Written Answers. - Regulatory Issues. Cúrsaí Rialacháin
Introduction
Since the last Statement of Strategy was issued in February 1997, the Office of the Director of Telecommunications Regulation (ODTR) has been established. While the establishment of the ODTR is a major milestone in the regulation of a specific industry in Ireland, regulation for all the other sectors coming within the Ministerial ambit still remains with the Department.
Regulatory Objectives
Whether regulation is carried out by arms-length independent regulation such as the ODTR or, indeed, by the Department, there must be a coherent regulatory policy framework established by the Department. Such a policy framework must be based on the following principles:
— protection of consumers
— promotion of competition and market efficiency
— equality of opportunity for market entry for all operators
— price control
— maintenance of service standards
— consistency and predictability
— enforceability.
Immeanna Rialacháin
— cosaint an tomhaltóra
— íomáocht agus margadh éifeachtach a chur chun cinn
— comhionannas i ndeaseanna tosú sa mhargadh
— srian ar phraghasanna
— caighdeáin sheirbhíse a chóimead
— comhsheasmhachta agus inphreideacháide
— Inchurtha i bhfeidhm
Protection of Consumers
As long as markets are supplied by monopolistic or dominant suppliers, there is an imbalance of power between the service suppliers and that of their customers. While any regulator must recognise the underlying economic realities faced by operators, it will not be credible or acceptable unless it is seen as the defender of consumers, particularly small consumers.
Promotion of Competition and Market Efficiency
In open modern economies, regulatory issues tend to be more prevalent in those markets that are not fully open to competition. Regulatory frameworks developed to cater for newly liberalised markets should be equipped to promote competition and remove unnecessary barriers to market entry.
There are many ways in which a regulatory framework can promote competition. Policing markets is an intrinsic part of the comprehensive competition legislation already in place and which will continue to apply to the transport, energy and communications sectors. For example, competition legislation already provides guidelines on horizontal concentration in the market place and abuse by dominant players.
Regulatory policy should facilitate the entry of new players into the market place. Such entry will reduce concentration and lessens the need for competition by regulation. Indeed, once effective competition takes hold of a sector, regulation may be reduced to a lighter touch, as the dynamic of the market place provides the best guarantee of choice for consumers and market efficiency.
Equality of Opportunity for all Operators
A key consideration for sectors where enterprises have ownership and control over basic infrastructure is how regulation can cater for a new market entrants and potential competitors. For those sectors for which the Department has responsibility, access by new market entrants to backbone infrastructure at reasonable and cost-related prices will be a key criterion in assessing the effectiveness of regulation. Drawing up and enforcing fair and equitable rules is a major task for any regulator.
Price Control
Price control is a straight admission that the market is not sufficiently developed to place confidence in its ability to price goods and services in the most effective way. Whilst price control is a less attractive option, it is necessary where natural monopolies have to be regulated. There is, for instance, no practical or ready alternative to a high voltage electricity grid; the development of a parallel high voltage transmission grid would inevitably lead to a higher cost burden being placed on the whole economy.
In the absence of competition, prices have to be determined by regulation. The basic ways of effecting price control are price caps, rate of return controls or a hybrid of these two. The empirical evidence worldwide is not decisive in opting for any one method. Price caps can put a premium on short to medium-term efficiency but could do so as the expense of long-term investment and therefore effectiveness. Rate of return formulate may guarantee long-term capacity but put a lower premium on efficiency incentives for the operators in the field. The Department will continue its own research on the most appropriate policies that will yield price control mechanisms best suited to the Irish market place.
Where effective competition takes hold, there will be less and less need for price control. The sooner the market place reaches the level where formal price control can be dropped, the better. Experience in other countries has shown that price control tends to become a "cat and mouse game" between the regulator and the regulated. The latter has a far better knowledge of the market place both present and future while the regulator, knowing that this is the case sometimes over compensates by setting the bar too high for the dominant player in the sector.
Maintenance of Service Standards
The interaction between regulation and standards of service to be provided by a regulated industry is vital. In certain sectors poor service quality by a State monopoly might have arisen because, in the allocation of scarce resources, it might not have been possible for Government to provide sufficient investment.
The first recourse in regulation where there is a former monopoly utility or a dominant company is price control. If service quality is not given sufficient weighting by a regulatory process, there is a real danger that regulated companies subject to price controls may seek to make more profits by reducing the quality of their service.
Regulators must set demanding and achievable service standards whilst, in response, industry players should focus on standards of service and customer relationships. The temptation to set targets that are too ambitious should be avoided. Standards should not be set in stone but should be evolutionary so that changes in technology and customer demands can be met.
Consistency and Predictability
The consistency and predictability of the regulatory system is essential for the effective development of competitive sectors.
Regulatory decisions and acts must be predictable so that industry players can plan for the future with confidence. So called "regulatory roulette" should be avoided at all costs since it introduces uncertainty and presents a barrier to further investment and entrance into the industry. Such uncertainty is unlikely to be consistent with the regulator's role in promoting Government's sectoral and national economic objectives.
Enforceability
Regulatory regimes will only be effective if they are enforceable. This means that the regulator must have the power to ensure that existing directives and rules, together with regulatory decisions, are complied with by industry players. In addition, the regulatory must be empowered to impose appropriate penalties where this does not happen. Such penalties must reflect the financial scale of the industry, the players concerned and the specific issues at hand.
In this regard, the Department intends reviewing existing legislation governing the penalties which may be imposed on industry players who fall to comply with EU Directives.
Regulatory Structures
Structúir Rialacháin
As indicated earlier, an independent regulatory function has now been established for the telecommunications industry. Where it is decided to establish an independent regulatory structure for other industries, the following three options will fall to be considered.
Industry Specific Regulation
This involves establishing separate regulators for each industry, such as electricity, gas etc. The argument in favour of industry specific regulators are that the regulator should have specialised industry knowledge and that creative diversity allows different regulators to experiment with different approaches.
Sector Specific Regulation
This option involves the establishment of a single regulator for the sector, such as energy. The proponents of this model argue that it would reduce the likelihood or regulatory capture, facilitate cross comparisons and take account of natural relationships between industries.
Multi-Sectoral Regulation
There can be economies of scale in combining the regulatory functions for a number of sectors such that this can be a more cost effective structure. The learning curve is reduced as more sectors are added. In addition, there is greater scope for cross industry and sectoral comparisons and for consistency in dealing with different industries and sectors.
If the sector specific or multi-sectoral options are chosen, the implications of the decision for the Office of the Director of Telecommunications Regulation (ODTR) will have to be reviewed.
The Department will also assess whether the appointment of individuals as regulators is the most effective regulatory structure. There are other options including the establishment of regulatory commissions or boards where decisions are taken on a collective basis.
Whatever structures are selected, the Department will ensure that the regulation of each industry and sector will also recognise the overall role and responsibilities of the Competition Authority. In addition, there are instances where specific industries are subject to control by a number of regulatory authorities. The Department will work with other Departments and agencies to streamline these arrangements in the near future.
In the medium term, the emergence of global operators in some of the industries/sectors will increasingly constrain the remit of national regulators, so that the roles of EU regulatory authorities and those of other large trading blocs will become more important.
Accountability of Regulatory System
Freagracht as Córas Rialacháin
Because of the impact that regulation has on vital areas of the economy and the effect it has in many instances on every household and citizen in the country, proper accountability for regulatory decisions and regulatory policies is essential.
Responsibility for the regulatory framework rests with the Minister and its implementation is a responsibility of the Department or independent regulation where this is provided for by law. The Minister and the Department are accountable to the Oireachtas and this has been a feature of regulation in Ireland until very recently.
The setting up of the ODTR has ushered in a new regulatory paradigm. While the legislation provides for the accountability of the ODTR through the Minister to the Oireachtas, the accountability arrangements provided for in statute law may be such as to give rise to the perception of a "democratic deficit". This issue will be carefully examined in the Department. Any further extension of independent regulation will be framed in such a way as to provide clear-cut avenues of accountability that will meet exacting standards without compromising the essential nature of regulatory independence.
There are a number of options for avoiding a "democratic deficit". For instance, regulators could be appointed by Government but be removed only by the Oireachtas. Regulators could be required to present annual reports to the Oireachtas. These accounts could be subject to audit by the Comptroller and Auditor General who would also have the power to carry out value for money and similar examinations.
In addition, regulators could be legally accountable to the most relevant Oireachtas Committee and could be brought within the remit of the Ombudsman. Regulators could be required to give written reasons for their decisions and a consumer council could be empowered to produce reports on the impact of regulation.
Regulators could and probably should be brought within the ambit of the Freedom of Information Act. In any event, decisions by regulators may be appealed to the courts.
Public Service Obligations
Oibleagaidaí Sheirbhisí Poiblí
A public service obligation is an obligation imposed by Government to provide a defined level of service which the commercial operator would not choose to provide. The funding burden of such obligations can either be met by Government directly or by all operators collectively, which ultimately means either all taxpayers or all consumers. Quantifying and funding this obligation is a major challenge for regulatory policy.
In the past the concept of public service obligation was associated with public ownership. Because public service obligations were, historically, met by monopoly utilities in State ownership, it was natural to equate the two. Public service obligations may also be provided for by operators not in State ownership.
Public service obligations often suffer from a bad press. They are seen as burdens on the former monopoly incumbent rather than a market opportunity to be exploited. In some cases, only the incumbent company has the scale and capacity to continue to meet the public service obligations. Where this is not the case, the obligations could be put out to tender. The market could then put an accurate price on the obligations inherent in delivering such services. Public service obligations arise where Governments decide that they are necessary in the maintenance of regional equality and social equity. They are not, however, absolute standards set in stone. Changes in technology will inevitably, require standards to be adjusted. The Department will attempt to anticipate and plan for changed standards within public service obligations. It is, of course, for the Minister to propose when changes are required and to lay down the new standards.
Conclusion
The Department intends to complete a review of all regulatory issues identified in this chapter. Proposals will be developed for consideration by the Minister in 1998.