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Press Release

    Pennsylvania Regulators Say Nevermind to Permanent Monopoly

    03/23/2001

    Yesterday, state regulators in Pennsylvania voted 5-0 to abandon a proposal to structurally separate Verizon – the incumbent local telephone provider. In the process, public utility commission chairman John Quain offered a stinging rebuke to the public relations and lobbying efforts of the various parties involved in the bitterly fought campaign. It is easy to see why there may have been confusion. Everyone claimed to be on the side of competition.

    Could it be possible that diametrically opposed viewpoints both represent competition? What does competition mean in the context of local telephone service? On one side of the debate were advocates of a split between the business interests that provide infrastructure and wholesale services and the business interests that provide retail telephone service. Advocates of this position – considered and rejected by the Pennsylvania PUC – would inject a degree of competition to the retail marketplace by regulating the basic framework under which all retail services are offered. However, this proposal requires that the network itself would be cast off into a regulatory neverland – never to return from the status of regulated monopoly. The emphasis here would be on competition in the retail marketplace.

    On the other side of the debate are advocates of more competition in the communications marketplace as a whole. Without an arbitrary division of infrastructure from services, more facilities-based competition is likely. Regulations geared to minimize short-term risk for competitors often do so at the expense of a more competitive marketplace. When coupled with artificially low retail prices, liberal resale and unbundling policies can discourage the very investment necessary to build competing facilities.

    Few analysts believe that the local market is a natural monopoly, but current policy biases competition policy on a single network, available to all entrants at or below cost. It is difficult to justify the irreversible capital expenditure necessary to build rival facilities if the existing network can be accessed at artificially low prices through regulation. And even if the investment in new facilities was made, retail prices capped below market-clearing levels make it impossible for the rival facilities operator to recover its sunk costs. How could such market conditions engender competition?

    To remedy this regulatory overkill, the Pennsylvania PUC proposed a structural separation that concluded, falsely, that true competition in the local market is impossible. The legacy copper—and the facilities associated with any telecommunications service—would have been thrown into a closely regulated commons. This may have produced short-term competition with arbitrageurs, but effectively ended the chance for facilities-based competition.

    When all physical assets are shared, competition means little to consumers. Improved quality, lower prices and new product offerings are curtailed. Only when private firms make independent investment, pricing, and service decisions in a free-market can competition provide its most profound consumer benefits. Deregulation will provide the market incentives necessary for such a transformation, while the Pennsylvania plan would have exacerbated the problem.

    The Pennsylvania decision was not an open and shut win for consumers and competition, but rather, a step away from an abyss. Had a wholesale-retail split occurred, regulators would have sent a message to communications providers to nevermind any planned investment in new, improved and competitive telecommunications networks.