Toward Competition in Local Telephony.

Ford, George S.

Despite its brevity, this book covers many relevant topics associated with the move toward a more competitive environment in local exchange telecommunications markets. The authors are capable and respected experts on the law and economics of local exchange telecommunications policy. While there are many other books and articles covering these topics in a more thorough manner, the consensus style of this book is indeed a contribution to the policy debate, and will aid those less familiar with the regulation of telecommunications common carriers decipher many of the pertinent regulatory and technological characteristics of the industry. The manner in which the topics are covered is accessible to most readers. Unfortunately, the size of the book does not permit a complete analysis of the topics covered, but full exposition of a single regulatory issue in common carrier regulation would fill many books of this size.

The purpose of the book, as stated by the authors, is to describe in nontechnical terms the theoretical basis for reforms that regulators have undertaken, or are soon to undertake, in markets characterized by economies of scale and scope. Specifically, the book attempts to specify those regulatory policies and institutions of the day that need be modified or abolished in order to expedite the move toward competition in local exchange telecommunications markets. The central theme of the book is no surprise - the combination of well designed regulations and an open entry policy will advance competition in local exchange telecommunications markets. In short, pare down regulation and let the market sort out the winners and the losers. The authors do not, however, blindly assert that competition will, or can, evolve in every market or submarket.

The second chapter of the book contains a brief overview of the current status and prospective sources of competition in local exchange telecommunications markets including wireless services, cable telephony, and competitive access providers. The next four chapters provide a discussion of the basic principles of regulation at both a general level and specifically relating to local exchange telecommunications markets such as price floors and ceilings, Ramsey prices, predatory pricing, cross-subsidization, economies of scale and scope, and price-cap regulation. Those unfamiliar with the economic ideas and terminology employed in local exchange telecommunications regulation will find these short chapters an excellent introduction to the basic principles of local exchange telecommunications economics. The style in which the ideas are presented makes them accessible not only to economists but also to attorneys and policy makers.

Many readers will get the impression that the book was motivated around Chapter Seven, "The Pricing of Inputs Sold to Competitors." The authors would not be mistaken by doing so. Designing the terms and conditions for the sale of the local exchange carrier's bottleneck facilities, bundled or unbundled, to competitors is one of the most difficult tasks facing regulators today. The authors assert that inputs sold to competitors should be priced according to the component-pricing rule. The component-pricing rule states that the prices competitors pay for bottleneck facilities should equal the average incremental cost of the facility, including any incremental opportunity cost. The incremental opportunity cost is measured by the contribution of the sale of the service or facility to the local exchange carrier's common cost forgone by providing the service or facility to its rival. It is quite possible that foregone monopoly profits will be included in that incremental opportunity cost. The authors do not fail to realize this and suggest that this is not a failure of the pricing rule, but rather of the regulator's inability to reduce the local exchange carrier's profits on services to competitive levels. But regulators have never been able to reduce profits to normal levels and will not likely learn to do so in the future. In fact, there is little reason to believe that it is in the interest of a regulator to do so. Even if the regulator refuses to recognize lost profits as opportunity costs, the information required to filter out those profits lies principally in the hands of the local exchange carrier. Suspending debate of its efficiency properties, the application of the component pricing rule is likely to be unworkable.

In chapter eight, the authors present their policy recommendations calculated to promote competitive entry in local exchange telecommunications. The list includes, for example, removing legal barriers to entry, unbundling facilities and providing them at reasonable terms, number portability, separate subsidiary arrangements, more spectrum for wireless services, and so forth. It was disappointing that a discussion of an alternative method of price cap regulation based on grouping network functionality rather than arbitrarily defined services was reduced to a single paragraph in the book's final chapter. Indeed, the ability of local exchange carriers to game the regulatory system by defining and redefining "services," which for all practical purposes are identical and amount to nothing more than the transport of bits of information, will serve to check the growth of competition in local exchange markets.

While there are no surprises in this book, neither are their many sources available that concisely cover so many of the relevant topics in the local exchange telecommunications industry today. At a minimum, the book is an excellent introduction to local exchange telecommunication terminology and basic principles. The book is short enough so that the reader can escape the inevitable boredom always looming about discussions of common carrier telecommunications regulation. The book will also expose its readers to the right questions and potentially to some right answers. If regulatory processes were at least half-heartily directed to the goal of economic efficiency, the book would be considerably more useful - but this is no fault of the authors.

George S. Ford Federal Communications Commission(*)

* The views expressed are those of the author and do not necessarily express those of the Federal Communications Commission.