Home Latin America 2015 Technological neutrality and regulation in developing countries: The experience of Peru

Technological neutrality and regulation in developing countries: The experience of Peru

by Administrator
Gonzalo RuizIssue:Latin America 2015
Article no.:1
Topic:Technological neutrality and regulation in developing countries:
The experience of Peru
Author:Gonzalo Ruiz
Organisation:Telecom Regulatory Agency of Perú (OSIPTEL)
PDF size:405KB

About author

Mr. Gonzalo Ruiz is the Chairman of the Board of the Telecommunications Regulatory Agency of Perú (OSIPTEL). He holds a Doctoral Degree in Economics from the Pontifical Catholic University of Peru and a Master of Arts in Economics of the Postgraduate Program in Economics from ILADES/Georgetown University, at Santiago de Chile.
He also has occupied the position of Vice-Minister of Communications at the Ministry of Transport and Communications (MTC), Chairman of the Consumer Protection Committee, Director of the School of Competition and Intellectual Property (INDECOPI) and Chief of Economic Division at INDECOPI. As well, he has been Technical Secretary of the Telecommunications Investments Fund (FITEL) and Regulatory Manager of the Infrastructure Investment Public Transport Agency (OSITRAN) and Member of the Committee of roads, port, airport and railways Infrastructure at the Investment Promotion Agency (PROINVERSION), among others.
He teaches prestigious universities in Perú and is author of an extensive list of publications and research papers.

Article abstract

In ‘net technology-importer’ countries, the use of principle of Technological Neutrality in regulation is important to the extent that allocative and productive efficiency depends of ensuring companies and consumers the access to the best technological alternatives. This article explains how this principle is applied in Peru, in two different contexts: interconnection and universal access projects. An important feature of applying the Technological Neutrality principle is that it implies transferring technological risk from Government to private sector. As well, a more open and competitive regulatory environment towards technology could facilitate the efforts made in many of developing countries for promoting processes of technology transfer.

Full Article

Modern regulation in telecommunications consist of combining regulatory and competition policy tools in order to achieve allocative and productive efficiency. During the last years, technological change and convergence has transformed dramatically the configuration of telecommunications markets, so the regulatory treatment of technology has become a sensitive issue both in developed and developing world. In Europe, in 2002, EU issued a Directive in which highlights the ‘desirability of making regulation technologically neutral’ while in United States, FCC stated among their objectives in the 2006-2011 Strategic Plan that ‘…Regulatory policies must promote technological neutrality, competition, investment, and innovation to ensure that broadband service providers have sufficient incentives to develop and offer such products and services’.
In the case of ‘net technology-importer’ countries, like Peru, technological neutrality as a regulatory principle it is even more important, given that allocative and productive efficiency depends of ensuring companies and consumers the access to the best technological alternatives. In most of the cases, choosing technologies or intervening in private technical decisions may distort the market and lead to suboptimal outcomes. As well, transferring the risk of technological decisions to private sector may be a good choice in contexts where information about market opportunities and technical solutions is asymmetrically distributed between regulators and industry.
In this article I present two examples corresponding to the Peruvian regulatory framework in which the principle of technological neutrality applies, explaining its meaning and implications. The first one corresponds to the interconnection regime and the second to universal access projects for rural areas. Finally, I present some concluding remarks.
Technological neutrality in interconnection
The regulation of interconnection has the objective of promoting competition among networks, avoiding the use of strategic barriers (like unjustified refusals to deal, disproportionately elevated interconnection charges, blocking or impeding communication among different network users, among others) that may discourage entry or strengthen operators’ market power.
OSIPTEL, the Peruvian Regulator of Telecommunications, was created in 1991. In their General Framework Regulation , states the Principle of Neutrality:
“Article 4. Principle of neutrality.
OSIPTEL will seek the neutrality of companies operations, preventing the use of their conditions for obtaining advantages against other telecommunication companies or against the users (…) However, OSIPTEL will avoid that regulatory decisions do not restraint unnecessarily the incentives to compete through investment, innovation and pricing.”
Even though the term “technological neutrality” it is not expressly mentioned, the article establishes clearly the notion that the regulator’s actions should not reduce the incentives to investment and innovation. In the case of the interconnection regulatory framework the reference to this principle is more precise:
“Article 9. Principle of technological neutrality in interconnection
According the Principle of Technological Neutrality in Interconnection the concessionaire of a telecommunication public service has the right to choose the technology and network architecture which considers more suitable for delivering their interconnection services.”
This regulation recognizes the right of operators of choosing the technologies to be used and applied for delivering interconnection services. However, this freedom to choose among different technologies should be interpreted in a consistent manner with other equally important principles like the Principle of Non Discrimination and the Principle of Equal Access . The first one prevents the operators to impose distinct interconnection conditions to different competitors, particularly between independent and vertically-related companies. The second principle, states the obligation of the operators to offer an equal interconnection treatment independently of the service provided by the company that request the interconnection. Thus, regulator will intervene neither in technology nor in network architecture decisions of operators, to the extent that equal treatment and non-discrimination is guaranteed.
On the other hand, in defining the interconnection relations among operators, the regulator has to keep in mind other key principle: efficiency. Efficiency means that interconnection should not be used to impose competitors’ unnecessary and unjustified costs. In other words, interconnection should not be used to transfer inefficiencies to other operators. In this cases, even when operators can exercise their freedom to choose the technology and their network architecture, regulators can employ benchmarks like ‘Hypothetical Efficient Model Enterprises’ or ‘Yardstick Competition’, among others, in order to discipline incumbents and incentivize innovation. Hence, even though the use of technology neutrality principle it is important in order guarantee the availability of all the technical solutions for network operators, this should be consistent with the application of regulatory and enforcement measures to ensure non-discriminatory and efficient conducts in telecommunications markets.
Technological neutrality in universal access projects
As in many other developing countries, in Peru, an important objective of public policy consist of reducing the access gap to telecommunications services. FITEL is the Peruvian Universal Access Fund, currently managed by the Ministry of Transport and Communications (MTC) , which is financed with the fines imposed to telecommunication operators and with a share of the spectrum canon levied from spectrum-user operators. FITEL projects are oriented to deliver voice and internet services to rural sites with no access to telecommunication services. Rural projects are formulated by FITEL and are awarded on a competitive basis to those bidders that offer the minimum subsidy in an open contest.
In order to provide incentives to innovation and to guarantee the most efficient technical solutions that could be offered by bidders, one of FITEL’s pillars is the principle of neutrality :
“7.5. Technological Neutrality. FITEL will not condition or discriminate any technology when allocating their resources. (…).”
For Universal Access Funds, technological neutrality is crucial, for at least four reasons:
Efficient allocation of resources. Wherever competition between technologies it is possible, allowing the participation of different bidders with alternative technical solutions will contribute to achieve a better allocation of FITEL’s resources. FITEL’s contract must specify clearly the sites to be served, and the quality of service required, but neither the technology to be used nor the topological characteristics of network or other technical aspects.
Better technological solutions. In the design of the project, FITEL can elaborate a technical solution in order to establish a base level of subsidy for the bidding; however, the market can provide better alternative solutions and this should not be prevented by regulation or any provision considered in bid specifications. The technical proposal elaborated by the bidders is considered confidential in order to provide incentives to operators to introduce the innovations necessary to comply with requirements of the project.
Managing technological risk. Applying the Principle of Technological Neutrality to universal access projects implies transferring the technological risk to the private operators. We must recall that Peru is a “net importer” of technology and that can be substantial informational asymmetries between Government and private sector. In this context, it is recommendable to allocate the risk to the party which it is in a better position to deal with.
The recent evolution of technologies applied to serve rural areas, demonstrate the importance of dealing properly with technology risk. The first generation of these projects consisted of delivering public phone and internet services to rural sites, mainly by satellite. The progress of mobile technology fostered the rapid expansion of voice and data services in rural areas impacting negatively on the profitability of satellite operations. The traffic of voice and data switched rapidly from satellite to mobile networks, providing the signal that in some rural sites, satellite technology became obsolete. In these cases, as well as private companies had the freedom to choose among technologies, they also must bear the current costs of obsolescence.
Concluding remarks
Technological neutrality it is an important regulatory principle which can be used by regulators for i) ensuring the efficient provision of telecommunications services, ii) avoiding discriminatory conducts which restricts competition, iii) transferring technological risks to private operators. In developing countries like Peru, there are important additional reasons to observe this principle, namely, the fact that these countries are “net-importers” of technology and that technology is a scarce -and consequently a most valuable- resource. In addition, a more open and competitive regulatory environment could facilitate the efforts made in many of these countries for promoting processes of technology transfer.

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