Regulators must establish effective and 1) … tariffing regimes in order to contribute to the orderly evolution to competition in the telecommunications sector. As markets become more 2) …, tariff regulation becomes a less important regulatory function. However, when tariffs are still being set by the regulator, they should … formally through the issuance of rules and other regulatory instruments. Additionally, before the market is fully competitive, regulators usually apply different tariff regulations on non-dominant operators versus dominant operators. In order to 3)… that fair competition can develop, non-dominant operators are generally subject to less onerous tariff regulations. Dominant operators, on the other hand, can be subject to ex-ante tariffing regulation. For example, dominant operators may be required to 4)… their tariffs for regulatory approval, whereas non-dominant operators may be subject only to publication requirements.
A fundamental reason for tariff regulation is to prevent the abuse of dominance. There are two market situations in which tariffs are required to address dominance: non-competitive or monopoly markets and competitive markets. For service markets in which a dominant operator does not face effective competition, the regulatory concern is that prices will be set substantially above cost so that the operator earns a monopoly level of profit. In this circumstance, regulators have historically used “rate of return” regulation, which establishes the maximum 5)… on capital invested, or increasingly, regulators have imposed a price cap regime (with or without consideration of the rate of return), which provides some level of incentives for operators to function efficiently and reduce costs. Price cap regulation involves the regulator creating “baskets” of services that are non-competitive. The composition of such baskets tends to vary by country to reflect individual market circumstances. Some examples of possible “baskets” of services include: basic services; basic and mobile services; basic local service; and local and access service.
For those markets in which a dominant operator faces competition, especially in the early stages of liberalization, the regulatory concern shifts to 6)… pricing tactics (e.g., predatory pricing and cross-subsidization) that are intended to weaken or damage new entrants. In this case, the concern is that retail prices for some services will be set below cost by a 7)…. Many regulators have explicit prohibitions regarding anticompetitive pricing, particularly predatory pricing.
For example, Singapore’s regulator, Infocomm Development Authority (IDA) requires dominant carriers to provide telecommunications service on terms and conditions that are just, 8)… and non-discriminatory and pursuant to filed tariffs. A dominant carrier may not abuse its market position by, for example, setting prices at levels that are so low so as to unreasonably restrict competition. The IDA1 utilizes a three-pronged test for predation, namely whether:
the dominant carrier is selling service at a price below marginal cost;
there is a likelihood that such price cutting will drive efficient rivals from the market or deter future efficient rivals from entering the market; and
entry barriers are so significant that, after driving rivals from the market or deterring entry, the dominant carrier could impose price increases that would be sufficient to recapture the full amount of the loss that it 9)… during the period of price cutting.
After making a determination of dominance, all regulators should adopt consistent principles and procedures to ensure that prices are just and reasonable, which is often expressed as “cost-based” prices.
Implementation of such tariff-fixing processes and procedures also requires that the regulator establish or approve a cost accounting system and allocation regime so that all of a dominant operator’s costs that relate to regulated services are identifiable and consistent with the cost accounting system.