economics of regulation industry studies

8/13/2019 Economics of Regulation Industry Studies

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Economics of Regulation

Industry Studies


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Telecommunications - EarlyHistory

Many local telcos competed.Bell System started in major cities.Independent developed in rural areas.Bell System created AT&T Long Lines for LDand only connected to their own affiliates.Kingsbury Commitment in 1913 forced BellSystem to add independents to LD network.


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Communications Act of 1934

In 1934, Telecom Act passed to create FCC toregulate LD.

States regulated local service.With concerns for universal service, costs wereshifted from the local side to LD side.By early 1980's LD was priced at 2-3 times MC, andlocal priced at its MC.Even within local, basic service was cross-subsidized by toll calls and other non-basic costs.


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Telecommunications -Competitive Entry

Hush-a-phone; Carterphone decisions brokedown the monopoly on CPE.

Above 890 and MCI decision allowed entry intoLD. Cross-subsidy and geographic rateaveraging became problems.


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Telecommunications -Divestiture

1. Competitive markets - LD, CPE, Equipment went to AT&T

2. "Natural Monopoly" market of local went toRBOCs.


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Telecom Act of 1996

Allows RBOC entry into LD and equipmentoutside of region right away and within region

when they open up their local market. Competition in the local market.

No longer considered natural monopoly.

Three methods of competitive entry - facilities,resale and unbundling.


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Telecommunications Pricing

TOD pricing - like crude peakload pricingTwo Part Tariffs


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Electric Utilities

Three stages of production- generation,transmission, and local distribution.

Advent of cogeneration allowed electricity to beproduced from heat that was produced duringmanufacturing or other process.

But it needed a market. In 1978, Public Utilities Regulatory Policies Act (PURPA)

required utilities to buy power from independentsuppliers at a price equal to the utilities' savings fromreduced generation costs.


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Electric Utilities -Rate structureIssues

First was flat rate pricing because meters weren't invented

Then came declining block rates, sometimes with fixed charge.


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Declining Block Rates

Advantages price discrimination can be welfare-enhancing. Lower prices as usage increases appears to make sense if

scale economies are present. Disadvantages

scale economies are small. In era of increased energy scarcity and environmental

sensitivity, we should not encourage large-quantity energyconsumption.

charges highest rates to those who use the least - usually thepoor - unfair.


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Electric Utilities Pricing

Some utilities have gone to inverted or lifelinerates where the price rises over successive

blocks. Time-of-Use (TOU) pricing has been

experimented with. Seasonal differentials areused in most states to smooth peak summerusage.


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Electric Utilities

Recent Deregulation Generation and transmission are considered to be

potentially competitive. Only local distribution is natural monopoly. Industrial users can buy electricity from outsiders and

pay to have it delivered. This will soon some to largeand small business and maybe? To residentialcustomers.

Issues of stranded investment still need to beresolved.


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Natural Gas

Three levels - exploration and production,pipeline delivery to local utilities and delivery to

retail customers.Wellhead prices were regulated from 1954-1985for interstate but not intrastate. This two-tierpricing system caused many economicdistortions. Local distribution and transmission isand has been regulated.


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Natural Gas

Production and Transmission are nowderegulated. But not local distribution.

economics of regulation industry studies

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