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A new study investigates the effects of deregulation on strategic choices in the telecommunications industry.

The Federal Communications Commission has failed to implement deregulation of the telecommunications industry set in motion by the Telecommunications Act of 1996. Competition cannot be artificially stimulated by a regulatory process, a fact shown in the deregulation of the trucking, airlines, gas and oil pipelines, and other industries.

Issues surrounding the liberalization of telecommunications markets are discussed. Particular focus is given to how liberalization is shaped by different market structures, regulation and new technologies.

Traditional theories of rate-of-return regulation are contrasted with alternative processes of price-cap and incentive regulation, using Data Envelopment Analysis of 1988-94 data of more than 20 US telephone companies. Alternative processes were found to produce better firm efficiency.

Controversies surround the deregulation of the telecommunications industry. The passage of the 1996 Telecommunications Act has brought about conflicting views on the various benefits and disadvantages of deregulation. The placement of wireless services has also been met with opposition from various sectors. As a result, a number of local governments have joined the Cellular Tower Coalition to promote both state and local authority in zoning and land-use decisions.

The Satellite Action Plan working group issued a report in early 1998 which discusses important issues concerning the satellite communications industry. The working group believes that countries that deregulate their satellite communications sector will reap economic benefits. Among the benefits are better telecommunications service, lower prices and innovations. Deregulation will foster economic development including job creation and facilitate universal access to telecommunications.

The impact of the regional universal telecommunication service policy on telephone access as well as the effectiveness and efficiency of the policy in providing telephone service for low-income households at the state level were investigated. The study covers the period 1984-1996 and was designed to determine whether the Telecommunications Act of 1996 has been successful in eliminating barriers to competition. Empirical results showed that there was a significant increase in the number of households with telephone at the state level even as inefficiencies in service were still evident.

Albania views telecommunications reform as a key to its future economic and political ambitions. Policy makers recognize the fact that liberalization of the telecommunications industry would enhance the performance not only of the private sector but also of state organizations and ministries. Thus, the government has included telecommunications in its ambitious stakeholder privatization program that would raise revenues and attract foreign investors. However, Albania faces a formidable challenge in its attempt to reform the telecommunications sector.

The experience of the telecommunications industry at the state level following the implementation of the 1996 Telecommunications Act provides some important lessons for policy makers worldwide. An analysis of the US model of telecommunications policy in California, Texas and Michigan showed an ongoing quest to render the state and federal levels of regulation mutually consistent. Furthermore, the telecommunications policy is influenced by the existing economic, political and social structures of territories where it is implemented.

The 1998 reform package for telecommunications in Europe failed to consider the economic and market realities affecting the industry. The European policies, which went into effect on Jan 1, 1998, will not be enough to secure competitive entry and failures because they take on a less empirical, more determinist view of the market model. What is needed is continuing regulatory intervention that is more flexible and centralized and is based on less determinist economics.

Deregulation of Mexico's telecommunications industry has resulted in a moderate increase in the number and type of telephone facilities in the country in addition to having encouraged investment from international telecommunication companies. However, much remains to be done to achieve Mexico's goal to achieve universal service target of 20 lines per 100 inhabitants by the year 2000. The lack of proper regulation is also presumed to increase the disparity between Mexico's haves and have-nots.

The viability of universal service and Internet commercialization are examined in terms of their ability to promote healthy competition technological development and collection of universal fund. Their existence, however, may be hampered by the concomitant realities that beset business and economics. For instance, efforts to collect a universal fund may be derailed by the profit motives of commercial sectors. The role of the government should be reevaluated in that it should be able to remove regulatory barriers to market competition.

Objective. Privatization and liberalization have been among the most important political and economic developments of the last twenty years. While both have occurred in most of the world, they have been most closely associated with telecommunications. Our objective is to explain the processes of privatization and liberalization in the telecommunications industry in Germany, a nation that is both representative and unique because of the difficult constitutional changes required to advance the process. Methods. Using traditional methods of political economy, we attempt to show how global economic and technological changes led to a dramatic shift in the public philosophy governing the choices that could be made in public telecommunications policy. Conclusions. We conclude that this force explains the dramatic policy shifts that have taken place.

Mr. Sidak and Professor Spulber extend here the analysis in Deregulatory Takings and Breach of the Regulatory Contract, published last year in this Review. They respond to comments and criticisms raised not only by Professors Baumol and Merrill, but also by Judge Williams and Professor Williamson in their Comments published kat year. Sidak and Spulber begin by exploring the constitutional limitations on the government's ability to redefine the public purpose to which a regulated utility has dedicated its private property. Then, the authors examine whether the government has made "givings" that implicitly compensate the regulated firm for its diminution in value owing to the imposition of policies mandating network unbundling at regulated prices. Sidak and Spulber refine the limiting principles for the recovery of stranded costs that they articulated in their earlier article and show how those principles reconcile with the actual treatment of losses from deregulation in disparate industries. Next, they expose the economic fallacies in the notion of "forward-looking costs" as that term has been used by the Federal Communications Commission and state public utility commissions to set prices for mandatory network access under the Telecommunications Act of 1996. The authors analyze the Supreme Court's 1996 decision in United States v. Winstar Corp. and argue that the reasoning employed by seven Justices in that case comports not only with earlier decisions of the Court construing the regulatory contract with public utilities, but also with the contemporary economic analysis of why the regulatory contract is essential and efficient. Sidak and Spulber explain how "transition bonds" may solve the stranded cost conundrum in the telecommunications and electric power industries by permitting the securilization of stranded costs in a manner that restores investors' faith in the state's ability to make credible commitments. Finally, the authors examine the significance of the Eighth Circuit's 1997 decision in Iowa Utilities Board v. FCC for the debate over deregulatory takings and breach of the regulatory contract.

Professors Baumol and Merrill reply to Deregulatory Takings and Breach of the Regulatory Contract, published last year in this Review, which argued that the price incumbents may charge potential competitors for bottleneck facilities under the Telecommunications Act of 1996 should be based not on forward-looking costs but on historical costs. Professors Baumol and Merrill contend that pricing with reference to historical costs would depart from the principles called for by economic analysis for efficient pricing, and they further argue that neither the Takings Clause nor the regulatory contract precludes the use of forward-looking costs in setting prices. If a taking or regulatory breach does occur, they suggest that the proper remedy is not to interfere with the pricing decisions reached by regulators but to make the appropriate compensation, if any, after those decisions have been put into effect. Support for these legal observations is reinforced with the economic contentions that the competition introduced by the Act will have minimal effect upon incumbents which will generally receive a very valuable quid pro quo for any damage to their legitimate interests. Finally, they argue that compensating any firm for the loss of monopolistic prices threatens to undermine the most basic purpose of the Act, which is to bring the benefits of competition and competitive pricing to all electronic communications markets.

The European Commission has recognized the importance of competition in telecommunications and is convinced that privatization is the alternative to the government monopoly of telephone companies. Despite, its resolve to encourage privatization and liberalization, however, competition in Europe involves only major players in telecommunications. While privatization ranges from 100% in Spain and the UK to none in Norway, it is evident that telecommunications competition in Europe is vastly different from that of the US.

The deregulation of the telecommunications industry in the relatively small countries of Australia, Chile, New Zealand and Guatemala have proven to be successful and disproved the myth that telecommunications is a natural monopoly. Chile pioneered telecommunications deregulation through its 1982 General Law on Telecommunications. Chile implemented unrestricted competition in Apr 1, 1989 while Australia created the 1991 Telecommunications Act. Guatemala implemented sweeping reforms in Nov 1996.

The US Telecommunications Act of 1996 aimed at the enhancement of competition among telecommunications providers and its associated benefits such as new services, quality improvements and price reductions. Contrary to expectations, it only served to reinforce old or create new problems. Competition does not necessarily result in price reduction but pushes prices toward cost. The US could learn from the example set by Canada which has reduced its regulation while, at the same time, promoting competition in its local telephone companies.

After overall entry deregulation, regulation of market power can only be justified in local telecommunication networks as long as they constitute monopolistic bottlenecks. Technical progress leads to a gradual disappearance of monopolistic bottlenecks, pointing out the large potential for economically efficient phasing out of sector-specific regulation. In contrast, all forms of asymmetric regulation containing an intrinsic bias towards some firms or technologies have a strong tendency towards overregulation. The new telecommunications laws in Germany and Switzerland are shown to be prominent examples of asymmetric regulatory frameworks. Since the new telecommunications law in Switzerland is less restrictive and more transparent than its German counterpart, it seems to be more suitable to tackle the potential for phasing out sector specific regulation in telecommunications.

The effects of technological change and deregulation on productivity in the telecommunications equipment industry are studied. Results show that deregulation increased aggregate productivity due to the reallocation of capital and improvements in plant efficiency. However, the growth of productivity and sales between plants varied with time. A model for predicting production function parameters is also derived.

International best practice benchmarking helps to monitor the effects of deregulation on telecommunications that promote competition. A case study of telecommunication services in Australia reveals that the introduction of competition helps in the achievement of many short-term expectations. The competition includes significant market rivalry in the areas of international, mobile and domestic long-distance services along with lower prices. Competition has also enhanced the quality of services.

A new intrastate telecommunications deregulation plan includes provisions for increasing local exchange competition in areas that lack competition, and allowing the beneficial aspects of competition to prevail where it exists. The plan emphasizes complementarity among its different components, minimizes regulatory constraints, and overcomes cost allocation problems. The industry plays the major role, with the state commission serving as a guide. The plan's objectives, the role of local exchange carriers, principles of deregulation and competition, and pricing policies are discussed.

The Telecommunications Act of 1996 completely overhauls US telecommunications law. The new legislation deregulates the telecommunications and cable industries. It may go down in history as one of the greatest accomplishments of the Clinton administration. However, upon closer examination, the Telecom Act actually increases government's involvement in the telecom industry rather than lessen it. For instance, it adds 80 new items for the FCC to pursue.

This paper estimates the productivity and consumer and producer changes in the New Zealand telecommunications network market between 1987, when it was deregulated, and 1993; as the major firm, Telecom, evolved from a government department to a public company in an environment of light regulation. The growth in productivity is estimated to reduced costs at an annual compound average of 5.6 per cent. The bulk of the substantial gains in consumer surplus has come from price reductions on 1987 consumption levels. There has been marked improvements in the quality of outputs. Shareholders have had a profitable investment.

European Union (EU) members are increasingly being pressured to liberalize their telecommunication markets. For EU members, the challenge lies in striking a balance between market liberalization and regulations that will promote fair competition. Although subsidiarity can bring about liberalization within the context of a properly functioning market, it can also prove disadvantageous when vaguely or improperly applied.