A Free-Market Scorecard: How Should We Judge Whether States' Telecommunications Policies Are Deregulatory and Pro-Competitive? (Telecommunications)

By May, Randolph J. | Regulation, Fall 2002 | Go to article overview

A Free-Market Scorecard: How Should We Judge Whether States' Telecommunications Policies Are Deregulatory and Pro-Competitive? (Telecommunications)


May, Randolph J., Regulation


MUCH OF THE UNITED STATES' communications infrastructure is used to carry both interstate and intrastate communications services. Even before the passage of the Communications Act of 1934, it was clear that the states and the federal government were determined to share responsibility for regulating communications services offered over the same physical facilities. The 1934 Act codified the sharing of jurisdictional authority, granting the Federal Communications Commission authority over interstate services while giving the states much of the authority to regulate the rates, terms, and conditions of intrastate offerings.

In some important respects, the Telecommunications Act of 1996 enhanced the regulatory authority of the FCC vis-a-vis the states. For example, the act gave the FCC greater authority to preempt state or local laws that impede the provision of intrastate service. The act also gave the FCC primary authority to implement several local telephone competition provisions contained in the legislation, including the issuance of rules governing the availability and pricing of unbundled pieces of the incumbent telephone companies' local networks.

In the main, however, Congress recognized the continued important role of the states in maintaining and fostering the evolution of a modern communications infrastructure. Indeed, the 1996 Act charged not only the FCC but also "each State commission" with the responsibility to encourage the timely deployment of advanced telecommunications capability. At the same time, Congress envisioned a presumptively "pro-competitive, de-regulatory" policy framework as the best means of achieving widespread deployment of advanced communications and information services.

A large number of state communications policymakers appreciate the desirability of implementing pro-competitive, deregulatory policies. They recognize that, as competition in all communications sectors continues to develop, consumers will benefit from allowing marketplace forces to supplant traditional "utility-style" regulation. There is agreement among an increasing number of state policymakers with the assessment of FCC Chairman Michael Powell that free markets "are far superior devices than central planning models for controlling prices, spurring innovation, enhancing quality, and producing consumer choice." Indeed, in the past, a few states such as New York have been leaders in adopting various deregulatory policies that have promoted a more competitive environment in their jurisdictions and that subsequently have been adopted by the FCC.

Unfortunately, many telecommunications-related state policies and actions that are lauded as "pro-competitive" and "deregulatory" are little different from traditional, utility-style command-and-control regulation that erects barriers to entry and suppresses competitive marketplace responses. To identify true, innovative, free-market state policies, I offer the following criteria, which are meant to provide a guide for determining whether a state's telecommunications policies are, in the main, "deregulatory" and "pro-competitive."

1. Has the state replaced rate-of-return regulation with true price caps?

Under traditional rate-of-return or "cost-plus" regulation, a telephone company lacks the incentive to operate in an efficient manner because regulators only allow it to recover a specified return on its investment. Expenses are recovered on a dollar-for-dollar basis. By capping rates and not profits, true price-cap regulation provides an incentive for the telephone company to operate efficiently because cost savings accrue to the stockholders. And under price-cap regulation, the regulatory authority no longer is required to conduct interminable and highly conjectural rate cases in an attempt to determine the "reasonableness" of the telephone company's capital investment and all its various expenditures.

Some plans that are labeled "price-cap" regulation actually employ mixed traditional and price-cap elements. …

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