Christchurch, New Zealand
April 30th, 1999
Table of Contents
- Overview of Peru's Current Regulatory Framework
- Analysis of competition and regulatory issues in the Telecommunications and Electricity markets
- Implications for APEC's future agenda in competition and regulatory reform
Overview of Peru's current Regulatory Framework (1)
- Peru's current regulatory framework is consistent with the call to establish a complementary approach between competition and regulatory reform strategies.
- Experts in regulation and multilateral organizations recommend that regulatory agencies should be designed with a cost effective approach, taking into account the four components that significantly determine the success of a regulatory institution: autonomy, accountability managerial freedom and incentive estructure.
- However, when these principles are applied to agencies in developing economies, problems have to be faced in relation to political support, rules and limits to regulatory discretion, and adequate staffing and budgeting.
Overview of Peru's current Regulatory Framework (2)
- These problems are aggravated when agencies rely heavily on profit rate regulations, controls over price and tariffs, and quota allocations.
- An effective way to overrun these difficulties, whenever this is possible, is to count more on the role that competition and market forces play in the regulatory process.
- The Regulatory Reform Process in Peru has taken into account these considerations, designing institutions that promote free and fair competition and look for maximizing consumer benefits in the long run.
Competition policies as complements to Privatization
- The essence of privatization is rivalry and freedom to enter the market.
- When even after intoducing competition the incumbent still has significant monopoly power, regulation of conducts is recommended.
- Limits on profits or to rates of return generate distortions such as disincentives of inefficiency, cost-plus mentality and expensive enforcement, vulnerability to the capture of the regulatory commission by the regulated industry, and a tendency to limit competition among incumbents and to restrict new entry.
- A better alternative is more reliance on competition policy: protecting existing and potential competitors against dominant incumbents.
Characteristics of the Reform Program in Peru
- The main reforms implemented considered:
- A legal framework to promote domestic and foreign private investment, guaranteeing a non-discriminatory treatment and the free flow of capitals.
- A trade reform to promote unrestricted international commerce and competition based on market mechanisms.
- A financial reform to liberalize exchange and financial markets and strengthen the supervision of financial intermediation.
- A labor reform to remove barriers to free labor hiring and make work relations more flexible.
- A pension system reform to promote domestic savings through a private individual capitalization system
The new role of the State in Peru
- The State was restructured to make it a more efficient provider of essential services including health, education, justice administration, safety and infrastructure building.
Regulatory Function of the State
- The regulatory framework devised for economic activities such as telecommunications, electricity and others seek to foster free and fair competition, promote sectorial development and protect consumer's rights.
Telecommunications: Objectives of the Regulatory Reform (1)
- Expand, modernize and improve the service
- Set targets for quality and modernization
- Promote private investment
- Change from monopoly to free competition
- Tariff restructuring (in relation to costs)
- Extend service in rural areas (universal access)
- Contribute to national economic growth and development
- Estrategies proposed: Deregulation and Privatization
Telecommunications: Objectives of the Regulatory Reform (2) Strategies Proposed
- Creation of a modern, transparent and flexible legal framework to promote private investment and establish real and fair competition.
- Open all markets to private investment, with no restrictions for foreign ownership.
- A modern regulatory framework that considered the Ministry of Transportation and Communications (MTC), a specialized regulatory agency (Osiptel) and a restricted role for the competition agency (Indecopi).
- Transfer of State monopolies to an operator with capital, techonology and experience that will meet regulatory objectives
Telecommunications: Analysis of Competition and Regulatory Issues (1)
- In August 1998, an agreement with Telefonica was reached to put an end to the period of limited concurrence.
- There is an important number of enterprises preparing to enter the market.
Number of Enterprises
Market Operating In Waiting List Fixed Telephony 1 2 Long Distance 1 11 Cellulars 2 Cable TV 57 28 Beepers 45 11 Trunking 11 3 Value Added 92 16 Local Carrier 3 52
Telecommunications: Analysis of Competition and Regulatory Issues (2)
- But still interconnection charges are higher than Latin American and USA averages.
USA cents Country Local Long Distance Average Argentina 3.35 3.50 3.37 Bolivia 2.31 2.31 2.31 Brasil 4.74 5.47 4.85 Colombia 2.93 2.93 2.93 Chile 1.78 1.78 1.78 Mexico 2.60 2.60 2.60 Peru 2.90 2.90 2.90 Latin America 2.77 3.07 2.82 USA 1.54 1.70 1.57
Telecommunications: Analysis of Competition and Regulatory Issues (3)
- Price cap regulation with quarterly adjustments, considering a productivity factor, will be the rule for the free competition period. New entrants have to inform of their tariffs before they are applied to consumers.
- Interconnection fees established by Osiptel are only applied by default: when agreements cannot be reached between parties.
- Benchmark regulation, according to Indicators of competitiveness, that take into account tariffs, interconnection fees, deepness, introduction of new services and degree of competition. Countries considered: Argentina, Brasil, Chile and Spain, among others. Osiptel projects to reach Chile and Spain standards by year 2003.
- Cross subsidization schemes ruled out by law.
Telecommunications: Analysis of Competition and Regulatory Issues (4)
- Osiptel has relatively little experience in solving competition disputes.
- Two important cases have already been considered:
- Red Cient'fica Peruana or RCP (Internet provider) vs. Telefonica (dominant incumbent entitled with a five year period monopoly on basic telephony), on delays in attending line requests from RCP customers
- Telefonica vs Tele 2000 (cellular telephony operator), on the legality of roaming services.
- Both cases were decided by ad-hoc special boards taking into account jurisprudential decisions from the competition agency (Indecopi).
- Osiptel has now published competition policy guidelines for the Telecommunications market
Electricity : Objectives of the Regulatory Reform
- Promote economic efficiency and protect consumers from abuse of market position and non-competitive practices.
- Cap-prices established for customers in the regulated market. Busbar Electricity Prices established every six months for distributors, considering penalties for losses in the transmission process.
- Regulated and nonregulated market prices cannot differ in more than 10%.
- Annual interconnection fees for generators, covering investment, operation and maintenance costs of transmission.
- Tariffs for final users adding value added in distribution, considering investment, maintenance, operation and other costs related to distribution.
Electricity: Regulatory Framework - Pre-Merger Control in the Electric Sector
- As a result of the privatization process, the Peruvian Government considered the need to regulate potential abusive behavior of firms, mainly explained by increasing control over firms operating in generation, transmission and distribution.
- In accordance with the Electrical Concessions Law, firms with high market power, operating in any of the electrical activities, need the approval of the Free Competition Commission (FCC), to increase their control over the system.
- Limits for notification set at 5% for vertical integration and 15% for horizontal integration.
- Control over a firm operating in the system can be increased through purchase of stocks, special management agreements, or increasing the number of members appointed to the board of directors.
Electricity: : Analysis of Competition and Regulatory Issues (1)
- The conduct regulation approach proposed try to avoid abuses of dominant position in the electric markets. This is done through restrictions on cross-ownership, that are being enforced horizontally across generators and vertically across the three components of the production cycle.
- Generating companies are prevented to participate in transmission and distribution operations, to avoid market foreclosure, with some exceptions for small local systems. The restrictions include limits on market share and participation in the new privatization processes. The same restrictions are applied to distributors trying to increase their share in the generation process.
- The projected increase in gas-based energy supply, is expected to change significantly the cost fundamentals of the market.
Electricity: : Analysis of Competition and Regulatory Issues (2)
- Until April 1999, very few concentration processes have been brought into the attention of the FCC of Indecopi. The Commission reviewed three concentration processes related to concessions in the transmission process (Mantaro-Socabaya), privatization of a generator (EGEMSA) and transfers of shares through the stock market (Generandes). The Enersis-Endesa transaction in Chile is also under surveillance.
- For 1999, the Government's schedule considers sales of shares in five generators and one distributor, and the privatization of five regional distributors and two regional generators.
- Non regulated clients located near big distributors, have been facing abusive conditions for renegotiating their supply contracts.
Some lessons from the review of selected cases
- Technological developments impose new challenges to regulators, that need to update and harmonize their views on regulatory and competition issues.
- The Regulatory Reform process never ends. It is a permanent learning process of the changing economic fundamentals of the markets, and of the mechanisms that regulatory and competition agencies need to develop to perform their duties.
- High priority should be asigned to the development of consistent legal frameworks, coordination mechanisms among competition and regulatory agencies, common information systems and training programs for all parties.
- Regulators should always have in mind their compromise for competition and for consumers.
Some basic proposals for APEC's future agenda in competiiton and regulatory reform issues
- Even when many APEC economies have sound regulatory experiences, the development of new techonologies impose serious challenges to regulators.
- APEC economies need to improve cooperation mechanisms among agencies for sharing regulatory and competition experiences and for developing consistent legal frameworks and common information systems, training programs and technical capabilities.
- It is important to advance in the study of the complementary role between competition and regulatory policies.
- APEC competition and regulatory bodies need to develop common views to deal with the regional strategies of dominant incumbents operating in different markets.