Pros& cons Dr. Musab Barakat Ahmed Ali PhD.;FCCA;FCMI Chartered Certified Accountant Practicing firm Barakat&co Senior partner & CEO Consultant National Telecommunication Corporation (Sudan The views expressed in this paper are those of the author and do not necessarily reflect the opinions of the ITU or its membership. Dr Kelly can be contacted at

Agenda Background Significant market power Pros of separation Cons * This will be the subject of separate presentations.

Pros&cons WHY IS ACCOUNTING SEPARATION USED AS REGULATORY TOOL IN TELECOMS?

Background 1 The issue of structural separation separation has gained some prominence in the aftermath of the competition reforms that followed the National Competition Policy Report by the Independent Committee of Inquiry (1993)

Background 2 in recent years, competition authorities and telecommunications regulators have indicated an increasing willingness to consider structural separation and divestiture of the local loop as a means of countering what is viewed as serious anti-competitive activity by incumbent operators

Background 3 The report questioned the exemption of public monopolies from competition laws and favored structural separation of incumbents as a way of introducing competition in monopoly markets of state-owned utilities.

Background 4 the implementation of liberalization policies in major markets such as energy, transport and telecommunications, has been the tendency to favor the provision of access to essential infrastructure facilities owned by incumbents as a way of achieving competition in the supply of final products.

Background 4 This has meant that incumbent, vertically- integrated operators supply services or facilities as inputs to the production of final services by competitors with which

Background 5 they compete directly with the incumbent. Consequently, by their ownership of essential facilities which they supply to competitors, incumbent operators are in a powerful position in the market and have a considerable incentive to use their market power to frustrate competition. Regulation of the behavior of incumbents, therefore, is essential for effective competition

Background 6 Reliance on access regulation alone to promote competition and prevent abuses of market power by incumbents requires extensive intervention and oversight by regulators. This arises from the fact that access regulation does not alter the incentives for uncompetitive behavior by incumbents

Clearly, as for any intervention in a market, structural separation would only be justified if its benefits outweigh its costs. In addition, it would need to be demonstrated that greater net benefits are not possible through the implementation of some other solution

Significant market power 1 1.Abuse of dominance 2.Refusal to supply (predatory prices;tying & bundling 3.Cross subsidization 4.Misuse of information 5.Non discrimination &net nuetrality 6.Misuse of information

Significant market power 2 7. vertical price squeeze “the price the firm demands makes it impossible for an equally-efficient retail- stage competitor to operate profitably given the level of retail prices, and The firm does not charge its own downstream operations this high prices

Pros of separation 1 A guarantee for nondiscrimination Leads to simplified and more effective regulation Provide transparency the publication of accounts which are transparent, thereby allowing other operators to understand how the DMP operator's revenues relate to costs;

Pros of separation 2 creation of a ‘level playing field’ by forcing the incumbent’s wholesale arm to deal with its retail arm on the same terms that it deals with any other competitor; allowing regulators to focus on the wholesale network to guarantee service quality, network reliability, and access to essential network facilities at cost based prices;

Pros 4 the publication of detailed cost statements showing the average cost build of products and services provided by a DMP operator, thereby increasing and raising the confidence of competitors that there are no anti-competitive cross subsidizations.

Pros 4 relative simplicity when compared to behavioral remedies. It is effective as it targets the very reason for the incumbent’s impact on competition within the market; that is, its vertically-integrated structure. In contrast, behavioral regulation can never be fully effective in this way as it is reactive, rather than pro- active;

Pros 5 Accounting Separation is a less intrusive and much less costly REMEDY to implement Comparison between internal transfer prices and external wholesale service charges for vertically integrated operators

Cons 1 Risk of under investment in the new access infrastructure Degradation the service quality Difficulty in defining demarcation line Increase in cost Double marginlization

Cons 2 Business separation lowers efficiency and delays innovation. The natural boundaries of businesses in telecommunications are always changing in unpredictable ways, as are the locations of bottlenecks

Cons 3 Business separation creates regulatory costs. The separation creates interest groups, some of whom benefit from the separation and some of whom can gain strategic advantage by changing the separation. These groups compete in the regulatory arena rather than in the marketplace, which clogs the regulatory process and decreases the resources devoted to marketplace competition.

Cons 4 encouraged service providers to compete in the political and regulatory arenas.

Cons 5 The risk that standard remedies might not be enough to prevent a discriminatory behavior by a vertically integrated operator particularly where bottleneck facilities are involved

Cons 6 The RAS does not identify efficient costs or force operational efficiencies. The latter may be encouraged by price setting or from competition development – but this is not directly related to the RAS

references Steven Dounoukos and Angus Henderson Mark A. Jamison Director, Public Utility Research Center University of Florida