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Fortnightly Magazine - March 15 1996

access to the customer. Consequently, bidders are purchasing the right to enter a market. High bid wins the license, and admits the winner to "The Show." Fees generally correlate with population size (expressed on a per capita or "per-POP" basis). This modern notion of "potential customer access" auctions suggests an approach to recovering costs for displaced franchise assets.

Since current marketing science places a value on a customer gained, held, or accessed, shouldn't new service providers pay for the right to approach a potential customer developed by a current franchise holder? In the retail wheeling situation faced by power companies, rather than employing traditional regulatory approaches to establish "fair and reasonable" connection costs, why not permit the power company to simply auction the right to access its distribution system to service a customer? And to address collocation and bypass issues in telephony, why not permit LECs to auction access to the local loop?

Utility Deregulation: Bringing Valuation to Market

Auctioning market access offers regulators a less expensive market management process than cost accounting. It is not evident that cost accounting is a practical way to value access. For example, in U.S. v. AT&T, the Department of Justice took deadly aim at cost-accounting methods in challenging AT&T's claim to a natural monopoly. Justice argued that managerial diseconomies at AT&T were not addressed in their engineering and productivity studies. Engineering economies of scale aside, Justice claimed that such bureaucracy unnecessarily raised costs and undermined any potential natural monopoly. Besides, since the Bell System decentralized much of its network planning and operation anyway, AT&T's natural monopoly argument was moot in practice.

These arguments of a decade ago have some validity today. They highlight the difficulties in proper cost allocation for control office assets (LECs) and centralized assets (utility transmission and distribution). Not surprisingly, LECs claim the regulatory compact must be made good over asset life, while entrepreneurs argue that aging technology is overvalued in the first place.

The problem might be resolved with a more contemporary notion of wealth. In the 19th century, land was wealth, and capital was scarce (em hence, the franchise. Today, wealth comes in more sophisticated forms (em spectrum, access rights, franchise rights, siting permits, intellectual property, even patents and copyrights, and licenses in general.

In the 19th century a single entity, the federal government (and Texas), owned the land (em today, modern "land" is held by government and private interests, sometimes jointly. In the past, public policy did not have to consider market harvest. Today, effective public policy cannot undervalue the private component, or overvalue aging assets without depressing the market (em and the public interest.

Local regulatory agencies must update their views and offer utilities incentives to be market innovators, rather than capital accumulators. Such a policy would lead to expedited asset writedowns to market value, and also assist utilities in redefining themselves. On the power side, however, competition remains mostly "seminar-speak" due to regulatory lag (em the pain has yet to fully hit. Perhaps the Federal Energy Regulatory Commission's rulemaking on open access will expedite the process. Until