Economic Analysis Series No.141
International Comparison of Privatization and Deregulation
among the USA, the UK and Japan
-- Volume I : Telecommunications --

December, 1995
  • Robert G. HARRIS,
  • Martin CAVE,
  • Tsuruhiko NAMBU,
  • Hiroshi TSUBOUCHI,
  • Fumito KUROSAWA

(Introduction )

1. United States

 A. Purpose of the Report
The purpose of this report is to provide an analysis of recent U.S. developments in competition in wireline telecommunications services and an examination of the effects of antitrust and regulatory policies on competition. By comparison to most other nations, public policies in the U.S. are much more favorable to competition in telecommunications and, correspondingly, competition is much further advanced. Yet, crucial competition policy issues remain unresolved, some dead-locked in public policy disputes that pits industry segments against themselves: interexchange carriers (IXCs) resist the efforts of the local Bell Operating Companies (BOCs) to enter interLATA long distance services; cable companies battle against the entry by Bell and other local exchange carriers (LECs) into video distribution services; and LECs oppose entry by cable companies or IXCs in local services unless and until they are allowed into long distance and video services.1 At the state level, competitors are eagerly seeking modifications of regulations, including certification to provide local exchange telephone services, all in the name of competition. This report will assess both the current status of competition in telecommunications services and the prospect for further developments in competition and competition policy in the near future.

 B. Structure of Public Policy Jurisdictions in the U.S.
In the "dual" system of Federal and state jurisdiction of regulation in the U.S., states have authority over the certification of local exchange carriers and approval of tariffs for local exchange services. Many services are tariffed on both interstate and intrastate basis, with the former regulated by the Federal Communications Commission and the latter regulated by the respective state commissions. Within the limits of the Communications Act of 1934, the Federal Communications Commission has the authority to pre-empt state regulations whenever it can meet certain legal tests. The FCC has aggressively used this pre-emption authority to promote competition in telecommunications, often in opposition (at least until very recently) to state regulatory policies. Also, the FCC has sole jurisdiction over the allocation of spectrum and has used this power to promote competition in long distance services (e.g., the "above 890 decision, which allowed use of microwave facilities for competitive entry) and wireless telecommunications services.

In addition to dual jurisdiction in regulatory authority, Federal antitrust policy has played a crucial role in the development of telecommunications competition in the U.S. Along with procompetitive regulatory decisions by the Federal Communications Commission, the Modification of Final Judgment compelled AT&T's divestiture of, and imposed line-of-business restrictions on, the Bell Operating Companies (BOCs). Judge Greene of U.S. District Court, monitors and enforces compliance with the MFJ and has authority to grant waivers from the MFJ. Under the terms of the Modified Final Judgment (the antitrust consent decree which required that AT&T divests its Bell Operating Companies), the seven Regional Holding Companies2 are prohibited from providing interLATA toll services3 or manufacturing telecommunications equipment. Through judicial review, the restriction on information services by the Bell Operating Companies has been removed.

 C. Organization of Report
Section II defines and sizes the markets for, and analyzes the vertical relationships among, access, exchange and interexchange services. It distinguishes access service -- which is a strong complement to interexchange service -- from exchange service, which is not. It also explains why the vertical relationship between access and interexchange services lies at the root of the competitive concerns about vertical integration across local and long distance services. Section II also identifies several key economic concepts involved in local competition policy in the U.S., namely, "bottleneck," "interconnection," "essential facility" and "unbundling."
Section III analyzes competitive developments and conditions in interLATA long distance services.4 It reviews a number of studies addressing the structure of the interLATA market; evidence regarding the pattern of pricing by AT&T, MCI and Sprint; and the growing importance of volume discounting -- i.e., price discrimination -- in interLATA services.
Section IV examines competition in access services. It presents evidence of the concentration of access revenues in major urban centers and shows how entrants are targeting the areas where revenues are most highly concentrated.
Section V reviews developments in competition in exchange services and assesses state regulations toward the certification and interconnection of alternative exchange carriers (AECs), and the unbundling of exchange services and facilities of incumbent local exchange carriers (LECs).

2. United Kingdom

This paper offers an account and an evaluation of the reforms that have taken place in the UK telecommunications industry since the early 1980s. The period has seen major developments, including the commercialisation and privatisation of the dominant firm, British Telecom and - especially since 1991 - a major liberalisation of entry into the industry. New telecommunications technologies have been employed. Developments over the period have been hectic, and many are still occurring. Accordingly, the process described in this paper is still incomplete, and key regulatory and market changes are occurring at - if anything - an accelerated rate.
The structure of the paper is as follows. Section 1 is devoted to an account of developments in the ownership and regulation of telecommunications. It begins with a description of regulatory institutions and ownership changes, and then discusses in turn a variety of regulatory issues including: licensing, pricing, interconnection, universal service obligations, quality, new services and mobile services.
Section 2 of the paper then analyses outturns under a number of headings: number of firms and market shares; prices charged by the two principal fixed link operators, BT and Mercury; profits, investment and employment in the sector; quality of service; availability of new services; and effects on consumer surplus. As in Section 1, a separate section is devoted to mobile services. Finally, Section 3 discusses the lessons of the UK experience.

3. Japan

In 1985 Japanese telecommunications industry was reshaped and several new institutional arrangements were adopted. We will summarize such changes as below.
1) NTT (Nippon Telegraph and Telephone) Corporation was given a birth by replacing public monopoly (Denden Kosha). NTT has become a private company but it is a special entity in that more than 51% of its shares were held by the government and it inherited public obligations as is called "Universal Service".
2) Instead of Public Telecommunications Law, Telecommunications Business Law came out which has become the key to determine the industrial structure of telecom industry. Under this law telecom service providers are classified into two categories: Type I carrier and Type II carrier. The former owns telecom facilities whereas the latter rents them from Type I carriers. Type II carriers are equal to Value Added Network Service providers (VANS) (See Table-1 and Table-2.).
3) The Ministry of Posts and Telecommunications (MPT) is in charge of regulating Type I&II carriers. In the days of public monopoly Kosha was under the surveillance of the National Diet. Accordingly the regulation of MPT was rather nominal and there could not exist any conflict between MPT and NTT because Kosha system was created in the spirit to encourage and respect the independence of Kosha. Although Denden Kosha was privatized, NTT still has maintained its bureaucratic system.
4) According to the new regime, companies which own telecom facilities are labeled Type I carrier. As a result Type I carriers include every size of telephone service providers from pager service companies to giant NTT. ALL Type I carriers are required to obtain detailed permission of MPT in doing their business whereas Type II carriers have only to file to MPT.
5) Type I carriers are classified into 5 categories as below (for more details see Table-1)

  • i) long distance (inter-city)
  • ii) local (regional)
  • iii) satellite
  • iv) mobile
  • v) international

NTT provides local and long distance services but it can not provide international service. KDD (Kokusai Densin Denwa Corporation) used to provide international service as monopoly but now it has two new competitors.
MPT regulates carriers according to the classification above and accordingly regulatory environment has been created that each carrier must operate in one of the 5 categories. For example, local new comers are mainly composed of subsidiary companies of electric utilities and they are technically interconnectable. But according to the established rule up to now, they cannot enter into long distance market.
The inability of NTT to provide international service is very strange from the world standard. But there used to be demarcation of market between NTT and KDD. This tradition cannot, it seems, be broken easily not from any economic reason but from MPT regulatory philosophy. When we look at the number of Type I carriers it amounts to 80 which is enough to astonish careless foreign watchers that competition has been enhancing. The reality is that regulation is applied onto each category and competition has been strictly controlled except for the case of mobile telephone area since April 1994.

1See Harris, Robert G., "Strategic Uses of Regulation: The Case of Line-of-Business Restrictions in the U.S. Communications Industry," with Robert A. Blau, in Research in Corporate Social Performance and Policy, James E. Post (ed.), JAI Press, 1992.

2Each of the seven RHCs or RBOCs -- Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell and U S WEST -- owns one or more Bell Operating Companies, each of which serve one or more states. Each serves approximately 11-12% of U.S. telephone subscribers. The remainder are served by more than 1000 independent local exchange carriers, most of which are very small, serving a few thousand customers.

3The MFJ imposed three main line-of-business restrictions on the RBOCs: manufacturing telecommunications equipment, interLATA services and information services. In 1991, the information services restriction was removed by judicial action.

4LATAs (Local Access and Transport Areas) served as the geographic boundaries for dis-integrating AT&T from its operating companies. There are approximately 200 LATAs in the U.S. BOCs are allowed to offer long distance services within their LATAs, but not across LATAs.

Structure of the whole text(PDF-Format 2file)

  1. page8
    ( Summary Table in English )別ウィンドウで開きます。 (PDF-Format 40 KB)
  2. page15
    1. United States別ウィンドウで開きます。 (PDF-Format 476 KB)
    1. "Competition and Public Policies in Telecommunications: A Survey of U.S. Developments"  Robert G. HARRIS
  3. page51
    2. United Kingdom
    1. "Development of the UK Telecommunications Industry through Privatization and Deregulation"  Martin CAVE
  4. page103
    3. Japan
    1. "Competition and Regulation of Japanese Telecommunications Industry"
    2. Tsuruhiko NAMBU, Hiroshi TSUBOUCHI and Fumito KUROSAWA
  5. This is one of the four volumes from the research project on "International Comparison of Privatization and Deregulation" . Others are as follows.
    1. Volume  II : Electricity
    2. Volume III : Airline and Trucking
    3. Volume IV : Country and General Overview
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