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Perspective

Barriers to Entry:
Fortnightly Magazine - December 2004

by DSL and cable modem, which are produced in combination with other products at a lower average cost for each product.

The Justice Department justified its prohibition against the divested Bell companies entering the competitive long distance (or interLATA) telecommunications market on the grounds that they could deny access to monopoly "bottleneck" local exchange networks essential to the origination and completion of interLATA telecommunications. Given the existence of cable and telephone company broadband transport systems, it is difficult to maintain that electric utilities control a monopoly "bottleneck" broadband transport facility. Access only to electric utility poles and conduits is essential to cable and telephone competitors, and it is no more essential than the access required to telephone company poles and conduits by cable companies and by BPL operators. Regulation has protected pole and conduit access well for a long time. It is not necessary to prohibit the owners of such facilities, or their affiliates, from participation in the broadband transport market to protect competition.

In light of the extensive experience regulators have with the provision of both monopoly and competitive services by the same firm, the risk of cross-subsidization, in and of itself, is insufficient to justify a flat prohibition against participation in an unrelated competitive business. To cite but one example, the AT&T divestiture court did not prohibit the Bell local exchange carriers from engaging in competitive businesses outside of interLATA communications. Since the broadband transport service market is largely duopolistic at this point, a new entrant would bring a substantial competitive benefit. The value of additional competition in the relevant service and geographic markets can outweigh a risk of cross-subsidization that is diminished by proper regulatory oversight.

Regulators also have employed a "maximum separation" approach to the cross-subsidy problem under which the competitive business must be run from a separate subsidiary without common officers, directors, employees, or billing systems. If this remedy were applied to BPL, however, it would add substantial costs to operations that regulators require neither DSL nor cable modem to bear. The competitive inequity of imposing such a requirement on BPL could not be justified on the grounds that telephone and cable companies have no ability to engage in cross-subsidization. While they face competition in their respective service markets, they continue to have geographic market power in places where there are no effective substitutes for their services.

A rational cost-allocation policy can be employed to protect against cross-subsidization without subjecting BPL to competitive inequity. Regulators have commonly developed cost-allocation policies in response, for example, to allegations of cross-subsidy in electric utility rate cases. Proceeding in that fashion, however, may be unacceptable to some electric utilities, particularly those who believe regulators could saddle their investments in BPL with "royalty" assessments. Regulators could alleviate that concern by issuing clear policy statements on the principles they will use to allocate costs and to regulate possible affiliate transactions. 11

Regulators would properly encourage economic BPL system investment by allocating to BPL only its direct costs, and that portion of joint and common costs actually caused by an electric utility's offering of