that the two internal carriers work out the technical and financial details of an interconnection agreement between themselves, with the proviso that the regulatory authority be empowered to impose an arrangement if the two parties fail to agree (this is the arrangement which obtains in the United Kingdom).
In
It may be asked whether an RPI-X form of price regulation might not be a suitable substitute for competition in local and/or international services, rather than being required in addition to such competition. our view it is not a suitable substitute. While the RPI-X form of price regulation exerts an appropriate downward pressure on tariffs, only the presence of a competitor can ensure that the dominant telephone company maintains or improves standards in terms of speed of response to customer requests, quality of maintenance, and technological and service innovation. Indeed, imposition of a price control formula without a competitive threat risks the danger that the monopoly provider will turn attention exclusively to the task of cost cutting (for the benefit of its shareholders), and pay less attention than in the past to these non price aspects of service quality. One advantage of the traditional means of regulation (by limiting rate of return on shareholders' funds) is that it provides an incentive for the company not to pay excessive attention to the opportunity to cut cost at the expense of service quality. There is therefore a danger in introducing the RPI-X mode of tariff regulation without applying some competitive pressure. It is not a coincidence that this form of tariff regulation was first introduced (notably in the United Kingdom) at the time a competitive network operator was licensed.
We also noted earlier that the RPI-X formula is intended as a transition measure, albeit a very long term transition, to an era of competition when price control becomes unnecessary. If viewed as a permanent means of price regulation, it suffers the disadvantage that the arbitrary X factor must be repeatedly reset. Incentives to efficiency will eventually weaken as the regulated company comes, in the very long run, to rely on the repeated resetting of this factor to ensure its profitability.
On balance, tariff capping would nevertheless be a more promising method of regulation than the current arrangements even if competition were not introduced. It would allow both the general public and the shareholders of the regulated company to benefit from strong incentives towards cost efficiency. In light of the comments noted in the previous two paragraphs, however, we caution that it should only be introduced in conjunction with effective regulatory powers which can be brought into force if service quality suffers. The experience of the UK shows that a draconian ultimate sanction (such as reference to the Monopoly and Mergers Commission) is not an effective instrument with which to ensure compliance with the numerous measures of service quality which affect the performance of a telecommunications service operation. The ability to impose reasonable financial penalties (e.g. tariff reductions) in response to specific violations of norms in such areas as installation delays, delays in responding to operator assistance calls, percentage of failures in call attempts, quality of the public coin box service, and so on, is important.
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