Monday, December 15, 2003 - The Progress & Freedom Foundation Blog

When to Deregulate Retail Rates?

I could not attend Friday's PFF seminar on our latest report, "Trends in the Competitiveness of Telecommunications Markets...". But, in reading today's trade press on the event, I am moved to rebut something that John Windhausen of ALTS said. John is reported to have said that retail deregulation is premature because ILEC's still have too much market share.

One premise of the report is that market share is not material to the deregulation question. Indeed, with the current comprehensive wholesale unbundling regime, you have by definition deprived the incumbent of any market power. Furthermore, because most state retail rates derive not from a cost basis, but rather from a social policy basis where residential rates are kept artificially low and business rates artificially high, then the retail rate structure distorts competitive outcomes. There will be over-entry into the business market because there are supra-competitive profits to be earned there; meanwhile, there will be under-entry into the residential markets because there is no return to be earned where rates are below cost. [And I won't even get started about the perverse incentives the low residential retails rates give to regulators to create margin through aggressively-low wholesale ratesetting.]

I also wonder why ALTs would oppose retail deregulation. There are two reasons I can think of, one good and one bad. The good reason could stem from some sort of predatory pricing fear. But this fear seems attenuated and even impossible to realize, particularly with the current unbundling regime and particularly since the recoupment-phase of a predatory pricing scheme would be too hard to pull off. In practice, predatory pricing schemes rarely succeed, and I cannot imagine in a closely-policed market like communications, how such a scheme would actually succeed -- and of course during the actual predation period, consumers win.

The bad reason for ALTS to oppose retail deregulation is that its members, which almost all play exclusively in the business markets, currently enjoy the price umbrella established by the ILECs' above-cost business rates. In this view, the BLEC sub-set of the competitors likes high business retail rates because they allow a comfy price umbrella to hang out under and earn supra-competitive profits. In other words, the retail regulation lessens the pressure on competitors actually to compete.

Indeed, that is one of the points of the study; namely, that retail rate regulation distorts competitive behavior throughout the market; and, indeed, deprives consumers of the benefits of competition. And that is supposed to be the point of competition: superior consumer welfare than regulated monopoly.

There are parallels here to the long distance market experience. There, AT&T fought throughout the late-1980s and into the 1990's for pricing flexibility. It competitors, however, preferred to limit AT&T's competitive options because AT&T would of course have been a formidable price competitor, not to mention they would lose the protection of its price umbrella.

posted by Ray Gifford @ 2:49 PM | General