Will access regulation work?

• Author: Faulhaber, Gerald R.
• Position: The Enduring Lessons of the Breakup of AT&T: A Twenty-Five Year Retrospective

The premise of this panel is that the FCC is transitioning from a rate regulation regime to an access regime. A rate regulation regime gives all customers full access to network facilities (common carrier) at regulated rates--generally, rate base rate of return regulation. An access regime is one in which all competitors are given full access to incumbents' networks, with little or no retail rate regulation, thereby allowing competition (over incumbents' networks) to discipline the market. Is this a good idea? Is it likely to work? What is the evidence for this?

At the core of this transition is the idea that incumbent monopolies control bottleneck facilities, such as local loops or cable IP channels, (1) which make facilities-based competitive entry difficult, at least in the short run. Such control will almost surely lead to well-known inefficiencies of monopoly. Can public policy help? Traditionally, regulatory agencies were established (e.g., telephone, airlines, trucking, electric power) that tightly regulated retail prices and entry, often establishing social objectives that were incompatible with competitive markets. For the first two-thirds of the twentieth century, rate base rate of return regulation was perceived as a necessary government intervention to solve the natural monopoly/essential facilities problem and improve social welfare.

During the last third of the twentieth century, political scientists and economists undertook a major revision of this perceived wisdom, showing that in industry after industry, regulation maintained monopolies, inefficient price structures, and reduced incentives to innovate. (2) In some industries, such as airlines, analysts saw a competitive industry struggling to emerge from the "dead hand of regulation"; (3) in others, scholars recommended deregulating parts of the industry and isolating the natural monopoly, where it could be regulated safely with access to all in the competitive sector. More generally, scholars argued that the cure of regulation may be worse than the disease of monopoly. (4)

In the face of this withering critique of traditional rate base rate of return regulation, regulators sought alternative ways to achieve the public policy objective of the control of monopoly power without the stultifying reach of bureaucratic regulation. Obviously, the best outcome could be achieved with competition, but if the presence of bottleneck facilities made competition impractical, then some form of regulation, it is argued, is needed--just not the oppressive rate base rate of return regulation.

One candidate for regulatory reform is to focus on the actual bottleneck facility itself, and to mandate that the owner of the bottleneck...