Principles and Practice of Price Cap Regulation: An Application to the Peruvian Context
3 April 2001
By Dr. Agustin Ros
The transfer of state-owned telecommunications assets to the private sector has been the linchpin of telecommunications reform in many developing economies. Coupled with a more liberalized and competitive telecommunications market structure, privatization has generated significant economic benefits in developing and developed economies. Some of these benefits include: increased network expansion, reduced waiting lists for access to basic service, more capital investment and improved operating efficiency. The benefits to the overall economy from a more developed and efficient telecommunications sector are considerable.
Many developing economies are now embarking on a crucial second stage in the reform of their telecommunications sector, a stage that may be as important as the initial privatization process. After a period of exclusivity in the post privatization period where competition for basic services was prohibited, many developing countries such as Peru have now permitted competition for basic services. As many countries have experienced, however, while the competitive process can be sufficient and robust enough to achieve allocative efficiency and reasonable prices for many telecommunications services, there remains some telecommunications services that, for the immediate future, will need to be regulated. The type of regulatory regime chosen will have an immense impact on whether the efficiency gains from the privatization process will be extended into this next stage of reform or whether they will be decreased, thus putting at risk the development of the telecommunications sector.
The regulator in Peru, OSIPTEL, is obligated to select a price cap regime to regulate certain telecommunications services. The purpose of this paper is to discuss and describe the characteristics of good price cap regimes with a special emphasis on the Peruvian context. Dr. Ros begins by describing the theory behind price cap regulation and presents some of the characteristics that distinguish good price cap regimes from those that fail to meet the basic goals of price cap regulation. He then discusses special considerations that arise when developing a price cap plan in a country like Peru. As he describes in the paper, low network penetration in Peru and the goal of maximizing telecommunications investments have a direct impact on the type of price cap plan that should be adopted and the pitfalls that should be avoided.
