A Study of Innovative Regulation for Telecommunications Privatization in the United Kingdom: Criticisms and Reflections

By Cheng, Kuo-Tai | International Journal of Management and Innovation, July 2012 | Go to article overview

A Study of Innovative Regulation for Telecommunications Privatization in the United Kingdom: Criticisms and Reflections


Cheng, Kuo-Tai, International Journal of Management and Innovation


Introduction

While the economic regulation in concerned with the imposition of controls on entry, exit, prices, outputs, services supplied, market served, consolidations and profitability in public utilities, the social dimension of regulation embraces protection of consumers from potentially adverse effects of competition. There are two modes of regulatory control; rate of return regulation which is used in the U.S. and a price control formula which is employed in the U.K. (Parker, 2002). Both systems have strengths and weaknesses, however, their foundation are much the same. A significant point that must be mentioned while setting up a regulatory mechanism is 'information flow'. As long as a regulatory agency is well informed about the conditions of an industry it will be able to operate properly.

Regulatory regime in the U.K. has a distinctive character since specialized regulatory bodies have been established for privatized industries. The authority of regulation is in the hands of the Secretary of State for Trade and Industry, the Monopolies and Mergers Commission (MMC; the Competition Commission now) and the chief executives of specialized bodies: the Office of Telecommunications (OFTEL; merged into Office of Communications, OFCOM) offers a good example of a specialized regulatory body in the U.K.

The reviews of regulatory policies in the UK, OECD (2002a) demonstrates that a well-structured and implemented programme of regulatory reform can make a significant contribution to better economic performance and enhanced social welfare. Economic growth, job creation, innovation, investment and new industries are boosted by effective regulatory reform, which also helps to bring lower prices and more choices for consumers. Comprehensive regulatory reforms produce results more quickly than piece-meal approaches; and they help UK to adjust more quickly and easily to changing circumstances and external shocks. Simultaneously, a balanced reform programme must take into account the social concerns. Adjustments in some sectors have been painful, but experience shows that the costs can be reduced if reform is accompanied by support measures, including active labor market policies. The purpose of this paper is intended to explore the evolution of telecommunications regulation and intended to analyze the remaining regulatory challenges facing in the telecommunications regulation in the UK.

Rationale of Regulation in the U.K.

Utility privatization and regulation in the United Kingdom have been closely scrutinized by the rest of the world. UK's unique style of regulatory reform can be described as one of managed entry, with price caps facilitating the transition to competition. The program privatized British Telecommunications (BT) in 1984, and set up a duopoly structure in 1985, allowing Mercury to compete with it in the provision of telecom infrastructure and services. This structure remained in place for seven years until the limit on the number of telecommunications licenses was removed in 1991 (Helm & Jenkinson, 1998).

Until the year 1979 there was an effort to bring enterprises under public ownership in the U.K. However, the Conservative Government, which came to power in 1979, introduced a massive privatization programme and it was the end of the public enterprise era in the U.K. (KirKpatrick, 1988). Due to this extensive public ownership in the public utilities (1) the U.K. has little experience on regulatory issues compared to the U.S.A.

Sir Stephen Littlechild (2000) claimed that the simplicity of the proposed scheme and the absence of significant scope for discretion by the regulatory authorities reduced the danger of regulatory capture. He insisted that the RPI-X formula can give enterprises a greater incentive to reduce their costs than US-style rate-of-return regulation, and ensure that the consumers get the benefits of efficiency improvement.

According to Hood (1999), UK case provides a typology which is usefully adapted for the purposes of 'regulatory mapping' inside government in other systems (see Table1):

Table 1. … 

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