoranda, and written records of its proceedings are available to the public. A "sunshine agenda" announces the items that will be discussed at upcoming public meetings. Public comment and participation are invited on proposed rules, and our rulemakings rely on the public record. The FCC provides an opportunity for comment on licenses. In some areas, such as technical requirements, the agency relies on voluntary standards-setting organizations composed of industry representatives to develop feasible technical requirements.

Transparency in decisionmaking allows investors, service providers, and the public the opportunity to have knowledge of, and participate in, the formulation of policies and regulations. This process engenders considerable public trust in the integrity of FCC decisions, decreases litigation and enforcement costs, and also provides the agency with valuable public input on challenging issues.

REGULATION AND NATIONAL GOALS

Regulators in newly competitive, liberalized and privatized environments might wish to consider the following general principles as a guide, as they face the many complex and difficult issues ahead:

 Encourage Private Investment, Innovation and Infrastructure Buildout

Governments cannot fund the tremendous investment needed to expand network infrastructure. Thus, encouraging and allowing private investment, both domestic and foreign, is critical. Government processes are not always able to keep up with the pace of technical change. Deferring to competitive markets tends to maximize technical and allocative efficiency. By focusing on lifting barriers to entry, and restraint in the imposition of unnecessary regulation, government gives private investors incentives to invest.

 Promote Fair Competition

By promoting competition in all sectors, the regulator ensures that innovative and cost- efficient services will be provided by a diversity of entities.

 Manage Scarce Resources Efficiently

The regulator should develop spectrum management policies that permit open entry and competition, allow maximum flexibility, encourage technical efficiency and innovation, and facilitate seamless networks.

 Promote the Public Interest Where the Market May Not

The regulator has a role to play when market forces alone may not best further the public interest. The regulator should ensure that universal service mechanisms are transparent, efficient, and competitively neutral. Furthermore, it is often up to the regulator to ensure that telecommunications services are available to the disabled community, and that networks serve public health and safety, and do no harm to the physical environment. While encouraging the private sector to take the lead, the regulator must also ensure that networks are reliable and interoperable.

ESSENTIAL FUNCTIONS OF THE REGULATOR

There are several essential functions that the regulator undertakes in the new regulatory environment: licensing; rulemaking; enforcement and adjudication; management of scarce resources; equipment approval; and telecommunications standards.

 Licensing

The regulator should seek to ensure that licensees have the capacity to provide reasonably priced quality telecommunications to the largest segment of the population. In carrying out this function, the regulator can choose from several options, including:

• no requirement of any license
• registration or notification of service being provided
• blanket licensing where all entities providing service are covered
• individual licensing after formal application and competitive selection
• individual licensing by auction

 Rulemaking

Most countries adopt telecommunication legislation that sets the general terms and conditions under which telecommunications providers must offer service to the public. Formal legislation cannot, however, anticipate all changing conditions that may occur. Therefore, most countries adopt legislation that establishes broad public telecommunications policy and directs the independent regulator to adopt more specific regulations to implement those broad policies. The process by which the regulator adopts such rules and regulations is generally referred to as "rulemaking."

Rulemakings may be instituted by the regulator itself or may result from the filing by a private party of a petition for rulemaking. Once a rulemaking begins, it is critical that the regulator be required to conduct its procedures in a transparent manner. That is, the regulator should make public the reason for initiating the rulemaking, issue a notice setting forth the proposed rule, allow interested persons to file public comments on the proposal, publish a decision setting forth the text of the final rule, and clearly explain how and why the regulator adopted the particular rule. (See Chapters II and III).

 Enforcement and Adjudication

The process by which the regulator ensures that telecommunications providers comply with its rules and regulations is referred to as enforcement or adjudication. To successfully enforce compliance with rules, the regulator must have power to investigate the actions and records of all telecommunications providers, and must have the authority to impose sanctions and penalties for violation of regulations. Sanctions can include fines, civil forfeitures, imposition of new operating conditions, issuance of cease and desist orders, and revocations of authorizations or licenses.

 Management of scarce resources

Another important responsibility for the regulator is to ensure that scarce resources, such as radio frequencies, numbers and orbital slots are allocated on a fair and impartial basis. To protect against abuse and influence, the allocator of such resources should not have any connection to any service provider using these resources. The assignment of these resources must be open and transparent, and must allow for public comment.

 Equipment approval

Another critical element in telecommunications liberalization is the ability of customers and service providers to attach pieces of terminal equipment to the incumbent's network and to use them in the provision of service to the public. Equipment attachment policies should encourage maximum competition in terminal equipment. Therefore, the responsibility for determining if potential competitors can attach specific equipment on the network must be removed from the incumbent carrier and placed under the regulator's responsibility. The regulator should establish equipment attachment policies that are limited to protecting the technical integrity of the network and preventing harm to network personnel. These rules for attaching equipment to the network should apply to all providers, including the incumbent.

When a telecommunications market becomes liberalized, technical standards become integral to the development of an efficient competitive network. First, it becomes vital that technical interconnection standards become public and freely available. Second, it becomes vital that all interested persons, including competitors, customers and suppliers of telecommunications and information equipment, have an opportunity to participate in the development of technical standards and an opportunity to comment on proposed standards before they are adopted.

The importance of technical standards to the development of effective competition necessitates that these processes be removed from the hands of the incumbent operator and placed in the hands of an independent, open standards-setting entity, preferably one organized by the private sector.

 Telecommunications standards

The regulator must also be concerned with the development of the incumbent network's technical standards. Traditionally, the network operator determined the standards, and during a period of monopoly, many governments did not find a need to make those standards public or allow other persons to comment on the setting of technical standards. The regulator must ensure that embedded standards are not employed as a vehicle for restricting access to the network.

OVERCOMING RESISTANCE

In carrying out these policies and achieving these goals, regulators should expect that the incumbent carrier will fiercely and frequently oppose any decisions that open the market to competition. The incumbent carrier is likely to challenge decisions throughout the regulatory processes, in the courts, and in the marketplace.

The incumbent carrier is also likely to request regulatory relief as competition is introduced in the market. For example, the incumbent might request that the regulator:

• Permit access to markets that it does not serve;

• Use greater pricing flexibility;

• Reduce or remove certain regulatory oversight;

• Create incentives for network development; and

• Slow the introduction of competition.

The regulator will also face some common demands from new entrants. Potential competitors will want:

• Clear terms and conditions and fair prices for interconnection;

• The ability to select network elements and locate its own equipment in the incumbent carrier's switching facilities;

• Viable resale opportunities;

• Access to spectrum; and

• Access to rights of way.