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This issue:  Whatever Happened to Telecommunications Deregulation?


This week's c:\spin is by Steve Pociask, President, TeleNomic Research , July 9, 2003.


Bankruptcies and layoffs have become commonplace in the information technology sector, particularly for telecommunications service providers and equipment manufacturers.  The apparent downturn comes despite the promise of deregulation and increased competition that were to bring significant consumer benefits.  


At one time it appeared that competition might slowly replace regulation.  Starting with the divestiture of AT&T, competition emerged with the entry of long distance, wireless and cable TV providers, which invested in network infrastructure and vended their services to the public.  Regulators adopted simple price adjustment formulae for local telephone services as a means to automate rate changes, thereby eliminating costly and time-consuming regulatory proceedings, as well as allowing incentives for efficient investment.  The Internet was commercialized with little regulatory surveillance, and the Telecommunications Act of 1996 provided a path toward eliminating entry barriers into the local and long distance telephone markets. 


It appeared the market was headed toward regulating itself through inter-industry rivalry.  Today, customers are unaware if the call they receive traversed over a fiber, coaxial cable, copper or wireless network.  In fact, incumbent telephone company lines now account for less than half of communications connections used by the public.  By next year, there will be more wireless subscribers than the incumbents' traditional telephone lines.  Instant messaging, emails containing voice attachments, voice-over-Internet telephony and high-speed Internet services are making the old telephone network look passť. 


However, instead of regulators letting market forces continue the progress, they entrenched themselves far beyond extraction.  Those regulators, once called upon to protect the public from the evils of monopolies, have become monopolist themselves - with the power to control market entry, set industry prices and redistribute revenue between telephone services providers - all in the name of the public interest.  In terms of gross outlays, the FCC's budget (chart) has tripled since 1994, and far outstripped the growth of inflation.  The regulator's budget reflects obsessive intervention, not sensible deregulation.


A major area where the compulsion to regulate is evident is the regulatory rules for local competition.  Purporting to spur competition, regulatory rules permit new telephone companies to lease the incumbent telephone companies' network facilities at wholesale prices far below costs.  These rules encourage entry of firms that avoid building alternative networks and depend on subsidized networks' facilities.  The few entrants that built alternative networks are now abandoning these networks (chart) for subsidized leased facilities.  Because regulated wholesale prices are set far below costs in many states, incumbent telephone companies have also cut their investments.  With neither incumbent nor new entrant investing, equipment manufacturers have closed plants and industry employment has fallen by half a million jobs.  In short, the once dynamic industry, poised for deregulation, has become paralyzed and, most ironically, increasingly reliant upon regulators for help.


Have artificially low wholesale prices for telecommunications services helped or harmed consumers?  While many federal agencies are required to estimate the costs and benefits of the regulations they manage, the FCC has no such obligation.  However, according to a new study released jointly by the Competitive Enterprise Institute and the New Millennium Research Council, regulatory rules that set wholesale rates far below costs have ended up costing Americans substantially more (chart) than what would be the case in the absence of such regulations.  While these rules purported to encourage competition, they have usurped market forces and crippled the industry, and by correlation, the economy. 


The telecommunications and computer industries have been long recognized as the major catalyst for economic growth.  According to the Department of Commerce estimates, these industries have accounted for nearly all of the productivity growth in the economy.  However, the industry and economy will meander aimlessly until regulatory rules are changed, the industry is deregulated and the monopoly power of regulators is curtailed.



C:\SPIN is produced by the Competitive Enterprise Institute, Washington, DC, www.CEI.org


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