Wednesday, March 20, 2002

Wrong about telco reg Lefties like Doc often evaluate laws by how it moves their moral sensibilities. Here are some of Doc's headlines that sum up Tauzin-Dingell regulation: it stinks!

But you should judge regulation on the effect it has on people. While I'm no fan of telcos, I won't block good regulation because it benefits companies I don't like. In essence, Tauzin-Dingell undoes 1996 pricing regulation (TA96) that mandated local loop incumbents 1) provide access to bottlenecks at just and non-discriminatory prices, 2) offer unbundled network elements (UNE) for resale and 3) allow local carriers to enter long-distance if they open their local loop. Sounds good, huh? Let's see how it falls apart.

1) Provide access to bottlenecks at just and non-discriminatory prices
The problem is that no one can agree to what such a price should be. The local loops are natural monopolies, so they push for the efficient component pricing rule which basically leaves them free to exercise their natural monopoly pricing power. Although this sounds evil, it encourages efficient entry and innovation, and will push down prices in the long run (albeit not quickly). But at least the incumbent has no inventive to block new technology, which in the grubby telco world, is quite novel.

The law passed in 1996 uses TELRIC pricing instead, which tries to set the cost somewhere between monopoly price and marginal cost, which allows the incumbent to theoretically recoup the cost of upgrading infrastructure. Unfortunately, this encourages inefficient entry and because it's "forward looking" (i.e. based on the marginal cost of current, best of breed services) reduces the incentive to upgrade equipment (because in practise incumbents can't gaurantee a reasonably return on their investment). Unsurprisingly, equipment upgrades have ground to a halt and the FCC has a huge line of arbitration cases filed by entrants saying the incumbent screwed them through unfair pricing.

2) Offer unbundled network elements (UNE) for resale
Heh heh heh--there's a clause in this section stipulating the incumbent has to offer UNEs at the same rate to all customers. A monopoly can only earn one monopoly profit, so it wants to restrict the quantity to make that profit. But if it can price discriminate, it can actually produce more AND make more money than if it was just a monopoly. Of course, it does this by reducing the amount competitive local exchange carriers can make but as a consumer I have no interest in subsidizing those guys, I just want cheaper rates. This non-discriminatory clause, while it *sounds* helpful, actually keeps the incumbent from cheating and so results in it restricting quantity, resulting in higher prices for end consumers, which is bad. Ahh, legally enforced collusion at work.

3) Allow local carriers to enter long-distance if they open their local loop.
This is a carrot, that says if you do 1) and 2) you can have 3). But long distance isn't a natural monopoly the way the local loop is, and the profits there are pretty slim, so it's not clear why this should entice local incumbents. Moreover, if there was significant monopoly power in long distance, joining the local and long distance parts of the service would remove the double-marginalization effect you get when two monopolies are stacked on top of each other. This would reduce the price I pay as an end consumer, which is good. So why aren't they allowing this anyway?

If economics doesn't move you, how about what you see with your owns eyes? In its six years of legislative existance, TA96 has done nothing to support competitive entrants into telco markets, created unbelievably long lines for FCC arbitration, and broadband is growing at a healthy 90% a year anyway. TA96 was bad regulation that hurt consumers. Be glad it's gone.
Link to this column

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