Silviase/jgov_v1.4_full_ann huggingface dataset:
market gives positively misleading policy conclusions, and it would be better if we didn't have it at all. Market competition is a very messy process and often a very nasty process, but when you look at all the alternatives it's the best of the bad lot.

3. I was talking about the advantages that we've got from the new regulatory structures in the U.K. That is not to say that the regulation can't go wrong. You mentioned public choice theory. That was one of my concerns about checks and balances. When regulators are intervening in a very major way in markets, it is wise to get a second opinion. I think that is not done enough at the moment in the U.K.

## (On Kahn's comments)

1. In Britain we love foreign ownership such as Japanese and American inward investment, and there is very little in the way of political problem. It is an important point in terms of the ownership of these natural monopoly assets. The wires and the pipes are in the U.K., and that's an enormous hostage to foreign investors who are spending billions of pounds to actually acquire these investments. All the power in the relationship lies domestically with the domestic regulators, and there is nothing to fear from foreign ownership of those assets. One of the disappointments is that the Japanese investment in the U.K. has not yet reached the utility sectors. When you move further towards deregulation you might find that Japanese utility companies are more active in overseas markets.

2. I agree that it is an extremely difficult problem of what happens when you're getting cross entry from one utility industry to another. I think we are just beginning to think about these problems in the U.K., and I think it is one of the reasons why our current regulatory system is not in a steady state. For example, we are seeing the convergence of broadcasting with telecoms, which is not being picked up very well by the existing regulatory institutions. For the future I think it is one of the areas where economists may be able to contribute towards regulatory thinking.

## (On Marshall’s comments)

I would like to stress the question of checks and balances. I am critical of the existing system in the U.K. on a number of counts. There are a number of other people who are also critical of the U.K. system but for entirely different reasons, and one of the dangers is that if there is reform it will be reform in the wrong direction, in particular, toward greater political control and in favor of particular interests. While I remain critical and I would certainly have suggestions to make, one has to be very careful in considering the reform of regulatory institutions.

### 3. FLOOR DISCUSSIONS

PERL:

The American regulatory scheme with the rate of return structure has functioned rather well for quite a long time. The problem has occurred because the regulators have broadened their
interests to go beyond cost control and getting prices aligned with cost, to social policy that were much more difficult and beyond the skill and competence of the regulator such as environmental policy. As long as the system stuck to the narrow concerns that were originally intended, in the competition between price caps regulation and rate of return regulation, each of them has claims to being reasonable systems.

## YARROW:

I am one of those who would prefer it to have a bit more legalism, or judicial control, in the system. We do not yet have a sufficiently robust view of private property rights. In the U.K., there was a mistaken overreaction to what were perceived to be the major deficiencies of rate of return regulation. It is American productivity which is higher, so rate of return regulation wasn't at all bad in terms of effective performance.

## ROBINSON:

Perhaps the rate of return versus price cap is not the most important thing. The most important thing is the scope of regulation. I would like to give regulation as little scope as possible because it's so unsatisfactory.

In Britain the rather illiberal initial privatization schemes have given our regulators tremendous amount of work to do to liberalize. Fortunately, we've also given them pro-competition duties, and that's perhaps one of the more useful characteristics of the British system -- that regulators have this duty which helps to avoid capture by producers or by other interest groups.

## KOJIMA:

I have a question about semi-independent regulatory offices. Is it independent from the cabinet? Who appoints the director-general? Assuming in Japan we were to create such an office, it would be just a subsidiary to the existing powerful ministry, or even if it were legally regarded independent there would be personnel secondment. The personnel are simply moved from one organization to another, and industries would lobby the new regulatory body, so still there will be similar vested interest relationship going on. How do you solve those kinds of complications?

## PERL:

i) In the U.S., in some state regulation the regulator is an elected official, and in other states and in the federal government, independent regulators are typically appointed by the executive for a fixed term. The elective system has not worked well because the regulator has been far too beholden to populist interests and to an unwillingness to protect the interest of the investor, but the independent regulator with rather well defined rights and responsibilities has generally worked quite well. ii) Traditionally the role of the regulator was to assure that they did not earn excessive rates of return and to exercise a certain rather limited judgment with respect to whether their investment processes were prudent. Still, that discretion was severely limited. Private property rights in the American regulatory system historically were
very strictly enforced and honored. A regulator who sought to set rates so that you could not earn a reasonable return might well be overturned by the courts.

## YARROW:

In Britain the model has been the fixed term appointment with duties set out in legislation and, therefore, with potential access to the courts in the event of belief that the regulator has gone wrong. But that access to the courts is too difficult at the moment for technical reasons. MARSHALL:

i) In the U.K. the regulators can and have appointed their own staff. There have been some secondments from government departments, but not very many, and in the policy making areas the policy makers are outside appointments. ii) The fact that the U.S. regulators have widened their remit into environmental policy, etc. is very interesting because in the U.K., in electricity, and perhaps even more so in gas, we have adamantly tried to restrict our roles to economic regulation and, at the same time, people have tried to thrust on us environmental duties, social obligations, and lots of other things which we have had to resist.

## KAHN:

I would like to add a little about legalism in the U.S. system, especially with regard to competition policy. The regulatory agency has a legal mandate. Legalism provides the opportunity for new entrants to exploit ambiguities in the specification of the regulatory charter. It provides opportunity for a forum for competitors that is potentially limiting the capture of the regulation by incumbents.

## HARRIS:

MCI used the antitrust laws to say the FCC literally did not have the authority in its statute to prevent MCI from competing in long distance services. However, there is an antitrust doctrine in the U.S. known as the "State Action Doctrine" or "State Action Exemption". If a state chooses to regulate a sphere of economic activity, then the state and all private parties acting under that regulatory scheme are exempt from the antitrust laws. Even though the federal antitrust laws rule supreme, there is yet an even more supreme principle, the principle of federalism. Airline deregulation occurred because it was an interstate activity and, therefore, we made a federal policy decision. You can't deregulate the electricity industry or the local telephone industry at the national level. It has to be done by fifty individual states, so it takes a long time to happen.

## SAKAKIBARA:

i) The major difference between Japan and the two countries so far represented was that they have an independent regulatory body. In Japan the Transport Ministry is both a regulator and the paternalistic defender of the industry, and this system will never work. We should establish an independent regulatory body, or regulator, to regulate the industry. ii) Japan also welcomes foreign investment, but very few people knows it. Our government should make our policy more transparent, in foreign languages, so that everybody can understand.
## KIBUNE:

i) Japanese utility companies are not interested in investing overseas, but subsidiaries of Japanese trading companies have invested in the U.S. wholesale electricity market. Next year our wholesale electric market will be opened. In the future, if some affiliates of U.S. utilities try to invest in the Japanese market, it will make our market more open and wider.

ii) In Japan, from the energy security viewpoint, nuclear is one way of the diversification of energy supply. But the government has not shown a consistent principle on nuclear development. In the U.S. power generation is highly market-based, and in the U.K. nuclear power will be privatized. I would like to know your national principles of nuclear development.

ROBINSON:

All fuels have different security characteristics, and for fuel security you want to promote diversity. I would be very doubtful about state promotion of nuclear power for all sorts of reasons, but particularly for reasons of security of supply, such as an extreme example of France, which excessively relies on nuclear energy.

PERL:

If Japan feels that it needs to have a certain level of nuclear dependence in order to maintain its security, a certain portion of the industry can be supplied by the government's nuclear industry. The private industry may not build nuclear capacity, at least not taking the risks that it entails. Still, the rest of the market can be supplied competitively. The real problem is that the need to have an independent security source can be used as a device for opposing all deregulation of the industry.

PERL:

We heard elsewhere that the British government is going to reduce OFTEL's activity in accordance with the development of competition. If such kind of philosophy is valid, other regulators like OFFER or OFGAS might be also in the future reduced or may vanish. That reminds me of the famous sunset principle in airline deregulation in the United States. Some people now are arguing that FCC itself should be abolished. Can such kind of philosophy explain the development of the U.K. deregulation policy?

YARROW:

i) It certainly was the original plan in telecoms that regulation would be a relatively temporary exercise. That was part of underestimating the difficulties, and I would not expect OFTEL to fade away quickly. I think the future is very open and people are genuinely looking around to see which way regulation is going.

ii) The U.K. regulatory offices have expanded in terms of personnel. But a lot of the staff are dealing with things like customer complaints. Rather small group of people are looking at the big public policy issues. The problem is not that the offices have grown but that they were too small to begin with.

iii) The state of the antitrust laws in the U.K. is historically very weak, and there has been a compensation for it. What we need to do in the U.K. is not to get too involved in the detail of
how to change regulatory bodies, but to reconstruct the over-arching antitrust laws because, as in the United States, they should be supreme. An interesting angle arises from European integration, because at the Community level the antitrust laws are over-arching, and there is no equivalent of the U.S. state exemption. Brussels can apply the existing antitrust laws of the treaty to these special sectors, and is actually trying to do particularly in the economies such as France and Italy where there is a bigger resistance to reform of the industries. The difficulty is simply that the Commission does not have the resources to handle the caseload that will be necessary to tackle this in a very vigorous way. But on paper the European Union does have this option of enforcing the general antitrust laws and using those as a lever to secure regulatory change in the sectors.

## (END OF SESSION 2)
Session 3: Privatization and Deregulation in Japan

Chair: Lewis PERL

Paper: Tsuruhiko NAMBU

### 1. DISCUSSANTS' COMMENTS

HARRIS:

1. Some of the basic lessons is to distinguish the deregulation potential in a naturally competitive industry like trucking and airlines than in a natural monopoly case. In the natural monopoly case, the effort should be to define the natural monopoly to its smallest possible sphere of economic activities, continue to regulate it as little as you need to.

2. What I would like to focus about is much more about the process of change, not so much the solutions. For example, we have repeatedly referenced airline deregulation as if an act passed and signed in 1978 was the whole of it, yet was not. Airline deregulation occurred over a fifteen year period in the U.S. That act was merely the culmination of that process. We move from one state to another state an incremental step at a time. What kind of steps can we take to speed up that process?

3. First: Policy-makers should look for greater opportunities to create opportunities that entrepreneurs can exploit. This isn’t about telling people what to do. It’s about creating a set of economic incentives that will cause people to think of doing something that maybe you wouldn’t have even thought of.

In looking for such opportunities, I suggest considering the following kinds of effects of small changes. i) The feedback effect. Some kinds of changes can be reinforcing. Look for policy changes that will create their own momentum. ii) The foothold effect. The foothold, the little tiny foothold, that spaced to compete in a tiny sliver of telecommunications, drives to something quite grand. iii) The demonstration effect. Footholds grow into something more substantial because if you give people a chance to gain a foothold in a market, it demonstrates to other entrepreneurs who might imitate, it demonstrates to customers what they have been missing.

Some of the specific incremental steps are worthy of consideration, anything at all that improves entry opportunities. Entry is not always economic and we should be promoting competition, not individual competitors. But even if it created some short-run inefficiencies, the dynamic gains have far exceeded those static losses.

4. Secondly: Do whatever can be done. Again, it won't happen overnight, but move gradually toward economic pricing, because economic pricing itself is of an important condition of entry.
5. Third: Increase the resale opportunities. Because these are infrastructure industries, we think too much about those who will build facilities. Much of the change in the marketplace comes not from people who build facilities but from people who figure a better way to sell them, a better way to buy them from someone else.

6. Fourth: To promote that, you need to reduce the use and user restrictions. A facility based company that has market power will try to protect that market, make it very difficult for customers who buy for one purpose to use it for another purpose.

7. Fifth: Increase pricing flexibility. Let people discount and package almost without any limits, because it creates this pricing dynamic in the market.

8. Sixth: To increase intra-modal competition. This is possible in all of these industries, but any steps that have the effect of limiting truck-rail competition or gas-electric competition, or telephone or cable, wireless competition in communications services.

9. Last: It does not require breaking up NTT, to impose nondiscriminatory interconnection on NTT. If one looks at the rest of the world, already AT&T is in the process of reintegrating in the local exchange service. The problem with NTT is not that it's vertically integrated into local exchange and long distance, but that there are not adequate rules that allow other firms to compete with it.

## KOJO:

1. First of all, Japanese case proves to be rather odd and strange, because the competitive industry such as airlines and transport industry would be amenable for the relaxation of regulation, but industries where monopolistic nature is strong will find it difficult to deregulate, such as the telecommunications and electricity. Within the picture of the deregulation in Japan, there are three stages involved:

First stage took place in the early 1980's, at which time JNR was privatized and the NTT is privatized. Its objective was to help the administrative reform and assist the administrative reform, and also to assist the fiscal reconstruction of Japan. That is why strong force was applied.

Then at the late 1980's deregulation was introduced for the livelihood of Japanese public. In spite of the appreciation of the yen, still the prices tended to be remaining high, and it was not contributing to the welfare improvement of the general public. The American Government was also adamant about the Japanese deregulation.

In the first round, the deregulation and reform had taken place from the top-down method, but the second round of the stage was led by the consensus method. The third stage, I believe, had already begun some time last year. Japanese economy had gone into a recessionary state losing much of its competitiveness internationally and deregulation came inevitable way for Japan to regain her international competitiveness. But the top-down method was not taken for this third stage.

The Ministry of Transport is passive for the deregulation of the transport industry,
but no external pressure or internal pressure has been applied either. As for the external pressure, mainly deregulation in Japan have been led by the pressure coming from the industry, not the consumers. The privatization of NTT was regarded as a part of the fiscal reconstruction programme of Japan. Then, the electricity deregulation was also going ahead with the deregulation because the strong pressure was applied for the industry.

2. The second point is that in Japan the deregulation in the strongly monopolistic industry has not been going on that well. With regard to the highly monopolistic industries, what has been deregulated so far is the telecommunication and electricity. Electricity has seen the deregulation just recently. In a telecommunication deregulation there were two characteristics to it.

Until about last year, the regulators were looking for the promotion of competition in the long distance market. But the measures applied were the mismatch as a result because one of the measures was the entry regulation. Apart from NTT, three NCCs have come in, but no other NCCs were allowed to enter into this area.

One more point is that in 1994 there was no admission of the rate rebalancing. Last year, subscribers line charge had gone up a bit, so there has been some modification in change. On the other hand, until 1994 there wasn't a sufficient type of the access charge rate structure, either.

Then, with regard to the long distance services, the NCCs had a wide opportunity for getting the cream-skimming of the business. Why was it that MPT had schemed this way? Because MPT wanted to nurture NCCs. In terms of the cream-skimming, MPT people have some image of bad cream-skimming and good cream-skimming. "Bad cream-skimming" is that cream-skimming is fully enjoyed and high profit is enjoyed. "Good cream-skimming" is that cream-skimming would be enjoyed but the nationwide services would be provided. In this case, the promotion of competition was not necessarily the primary objective for the deregulation process.

The next stage is to open up the local market. Because in Japan there is unprofitable universal services and this needs to be maintained, the discussion is whether to provide a fund for it, or make some external funding method or not. The second issue is regarding the tariff. Inclusive of the rate rebalancing, full liberalization should take place. Thirdly, the incumbents will not be the sole entity for bearing the cost or the burden for the universal services.

3. The third point is about the institution of regulation. In Japan, basically the deregulation is being effected on the top-down basis. So far, deregulation has been going on under the leadership of the bureaucrats, but some people say that the Cabinet Department shouldn't be responsible for the deregulation, and that an independent regulatory body should be made. As in the case of the U.K., courts should be competent to control the regulating agencies.
## MATSUBARA:

1. In 1980's in Japan three public corporations were privatized. Basically the administrative reform centering around this privatization was successful. However, the reform is still mid-way, and also the administrative and political reform is still mid-way.

2. We have been discussing greatly about deregulation, and also the possible unemployment that could be caused by deregulation. There was a tacit understanding among us that deregulation will cause unemployment, that is to say, regulated industries do have surplus workers. If we look back to JNR privatization, 270,000 employees were reduced to 200,000 employees. In the case of NTT, at the time of privatization, there were 300,000 people working for the Company. Today we have 200,000 people working for NTT. However, NTT created about 37 subsidiaries. Even if the total number of employees decreases, they are just transferring people to subsidiaries. A huge amount of financial assistance as well as capital investment is also made by NTT for the benefit of these subsidiaries. We only need 150,000 people to deliver letters to various areas of Japan. However, just for telephone exchanges we have 200,000 people.

3. From other viewpoints as well, NTT is not necessarily competitive enough today. Inter-city service and intra-city service are integrated by NTT and there is virtually no competition in intra-services market. There is a cross subsidization within the company, and NTT does not have a fully strong competitive edge. We have to break up NTT in terms of intra-city services and in terms of regional franchise. Even if we have a law to allow competition, NTT is still a dominant company in intra-city service, and it is very difficult for new entrance to come into this market and successfully compete with NTT.

### 2. SPEAKER'S REACTIONS

## NAMBU:

1. I agree to the first point that the most important role of government is to create opportunity or economic incentive. We discussed that especially in Europe or in Japan the regulatory body is the combination of regulation and also industrial policy. In case of telecommunications, such kind of state gives us a very serious problem. One is that in the past ten years MPT was eager to protect new entrants. This comes from a very mistaken sense of responsibility. Because the Government invited new entrants into this industry, the Government feels that it has some kind of responsibility to protect these newcomers. The other problem is that the Government is often very conservative or very prudent. They inhibit to take risks of the companies. If one business is very risky, the government says: "No. Don't enter." It's an unnecessary guidance of the Government.

2. The second point is also the government attitude towards industry. In Japan some regulatory ministries are very protective to the business. It has also some kind of historical reasons. In Japan, or maybe in the United Kingdom or in Europe, the government