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Regulatory Governance and the Implementation of Universal Service: A Comparative Study of the US and Japan
Unformatted Document Text:  Tracking Number: ICA-1-11804 Regulatory Governance and Universal Service 5 institutional perspective, focusing on Levy and Spiller’s work, which can be used as a framework for this study. Levy and Spiller (1996) explain that there are three characteristics of utilities such as telecommunications. First, their services have important economies of scale and scope. Second, most utilities’ assets are specific and nonredeployable in other uses (i.e. sunk cost). And third, utility services typically have broad range of domestic users, often as broad as the entire voting population of the country. They also emphasize that “utilities are never free of the threat of administrative or outright expropriation, even in rapidly growing economies” (pp.2-3). Recognizing these characteristics, they see regulation as a design problem with two components: regulatory governance and regulatory incentives. According to them, the governance structure “incorporates the mechanisms a society uses to restrain the discretionary scope of regulators and to resolve the conflicts to which these restraints give rise” whereas the regulatory incentive structure “comprises the rules governing pricing, subsidies, competition and entry, interconnection, and the like” (p.4). Thus, regulatory governance is intended to restrain the behavior of regulators, while regulatory incentives are intended to affect the behavior of private entities (Cherry & Wildman, 1999). Levy and Spiller argue that choices about regulatory governance are constrained by the specific institutional endowment of the nation, which determines the form and the severity of the country’s regulatory problems and the range of options for resolving them. In addition, choices about regulatory incentives are also constrained by institutional endowment and by the governance features built into the regulatory system. They argue, however, that for theoretical works on regulation, the regulatory governance structure is more important in the sense that “incentives are not implemented in an institutional vacuum although incentives do affect performance as well” (p.4). In this context, Levy and Spiller provide five elements of a nation’s institutional endowment; 1) legislative and executive institutions, 2) judicial institutions, 3) custom and other informal but broadly accepted norms that tacitly restrain the actions of individuals or institutions, 4) the character of the contending social interests within a society and the balance between them, including the role of ideology, and 5) the country’s administrative capabilities (p.4). In addition, they suggest three complementary mechanisms restraining arbitrary administrative action; 1) substantive restraints on the discretion of the regulator, 2) informal and formal constraints on changing the regulatory system, and 3) institutions that enforce these formal, substantive and procedural, constraints (p.5). Based on these suggestions, they argue that utility regulation is likely to be far more credible and regulatory problems less severe in countries with political systems that limit executive and legislative discretion and have a strong independent judiciary to

Authors: Park, Namkee.
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Tracking Number: ICA-1-11804 Regulatory Governance and Universal Service 5
institutional perspective, focusing on Levy and Spiller’s work, which can be used as a framework
for this study.
Levy and Spiller (1996) explain that there are three characteristics of utilities such as
telecommunications. First, their services have important economies of scale and scope. Second,
most utilities’ assets are specific and nonredeployable in other uses (i.e. sunk cost). And third,
utility services typically have broad range of domestic users, often as broad as the entire voting
population of the country. They also emphasize that “utilities are never free of the threat of
administrative or outright expropriation, even in rapidly growing economies” (pp.2-3).
Recognizing these characteristics, they see regulation as a design problem with two components:
regulatory governance and regulatory incentives. According to them, the governance structure
“incorporates the mechanisms a society uses to restrain the discretionary scope of regulators and
to resolve the conflicts to which these restraints give rise” whereas the regulatory incentive
structure “comprises the rules governing pricing, subsidies, competition and entry,
interconnection, and the like” (p.4). Thus, regulatory governance is intended to restrain the
behavior of regulators, while regulatory incentives are intended to affect the behavior of private
entities (Cherry & Wildman, 1999). Levy and Spiller argue that choices about regulatory
governance are constrained by the specific institutional endowment of the nation, which
determines the form and the severity of the country’s regulatory problems and the range of
options for resolving them. In addition, choices about regulatory incentives are also constrained
by institutional endowment and by the governance features built into the regulatory system. They
argue, however, that for theoretical works on regulation, the regulatory governance structure is
more important in the sense that “incentives are not implemented in an institutional vacuum
although incentives do affect performance as well” (p.4).
In this context, Levy and Spiller provide five elements of a nation’s institutional
endowment; 1) legislative and executive institutions, 2) judicial institutions, 3) custom and other
informal but broadly accepted norms that tacitly restrain the actions of individuals or institutions,
4) the character of the contending social interests within a society and the balance between them,
including the role of ideology, and 5) the country’s administrative capabilities (p.4). In addition,
they suggest three complementary mechanisms restraining arbitrary administrative action; 1)
substantive restraints on the discretion of the regulator, 2) informal and formal constraints on
changing the regulatory system, and 3) institutions that enforce these formal, substantive and
procedural, constraints (p.5). Based on these suggestions, they argue that utility regulation is
likely to be far more credible and regulatory problems less severe in countries with political
systems that limit executive and legislative discretion and have a strong independent judiciary to


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