Independent Regulatory Agencies, implementation strategies and credible commitment. A comparative research on Universal Service policies in Italy and the UK Maria Stella Righettini (
[email protected]) Giorgia Nesti (
[email protected]) Department of politics, Law and International Studies University of Padova 1st International Conference on Public Policy -‐ ICPP Grenoble, June 26-‐28 2013 Panel ‘Institutional analysis and public policy: towards a new research agenda’ Session 2: Actors, interactions, and institutional context Working paper – please do not cite without authors’ permission
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Introduction In this paper we contribute to the debate on institutional analysis and policy implementation studies by considering the expansion of regulatory policies through the use of Independent Regulatory Agencies (IRAs). The deep changes in public utilities markets in the last decades and the privatization of public monopolies have produced a modification in the way states adopt and implement regulatory policies. IRAs have become important actors for the intervention in this economic sector and have changed the structure and the functioning of the Regulatory State (Majone, 1994, 1997; Gilardi, 2007). Many scholars have stressed specific structural aspects of regulatory institutions, outlining the causal relation existing between structural variables (independence and delegation) and policy outcomes (Gilardi, 2007). The central point of the neo-‐institutional approach is that delegation and independence given to regulatory institutions make them fundamental agents of the regulatory performances of the delegating principals. Nevertheless, some scholars have pointed out how IRAs can be considered a case of “similar device adopted for different motives” (Lodge, 2008) reaching different results. Starting from this consideration, we would argue that IRAs’ institutional work can differ significantly in the manner it is performed, the time it requires, and the results it achieves, and that regulatory policies can include different types of mechanisms and relationships between regulators and regulated subjects. We will therefore look at the way regulation is implemented by IRAs and the way implementation mechanisms influence their credible commitment, that is to say, their problem-‐solving capacity. Our comparative empirical research examines how the British and Italian independent regulators for the telecommunications sector (Ofcom and Agcom) have become crucial actors in the implementation of Universal Service Obligation (USO) and to what extent their participation to the regulatory implementation process make a difference in their regulatory commitment and credibility. The two countries have different economic and technological contexts: the UK has a developed market both with respect to fixed and mobile telephony and access markets (i.e. network properties) while Italy is still characterized by monopolistic markets both in fixed telephony and in the network property. Italy also has a technological scenario that is very different from the British one: Italy has a more traditional access market based on analogical systems while UK has developed the so-‐called ‘Next Generation Network’
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(NGN)1. With reference to users, UK has a higher internet-‐penetration than Italy has. The development of mobile telephony has changed market and users’ dynamics but it has not yet filled the telecommunication access gap between the two counties (Agcom, 2012). We will consider all these differences as a scenario (ceteris paribus) for our unit of analysis: the structure of the policy problem and the implementation processes characterised by a chain of actions and reactions between policy actors (Dossi, Dente, Radaelli, 2012). We will focus on the USO policy implemented by the British and the Italian IRAs to guarantee consumer inclusion and benefits from privatisation of communications operators and from market liberalisation (Domah and Pollit, 2001). With the implementation of USO policies new regulatory tasks, standards and practices have been introduced and the role and the scope of regulation of communications markets have changed. This paper seeks to review the regulatory actions of the two IRAs and to analyse the interactions between regulators and regulated businesses, to focus on the relational mechanisms linking policy actors in order to regulate social inclusion. The main research question is: how and to what extent do the tools and policy implementation mechanisms adopted by the two IRAs influence their credibility as problem solver agencies and their “output legitimacy” (Sharpf, 1999: 19)? The paper proceeds as follows. Part 1 reviews the neo-‐institutional literature on independent regulation. Part 2 discusses the conceptual framework and main research questions, independent and dependent variables and hypotheses. Part 3 and 4 describe the implementation processes in the two countries and discuss main research findings. 1. New institutionalism and Independent Regulation The existing literature on regulation considers three principal approaches for the analysis of causes and characteristics of regulatory policies: the public interest theory, the economic theory and neo-‐institutionalism. For the first approach, a regulatory activity emerges in order to correct market failures. In contexts in which competitive markets do not lead to an equal-‐ optimal allocation of resources2, in fact, regulation is supposed to correct these failures: lack of competition, emergence of negative externalities, information asymmetries, the need to provide public goods that would otherwise be lacking. Regulatory agencies, in this 1
According to ITU ‘A Next Generation Network (NGN) is a packet-‐based network able to provide services including Telecommunication Services and able to make use of multiple broadband, QoS-‐enabled transport technologies and in which service-‐related functions are independent from underlying transport-‐related technologies. It offers unrestricted access by users to different service providers. It supports generalized mobility which will allow consistent and ubiquitous provision of services to users.’ For more details see: http://www.itu.int/ITU-‐T/studygroups/com13/ngn2004/working_definition.html 2 That is to say, in those situations in which no single position can be improved without at the same time worsening that of another party.
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perspective, operate as ‘benevolent agents for the public interest’ (Baldwin, Cave and Lodge 2012: 41), or impartial experts acting to protect the collective public interest. 3 The economic theory of regulation, on the other hand, assumes that the regulatory activity is influenced by interest groups. Authors like George Stigler (1971) and Samuel Peltzman (1976, 1989), in particular, hypothesize that regulators serves the interests of the regulated enterprises. In this situation, the regulator is seen as being "captured" by firms and induced to implement policies aimed at benefiting them. Thus IRAs’ main activities are seen, under this approach, as primarily seeking to create barriers to new market entrants, to distribute subsidies, to control prices, to discourage consumers from the use of substitute products. The neo-‐institutional approach has been increasingly adopted over the last twenty years within the social sciences, and has recently found a number of interesting applications also in the field of independent regulation. In this context, neo-‐institutionalism has focused its research interest on the emergence of IRAs. It is possible, in fact, to distinguish at least two lines of inquiry within the neo-‐institutional approach to independent regulation: 1) those studies which investigate the causes leading to the creation and diffusion of IRAs throughout the world; 2) studies which examine the nature of the relation existing between political actors and IRAs, in order to verify whether to and to what extent the former are able to control the latter, seeking moreover to ensure that the principles of legitimacy and democratic accountability are respected. Both of these approaches interpret IRAs as subjects entitled of powers by government bodies. The relationship between the two parts involves therefore the delegation of regulatory powers by a principal (the political actor, in this case) to an agent (the IRA), which must exercise it according to the mandate received. The political actors’ choice to entrust regulatory powers to an independent third party derives, prima facie, from the necessity to improve rule-‐making processes in particularly technical and complex contexts often requiring specific expertise. A more rigorous conceptualization of the causes at the basis of the delegation of regulatory powers to independent institutions, however, was made by Giandomenico Majone, (1994, 1996a, 1996b; La Spina e Majone, 2000). According to the author, in fact, this process has its origins in the need for creating regulatory policies that are stable over time and insulated from the electoral cycles. Policy sectors requiring long-‐term investments, in fact, need clear regulations, which political actors cannot guarantee due to the limited time frames within which they operate. Such regulatory delegation is therefore necessary to confer credibility to
3 See Veljanoski (2010) and Baldwin, Cave and Lodge (2012).
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policies. The credible commitment thesis has given rise to the most recent empirical analyses deriving from the neo-‐institutional approach. Gilardi's comparative research (2002, 2005, 2009), for instance, has evidenced how politicians seek, through the delegation of regulatory powers to IRAs, to tie subsequent policy makers to previous decisions. The exponential diffusion of IRAs throughout the world since the 1990's, would then be, according to this theory, the result of isomorphic processes through which national governments adopt similar institutional solutions, in order to resolve similar problems. Delegation of powers raises, nevertheless, several problems: To what extent principals (i.e. political actors) are able to control their agents (IRAs)? How can we ensure that the independence conferred upon the agencies does not lead them to deviate from their principals’ mandate (a phenomenon often referred to as ‘bureaucratic drift’) and/or that IRAs’ interests do not conflict with those of the political actors (a phenomenon also known as ‘moral hazard’)? Several studies have sought to define and to measure the level of both the formal (or ‘de jure’) and the real (or ‘de facto’) independence of IRAs in different policy sectors and countries (Gilardi, 2009; Gilardi-‐Maggetti, 2011; Maggetti 2012). Other scholars, particularly from the United States, have instead focused on control mechanisms adopted by politicians to prevent drifting (for a review of literature on this topic see Carrigan and Coglianese, 2011). The last fundamental aspect analysed by neo-‐institutionalism pertains the inevitable tension originating between the need to render IRAs as autonomous as possible in order to allow them to perform the assigned tasks efficiently, and the need to ensure that these institutions are linked to the will of the people -‐ of which, politicians, in turn, are the expression. Accountability studies aimed at analysing the various control mechanisms adopted to guarantee IRAs’ legitimacy seek to shed light upon this issue (Scott, 2000; May, 2010). The Neo-‐Institutional theory is one of the most promising approaches in the study of independent regulation. In particular, the research on causes and dynamics of IRAs’ diffusion has demonstrated the importance of the circulation of ideas between states and of isomorphic mechanisms. At the same time, in-‐depth analyses of the principal-‐agent relationship have better portrayed how de jure and/or de facto structural characteristics influence IRAs’ independence. Nevertheless, the study of the delegation of regulatory powers from central governments to IRAs has prevalently looked at institutional and structural aspects of agencies, while limited empirical research has been conducted on regulatory policy-‐making
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processes4. The creation of a new actor like IRAs within a policy sector, transforms the balances between the already existing actors, both public and private, and influences the relationships between them in the policy process. The goal of this paper is, therefore, to analyse the impact of IRAs on policy-‐making and to analyse how implementation mechanisms influence their problem solving capacity. To do so, we will focus our attention on the regulation of USO in telecommunications, a sector where IRAs are by now a consolidated actor of policy-‐making. 2. Conceptual framework, research hypothesis and case studies The regulatory powers delegated to IRAs have reshaped relations at a constitutional level, between the executives and the other major constitutional players, judiciary and parliaments (Righettini, 2001; Radaelli, 2012, 180), and between public and private actors in the market. These changes have modified the design of the regulatory governance, the functioning of the regulatory process, the way policy actors are involved into regulation and the repertories of actions and behaviours they adopted in order to achieve their goals. Neo-‐institutionalism points that IRAs have been created to solve problems of political uncertainty and time-‐inconsistency that may lead to a lack of credibility of policy makers (Gilardi, 2006). By “delegating authority, policy makers bind themselves and therefore increase the credibility of policy commitment”. IRAs are meant to be more competent and flexible in order to better confront time inconsistency problems and to guarantee a policy credible commitment intended as a problem solving orientation (Gilardi 2006: 128,129). This paper is meant to be an empirical contribution to the understanding of the complexity of IRAs’ functioning and of the influence that implementation process exerts on IRAs’ credible commitment. The theory of delegation indicates that the problem of time inconsistency and of credible commitment is shifted from political institutions to IRAs. Nevertheless the mechanism of delegation does not automatically improve the credibility of policy-‐making and IRAs’ problem-‐solving capacities. Credibility is an important asset in the regulation of utilities that are characterised by high investments and significant dangers of bias in the regulatory policy-‐making (Levy and Spiller, 1994). Credibility is related to the ability to solve problems, to find agreements on policy change and to work within the context of interdependence of actors in the policy process. The methods adopted to select and to implement policies (not just to make rules) make a
4 For an exception see Maggetti (2012) and Thatcher (2001; 2002; 2004).
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difference in the problem-‐solving orientation (Sharpf, 2006). For this purpose we will analyse the implementation of regulatory policies in the telecoms sector, particularly in USO regulatory policies, looking at the ways IRAs work in order to guarantee that national providers improve access and social inclusion in communications for final users. IRAs are intended and analysed as unitary core actors of the USO policy with legal, technical and economic resources, interacting with other participants in the implementation process. The USO policy is complementary to privatization policies, which spread throughout Europe during the 1980s, affecting the production and the delivery of public services essential for the everyday life (gas, electricity, water and communications). USOs have to do with the transformation of public monopolies into more competitive markets and with the grouping of private or privatised utilities under a single regulator (the IRA). USO is actually a type of regulation oriented to produce general benefits in a particular sector of economic activities. IRAs, in order to ensure that individuals cannot be excluded from accessing and using public utilities, adopt specific policies to guarantee a universal access to these services, that is to say, to guarantee social inclusion to territorially, socially and physically disadvantaged groups and individuals. The conceptual framework for the comparative analysis of the Italian and British cases departs from the idea that the implementation of USO goals tell us much about how institutions work, how actions and behaviours of regulators and regulated firms change, and how relationships between them contribute to fulfil the regulatory goals. Implementation determines the “circumstances under which regulation is achieved, design of regulatory programs are influenced and regulators are captured” (Wilson, 1960). The metaphor of the ‘regulatory capture’ is an alternative way of looking at IRAs’ independence not from politics but from regulated interests (Bernstein, 1995). We are not so concerned with the normative theory of the regulatory capture but rather in the ways independent regulators interpret their delegation and credible commitments to policy goals. We are interested in how regulators and regulated interests influence each other by modifying the policy process in order to achieve (or not) given policy objectives. As has been pointed out in previous studies (Matland, 1995), implementation can be analysed from a normative point of view (top-‐down approach) or from an empirical and functional perspective (bottom up). The first approach sees “policy designers as the central actors of the implementation and focuses attention on factors that can be manipulated at the central level” by central institutions, such as IRAs (Van Meter, D. S and Van Horn, 1975). The bottom up approach (Lipsky, 1980) emphasises the street level implementation, the target groups and
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service deliverers, arguing that a policy is really made by the reactions to central decisions at the lower levels and by interactions between regulators and regulated interests. In the field of regulatory policy this means to put regulated interests, final users, other potential institutional actors (such as the judiciary) and their interactions at the centre of the analysis. Even the definition of what a successful implementation is differs greatly: for the top-‐down approach ‘success’ is measured in terms of steering powers and specific outcomes tied to program goals. For bottom-‐up theorists only a “program leading to positive effects” (Wright, 1984), in terms of problem-‐solving solutions, can be considered a success. The attempt to reconcile the idea of policy steering by central institutions and street level transformation comes from implementation studies focusing on the interactions of a multitude of actors with separate interests and strategies (Sharpf, 1978). One aspect of this institutional approach is of particular interest. The idea that policy-‐making is characterized by a polycentric configuration that includes a variety of subjects that are all interdependent within the policy-‐making. This approach includes in its analysis several types of actors that are often forgotten: for example, the judiciary, including specialised administrative courts, often neglected despite the fact that they play a crucial role in shaping policy problems, the constellation of actors, and pay offs in the policy process (Sharpf, 2006). In this perspective, IRAs’ credible commitment as problem-‐ solving orientation results from the overall interactions developed in the policy arena and from strategies of IRAs’ blame avoidance in a context characterised by high interdependence. The theory of the Regulatory State and of the delegation of regulatory powers to IRAs falls into judicial removal, increasing the difficulties in explaining regulatory changes and agencies’ problem-‐solving orientation. Up to the present, the question of success has been addressed by studies that dealt with the issue in a mainly negative way, such as the “problem of translating policy into action” (Barret, 2004, 251), or the “implementation gap” (Pressman and Wildavsky, 1973) or “bridging the gap”. The empirical approach to the analysis of regulatory success as the capacity for problem-‐solving is the principal task. In the neo institutional theory IRAs are the principle instrument used at the national level for USO policy implementation and the ways IRAs implement USO goals should be measured in terms of their success in compelling business to serve specific objectives. For that reason, in regulatory studies conflict has a central role in differentiating policy implementation processes. According to the classic typology of public policy and policy sectors (Lowi; 1972, Wilson; 1980), regulatory policies involve a particular type of rules and instruments that share common characteristics: they are basically affected by the direct
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coercion of individual behaviour. Coercion involves compliance and enforcement costs by coerced individuals and groups that commit themselves to limit and reduce their freedom to obtain some type of particular collective benefit. We are interested in analysing how the USO policy implementation process affects IRA’s credible commitment in two different countries – Italy and the UK – and how relational mechanisms of blame avoidance trigger policy changes. We address the question of how the implementation process, and specifically certain elements, such as he intensity of conflict, veto players, and mechanisms of regulatory blame avoidance, influences IRA problem solving-‐ orientation, and their credible commitment to USO goals. We will focus on the day-‐by-‐day regulation in the Italian and British cases to provide a realistic understanding of the problems and opportunities deriving from the interaction between IRAs and other institutional actors (judiciary and other IRAs) on one side, and of the opportunities and constraints deriving from the relationships between IRA and regulated interests on the other. Our analysis is based on the concept of regulatory mechanisms in order to understand what links policy actors to each other: regulatory procedure, policy tools and causal mechanisms. At the micro level of the institutional setting we will analyse ‘situational mechanisms’, that is to say, mechanisms that explain individual action and behavioural choices along the policy process. From this perspective we focus on actor resources and strategies from a rationalistic perspective: cost-‐benefits concentration and diffusion. Then we will use the micro-‐macro level analysis to seek to understand changes in the policy arena: the politics of USO regulation (Panebianco, 2009; Vecchi, 2011). We use the notion of ‘relational mechanisms’ as “entities and activities engaged in, either by themselves or in concert with others that bring about change” (Hedstrom and Swedberg, 1998: 9-‐10), strengthening the relationships between policy actors and policy resources and also underscoring the problems of how (i.e. through what processes) relationships are created. Our main hypothesis is that the more IRAs adopt a confrontational regulatory process, characterized by high concentration of costs and benefits, the more veto players compromise the IRAs’ problem solving capacity. Veto players generate specific and diffuse negative biases on IRAs’ problem solving capacity, which could even suggest the opportunity to reform or to abolish the independent agency. IRAs’ blame avoidance strategies to gain or regain credibility can be of three types (Hood, 2011): presentational strategy, agency strategy and policy strategy. The first is based on
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secrecy and on the cover-‐up of negative effects of regulation; the second is based on shifting the responsibility of any failure to other actors; the third is based on the bureaucratisation of procedure and of technical ability to justify and legitimise bad choices. With regard to this last point, regulation is characterised by time-‐consuming activities principally oriented toward bureaucratizing regulation and toward solving conflicts between policy actors rather than on creating social benefits. In analysing the implementation processes and the regulatory mechanisms related to USO policies we look at IRAs’ working rules (Ostrom, 2005). What links formal rules to effective behaviours? How do the IRAs’ decisions affect expectations and reactions by using certain regulatory instruments/rules as opposed to others? We can consider four main clusters of working rules that should allow us to detect relational mechanisms in the USO policy, affecting the credible commitment of IRAs and their problem solving orientation: 1. Attribution or definition: to whom regulation is applied, who indentifies who participates in the implementation process (boundary rules). This allows us to understand to what extent IRAs contribute to structuring USO policies and which other actors are involved. 2. The choice rules: relate to the content of regulation in terms of “permission”; “oblige” or “forbidden”. In the case of Universal Service ‘Obligations’, how is the obligation between regulators and regulated business interpreted and bargained and which regulatory tools are utilised to do so? 3. The amount and frequency of prescriptions for the action of the provider, in terms of technical standards or informative burdens requested by the regulator to the USO provider and the information necessary to decide on costs, financing and reimbursement of the USO (level of bureaucratization). 4. Enforcement rules, or institutionally assigned competences and consequences in the case of failure. Enforcement rules and sanction structures are meant as legal resources for policy actors. Is the violation of rules convenient in the policy process? Each State endows upon certain Universal Service Providers (USPs) special status that allows the national regulator to obtain subsidies from the Universal Service Fund (USF) to provide the necessary service more economically. Service providers also must assure the independent regulators that what they are supplying meets national specific needs and expectations. The USO policy in the UK and Italy have some common general features: Regulatory agencies, Ofcom and Agcom, act in a context characterized by a defined, fairly low number of
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participants (policy actors); Interactions between policy actors are influenced by boundary rules (entry and exit rules), that is to say criteria used to determine whether a telecoms provider is eligible to fill the particular position of USP; And, finally, national independent regulators are the most important instruments of the European USO policy, which defines a number of general policy objectives and general constraints for national regulators. Despite these general features, national regulators greatly differ in the way they implement common policy goals and chose to achieve the credibility of regulatory commitment. 3. Defining and regulating Universal Service Obligations in the UK and Italy 3.1 Supranational constraints The concept of Universal Service can be applied to many different types of services. In the case of telecommunications, it generally relates to the need to deliver the service to everyone, under identical conditions and at an affordable price. The rationales underlying the provision of Universal services (generally labelled as Universal Service Obligation – USO) are economical, social and political. The first argument relates to the fact that if an additional customer joins a telecommunications network, existing members benefit because they can contact the new user and they can receive calls from that individual. From an economic perspective, USO can also help to boost productivity and economic growth, to promote regional and rural development, and to improve working condition and public administration efficiency (OECD 2003; Calvo, 2012). The sociological rationale refers to the need for everyone to have access and to be connected to telecommunications networks in order to avoid exclusion and to fully participate in society, for instance by communicating with others and by accessing public and/or emergency services. For this reason, USO is usually targeted to low incomes groups, people living in remote rural areas, and to the disabled and other vulnerable groups. The political rationale pertains the ‘governance’ of USO. Due to the public concerns it entails, it is generally perceived that the definition of the scope and the extent of USO for telecommunications should fall under the political domain and should be decided upon by elected institutions. Historically in Europe, the USO was provided by state-‐owned monopolies since they were characterized by substantial economies of scale and scope. Often, these services included uniform rating and entry restrictions (OECD, 2006). When the liberalization of telecommunications spread across the world in the 1990s, in some countries, such as the UK,
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the already existing USO regime5 was slightly modified and adjusted to better fit the new economic environment. In other countries, such as Italy, the provision of Universal service in telecommunications was introduced later, reflecting the delay of the privatization and the liberalization process. The imposition of a USO that generally obliges the designated firm to provide loss-‐making services, could conceivably generate anti-‐competitive behaviour, since any new market entrants would be allowed to take only profitable customers. For this reason, since the early 1990s the European Commission has introduced a number of USO requirements within its regulatory framework for telecom liberalization6. The Open Network Provision (ONP) Directive, published in 1995 and amended in 1998, defines Universal service as the right to connect both to fixed public telephone networks on a fixed location and to fixed public telephone services7. The Directive also establishes that EU Member States should designate at least one operator to deliver Universal Service and should create arrangements in order to finance the Universal Service provision. The 1999 reform of the EU telecom regulation updated the notion of Universal service through the so-‐called ‘Framework Directive’ 2002/21/EC8, which defines Universal service as ‘a minimum set of services of specified quality which is available to all users regardless of their geographical location, and in the light of specific national conditions, at an affordable price’ (Art. 2). The notion of Universal service is further detailed in Directive 2002/22/EC (Universal Service Directive), amended by Directive
5 A not yet legally formalized concept of Universal Service originated in United Kingdom in 1837, leading to the creation of a General Post Office (GPO) service monopoly. The GPO became in 1912 the monopoly supplier of all telephone services in the UK (except for a few local authorities). In 1969 the GPO ceased to be a government department and was converted to a Public Corporation (Post Office Act) and split into two divisions: Post and Telecommunications. The division of Telecommunications was renamed in 1980 as British Telecom and in 1981 separated from the Post Office. BT was empowered to license other operators to run telecommunications systems on the basis of apposite standards approved by the Secretary of State. 6 The 1992 ONP lease-‐lines directive (Council Directive 92/44/EEC of 5 June 1992 on the application of open network provision to leased lines) introduces some elements related to the Universal Service stating the principle that leased lines should be available to everyone under transparent conditions and at a regulated price. The 1994 Council Resolution 94/C48/01 ‘On Universal Service principles in the telecommunications sector’ further specifies what Universal Service is made of some basic elements, such as price and quality of service, provision of information, settlement of disputes, access to directory information, public telephone facilities, emergency numbers and facilities for the disabled. 7 Directive 95/62/EC of the European Parliament and of the Council of 13 December 1995 on the application of open network provision (ONP) to voice telephony, OJ 1995 L 321/6-‐24 (30.12.1995) and Directive 98/10/EC of the European Parliament and of the Council of 26 February 1998 on the application of open network provision (ONP) to voice telephony and on Universal Service for telecommunications in a competitive environment (incl. Annex I-‐V), OJ 1998 L 101/24-‐47 (01.04.1998) 8 Directive 2002/21/EC of the European Parliament and the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services.
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2009/136/EC (Citizen Directive)9, which states that minimum services for users is to consist of a) a connection to public communications networks at a fixed location and at an affordable price. The requirement is for the provision of local, national and international telephone calls, facsimile communications and data services. Data connections should be capable of supporting data communications at rates sufficient for access to online services such as those provided via the public internet; b) access to at least one comprehensive directory and at least one comprehensive telephone directory inquiry service; c) public pay telephones and other public voice telephony access points; d) access to the European emergency call number 112 and to other national emergency numbers free of charge from any telephone, including public payphones, without the use of any means of payment; e) suitable measures to guarantee access to and affordability of all publicly available telephone services at a fixed location for disabled users and for users with special social needs. In addition to providing a definition of Universal service, the Directive also outlines the general conditions under which EU Member States are called upon to adopt their USO schemes. Article 8 states that “Member States shall use an efficient, objective, transparent and non-‐discriminatory designation mechanism and no undertaking shall be excluded a priori from being designated as a provider of USO and the USO must be provided in a cost effective manner”. The designated undertakings should also guarantee that the Universal Service respects certain quality standards
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and affordable rates (particularly for low income
consumers). Both the requirements (affordability and quality standards) should be periodically assessed by national IRAs. The European Directive left to Member States the discretion to decide whether USO should be publically financed or not. In fact, since ‘Ensuring Universal service (…) may involve the provision of some services to some end-‐users at prices that depart from those resulting from normal market conditions’ (considerandum 4), and whenever national IRAs find that an undertaking is subject to an unfair burden, Member 9 Directive 2009/136/EC of the European Parliament and of the Council of 25 November 2009 amending Directive 2002/22/EC on Universal Service and users’ rights relating to electronic communications networks and services, Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector and Regulation (EC) No 2006/2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws. 10Quality-‐of-‐Service Parameters, Definitions and Measurement Methods are detailed in the Annex III to the Directive.
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States may compensate Universal service providers’ net costs. These costs are identified in the providers’ designation mechanism or are calculated by national IRAs, taking into account any market benefit obtained by the provider through the USO. Providers, for their part, provide IRAs with a detailed report on all costs incurred. Member States may finance net costs through public funds or may establish a mechanism to share the USO’s net cost between providers of electronic communications networks and services (Art. 13.1). This sharing mechanism (usually labelled as USO Fund) should be administered by IRAs or by a body independent from both the beneficiaries and the IRA supervised businesses (At. 13.2). 3.2. Attributes of regulation The EU requirements represent general constraints to the domestic definition of Universal service provisions. The UK and Italy have tailored their USO schemes to conform to the EU framework while at the same time taking into account the features of their own national contexts. The legal notion of Universal Service was introduced in the United Kingdom in 1984, when British Telecom was privatized and it was given the task of guaranteeing that basic fixed line telecommunication services were available throughout the United Kingdom at an affordable price. BT was given the special status as the USP at that time and detailed obligations were listed in its license. The most recent definition of Universal service conditions is set out in the Communications Act 2003 and is further detailed in the Electronic Communications (Universal Service) Order 2003, emended by the Electronic Communications (Amendment) Order 2011 -‐ both issued by the Secretary of State, that updated British legislation in the telecom sector according to the 2002 Universal Service Directive and the 2009 Citizens’ Directive11. According to the Order of the Secretary of State, the designation of the Universal service provider is an IRA’s duty. Oftel designated BT and Kingston as USPs (the latter only for the Hull area) for the UK in its 2003 Statement12. Ofcom has never amended this designation. In Italy, on the other hand, the notion of Universal Service was introduced only in 1997, by Decree no. 318 transposing the European telecommunications Directives, updated in 2003 by 11 Art. 65 (2) of the Communications Act states that Universal Service conditions are: electronic communications
networks and electronic communications services; facilities capable of being made available as part of or in connection with an electronic communications service; particular methods of billing for electronic communications services or of accepting payment for them; directories capable of being used in connection with the use of an electronic communications network or electronic communications service; directory enquiry facilities capable of being used for purposes connected with the use of such a network or service. 12 Oftel, Designation of BT and Kingston as Universal Service providers, and the specific Universal Service conditions. A statement and Notification issued by the Director General of Telecommunications on the implementation of the Universal Service Directive, 22 July 2003
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Decree no. 259 and then again in 2012 by Decree no. 70, now referred to as the Code for Electronic Communications. Art. 1 defines the Universal service as ‘a minimum set of services of specified quality which is available to all users, regardless of their geographical location and, taking account of national conditions, at an affordable price’. Article 3(4) of the Code designates Telecom Italia, the ex national incumbent, as the USP. 3.3. The contents of obligation The UK Communication Act of 2003 defines the regulatory framework for USO. It lists a number of general obligations and allocates the regulatory competencies between the government and the independent regulator. The Act calls the Secretary of State to set out by Order the extent to which the Universal service conditions ‘must, for the purpose of securing compliance with Community obligations for the time being in force, be provided, made available or supplied throughout the United Kingdom’ (art. 65, 2). The Secretary of State should consult with Ofcom before making or varying the Universal service order. Ofcom is, moreover, at the heart of the regulatory regime, given that it is responsible for the performance of several duties. It may set all the appropriate USO conditions for securing compliance with the obligations defined in the Universal service order, require all necessary information from the provided by the USP to be independently audited (also by a third party), monitor Universal service tariffs and it may calculate and review the extent (if any) of the financial burden for the designated USP and carry out independent audits of costs borne by the provider. In Italy, the regulatory framework for the USO is detailed by a governmental law. The Communications Code of 2003 (Art. 53) assigns to the Ministry the duty to monitor over the application of rules, to re-‐examine the general conditions of application of the USO every two years and to finance providers’ net costs. Universal service conditions have been detailed by Agcom through nearly 10 deliberations issued between 2000 and 2011. Agcom is also responsible for designating the undertaking charged with the USO (ex Art. 61 of the Communications Code). Despite this, however, Agcom has not yet named a new provider and Telecom Italia still fulfils these obligations. 3.4 Informative burdens and other rules To evaluate net costs, Ofcom assesses estimated costs and potential benefits for carrying the USO. Three components of costs have been identified: •
areas of the United Kingdom which give rise to a universal service cost, 15
•
customers in areas that are otherwise profitable for the USP, and
•
public payphones which give rise to universal service costs.
Possible benefits generated are: customer life cycles (unprofitable customers later becoming profitable customers), ubiquity (a household moving from an uneconomic area to an economic area will know that it can obtain service from BT), corporate reputation from being known to provide uneconomic services and call box benefits (because uneconomic call boxes may become economic over time and because even uneconomic call boxes provide constant logo advertising that enhance corporate reputation). Art. 71 of the 2003 Communication Act states that in the event Ofcom considers it to be unfair for the provider to bear the burden of USO, this burden may be shared by other operators. The assessment, collection and distribution of contributions from other providers should be carried out in an objective and transparent manner. To reimburse the USP, the Act also allows for the creation of a fund (the ‘sharing mechanism’) in accordance with European legislation and managed by Ofcom. Art. 72 of the Act establishes that Ofcom must report every twelve months with regard to the sharing mechanism, setting out costs and market benefits derived from the USO and the amount of contributions. At the present writing, however, the fund has not yet been created, given that Oftel/Ofcom have always considered that BT has not incurred any excessive burden in fulfilling its obligations. In 1997, for instance, Oftel estimated that the costs of Universal service provision for BT were approximately £ 45-‐65m while the indirect benefits to BT were £ 102-‐151m (OECD, 2003: 33). In 2003-‐2004 Ofcom estimated that net costs were £52-‐74m and indirect benefits were £59-‐64m. Concerning the quality of Universal service, Ofcom has not yet defined any standards. In Italy, on the other hand, Agcom has the duty to assess the equity of the net cost reported by Telecom Italia. The method to calculate the net cost is outlined in Annex 11 of the Code, which defines this cost as the 'difference between the net cost of operations of a designated undertaking subject to Universal service obligations and the net cost of operations in the absence of such obligations'. Agcom reviewed the method of calculation in 2008 on the basis of avoidable costs and missed revenues related to: •
potentially unprofitable areas
•
unprofitable public telephone (in profitable areas)
•
favoured customer categories.
The overall net cost is the sum of the net costs of the various elements of the USO, taking into account all intangible benefits. Undertakings entrusted with the provision of Universal service are required to submit to the agency, no later than 31 March of each year, the calculation of
16
the net cost for the previous year. Agcom determines whether the USP is entitled to a reimbursement and, if so, Agcom submit the provider’s accounts to an independent auditor (as indicated by art. 62 of the Code). In accordance with the European Directives, the Italian Law states that Telecom Italia’s net cost should be financed by a fund shared among all the telecom operators, included mobile operators, according to their network usage. Annex 11 of the Code amended by Agcom deliberation (1/08/CIR) defines the method of calculation for contribution to the fund. The financing process calls upon Telecom Italia to annually present the calculation of its net costs to be revised by Agcom. If Agcom concludes that there is an unequal burden on Telecom Italia, the sharing mechanism is applied to the selected telecom operators. In parallel, Agcom instructs an independent auditor to verify Telecom’s calculations. Once the audit is completed, Agcom consults the operators and the national Antirust Authority on the applicability of the sharing mechanism. Concerning the definition of quality standards, the Annex 6 to the Code lists some quality parameters that the provider is supposed to respect. Agcom updates such parameters every year and in 2010 it also adopted a Global Quality Index (GQI) for the Universal Service to integrate these requirements13. Telecom Italia should communicate to Agcom the achieved results every years and the IRA has the duty to sanction the provider for violations. Telecom Italia is also called to propose its quality standards for the following year. Agcom submits them to consultation with consumers and then adopts the final parameters. Up to now, Agcom has always reimbursed Telecom Italia’s net costs, apart from 1998 when the IRA affirmed that Telecom Italia’s cost were balanced by indirect benefits. The reimbursement amounted to almost € 62m in 1999, € 58m in 2000, € 40m in 2001, € 37m in 2002, € 41m in 2003, € 26m in 2004, € 28m in 2005. In 2003 and 2010 the mobile operator Vodafone appealed Agcom’s decisions to include mobile operators within the USO Fund at the Italian administrative courts (the Regional Administrative Tribunal and then the Council of State). Five court rulings, however, have acknowledged the legitimacy of the extension to mobile operators of the cost of Universal service. These rulings have also been supported by Antitrust opinions. The main consequence of the judicial review has been the revision of all Agcom decisions issued between 1999 and 2003, thus Agcom is actually compensating Telecom Italia’s net costs related to 2005. Telecom Italia was also sanctioned in 2007 (€ 116.000), 2009 (€ 116.000), 2011 (€ 174.000), 2012 (€ 58.000) and 2013 (€ 174.000) for failing to meet its quality obligations, respectively 13 The GQI is detailed in the Agcom Deliberation no. 328/10/CONS while the 2013 quality goals are determined
by the Deliberation no. 644/12/CONS.
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in 2006, 2007, 2009, 2010 and 2011. 4.
From credible commitment to regulatory “capture” and beyond
The presence of the fund and its management makes a great difference in the level of conflict existing in Italy in the regulatory process and may lead to the emergence of veto players. The choice to create a Universal service fund may hinder IRA’s problem-‐solving capacity and freeze regulation. The comparison between how the two IRAs operate in their different contexts, shows how the IRAs’ credible commitment is conditioned by the dilemma between short terms options and long terms policy objectives. When the level of conflict on short term options is high and veto players are present in the policy arena we have a shift of IRA’s attention from substantive policy goals (inclusion) to process goals (who loses less), frustrating IRA’s problem solving capacity. The Italian case clearly demonstrates how the high discretion characterising the USO policy creates counter-‐productive conflicts and veto players in the independent regulatory arena and leads to high levels of uncertainty in the implementation process. Assessing outcomes and problem solving capacity in a comparative perspective is quite problematic (Domah – Pollit, 2001): records and data are difficult to interpret. For example, despite the decreasing trends of fixed telephony rates throughout the last ten years in both countries, Italian fixed telephony rates are still the highest in Europe (Ofcom, 2012). The difficulty of guaranteeing affordable rates in fixed telephony can be explained by Agcom’s choice to maintain initial rates high in order to facilitate the access markets and to develop new networks in the most remote areas. This choice did not take into account the technological evolution, i.e. that mobile phones would replace fixed telephony services. Moreover, over the last two decades fixed telephony quality standards adopted by IRAs have considerably increased providers’ technical efficiency, in both Italy and the UK. Nevertheless, Agcom’s adoption of a Global Quality Index (GQI) hides a number of permanent deficits of the Italian provider in achieving the required quality goals. These deficits are measurable by the frequent fines levied upon Telecom Italia by Agcom . IRAs in the telecoms sector should be credibly committed to realize Universal service and social inclusion by regulating business, but this commitment is interpreted and implemented in very different way, with different policy instruments, different incentives and implications for the policy arena. Ofcom, due to the legacy of the British independent regulatory State (Moran, 2003), adopts an agency strategy (Hood, 2011) to maintain its regulatory credibility and to avoid blame for failures. Through mechanisms of reputation and a so-‐called “light
18
touch legal regime”, Ofcom has transferred entirely to BT (and Kingston) the responsibility of implementing the USO, balancing costs and benefits and using as incentive the option of exit (the possibility to change the USP) to guarantee BT compliance. Agcom, on the other hand, has adopted a policy strategy (Hood, 2011), based on high bureaucratization of procedures and regulatory decisions based on technical procedures for justifying USO financing and reimbursements. The main task of regulators adopting this strategy is to properly represent outputs and outcomes and to conceal weaknesses. The high level of bureaucratization adopted by Agcom throughout the implementation process gives centrality to legal resources and to the actors controlling them (Dente, 2009). As the theory of regulation argues (Wilson, 1961), regulatory actors are more generally “threat oriented” than “opportunity oriented” and thus they are more inclined to take decisions that increase costs and decrease benefits rather than the contrary. This implies that regulated firms adopt counterattack strategies through reactive behaviours to reduce increasing costs. That is certainly the case of Vodafone’s systematic judicial actions against the imposition to finance the US fund. These administrative courts have judged IRA’ decisions and obliging it to review continuously. This time-‐consuming procedure, also involving the Antitrust authority, gives a juridical appropriateness to Agcom decisions, but at the same time makes them less effective and credible to the public. The two different levels of bureaucratization at the street level of policy implementation correspond to different strategies of credible commitment and blame avoidance. In the Italian case, the regulatory gridlock caused by Vodafone’s judicial actions against Agcom decisions allows Agcom to shift the blame for its failure to the judicial actors in order to maintain its credibility. The so-‐called “juridical problem” has been long indicated as the main cause of the delay and ineffectiveness of USO regulation in Italy. The trade-‐off between the substantive objective of social inclusion and the goal of governing conflicts arises from the asymmetric distribution of costs and benefits between fixed and mobile operators. Agcom and Ofcom play different roles in the distribution of pay-‐offs along the implementation process. The Italian regulator adopts a traditional command and control regulatory approach, playing a redistributive game by establishing the Universal Service Fund and by creating a high concentration of costs for mobile operators that must finance it, and a high concentration of benefits for the provider (Telecom Italia). Ofcom, on the other hand, chooses to play a ‘wilsonian regulatory game’ based on reputation incentives and characterized by concentrated costs for the USPs, and diffuses benefits for the society. The different choice to create the fund is based on different IRAs’ cost-‐benefit analysis and is important in structuring the relationships between regulators and regulated interests. Agcom’s cost-‐
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benefit analysis is not based on technical competences but more on a “cognitive short cut” based on incumbent’s data with regard to USO investment costs. We may thus synthesize this as follows: a blame avoidance regulatory mechanism (UK) versus a blame shifting regulatory mechanism (Italy). Agcom’s regulatory failure has produced policy learning and policy change. As stated above, Vodafone’s judicial actions have caused a relevant regulatory delay. At the present Agcom is reimbursing the USO net costs for 2006 and “regulating the past”. In this “regulatory fiction”, the Italian IRA has changed its’ mind about the fund. For the amounts due after 2006, the evaluation of net costs will change and will no longer be in favour of Telecom Italia14. Agcom has decided to suspend operators’ contributions to the fund in order to decrease the level of conflict and to change the pay-‐off distribution between the actors. The ‘differential adjustment’ mechanism put in place by Agcom explains the regulatory change in the Italian case: this cost-‐ avoidance mechanism allows the regulatory process to proceed. The Italian independent regulator has been nudged to change its regulatory strategy in order to increase its credibility in the regulatory process and its commitment to USO goals: We see a shift from a “policy strategy” approach to “an agency strategy” approach aimed at avoiding veto players and to re-‐gain regulatory credibility. Ofcom, on the contrary, bases its regulatory approach to USO on compensative and reputational mechanisms, thereby avoiding the creation of veto players in the implementation process and maintaining its credibility as a problem-‐solver agency. If we ask the four questions: who uses, who chooses, who pays, who profits (Thaler and Sunstein, 2008:108) we see that, at times, both incentive conflicts and mechanism conflicts arise. In Italy, disadvantaged citizens receive fixed telephony services at the highest costs in Europe from the national incumbent, which, based on Agcom decisions, is reimbursed by the mobile operators. In the event of poor functioning of the US due to the failure to comply with its obligations, Telecom Italia is liable for fines, which, however, are far inferior to the net costs for which it receives reimbursement and, moreover, it never risks losing its legal status, which is guaranteed by a parliamentary law. In the context of this decisional architecture the relevance of profit and loss is asymmetric, while in the case of the UK, the decisional architecture and the relevance of costs and benefits are far more symmetrical. The regulator capture mechanism may be reinterpreted as an asymmetrical incentive relevance strategy (salience) in the decisional process, which invalidates the regulator credibility and its 14 Telecom Italia’s net costs in 2006 have been estimated around € 8m, so Telecom Italia would probably not get
the reimbursement.
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problem solving capacity. Agcom's recent change of strategy is the outcome of a learning process through which the weakened authority tries to realign the salience of its incentives at all levels of the decisional process in order to curb and to limit existing capture mechanisms and to regain its compromised credibility. Conclusions This paper was meant to be a contribution to the debate on institutionalism and on the relevance of institutional factors in policy implementation. It sheds light upon IRA credibility within policy-‐making processes and contributes to enlarge the empirical research on the functioning of regulatory policy. We have focussed our attention on the relationships existing between the distribution of costs and benefits along the implementation process in the USO case and the IRAs credible commitment as an orientation to problem solving. We were meant to understand how and why implementation processes may differ not only on the basis of structural variables, such as independence or delegation, but also on the basis of different levels of conflict between policy actors and on the basis of IRAs’ defence mechanisms that seek to gain, regain and retain policy credibility. These findings have direct implications on the theory of delegation and the effective utility and role played by IRAs in national policy arenas despite their independence from politics, and raise a number of questions on the regulatory isomorphism pursued by the European Commission and by the European IRA coordinator (BEREC) which seeks to render national policies more homogeneous throughout the European Union.
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