[BETA] Fortnightly

What the Supreme Court thinks about handicapping the incumbent to level the field for new players.

Regulators today sit on the horns of a dilemma: How far to level the field in the name of competition?

If regulators fear market power in the incumbent utility, and so impose restrictions on its activities and assets, they may impair its effectiveness and thus distort the very competition they attempt to foster.

One example - restricting utility affiliates in using the parent company's name and logo - was the focus of a recent work in this publication.[Fn.1] That article showed how restrictions raise a constitutional question regarding freedom of speech, as defined by decisions of the U.S. Supreme Court. Here, we trek further down that road, examining the Court's Jan. 25 opinion in AT&T Corp. v. Iowa Utilities Board.[Fn.2] In light of that case, and the response of the Federal Communications Commission, we review the legal and policy considerations that should guide regulators as they devise restrictions or impose requirements on incumbent utilities to level the field to encourage competition.

Do regulators have the authority to handicap incumbents? The boundaries of such administrative authority are only now being considered. Before continuing, let's look at some past examples.

Consider the AT&T consent decree issued in 1982, which split the telephone industry vertically and prohibited incumbent Bell operating companies (BOCs) from entering long-distance markets. That order was born of the need to fashion remedies for alleged antitrust violations.[Fn.3]

Outside the antitrust context, however, open-access and other restructuring initiatives in telecommunications and electricity have involved tradeoffs: a restriction imposed (or sometimes accepted voluntarily) in exchange for certain recognized benefits. For example, section 271 of the Telecommunications Act of 1996 permits BOCs to obtain access to the long-distance market on the condition that they make their networks available to competitors. On the energy side, the Federal Energy Regulatory Commission and many state legislatures and commissions have required open access to the incumbent's transmission and distribution (T&D) networks, at the same time allowing electric utilities an opportunity to recover their stranded costs. How far down this path can regulators go?

As the cases will show, any administrative authority to impose restrictions on future conduct implies the power to withhold fundamental economic rights from market participants or to decide which rights are essential and which are gratuitous. Such decisions cannot be made in a vacuum, but must follow from a clearly articulated judicial or legislative state or federal policy.

This article focuses on certain proposed restrictions and requirements that federal and state agencies are implementing or considering as a way to promote competition. We show how the Supreme Court's Iowa ruling may affect such regulations. We also demonstrate how the ruling may sway regulators to rethink any conditions imposed on the incumbent, especially those requirements that would protect market entrants at the expense of incumbent providers who seek to compete as well.

The Iowa Case: A Model for Open Access

The Telecommunications Act of 1996 fundamentally altered the approach that regulators must take in fostering local exchange competition. Among other things,