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The Baby and the Bathwater: Utility Competition, But at What Price?

Fortnightly Magazine - November 15 1999

not required to supply the facility to competitors) against potential welfare losses in the wholesale market (losses from the incumbent's diminished incentives to supply essential elements and the competitors' diminished incentives to compete in supplying the elements).

In unregulated markets, antitrust law provides the only basis for requiring a privately owned facility to be shared with competitors. As fragile property rights are involved, the essential facilities test defines narrow and strict criteria: If rivals may compete, in any manner in the same market, without access to the facility, then the facility is deemed non-essential. In general, essentiality requires that the economic importance of the facility to the competitive process be relatively high:

"There is no general duty to share. Compulsory access, if it exists at all, is and should be very exceptional. ¼ No one should be forced to deal [i.e., share] unless doing so is likely to substantially improve competition in the marketplace."[Fn.15]

With an appropriately high threshold for compelling access, damages to incentives will be offset by the benefits to competition in the given market.

While the Iowa decision found the economic reasoning restricting mandatory access to some kind of essential facility to be attractive, this doctrine has some wrinkles when applied to regulated network industries such as energy distribution and telecommunications.

First, in formerly regulated public utility markets, property rights are somewhat more controversial than in unregulated markets. The question here is, should the utility be permitted to benefit competitively from advantages that were acquired as a consequence of franchise monopoly and, arguably, not through any innovation, risk-taking or superior effort by the utility? Because these advantages were developed under a regulated franchise, some parties argue that they should not belong exclusively to the utility - as opposed to the competing retail entity - and that public interest considerations and not stricter property right-concerns should govern the policy determining sharing of essential facilities with competitors.[Fn.16] Note that if this argument is persuasive, it still only applies to facilities or services rooted in the public utility past. In telecommunications, for example, this argument cannot be used to require mandatory unbundling of elements of new broadband data networks. Undue breadth in the definition of what constitutes "advantages acquired as a consequence of the franchise monopoly" will undermine the initiative of the incumbent, weakening its participation as a competitor on the new playing field.

Justifying Open Access:

What Rights Must Incumbents Share?

The task for regulators today calls for distinguishing normal and appropriate competitive advantage from that which is unfair.

What factors will agencies consider in determining whether to restrict or prohibit the incumbent from sharing facilities, services, employees and corporate support services between its regulated and competitive operations? How will they decide whether to open up to competitors the same access to facilities, services, employees or support used for regulated activities?

Iowa suggests that where certain components essential for competitive services and controlled by the incumbent are used by the regulated and competitive sides of the incumbent's business, the incumbent should not be the only one to gain access to such