AEI-Brookings Joint Center
Managed Competition in U.S. Telecommunications
The 1996 Telecommunications Act represents a major turn in U.S. policy towards "deregulation." Instead of tying price deregulation to the opening of entry in a market that has been regulated for decades, the Act creates a maze of new regulatory responsibilities for the Federal Communications Commission (FCC) and the states. Incumbent local telephone companies, who were being freed from cost-based regulation prior to 1996, are now subject to detailed regulation of their wholesale services. Specifically, they must “unbundle” their network facilities into a large number of components and lease these components or “elements” to entrants at cost. Moreover, the Bell companies are not permitted to compete with long distance companies until they satisfy regulators that they have complied with a large number of interconnection requirements. This complex new regulatory regime has been the source of three years of regulatory battles and legal challenges and has needlessly delayed facilities-based entry into telecommunications. It would be far better if the FCC and the states were to pursue a strategy of full deregulation. The regulators should announce a date sufficiently far in the future at which all rate and entry regulation will cease, much as the Congress did for airlines in 1978. This would place potential competitors and customers on notice that fully flexible rates will be in place on this date and that new opportunities could be available for both. It also would reduce the value of rent seeking before the regulatory commissions and the never-ending cycle of rulemakings and court appeals.
The last two decades may readily be described as the era of the "triumph of markets." Statist controls on the delivery of everything from basic materials, such as steel, to advanced services, such as telecommunications, are rapidly disappearing. Western Europe and Eastern Europe are converging toward the U.S. model of private markets with limited regulation as the best alternative for delivering important goods and services to their citizens. After the dust settles from the recent spate of currency collapses, Asia may well follow.
Despite these successes, there are a few ominous clouds on the horizon. The trend toward open, competitive markets is in danger of being preempted by legislators and regulators who are now mustering support for the notion that government must guide the evolution to competition to prevent powerful interests -- the erstwhile regulated monopolists -- from derailing the process for their own private gains. These clouds loom most particularly over the electricity and telecommunications sectors, but in this paper I will concentrate most on the dangers that are now apparent in the recent "deregulation" of telecommunications.