economics of regulation industry studies
TRANSCRIPT
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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.