Aligning Price Regulation with Telecommunications Competition

01 December 2003
By Dr. William Taylor and former NERA Vice President Dr. Timothy Tardiff

Shortly after passage of the Telecommunications Act in 1996, but before the release of the Federal Communication Commission's landmark order that implemented the local competition provisions of the Act, NERA Special Consultant Dr. William Taylor and former Vice President Dr. Timothy Tardiff reviewed the rapid evolution from traditional cost-of-service regulation to price-based incentive regulation that had been attained in the first part of the 1990s. In roughly half a decade, well over half of state regulators as well as the FCC had instituted new plans for pricing the services of local exchange carriers (LECs), and there appeared to be widespread agreement on the theory and methods of establishing key parameters. However, because of the new extensive requirements imposed by the Telecommunications Act, state regulators necessarily shifted attention away from investigating incentive regulation plans. Renewed attention and subsequent revisions of particular plans have been undertaken only relatively recently in a number of states.

During what was in effect a hiatus in regulatory action on incentive regulation issues in the last half of the 1990s, not only did local competition grow but there were also some theoretical advances on the issue of how regulation of the services of former regulated monopoly providers of local exchange services should evolve apace with such competition. The authors focus on these developments in this paper, in particular (1) adjusting price change/productivity expectations as the proportion of services subject to price regulation decreases, (2) whether earnings sharing is compatible with more limited price regulation and (3) compatibility among wholesale and retail price and quality regulation. Based on several examples of the evolution of price cap plans in particular states, the authors recommend directions for future incentive regulation.

This article is republished with permission from the Review of Network Economics, Vol. 2, Issue 4, December 2003. Copyright (c) Network Economics Consulting Group. All rights reserved.