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easier to find reasons for rejecting than embracing."
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Tuesday, July 26, 2005

The Unsettling Concession of Basic Local Price Regulation
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To put it mildly, the most contentious issue in the working group involved the survival of any state rate regulation. The current draft retains to states the ability to retain a residential basic local rate, with a process whereby that rate can be petitioned away.

On the broader question of price controls, if it had its druthers, the group would abolish all rate regulation. However, a concession to the longstanding universal service tradition of communications regulation leads toward retaining the basic service rate on a grandfathered basis. Under this model then there would be no rebalancing of the rate, but just a "rough justice" grandfathering of the various state rates. This would mean that companies would remove all tariffs, cease all rate filings and cost studies, leaving only local exchange maps and a single basic res service tariff in place (in the lingo, the 1FR) at the state level. All other rates would be deregulated and there could be no imputation of the 1FR rate into any packages.

Admittedly, the persistence of any rate regulation is abhorrent and an invitation to mischief. Nonetheless, the quarantine around the 1FR rate insulates the model from any litigation risk and allows no room for bootstrapping this single grandfathered rate into broader arenas.

The take rate for a basic package is very low (as I recall below 5% and undoubtedly lower than that if you include wireless subscribers), so the negative effects on the market equilibrium are real, but minimal. Furthermore, the concession of a basic rate acknowledges that the universal service hangover in telecommunications policy cannot be slept off overnight. By creating a petitioning process (with the presumptions all heading toward deregulation), the rate can gradually fade into desuetude. Furthermore, the apologia for retaining the rate is consistent with all of the state legislation of the past years, all of which retains some sort of basic service rate. Thus, while limiting price controls to basic local service may not be pure, it is possible and eliminates 80-85% of what is now done under state utility law. (Ironically, most of the mischief states achieved in the past 5 years was under color of federal, not state, law.)

As for the delegation of competition authority portion of the statute, I think that could be tightened up to make it clearer that the state my operate only under color of an explicit grant from the FCC, which shall only extend to hearing specific claims under the FTC Act standard. Thus, there would be no delegation of prophylactic rulemaking authority, or bootstrap its way back into plenary regulatory activitiy. In this capacity, the state can only act like an ALJ, consistent with a federal procedural and substantive standard. (An alternative here is the FERC ALJ’s who “ride circuit” to the location of a given FERC case.) Finally, I still maintain — perhaps out of institutional pride — that there is some value to independently-powered institutions being able to act, within a unitary federal scheme. A small degree of decisional heterogeneity in decisionmakers has its costs, but also has potential benefits, especially on questions where the answer is not clear.

In the end, it seems to me some state province will remain in communications law, even under a unified federal regime. By removing all rate regulation except a basic service rate, the majority of the market-distorting and rentseeking-inducing aspects of state regulation can be eliminated, at the same time giving some ability to perform specifically delegated proceedings under the framework's unfair competition standard.

posted by Ray Gifford @ 12:56 PM | Rate Deregulation

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