Silviase/jgov_v1.4_full_ann huggingface dataset:
## OVERVIEW

This paper summarizes the fourteen papers written by the participants of the joint-study, namely, three country overview papers authored by the chairmen of the U.S., the U.K. and Japan subcommittees, and eleven papers covering each of the four industries (telecommunications, electricity, airlines, and trucking; in the US excluding trucking) written by the participants of the joint-study project. This paper also seeks suggestions out of US and UK experiences for future regulatory reforms in Japan.

The first section compares the general characteristics of privatization and deregulation in the three countries, mainly relying on the three chairmen's overview papers. The next four sections compare each of the four industries, based on the industry papers. Section 6 summarizes some major differences between the US and the U.K. experiences and Japan's situations, focusing on regulatory reform processes, and seeks suggestions for future policy direction in Japan.

### 1. GENERAL COMPARISON OF THE THREE COUNTRIES

#### 1.1. Deregulation in the USA

Dr. Lewis Perl shows a very instructive viewpoint on the US deregulation experiences of the three industries. He lists the cases in which competitive forces strengthened:

i) that an industry which had been a natural-monopoly changed into a potentially competitive one due to expansion of its market size or technological change, such as in telecommunications and electric power generation;

ii) that services of an industry were priced artificially different from their costs due to cross-subsidies, which invited new entry to seek cream-skimming in the market, such as in long-distance telecommunications; and

iii) that an industry under regulation was basically competitive and its market structure was simple enough to be politically understandable, such as in airlines and trucking.

On the contrary, the pace of deregulation and competition in local call and access services in telecommunications and electricity “retail” markets have been slow and some of them are still in dispute. This mainly comes from the complexity of their markets. New technologies turned those regulated industries into a partially competitive one, but the remaining part of the market had to be regulated like a natural monopoly case to protect small consumers who didn’t have choice. As a result, the entire market became a mixture of competitiveness and regulation, and regulatory reforms tended to take long time because of political complexity and technical difficulty of regulatory designing.

In addition, characteristic of the US, federal regulations were apt to be reformed rather straightforwardly, in such services as long-distance calls, airlines and interstate trucking, whereas state regulations tended to take longer time with a lot of controversy.
##### 1.2. Privatization and deregulation in the U.K

According to Prof. Yarrow, the U.K. privatization and deregulation proceeded in three stages since Thatcher Administration started.

i) At the first stage of the privatization from 1979 through 1983, privatization centered on smaller size companies or relatively competitive, private company type enterprises such as British Petroleum and Cable & Wireless.

ii) Since the privatization of British Telecom (BT) in 1984, the U.K. Government privatized major government-owned corporations whose markets had been believed to be a natural monopoly. New regulatory agencies such as OFTEL were established. However, the privatization in this period did not always bring about active competition. When BT was privatized, the Government allowed only one competitor in the long-distance telephone market, and British Gas monopoly remained intact after its privatization. The Government intended to promote competition in the airline industry but the dominant market power of British Airways (BA) persisted even after the privatization in 1987.

iii) Since the end of the 1980s the Government has emphasized more to promote privatization and market competition together, and conducted major regulatory reforms as well as privatization. In the electricity privatization, taking into account the problem of British Gas monopoly, the Government divided the vertically integrated national monopoly into generation, transmission, and distribution and access. In the generation sector which was believed to be competitive, it established two generating companies to compete each other. In telecommunications, the Government widely licensed new entry into long-distance calls and allowed the cable television (CATV) companies to offer local telecom services.

#### 1.3. Regulatory problems of Japan

According to Prof. Nambu, Japan’s major deregulation processes, some accompanied by privatization of public corporations, appeared like the U.K. cases, but the combination between privatization and deregulation was very different from that of the U.K. Also different was the relationship between regulators and regulated industries. He emphasizes that in Japan economic welfare has suffered from problems brought about by regulations.

He is critical of Japan’s regulation and deregulation policies from the following viewpoints:

i) Regulations, and in particular supply-demand balancing requirements, has contributed a lot to international price differential of services. In electricity, telecoms and airlines, new entry has been strictly restricted and high price structure is built-in in those industries. Productivity levels in airlines and electricity in Japan fall short of those in other industrialized countries. The resultant high price among those services gives negative impact on international competitiveness of Japan's tradable goods sectors.

ii) As for government-business relations, among many regulated industries including electricity and airlines, both regulators and management of regulated industries has shared conservative
attitude and tended to resist any regulatory reform initiatives. On the other hand, in some industries including telecommunications, regulators and corporate management have conflict with each other, delaying many crucial decisions.

### 2. PRIVATIZATION AND DEREGULATION OF TELECOMMUNICATIONS

### A. LONG-DISTANCE MARKET

In any countries, regulatory relaxation of telecommunications started first in the long-distance area. It has been increasingly perceived that market size expansion and technological innovations have transformed the long-distance market from natural monopoly into a potentially competitive one. In all of the three countries this co-study covers, liberalization of long-distance market was initiated in the mid-1980s.

#### A.1. Deregulation in the USA

In the USA, according to Dr. Perl, the fact that prices of long-distance service had been well over its costs was a major cause of pressure for competitive entry. Before major deregulation policies were taken, new entrants such as MCI often entered the market first and then were ready to fight regulators or incumbents at the regulatory process or at the court, rather than wait for their entry application to be accepted.

The division of AT&T was argued not as telecommunications policy but as anti-monopoly policy, and was finally determined in 1982. In the US explicit rate rebalancing between long-distance and local services was not achieved, but after the divestiture, access charges were introduced for long-distance service providers to share adequate part of cost of local and access services.

##### A.2. Privatization and deregulation in the U.K

In the U.K. British Telecom (BT) was privatized in 1984. Different from AT&T, it maintained its vertically integrated network. In the 1980s the U.K. regulators employed the "duopoly policy", allowing only one competitor Mercury in the market, thus the BT dominance continued. In the 1990s the U.K. Government introduced more competition by allowing many other firms to enter the market.

The UK Government charged a price cap regulation to BT, and BT attained rate rebalancing under the price cap formula.

Development of international telecommunications is extremely important for the U.K. In the U.K., competition in this area has been limited by the maintenance of a duopoly in the provision of international infrastructure. However, service providers such as international resellers have eroded the position for BT and Mercury to some extent.
#### A.3. Privatization and deregulation in Japan

In Japan, at the time of the privatization of the Nippon Telegraph and Telephone (NTT), competition was introduced and three new common carriers (NCCs) were allowed to enter the long-distance market. Cross-subsidies from long-distance to local service inside the NTT Public Corporation was not corrected, and as a result long-distance service prices were higher than its costs, so the NCCs enjoyed high profit, taking advantage of artificially high rates. This should attract other firms to try to enter. But new entry is subject to permission by the Ministry of Posts and Telecommunications (MPT), which can determine the number of businesses in the market, based on the demand-supply balancing clause of the Telecommunications Business Act of 1985. According to Prof. Nambu, the MPT has not allowed any subsequent entry. Thus he points out that competition has not worked. The NCCs (at least two of them) have recorded favorable management performances, but this does not necessary mean they are efficient and competitive, because they have not been tested in the genuinely competitive market. Prof. Nambu wonders if this MPT policy is a kind of infant industry protection for the NCCs, but questions that, if so, time limit must be attached to such a policy.

After long negotiation, in 1994 the NCCs finally agreed to pay access charges to the NTT. This may have considerably impact on the NCCs' profitability.

### B. LOCAL AND ACCESS SERVICES

Local exchange and access services were formerly believed to be a typical natural monopoly, but again thanks to new technologies it is changing into a fairly competitive industry. Still, it is controversial if full scale introduction of competition is appropriate. Even after liberalization of the market, at least a part of the customers might have to rely on remaining public utility type service providers.

#### B.1. Present situation in the USA

In the USA, local and access markets are rapidly changing with many actual and potential new players. Prof. Harris points out that access service revenues and profitability are highly concentrated to a small number of customers, while LECs have an obligation to serve all customers, so competitive entrants can focus on customers with highest expected returns. Long-distance providers are tying to enter local or short-distance (intra-LATA) services; competitive access providers (CAPs) offer direct access between big customers and long-distance networks, bypassing local exchange carrier loops; private lines and cellular phones are increasingly participating as competitors; and cable television companies will almost surely enter the local services soon.

##### B.2. Present situation in the U.K

In the U.K., after the duopoly policy was abandoned in 1991, the regulators have licensed various businesses for local and access services. Among them, many CATV providers came into the market. They are even trying to enter long-distance services by interconnecting each others'
local networks.

The U.K. Government has promoted the development of radio-based telecommunications, both mobile systems such as PCS and fixed radio access, though the latter has not yet come into operation. These technologies may have an influence upon the industrial structure.

#### B.3. Present condition in Japan

In Japan, at the time of the NTT privatization and telecommunications regulatory reform in 1985, the Telecommunications Business Act allowed competition even in the local markets, leading the world. Actually subsidiaries of regional electric utility companies entered into local services in the respective franchise region. However, according to Prof. Nambu, the following regulatory arrangements among others have impeded effective competition in the market, and even now the NTT's de facto monopoly is continuing:

i) Under the 1985 Law, telecommunications businesses type I (carriers owning their exchangers and line facilities) are subject to permission for entry and approval for rate making, irrespective of their firm size or kind of services.

ii) As cross-subsidies in the NTT continue, its local and access rates are lower than their costs, thus leaving new entrants uncompetitive in terms of prices.

iii) The actual entrants (electric utility subsidiaries) have been regulated such that their subscribers cannot access to NTT network subscribers, and that the companies are not allowed to interconnect to provide long-distance services.

The first condition is going to be partly unproved because the Government’s “Deregulation Promotion Action Plan” starting in 1995 includes regulatory change in telecommunications area that price approval in type I carriers be relaxed to notification except basic services related to people’s life. It is still unclear in what kind of services price regulation will be relaxed.

### C. RATE-MAKING REGULATIONS

###### C.1. US and U.K. regulatory schemes

In the U.K., at the initial stage of the BT privatization, a price cap formula was introduced, and under this scheme rate rebalancing was carried out. In the USA, according to Dr. Perl, because of the introduction of competition, investment risks increased among incumbent businesses, and under the fully distribute cost (FDC) regulation the investment risk was passed on to customers as sunk costs. So many State public utility commissions are considering of changing price regulation systems from cost-based regulation to price cap formula.

#### C.2. Japan’s regulatory reform

In Japan, for the type I carriers, rate regulation remains FDC- and fair return-based. According to Prof. Nambu, the FDC formula has following problems:
i) it does not contain incentive mechanisms for efficiency improvement;

ii) it may give incentives for excessive investment;

iii) in case of new services, insufficient information on their true costs is available; and

iv) a new type I entrant cannot employ a so-called strategic pricing (to set a rate below its cost at the initial stage of entry to attract customers, aiming at expansion of its network size to exceed the critical mass for business survival).

The third problem could be common in telecommunications as various new businesses emerge. The fourth problems may have affected cellular phone and cable television services. Their service prices have remained high and failed to attract customers, and they were suffering low penetration ratio. In case of cellular phone, though, owing to foreign pressure, regulation was relaxed in 1994 to allow sales of telephone sets (formerly only rental was allowed), and competition became very active, resulting in lower rates and doubling of subscribers. In the case of CATV, still very low penetration ratio of 5% or so causes concern for the future multimedia development. In Japan CATV has been subject to regulations as broadcasting, not as miscellaneous entertainment media, on contents of programs, on franchise region and so-called localism rule of capital, and on rate-making. In 1993 some regulatory relaxation were carried out, including expansion of service areas and relaxation of capital requirement (formerly confined to local capital in the franchise area).

#### 3. PRIVATIZATION AND DEREGULATION OF ELECTRICITY A. BACKGROUND OF REGULATORY REFORM

According to Dr. Perl, a leading force of regulatory reform in electricity was again artificial discrepancy between prices and costs. Other driving forces were technological progress in the generation sector, and expansion of market size, that is, widening of transmission networks enabled by broad interconnection of franchise networks. As a result, in the generation market, the room expanded for potential competition among utilities and competitive entry by independent power generators and co-generators. Nevertheless, because of the complexity that even after regulatory relaxation some part of the market must remain regulated, the deregulation is necessarily a time-consuming process.

#### A.1. Pressure toward regulatory reform in the USA

According to Dr. Perl, the cost and price discrepancy resulted from excessive investment in coal and nuclear generation plants during the high oil price period. The resultant high capital cost and fall of oil and gas prices caused the difference between the average cost of incumbent utilities with high fixed cost and that of new entrants with lower capital cost taking advantage of new technology with high energy efficiency.
##### A.2. Pressure toward regulatory reform in the U.K

The U.K. electricity regulatory reforms were conducted basically on the course of general trend of privatization, but major competitive forces seem to be common to the US case. In addition, the obligation of the national electric utility company to purchase almost all of coal produced domestically influenced its cost.

#### A.3. Pressure toward regulatory reform in Japan

In Japan, according to Prof. Nambu, due to regional monopoly, cost-based price regulation and obligation for stable supply, incentives for efficiency improvement did not work well, and, helped by yen rate hike, international price differential expanded. According to Prof. Kibune, electricity price declined by 13% from 1980 through 1993, but it is more than 30% higher than in other major countries. Other problems are supply side ones, including i) deterioration of load factor and ii) worsening of public acceptance and resultant location of new plants in remote areas from dense demand areas. On the former condition, one percent improvement of load factor is expected to lower cost by roughly one percent. This suggests that even in Japan excessive capacity possibly exists, created by fair rate-of-return regulation and deterioration of supply-side conditions. Seeing that capital cost accounts for 42% of the total cost, one cannot deny the case of substantial cost difference between electric utilities and independent generators.

### B. DIRECTION OF REGULATORY REFORMS

###### B.1. U.K. privatization and deregulation

The front runner of electricity regulatory reform is the U.K. There, partly because the 1987 gas privatization left strong market power of British Gas, promotion of competition was emphasized. So when the national electricity monopoly was privatized in 1990, the vertically integrated corporation was divided into generation, transmission and distribution. The transmission part, National Grid, was left as a monopoly, and regional distribution companies were left as franchise monopoly, but in generation sector two companies were created to compete each other. Big customers were allowed to purchase electricity from any generator they choose. In 1998 this choice will be widened to all customers. The competitive retail electricity market will be formed and consumers should obtain the full right to “exit” from any provider. However, Prof. Robinson points out that the electricity market liberalization is still insufficient, and that the two generation companies (plus one nuclear power company) maintains strong market power.

#### B.2. Current situation in the USA

In the US, the pace of electricity regulatory reform has been relatively slow partly because the regulators are mostly State governments. Entry into the wholesale market goes back to 1979 when the Public Utilities Regulatory Policy Act (PURPA), which was energy and environment policy rather than competition or industrial policy, was implemented. It first obliged electric utilities to purchase electricity from qualified facilities by the avoided cost, then a competitive
bidding system for long-term power sales contracts eventually became prevailed.

According to Dr. Kahn, though, partly because of problems of the bidding system and resultant political intervention into the process, contracted rates between utilities and independent generators tended to be high. This phenomenon was particularly significant in the phase of lowering fuel costs, because once a certain price was contracted, then even before the plant construction started, it was politically difficult for utilities to request revision of contracted terms even if their fuel cost declined. It tended to cause downward rigidity of electricity prices.

The reform of the scheme is now under way, and the reform process may lead to more comprehensive regulatory reform. Independent generators are requesting direct sales to large-size industrial customers, and industrial customers are seeking direct contract with lowest-price generators. Should these be realized, liberalization of retail market would be achieved, and price regulation might be unnecessary. If such regulations were eliminated, spot price of generation capacity would emerge and market price would be realized. In California, the public utility commission temporarily adopted such a drastic reform proposal.

#### B.3. Japan’s deregulation initiatives

In Japan, at the beginning of 1996, the following regulatory reforms will be introduced:

i) to liberalize the wholesale market, that is, to change the current licensing system into competitive bidding;

ii) to allow independent generators to sell their electricity, through transmission channels (wheeling) to other utility companies than their franchise utilities;

iii) to introduce the specific electric utility project, in which a licensed independent generators can sell electricity directly to final users in a limited area;

iv) to employ a yardstick rule for rate-making;

v) to relax rate-making regulation from the current approval to notification system, in case of modifying price structure for the purpose of leveling the loads; and

vi) to streamline safety regulations.

The followings are the expected gains and problems of the reform:

i) New entry into the generation sector is expected to enhance efficiency. Even if its volume is relatively low (c.f. the current generation share of independent generators is 11%), its contracted price can indicate utility companies' marginal costs.

ii) For further efficient use of transmission channels expansion of access to the networks is indispensable, but pricing of transmission network use is unsettled.

iii) Introduction of yardstick rule in rate-making regulation is a favorable step, but the basic framework of the FDC scheme will be maintained, and pricing bringing incentives for efficiency enhancement such as price cap rule will not be employed.