SUPRA-NATIONAL REGULATION FOR SUPRA-NATIONAL

TELECOMMUNICATIONS CARRIERS?

Eli M. Noam and Anjali Singhal

May 1996

Johns Hopkins University Foreign Policy Institute Telecommunications Project

I. INTRODUCTION^[1]: THE NATURE OF CHANGE

Telecommunications regulation has evolved from a primarily domestic concern to one of international significance. As liberalization of the telecommunications sector spreads to many countries, it also transforms the international system of telecommunications. In particular, liberalization leads to the emergence of global telecommunications networks, alliances, and carriers, to new types of service providers, and to an end of the traditional notion of telecommunications as a national and territorial sector. The trend of supra-national carriers and ventures in turn leads to pressure on the traditional form of regulation and control of telecommunication networks. This suggests the need to think about the appropriate regulatory structure of the new type of telecommunications firm-- supra-national carriers which transcend the traditional national and territorial definition of telecommunications operators.

Traditional regulation and policy was premised on a certain market structure. Change that market structure, and the nature of regulation must change, too.

The core of national goals in regulating telecommunications services and providers have been fairly similar from country to country. Such goals include, explicitly or implicitly:

• Consumer protection -- to guard against monopoly pricing, unreasonable price discrimination, low quality, gatekeeper power, and privacy violations.

• Universal connectivity -- to spread service across the geographic and social range.

• Protection of network operators -- assurance of adequate earnings to enable the development of networks

• Promotion of economic growth, technological innovation, and trade.

• Assurance of communications for emergencies, law enforcement, and national security

To accomplish the goals, governments have, in principle, a wide assortment of regulatory tools at their disposal such as restrictions on ownership control; market structure regulation (e.g., entry and exit control, definition of service sectors); company structure regulation; anti-monopoly rules and concentration restrictions; price and profit regulation, conduct regulation (e.g., in quality, interconnection, common carriage); investment and service approvals; and representation in trade negotiations.

These traditional tools of government were predicated on a certain industry structure. But that structure is rapidly changing, and telecommunications are being transferred into an internationalized industry.

II. THE EMERGENCE OF TRANSNATIONAL CARRIERS AND

ALLIANCES

There are many reasons for the trend in transnationalization. The world-wide trend in privatization and liberalization has resulted in the possibility for new entry, and in experienced firms legally able to expand beyond their national borders. Ownership has diversified into equity investments by firms of one country into another country, often through multinational consortia. The globalization of large firms has led to an increase in global demand for advanced and specialized end-to-end (seamless) telecommunications services. Such seamless services can be offered by: a) discrete bilateral or multilateral collaborations of networks (the traditional way), b) a joint entity of the participating carriers, coordinating among them and functioning as the single contact point for global users, c) a coordinating entity, owned by a single carrier, that is the global contact point for users, or d) a systems integrator dealing with various carriers, and independent of them.

The tendency of recent years has been to discard the traditional bilateral or multilateral model as too complex for users, in comparison to the seamless approach. The traditional carriers, too, have reduced their bilateral correspondent relations. Nor can that model benefit from the flexibility and efficiency in capacity utilization of centralized traffic management.

The main models for future contention are likely to be a combination of (b) and © -- systems integration by several (but not all) carriers, and (d) -- independent systems integration. The first is a part-competitive, part-collaborative model centered on traditional carriers. The second model is based on an extension of today’s resellers, and “light” and “ultralight” carriers.

The size of the market for end-to-end (or seamless) services is increasing rapidly. Revenue is currently estimated to be several billion dollars, and to grow to $25 billion by the year 2000.^[2] These seem to be conservative estimates. In 1992, the US market for domestic telecommunications services was $160.5 billion. The European market for domestic and long distance services was in 1992 was $120 billion. The international market in 1994 was $55-60 billion.

Patterns of the newly forming alliances indicate, not surprisingly, a heavy emphasis on companies from the developed world as partners.

a) Major developed countries account for most of the demand for international service. Participants in the alliances are largely from these countries. (29% from Western Europe; 17% from North America, and 13% from Asia/Pacific countries). Their extra-territorial investments are partly in their home regions (though only 3% in North America), and heavily in Eastern Europe (32%) and South America (26%). There is little partnership activity in Africa (2%).^[3]

b) Several of the largest carriers have already achieved a significant penetration of international markets. BT is present, by way of venture activities, in markets accounting for 80% of multinational corporations, and of 57% of all international voice traffic. Sprint, AT&T, and MCI have similar, but lower, market penetrations. Concert and GlobalOne, two of the main alliances, have an even greater reach.

There are several ways in which traditional carriers can transnationalize their services:

• Cartel -- non-competition agreement(s) among competitors which may cover prices, output levels, market shares, territories, etc. Neither operational collaboration nor integration of resources are necessary. This permits the participants to retain their own identity and independence

• Consortium -- loosely organized international business combination in which companies retain their individual identities and collaborate with the other companies to achieve objectives which would not be feasible if they acted alone

• Joint Venture -- this can be a “contract joint venture” (strategic alliance) in which there is no exchange of equity or creation of a new entity, or “entity joint venture” which involves the creation and joint ownership of a legally separate firm by the partners

• Acquisition of ownership interest in one firm by another firm.

• Merger -- full integration of resources by Firm A’s acquisition of Firm B’s assets or shares, or by putting both A and B under the control of a third entity.

The benefits of providing transnational service via cooperative structures include: • By aligning with other providers, carriers compensate for their lack of sufficient global presence or lack of adequate financial resources.

• Carriers can gain indirect market access to monopolized markets where they are not allowed to compete with the local operator.

• These affiliations spread the risk of new activities and technologies across multiple participants.

• A consortium of carriers from several countries can pool its political influence to obtain licenses in other countries

B. Supranational service providers -- there are several types of supranational telecommunications providers:

1. Traditional multi-national carriers, primarily Cable & Wireless (UK), GTE, or ITT (in the past).

2. Traditional collaborative carriers includes Intelsat which provides international, regional and even domestic telecommunications services as a “carriers’ carrier,” ranging from public switched telephony to transmission of broadcast signals to dedicated business services. Inmarsat is another such carrier.

3. Regional-Collaborative carriers, such as Eutelsat and ArabSat.

4. New types of international carriers, such as PanAmSat.

5. International joint ventures and alliances

t Concert: BT and MCI. BT acquired a 20% interest in MCI in 1994.

t GlobalOne: Participants are Sprint, France Telecom, and Deutsche Telekom. FT and DT each purchased 10% of Sprint in 1996.

t Uniworld comprises AT&T and Unisource (itself a partnership of KPN Telecom (Netherlands), Telia (Sweden), Telefonica (Spain), and Swiss PTT Telecom).

t Worldpartners is a loose coordinating agreement of carriers with AT&T, KDD (Japan), Singapore Telecom as equity owners, and Telestra (Australia), Korea Telecom, Telecom New Zealand, Hong Kong Telecom, Unitel (Canada), Telekom South Africa and Philippines Long Distance Telephone as non-equity partners. A potential participant is NTT (Japan).

t FLAG: NYNEX is the managing partner of FLAG, a 17,000-mile, $1.2 billion undersea “Fiber-optic Link Around the Globe”.

t Infonet: Participants are Deutsche Telekom and France Telekom (temporarily), Telefonica (Spain), Swiss PTT Telecom, Belgacom, Telestra (Australia), Telia (Sweden), and KDD (Japan).

6. VENTURES BY REGION

a. WESTERN EUROPE

Major ventures formed for the provision of services throughout Western Europe are: Atlas (Deutsche Telekom and France Telecom), Belgacom (Ameritech (US), Tele Danmark and Singapore Telecom), C&W Europe and Vebacom (C&W (UK) and Veba (Germany)), Gibraltar-NYNEX Communications Company (Gibraltar government and NYNEX (US)), Infostrada (Bell Atlantic (US) and Olivetti (Italy)), Mercury (C&W and Bell Canada Enterprises), Nordic Teleholding (Tele Denmark, Telecom Finland, Telenor (Norway)), and Telenordia (BT, Tele Denmark, Telenor (Norway)).

b. CENTRAL AND EASTERN EUROPE AND FORMER SOVIET UNION

The potential for lucrative operations in Eastern Europe is great due to economic reform, lack of infrastructure, and high demand. As a result, ventures have formed for the provision of services in Eastern European countries: Armenia: Armentel (two Armenian PTOs and Trans-World Telecom (US)). Belarus: Belcel (ComStruct International, C&W (UK), Belarus, PTT). Poland: Centertel: (Ameritech (US), France Telecom, Polish PTT). Czech and Slovak Republics: Eurotel Cellular Service (US West (US), Bell Atlantic (US), Czech PTT, Slovak PTT). Estonia: Eesti Mobiltelfon (Estonian PTT, Telecom Finland, Telia (Sweden)). Hungary: Matav (equity investments by Deutsche Telekom and Ameritech(US)); Westel (Matav (Hungary) and US West International), Pannon GSM (Tele Denmark, Telia (Sweden), Nortelinvest, Telecom Finland, Netherlands PTT, local Hungarian carriers). Latvia: Tilts Communications (Telecom Finland, C&W (UK), World Bank/IFC, Lattelekom (Latvian PTO). Russia: Metropolitan Communications (C&W (UK) and Intertelecom (Russian PTO)), Rosnet International (AT&T, Rosnet (Russia), Intercon (US)). Ukraine: UMC (Ukrainian PTOs, Deutsche Telekom, KPN Telecom (Netherlands), Telecom Denmark), UTEL (Ukraine Telephone Co., Deutsche Telekom, AT&T, Netherlands PTT).

c. ASIA-PACIFIC

Some of the major ventures focussing on the Asia-Pacific region are Asiasat (Asia Telecommunications Co Ltd) (C&W (UK), Hutchinson Whampoa (Hong Kong), Chinese state-owned investment company); Birla Communications (AT&T and Birla Group (India)); Honeycomb International (Tele Denmark, Hysan (Hong Kong), China Unicom, Telenor (Norway)); Optus (BellSouth (US), C&W (UK), Australian investors); PHS International (Personal Handyphone Systems) (C&W, Hong Kong Telecom, Itochu Corporation (Japan), DoCoMo (NTT Mobile, Japan)); TelecomAsia (NYNEX (US) and local Thai PTO); and equity investments in Telecom New Zealand (Bell Atlantic (US) and Ameritech (US)).

d. THE AMERICAS

Some ventures for service provision in North and South America are: Canada: MCI-Stentor (Canada); Unitel-AT&T; WorldLink Telecom (Infonet consortium and Bell Canada Enterprises); USA: Nextel Communications (NTT (Japan), Bank of Tokyo, Matsushita (Japan)), the aforementioned Concert (MCI and BT), and GlobalOne (Sprint, DT, FT); Mexico: AT&T - Grupo Alfa alliance to provide services in Mexico; equity investments in Telmex (by Southwestern Bell (US), France Telecom, Grupo Carso (Mexico)); Unicom Telecomunicaciones (GTE (US), Grupo Bancomer (Mexico), Visa (Mexico), Telefonica (Spain)). Cuba: equity investments in Cuban PTO by Grupo Domos (Mexico) and Stet (Italy), Iusacell (Bell Atlantic (US) and Peralta family (Mexico)); Argentina: equity investments in Telecom Argentina by STET (Italy), France Telecom, J.P. Morgan (US), Perez Company (Argentina); equity investments in Telefonica de Argentina by Telefonica (Spain), Citicorp (US), Techint (Argentina); Puerto Rico: Telephonica Larga Distancia de Puerto Rico (Telefonica (Spain), Puerto Rico Telephone Authority), Caribbean: C&W is present in numerous countries.

7. INVESTMENTS BY MAJOR CARRIERS

Another way to present this information is according to investing company. Major investments are listed below.

t Ameritech:.

a. 49.9% Telecom New Zealand with Bell Atlantic

b. owns 40% of consortium which owns 49.9% of cellular interests in Poland and Norway

c. owns 67% of Matav (Hungary) with DT.

d. 49.9% Belgacom with Tele Danmark and Singapore Telecom

t AT&T:

a. 10% Compania de Telefonos de Interior (Argentina)

b. 22.5% Unitel (Canada)

c. Yunnan & Xhia (China)

d. 35% Celumovil (Columbia)

e. 30% Smartone (Hong Kong)

f. 35% Jamaica Digiport Int'l

g. 62.2% AT&T Jens (Japan)

h. 22% Movitel del Norocsts (Mexico)

I. 100% AT&T Puerto Rico

j. A/O Telmos (Russia)

k. UTEL (Ukraine)

l. 49% Birla Communications Ltd. (India)

m. 55% Rosnet International (Russia)

t Bell Atlantic:

a. jointly owns 49.9% of Telecom New Zealand with Ameritech

b. joint venture cellular and packet operations with US West in Czech and Slovak Republics

c. 49% interest in Iusacel, second largest Mexican telecommunications company.

t BellSouth:

a. mobile data network in U.K.

b. paging and answering services in Australia and UK

c. cellular and/or mobile operations in Argentina, Mexico, New Zealand, Chile, Venezuela, Uruguay, Denmark, France and Germany

t BT:

a. 37.5% Viag Interkom AG (Germany)

b. 50% Gibtel (Gibraltar)

c. 20% Personal Comm. Ltd. (Hong Kong)

d. 50.5% Albacom (Italy)

e. 50% Megared (Spain)

f. 33% Telenordia (Sweden)

g. 100% St. Australasia (Australia)

h. 100% BT North America (U.S.)

I. 49% India Cellular

j. 25% Clear Communications (New Zealand)

k. 25% Newtone (Israel)

t Cable & Wireless

a. local telecom operations in 22 countries in Europe, Asia, Africa and English-speaking Caribbean and major telecommunications companies in UK, Hong Kong & Australia such as :

b. 80% Mercury Comm (UK)

c. 70% Grenada Telecommunications Ltd.

d. 57.5% Hong Kong Telecommunications Ltd.

e. 79% Telecommunications of Jamaica

f. 80.7% Paktel (Pakistan)

g. 51% Yemen International Telecommunications Company

h. 20% Bahrain Telecommunications Company

I. 49% Fiji International Telecommunications

j. 17.58% International Digital Communications (Japan)

k. 39.90% Tele 2 (Sweden)

l. 24.50% Optus Communications (Australia)

m. 21% Lattelekom (Latvia)

n. 45% Dhivehi Raajjeyge Gulhun Private (Maldives)

o. joint ventures with Veba in UK and Germany

t Deutsche Telekom

a. 50% MagyarCom (Hungary)

b. 16% Matav (Hungary)

c. 25% PT Satclindo (Indonesia)

d. 27% Mobil Telesystems (Russia)

e. 20% Teletes (Turkey)

f. 16% Ukrainian Mobile Comms.

g. 19.5% UTEL (Ukraine)

t France Telecom

a. 10% MoviStar (Argentina)

b. 19.5% Telecom Argentina

c. 40% Socatel (Central African Republic)

d. TDF (Czech and Slovak Republics)

e. DGCT (Equitorial Guinea)

f. 49% Telecoms Ext. de la Polynesia Francais (Fr. Polynesia)

g. 35% Panafon (Greece)

h. 49% Operator Hungaria

I. BPL Systems (India )

j. 100% Martinique operator

k. RadioMovil (Mexico)

l. Telmex (Mexico)

m. 49% OPT -New Caledonia

n. 25% Centrel (Poland)

o. 11% Mobil Telesystems (Russia)

p. 24% Societe Nationale de Telecoms (Senegal)

q. 20% St. Pierre & Miguelon

r. Teco Tasa (Uruguay)

s. 33% Vanitel (Vanuatu)

t. 33% Vanitel Cellular (Vanuatu)

u. 90% Mobistar (Belgium)

v. 100% FTIVS Nordic (Sweden)

t GTE

a. controls British Columbia Telephone Co. and Quebec Telephone in Canada

b. 100% national PTO in Dominican Republic

c. 20.4% Venezuelan PTO

d. partner in cellular consortiums in Germany, Argentina and Japan

e. provides international telecommunications services to Moscow hotels

f. 4.5% Tu-Ka Kyushu (Japan)

g. joint venture in China to provide paging services

t MCI

a. 23.5% Belize Telecom

b. 49% Avantel (Mexico)

c. 25% Clear Communications ( New Zealand)

d. 100% MCI de Venezuela

e. 15% Newtone (Israel)

t NTT

a. NTT is Japan’s dominant domestic service carrier. It faces limitations on its international role (where KDD long held an exclusive franchise), and is subject to government review of its structure. Partly as a result, it has been less active in supra-national ventures than its size as the world’s largest telecommunications company would indicate.

b. Thai Telephone & Telecommunication Public Company (TT&T) -- installation of one million telephone circuits through much of Thailand.

c. Nextel Communications (US) -- participation in first US nationwide wireless network based on SMR truck dispatching frequency allocations. NTT paid $75 million for 0.9% share.

d. General Magic -- develops and licenses software to communications providers. NTT is one of General Magic’s 14 principle partners, which includes Apple, AT&T, C&W, and France Telecom..

e. NTT FAN (Future Agent network) -- to test provision of multimedia services in Japan. NTT owns 44% f this venture. Other partners are AT&T and Sony, each with 28%.

f. 15% Smart Communications (Phillippines)

g. 2% Nextwave Telecommunications (US)

h. Agreement with Unicom (China) to build provincial GSM networks

t NYNEX

a. joint venture partner in major telecom projects in Thailand, Phillippines, Indonesia, Gibraltar

b. FLAG --- fiber optic undersea cable system linking the UK and Japan (and a dozen intermediate points) via the Red Sea and the Indian Ocean

c. cellular joint venture in Greece and Japan

d. major cable TV holdings in UK, which also provide local telephone service.

t Pacific Telesis

a. cellular operations in Germany, Portugal, Sweden, Belgium and Japan

b. paging system in Thailand, France, Spain and Portugal.

c. 9% interest in trans-Pacific cable between Japan and US

t Southwestern Bell

a. $935 million investment in TelMex, Mexican PTO

b. alliances also in Australia, Israel, UK

t Sprint

a. 51% Sprint Movil SA. (Argentina)

b. 100% PTL (Sprint) Lmtd. (UK)

c. 60% Sprint Bus. Telecom Co. (Bulgaria)

d. 100% Sprint Communications Canada

e. 49% Alcatel Data Networks (France)

f. 26% Sprint RPTelekom (Poland)

g. 100% Sprint Japan, Inc.

h. 100% Sprint Holding Ltd. (UK)

I. 50% Rosprint (Russia)

j. 50% Sprint Networks (Russia)

t Swiss PTT

a. 25% Unisource global venture

b. 27% SPT Telecom (Czech Republic) with PTT Telecom Netherlands

c. 30% joint venture to operate GSM networks in 3 states of India

d. 30% Muitara Telecommunications Sdn Bhd (Malaysia)

t Telefonica (Spain)

a. Long distance operation of Puerto Rican PTO

b. 44% of Chilean telephone company and 20% interest in Chile's international long distance telecommunications carrier, which also owns cellular operations.

c. 10% of the consortium which owns PTO of southern Argentina

d. owns 15% of consortium which owns Venezuelan PTO

e. won bid for Peruvian PTO

f. cellular franchise in Romania

g. 40% of Chilean cable-telecommunications joint venture with TCI (US) and two Chilean companies

t Telia

a. co-owner of Unisource.

b. holdings in telecommunications companies:

1) Russia

2) Estonia

3) Latvia

4) Hungary

5) Italy

6) United Kingdom

7) France

t US West

a. joint venture cellular and packet operations with US West in Czech and Slovak Republics

b. personal communications network operations in UK

c. international telecommunications gateways in Russia and Lithuania

d. joint venture in cable television/telecommunications operations with TCI in the UK.

C. New types of transnational carriers

In addition to alliances of existing carriers, new kinds of carriers are also emerging such as: Low-Earth Orbiting Satellites (LEOs) ventures which are usually comprised of many investors. For example, Iridium is owned by over 17 companies from 9 countries. Other LEO ventures are Global Star, Odyssey, Teledesic, and Inmarsat-P.

Light carriers are non-facilities service providers and resellers of telecommunications services that purchase bulk services from telecommunications carriers. International simple resale (ISR) involves the use of leased international private lines interconnected to the public switched network at both ends to provide traditional switched services. ISR permits entry into a foreign country that provides dial up and dedicated access to customers similar to that available from traditional carriers;

Ultra-light carriers originate calls in foreign countries without establishing a traditional network presence. They operate entirely from abroad. The major service offered is"call back,” which enables a consumer to take advantage of the lower prices offered in one country while he is in a country that has high monopoly prices. Call-back service is basically network arbitrage and is done by resellers who lease high capacity circuits from facilities based operators;

Systems integrators will not own or operate the various sub-production activities but rather select optimal elements in terms of price and performance, package them together, manage the bundles, and offer it to the customer on a one-stop basis. They will offer individually tailored "virtual" network arrangements that serve individualized communications needs;

Internet telecommunications is made possible by applications such as Internet Phone which enable telecommunications via the Internet. The dynamics of this development go beyond computer applications. Since the Internet is presently distance-insensitive in respect to price, it is also a means of long distance and international service. This additional level of competition offers substantial opportunities for new entrants, and exerts additional pressures on traditional carriers to meet the challenges of a future which is likely to consist of non-hierarchical, interconnected networks of networks. These pressures will also affect carrier structures, modularization, and organization of the entire company, not to mention pricing, business strategy, and alliances.

III. THE IMPACT OF NEW GLOBAL TELECOMMUNICATIONS ON TRADITIONAL REGULATION

The change from regulated national and governmental carriers to competitive, private transnational companies affect the traditional approaches of regulation. The impact of these new global telecommunications arrangements range from serious to minor and from concrete to hypothetical.

• An asymmetric liberalization in different countries permits an extension of national market power from a relatively protected market into an open one.

• The free flow of information is based upon national rules about content policy. National efforts to control content by one country may wreak havoc on the entire system of information flow across countries.

• New forms of consumer fraud from distant locations become possible and harder to purge.

• National encryption rules and escrow standards could create compatibility and confidentiality problems.

• National regulation of prices and profits can be undermined by accounting shifts of revenues, costs, and productivity gains among jurisdictions.

• Through international arbitrage, countries lose control over the price structure. This means, among others, that universal connectivity in a country needs to be financed in new ways.

• The question of which country has jurisdiction can create conflicts.

• National labor laws can be undermined by the ability of carriers to shift activities to other locations.

• Catastrophic network crashes could spill across borders.

• Quality standards are harder to maintain in an international chain of transmission. High quality countries may be negatively affected. Conversely the imposition of high quality standards world-wide may impose a cost on low-income countries.

• Loopholes for privacy and data protection can emerge.

• Foreign investment rules can be undermined by intricate relationships among carriers.

While it is important to be alert to new problems, the good news is that most of the issues outlined here are either hypothetical, or do not suggest an imminent crisis. This gives us time to think. What, if anything, might be done. Several options exist, including doing nothing. To evaluate the choices, we must first establish some theoretical framework.

IV. A THEORY OF MULTI-JURISDICTIONAL REGIMES

The choice of regulatory arrangements and institutions is not merely procedural but also is policy determinative; i.e. it has an important impact on substantive outcomes. The determination of the regulatory structure is not just a question of historical tradition, functional efficiency, or economic externalities. The determination of the regulatory level, for example, can be in itself a decision about the strictness of regulation that will prevail. Interest groups pragmatically desire the regulatory structure whose outcome they like best, and the relation between group strengths and benefits determines the preferred system of regulation.

The following will provide a simple economic framework to analyze a regulation in its intersectoral and international dimensions. We start by narrowly defining regulation as the setting, by a regulatory body, of a price vector R for a set of economic activities. A total prohibition is an infinite price; total laissez‑faire approach means a vector of market prices; most regulation is somewhere in between and can be viewed as a way of making an economic activity costlier (as for example in telemarketing) or cheaper (as for example in residential telephone usage). Various interest groups are affected by the setting of these prices, and they seek favorable Rs by exercising pressure through the political process.

Regulation is set by the agency according to some optimization criterion. This criterion is, of course, the subject of some debate. For those who hold the "public benefit" view of regulation, the agency's objective is to maximize the benefits to society; for others, it is to maximize the agency's self-interest.^[4] These two criteria are not necessarily inconsistent if we assume that an agency sets the restrictiveness of regulation to a maximize its total political support, and that such support is a monotonously increasing function of aggregate benefits.

Now assume that the regulation in one country may affect the interest groups in the other countries as well. For example, manufacturers in country A is benefitted by B's regulation if, for instance, its competitors in country B must contend with the added costs from regulation. In other instances, the cross-border effect of regulation would be negative, as in the case of transborder data flow laws. The less protected data are in one country, the tighter the other may become in response, as a defensive measure. The a regulatory strictness in A is therefore, among others, a function of country B's regulation. Thus we have a “reaction model,” depicted in Graph 1, in which each country adjusts its regulation in response to the other country’s regulatory strictness.

GRAPH 1

Reaction Functions of National Regulations

This process leads either to an equilibrium at the point of intersection, or to "corner solutions"; the latter are occurring where countries drive each other into total deregulation or into total prohibition. A good example of a competitive deregulatory trend within the United States is the increasing liberalization of state laws governing corporations, a process which has been described by a former Chairman of the Securities and Exchange Communication (SEC) as a "race the bottom." A "race to the top" would be where each jurisdiction attempts to shift undesirable activities to its neighbors, or tries to avoid becoming the recipient of its neighbor's undesirable exports. An example is the regulation of radioactive waste, where each jurisdiction would like the other to be the recipient. Other examples include: (a) lower telephone rates, if one wants to attract business from the other jurisdiction; (b) stricter data privacy, to prevent undesirable activities from spilling in, e.g., by telemarketers.

The important point is that there is no need for formal coordination between countries A and B; an equilibrium can be reached by unilateral actions and reactions aiming at unilateral optimization. In some cases, the reactions of both countries are such that no equilibrium is reached, but rather corner solutions, which are not the outcome sought by either country. In other circumstances, an equilibrium regulation may emerge, but might be sub-optimal.

To deal with the problem of unstable or undesirable equilibria that emerge under a non-coordinated system, the countries may agree that the regulation be coordinated. Several courses of action are possible.

V. INSTITUTIONAL OPTIONS FOR REGULATION

Following the theoretical discussion of Section IV and the identification, in Section III, of the regulatory issues raised by supranational carriers, we can now address the institutional options for regulation. The menu of possible approaches is quite long; ranging from centralized supranational agencies to doing nothing. A few of the major ones will be discussed below.

A. SUPRA-NATIONAL REGULATORY AGENCY

The most extreme way to conduct international coordination, if such is the overriding goal, would be to establish a supranational regulatory body with full authority to supersede national institutions. But this would severely reduce national sovereignty, more than most governments -- and individuals -- would be prepared to accept in the absence of truly major problems that cannot be dealt with otherwise.

Supra-regulation is not invariably stricter than particularized regulation. In telecommunications, for example, the regulatory principles of the European Commission are less strict than those of most of the member states. In the United States, the same holds true for the FCC relative to the many of the state Public Utility Commissions. But the reverse is also often the case, as for example in the regulation of cable TV in the US.