Deregulation vs. Reregulation of Telecommunications : A Clash of Regulatory Paradigms

For the past several decades, U.S. policymakers and the courts have charged a largely deregulatory course with respect to telecommunications. During the initial stages, these decisionmakers responded to technological improvements by narrowing regulation to cover only those portions of industry that remained natural monopolies and deregulating those portions that became open to competition. Eventually, Congress began regulating individual network components rather than services, mandating that incumbent local telephone companies provide unbundled access to any network element. As these elements became open to competition, the courts prompted the Federal Communications Commission to release almost the entire network from unbundling obligations. The advent of the Obama Administration, the recent financial crisis, and the persistence of regulatory intervention in Europe has prompted a debate over whether the U.S. should begin to reregulate. This article reviews how regulation has forced the consumers and providers to bear the costs associated with rate regulation, prevented them from benefitting from the efficiencies associated with vertical integration, have forced them to bear the implementation costs of unbundling, and adversely affected incentives to invest in new network capacity. More recent arguments in favor of using unbundling as a way to help new entrants climb the “ladder of investment” have proven difficult to administer and empirically unsubstantiated. As a matter of comparative second-best analysis, the decision should be based on the tradeoff between short-run static efficiency losses and long-run dynamic efficiency gains and institutional considerations, such as the greater administrability of structural relief, the benefits of decentralized decisionmaking, the distortions caused by regulatory lag, and biases in governmental decisionmaking processes, which generally favor deregulation. Moreover, the increasing viability of competition heightens the importance of investment incentives and makes the costs of regulatory intervention harder to justify