Lately I'm reading up on the new Telecommunications Act. Last week I printed a copy from the Internet and stuffed it in my briefcase. Each night on the train I give it a go and skim a few sections.
The new law unabashedly favors competition over regulation, but appoints state commissions (PUCs) to certify when that competition may be deemed effective enough to open markets. Thus, the PUCs will take at least one last shot at managing markets before they relax regulation for competitive services.
But what if this "relaxation" actually makes some rates higher (em to the advantage of the incumbent, which still exerts monopoly power? That result sounds counterintuitive, but read on.
Back in 1989, the California Public Utilities Commission (CPUC) imposed a "new regulatory framework" for incentive pricing for Pacific Bell and GTE California, the state's largest local exchange telephone carriers (LECs). As the plan evolved it imposed price caps, allowing rates to float as long as they did not exceed a price ceiling. The CPUC would adjust the ceiling periodically for inflation and other factors. Also, the CPUC would offset inflation by productivity gains in telecommunications. In essence, the productivity offset served as the ratepayer's friend. As new technology shaved costs, rising productivity would protect ratepayers from inflation-driven price hikes. The CPUC tabbed this offset the X Factor.