Regulation, institutions, and commitment in the British telecommunications sector

In the past decade the United Kingdom has emerged as a world pacesetter for institutional change in the telecommunications sector. In particular, British Telecom has been divested, price-cap regulation has been introduced, a new regulatory institution (Oftel) has been set up (with its Director General of Telecommunications), and the market has been opened up to increasingly more competition. At the same time, investment in the sector has jumped, despite the uncertainty that might have been created by the United Kingdom's lack of modern experience with public utility regulation, by the lack of constitutional protection against governmental and regulatory discretion, and by continuing institutional change. Part of the reason for the investors'confidence may be the government continuity resulting from a series of Conservative election victories. But the authors emphasize the nature of British Telecom's privatization and restraint on discretion achieved by basic features and specific details of the regulatory process. In particular, the use of the license as an instrument to stipulate pricing and access regulations, and the use of several agencies to check on license amendments, have a strongly stabilizing influence. The authors show how the regulatory process provides commitment even when there are personnel changes among regulators and government officials, so long as changes in government are not long-term. This commitment -- based on the British courts'tradition of upholding contracts -- is supported by a number of weak but mutually reinforcing pillars. Changes in the United Kingdom's regulatory practice -- such as the gradual tightening of price-cap regulations -- can be interpreted largely as adaptations to increased competition and to the more favorable cost and demand conditions British Telecom faces.