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Paul J. J. Welfens and George Yarrow A. Telecommunications in Western Europe: Liberalization, Technological Dynamics and Regulatory Developments 9 Paul J. J. Welfens and Cornelius Graack 1. Introduction 9 2. Liberalization and Market Expansion in Telecommunications 12 2. 1 Global Forces in Telecoms Liberalization 19 2. 2 Privatization and Deregulation in Western Europe 22 2. 3 Politico-economic Deregulation Pressures 26 3. Technological Dynamics 30 3. 1 Digitization 31 3. 2 Integrated Services Digital Network 33 3. 3 Fibre Optics, Fibre to the Home and Optical Networks 35 3. 4 Mobile Communications 38 4. Regulatory Developments 40 4. 1 Regulatory Developments on the EC Level 41 4. 2 National Regulatory Frameworks: Developments and Experiences 46 4. 2. 1 Telecommunications Equipment 47 4. 2. 2 Value-added Services 49 4. 2. 3 Infrastructure 52 5. Prospects and Consequences for Central and Eastern Europe 72 Appendix 78 B. Telecommunications in Systemic Transformation: Theoretical Issues and Policy Options 85 Paul J. J. Welfens 1. Introduction 85 2. Points of Departure in Eastern Europe 90 2. 1 Structure of the Telecoms Industry in an East-West Perspective 94 2. 2 Telecoms Industry as a Strategic Industry for Systemic Transition 97 VI Telecommunications and Energy in Systemic Transformation 3. Theoretical Aspects of the Telecoms Industry 99 3. 1 Some Problems of Uniform Subscriber Pricing 99 3. 2 Competition, Natural Monopoly and Economies of Scope 102 3. 3 External Effects of Telecoms Network Expansion 109 3.




Systemic transition in Central and Eastern Europe has raised many new challenges for economic policy, including problems of encouraging adjustments on the supply sides of rapidly evolving markets. The supply-side effects of public policy are of particular significance in respect of the development of infrastructure investment. In part this is because industries such as telecommunications and energy are, for a variety of reasons, liable to be particularly prone to government regulation. In part it is because of the size and significance of the sectors in modern market economies. Both industries are capital intensive, and the expansion and modernization of infrastructures can have strong effects on, and can be strongly affected by, capital market conditions. Since both information and energy are important inputs into many other industries, the innovativeness and international competitiveness of large parts of the economy can be influenced by the performance of the telecoms and energy sectors, which in turn tends to be heavily affected by the government’s regulatory stance. Investment in infrastructure, whether to expand systems or to upgrade their quality, has the effect of raising the marginal productivity of private capital in other sectors. Consequently, regulatory reforms and changes in industrial structures in telecoms and energy can have wide ranging effects on aggregate investment in an economy, and hence on its rate of growth. Issues of privatization, deregulation, and regulatory reform are, therefore, of strategic importance for countries engaged in systemic transition.
Paul J. J. Welfens, George Yarrow

A. Telecommunications in Western Europe: Liberalization, Technological Dynamics and Regulatory Developments

Telecommunications is a dynamic growth-field in OECD countries. In the European Union (EU) the share of the telecoms sector in GNP is expected to increase from 3% in 1988 to about 6% in 2000. The telecoms sector represents some ECU 285 bill, worldwide, of which 84 bill, are accounted for by markets in the EU. The equipment market amounted to ECU 82 bill. worldwide and 26 bill. in the Community. Annual growth rates of 6% in the telecoms service sector and 4% in the equipment sector are expected until the year 2000 (EC COMMISSION, 1993a). Modern telecommunication allows the increase of decentralization of firms, facilitates cooperation across space and could help to reduce traffic and energy use via telework, which links households and specialized local centers to company headquarters. Moreover, technological progress could be accelerated by easier scientific communication - a perspective which has stimulated the vision of a global information highway system in the US and the establishment of trans-European information networks in the EU. In 1993 the EC Commission estimated that some ECU 150 bill. of investments are needed over a decade for building trans-European telecoms networks; the first stage between 1994–99 will require ECU 67 bill. The integration of nationally fragmented telecoms markets in the EU thus requires huge investments, which can best be financed by private capital; they call for a national deregulation of the telecoms sector as well as a European framework program with certain standards and uncertainty-reducing rules of the game.
Paul J. J. Welfens, Cornelius Graack

B. Telecommunications in Systemic Transformation: Theoretical Issues and Policy Options

In OECD countries there are four major forces driving the liberalization of telecommunications: (i) national liberalization initiatives (e.g. US, UK, Sweden) which set a role model for other countries; (ii) the European Commission’s liberalization scheme with the magic date of 1998; (iii) US pressure on EU countries to open up their national market as a prerequisite for EU consortia to invest in the USA; (iv) strong technological dynamics in telecoms technologies and computer network development. Already in the 1990s the local loop is no longer a natural monopoly as wireless technology allows to bypass the national operator’s local terrestrial network. Moreover, with the expansion of the cable TV business and the option that electricity firms (grid companies) enter the telecoms market, there exist potential newcomers for the local network. In some countries the electricity grid companies will largely remain in the trunk (long distance) business, where they can easily add to competition. At the same time this will create new problems with regard to cost allocation because it is not clear to which extent the cost of adding optical fibres to the existing electricity network will be taken as the only marginal costs of telecoms network expansion, while an opportunity cost approach would include at least part of the depreciation of the existing pylons (WELFENS, 1995).
Paul J. J. Welfens

C. Modernization of Telecommunications in the Former GDR

The Deutsche Post was the ministry in the German Democratic Republic (GDR) responsible for the operation of the telephone system. Its other duties included regular postal services and those banking facilities typical for European PTTs (Post, Telephone and Telegraph Offices) and was approximately equivalent to the Deutsche Bundespost of the Federal Republic of Germany in its organizational structure and the services it provided. The legacy of the Deutsche Post in providing telecommunications services, however, is a poor one. Dilatory, lackadaisical and inefficient service was trademark of a technically antiquated and totally inadequate system which was never able to meet the demands of a modern industrialized society. This was certainly not due to the technical incompetence of the engineers and staff. The inefficient allocation of financial and material resources did indeed play a role, but this was a problem notoriously inherent in every socialist economy.
Stephen Economides

D. Recent Evolution of Telecommunications in the Region of Central Europe

The aim of this article is to present selected telecommunications development issues from the Polish perspective. The achievements of local reform are compared with solutions implemented in the Czech Republic, Hungary and the Slovak Republic.
Hanna Kontkiewicz-Chachulska

E. Modernizing Telecommunications in Central and Eastern Europe: A Business Perspective

The telecommunications infrastructure of Central and Eastern Europe is underdeveloped not only in comparison with leading Western countries, but also in comparison with the networks of the dynamic threshold countries of South East Asia. This underdevelopment is dangerous, since telecommunications are a key factor for success in global economic competition - nowadays to a larger extent than ever before. Even for countries enjoying much more favourable economic circumstances, it sometimes took 10–15 years to bring the main line density from a level of 13 per 100 inhabitants - which can be taken as a starting point comparable to that of many Eastern countries around 1989–1990 - to 30 main lines per 100 inhabitants, the minimum of what is today acceptable. However, the examples of France and South Korea show that such a progress can be made within 5–6 years as well (see Tab. E1).
Marec Béla Steffens

F. Telecommunications Reform in the United States: Promises and Pitfalls

The United States Congress recently enacted sweeping legislation to overhaul the rules governing competition in telecommunications services. The Telecommunications Act of 1996 (see CONGRESSIONAL RECORD, 1996) is the first major rewrite of the Communications Act of 1934. It also supersedes the 1982 antitrust consent decree that broke up AT&T and barred the seven new regional Bell operating companies (“Bells”) from manufacturing equipment and offering long-distance service.
Marius Schwartz

G. Regulation and Tariff Policies in the Energy and Telecommunications Sectors in the Transition Countries: The Case of the Czech Republic

The transition in the Czech Republic is characterised by wide-spread liberalisation and privatisation. These processes bring a necessity for new regulation structures. This paper describes briefly the situation in the energy and telecommunications sectors, and the state of regulation with a emphasis on tariffs. Each sector has its own particular problems and requires careful regulatory reforms. The paper explores these problems and comments on recent regulatory changes. The paper commences with section 2 describing the features of the energy sector. Section 3 concentrates on price regulation and the design of tariffs in the energy sector. Section 4 analyses the characteristics of the telecommunications sector. Section 5 describes theregulatory environment and the development of tariffs in telecommunications. Section 6 provides a brief comparison of the regulatory positions in the selected CEC and EU countries. Section 7 presents conclusions.
Zdenêk Hrubý

H. The Process of Systemic Transformation and Reforms in the Energy Sector: The Regulatory Issues of the Reforms

Two issues are the subject of this paper. The first one regards the relation between the process of implementation of the Economic Transformation Program and reforms in the entire energy sector. The second one is related to this issue of the reform in the energy sector which comes to have a key meaning for further development of those reforms, especially in reference to the power sector. That is a creation of the new legal and regulatory framework for the energy sector supplementing a new model of operation of the energy sector.
Andrzej Szablewski

I. Restructuring and Regulatory Reform in the Polish Energy Sector: an Assessment

Interest in liberalization in the electricity and gas segments of the energy sector is a relatively recent phenomenon in Europe, and, although such interest developed somewhat earlier in the United States, the legal and political constraints that inhibit major structural change in North America have meant that developments there have proceeded at a relatively slow pace.1 In Europe, Britain is the country that has implemented the most radical policy reforms and that has taken the greatest strides towards establishing competitive markets. Even in Britain, however, the reform process dates only from the early 1980s and the first pieces of liberalizing legislation — the Oil and Gas (Enterprise) Act 1982 and the Energy Act 1983, which provided for third-party access (TPA) in gas and electricity respectively — were relatively modest steps that did not have major impacts on the ways in which energy markets functioned.2 Major regulatory reforms were only finally implemented during and after the privatizations of the gas industry (1986) and the electricity industry (1990 and 1991).3
George Yarrow

J. Energy Law Developments in the European Union and Poland

This paper is based on my presentation at the conference although revised considerably in order to reflect the last developments and amendments to the Polish draft Energy Law. The paper is divided into 3 sections: First a description is given of the energy policy developments in the European Union and Poland as the political framework indicates the intentions for the establishment of the legal regulatory system. Chapter 2 will discuss the Community law of specific relevance to the energy sector and the Polish proposal for a new Energy Law. The paper is completed by a conclusion under chapter 3.
Anita Ronne

K. Institutional Choice or Muddling Through - Problems of Transformation in the Electricity Supply Industry in Russia

In this paper we will analyse the options of institutional choice in the phase of transformation for a sector with special characteristics. Network-oriented sectors like electricity supply, natural gas supply, telecommunication, railways, etc., even in a market economy have some peculiarities which have led to special arrangements. Frequently, instead of the general rules prevailing in the market, special rules, excluding almost all elements of competition, have been introduced. In extreme cases the systems were state-controlled: The structure of the stateowned electricity supply industry (ESI) in Great Britain was very similar to the one of the former GDR.
Petra Opitz, Wolfgang Pfaffenberger

L. Co-operation in Energy Policies: European Union (EU) - Eastern Europe

The revolutionary upheavals in Eastern Europe have made increased co-operation between Eastern and Western Europe possible (in the energy sector too). The conditions are particularly favourable and promising in the energy sector. Western Europe has a large requirement for imported energy (approximately 43 % covered by imports in the EU). Eastern Europe (and especially the Community of Independent States, CIS) has large energy reserves (natural gas, oil and coal). The security of supply to Western Europe could be improved in the long term by increasing the exchange of energy, i.e. energy exports from Eastern to Western Europe. The first precondition for this, however, is that it proves possible to establish political structures which are secure over a long period in the Eastern European countries. Increased exchange of energy between Eastern and Western Europe could also provide the financial resources necessary for restructuring the energy sector itself (energy saving, improvement of energy efficiency, encouragement of environmental protection) and for generally reconstructing the whole economic system. Western Europe could in this way make a contribution to economic stability in the Eastern European countries, at the same time securing and strongly reinforcing the democratisation process. In addition damage to the environment, which also affects Western Europe, could be reduced as a result. Finally, it is to be expected that increased co-operation in the energy sector between East and West will tend to have a marked stabilising influence on world energy markets.
Peter Palinkas

M. Regulation and Systemic Transformation

Economic regulation, understood both as regulatory activities of authorities and as regulatory institutions, exists in any economy and is not a constitutive characteristic of any economic (or political) system; its form and methods are, however, and therefore must change in the process of systemic transformation. The form that regulation, defined as an element and tool of public policy (towards different sectors of the economy), takes depends also on economic (and political) systems and their internal structures, on the level of economic development, and on the economic policies actually pursued, as well as on the specific characteristics of various regulatees. Taking into account this multidimensional, dynamic reality we shall start this paper with some general remarks on transition from Soviet-type economies (STEs) to market ones (Section 2). In Section 3 we shall present equally general observations on various aspects of regulation in market economies. The next section will be devoted to regulation in the strict sense of the word, i.e. to regulation of public utilities (network industries). Returning our attention in Section 5 to post-STEs we shall analyse and discuss above all the issue of regulation, both sensu stricto and sensu largo, on the way back towards capitalism. The last section of this paper will try to present some normative remarks and suggestions regarding the regulatory structure to be created and policy to be pursued in the medium to longer run. All of this will be illustrated using as examples the electricity supply and telecommunications industries in the UK and Poland.
Piotr Jasinski


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