Thursday, February 28, 2002

Economics of Tauzin-Dingell The House passed the Tauzin-Dingell bill that repeals 1996 legislation requiring incumbent local loop telcos to provide access to bottlenecks at "just and non-discriminatory prices." They also had to offer network elements a la carte (unbundled), allow buyers to resell, and local carriers could only enter the long-distance market if they opened the local market.

This regulation was an utter failure. It was impossible to define what a "just and non-discriminatory" price was, so there's a huge line of litigants wanting the FCC to arbitrate their greivances. Local access prices have remained the same (or risen), and most new telco entrants have gone bust. Broadband deployment remain piteous, with high prices and poor service. Given that this legislation has done no good, rolling it back shouldn't be a big deal.

The central problem is that the local loop is a natural monopoly. If the government sets access charges at marginal cost, then the local incumbent cannot cover its fixed costs and will not upgrade the network. Prices might be set low, but they will never fall. On the other hand, if the incumbent sets access charges at the monopoly price, it will have incentive to upgrade the network, but only some of this efficiency will trickle through to consumers. So prices will be higher, but they will fall.

The 1996 legislation used TELRIC pricing that tried to set access costs somewhere between the marginal cost and monopoly price. It was complicated, murky, and gave entrants and incumbents little incentive to invest in new networks (and so lower costs). It did nothing to help competition, the industry, or consumers.

Tauzen-Dingell essentially rolls back this legislation giving local loops monopoly power. It's not clear if it will pass the Senate, or in what form, but it's not bad news for consumers.

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