ERI Discussion Paper Series No.61
International Comparison of Privatization and Deregulation
-The Case in the United States-

August 1995
Robert HARRIS(University of California,Berkeley)
Steven MORRISON(Northeastern University)
Edward KAHN(University of California Energy Institute)



A. Purpose of the Report

The purpose of this report is to provide an analysis of recent U.S. developments in competition in wireline telecommunications services and an examination of the effects of antitrust and regulatory policies on competition. By comparison to most other nations, public policies in the U.S. are much more favorable to competition in telecommunications and, correspondingly, competition is much further advanced. Yet, crucial competition policy issues remain unresolved, some dead-locked in public policy disputes that pits Industry segments against themselves: interexchange carries (IXCs) resist the efforts of the local Bell Operating Companies (BOCs) to enter interLATA long distance services; cable companies battle against the entry by Bell and other local exchange carriers (LECs) into video distribution services; and LECs oppose entry by cable companies or IXCs in local services unless and until they are allowed into long distance and video services.2 At the state level, competitors are eagerly seeking modifications of regulations, including certification to provide local exchange telephone services, all in the name of competition. This report will assess both the current status of competition in telecommunications services and the prospect for further developments in competition and competition policy in the near future.

B. Structure of Public Policy Jurisdictions in the U.S.

In the "dual" system of Federal and state jurisdiction of regulation in the U.S., states have authority over the certification of local exchange carriers and approval of tariffs for local exchange services. Many services are tariffed on both interstate basis, with the former regulated by the Federal Communications Commission and the latter regulated by the respective state commissions. Within the limits if the Communications Act of 1934, the Federal Communications Commission has the authority to pre-empt state regulations when they meet certain legal tests. The FCC has aggressively used this pre-emption authority to promote competition in telecommunications, often in opposition (at least until very recently) to state regulatory policies. Also, the FCC has sole jurisdiction over the allocation of spectrum and has used this power to promote competition in long distance services (e.g., the "above 890 decision, which allowed use of microwave facilities for competitive entry) and wireless telecommunications services.

In addition to dual jurisdiction in regulatory authority, Federal antitrust policy has played a crucial role in the development of telecommunications competition in the U.S. Along with pro-competitive regulatory decisions by the Federal Communications Commission, the Modification of Final Judgment compelled AT&T's divestiture of, and imposed line-of-business restrictions on, the Bell Operating Companies (BOCs). Judge Greene of U.S. District Court, monitors and enforces compliance with the MFJ and has authority to grant waivers from the MFJ. Under the terms of the Modified Final Judgment (the antitrust consent decree which required that AT&T divest its Bell Operating Companies), the seven Regional Holding Companies3 are prohibited from providing interLATA toll services4 or manufacturing telecommunications equipment. Through judicial review, the restriction on information services by the Bell Operating Companies has been removed.

C. Organization of report

Section II defines and sizes the markets for, and analyzes the vertical relationships among, access, exchange and interexchange services. It distinguishes access service - which is a strong complement to interexchange services - from exchange services, which is not. It also explains why the vertical relationship between access and interexchange services lies at the root of the competitive concerns about vertical integration across local and long distance services. Section II also identifies several key economic concepts involved in local competition policy in the U.S., namely, "bottleneck," "interconnection," "essential facility" and "unbundling."

Section III analyzes competitive development and conditions in interLATA long distance services.5 It reviews a number of studies addressing the structure of the interLATA market. It also provides evidence regarding the pattern of pricing by AT&T, MCI and Sprint, and the growing importance of volume discounting -- i.e., price discrimination -- in interLATA services.

Section IV examines competition in access services. It presents evidence of the concentration of access revenues in major urban centers and shows how entrants are targeting the areas where revenues are most highly concentrated.

Section V reviews developments in competition in exchange services and assesses state regulations toward the certification and interconnection of alternative exchange carriers (AECs), and the unbundling of exchange services and facilities of incumbent local exchange carriers (LECs).

1The reader of this report should be aware that I have worked, and am working, extensively with Regional Bell Operating Companies and other Local Exchange Carriers in the antitrust and regulatory policy-making process in telecommunications. I have identified the nature of those activities in an attachment to this report.

2See Harris, Robert G., "Strategic Uses of Regulation: The Case of Line-of-Business Restrictions in the U.S. Communications Industry," with Robert A. Blau, in Research in Corporate Social Performance and Policy, James E.Post (ed.), JAI Press, 1992.

3Each of the seven RHCs or RBOCs -- Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, Southwestern Bell and U S WEST - owns one or more Bell Operating Companies, each of which serve one or more states. Each serves approximately 11 - 12% of U.S. telephone subscribers. The remainder are served by more than 1000 independent local exchange carries, most of which are very small, serving a few thousand customers.

4The MFJ imposed three main line-of-business restrictions on the RBOCs: manufacturing telecommunications equipment, interLATA services and information services. In 1991, the information services restriction was removed by judicial action.

5LATAs (Local Access ant Transport Areas) served as the geographic boundaries for dis-integrating AT&T from its operating companies. There are approximately 200 LATAs in the U.S. BOCs are allowed to offer long distance services within their LATAs, but not across LATAs.

Structure of the whole text

  1. full text別ウィンドウで開きます。(PDF-Format 559 KB)
  2. page3
    I. Introduction
  3. page5
    II. Economic Concepts for Analyzing Competition in Telecommunications Services
  4. page13
    III. Competition and Public Policies in Interexchange Services
  5. page20
    IV. Competition and Public Policies in Access Services
  6. page27
    V. Competition and Public Policies in Exchange Services



After forty years of tight regulation by the federal government, the airline Industry was deregulated in 1978. Such a dramatic change in an Industry's economic environment is bound to have significant effects and the airline Industry in no exception. Airline provide an interesting example of how an industry evolves when freed from government regulation. After mode than a decade and a half of deregulation, this evolution is still not complete, although the from to which the industry is evolving is becoming clear.

This evolution has not been without controversy. Each zig and zag of the industry renews the debate about the wisdom of deregulation and the future of the industry. The industry has this high profile because many people are fascinated with aviation. Others devote attention to airlines because airline deregulation was the first of many regulatory reforms (e.g., railroads, trucking, telecommunications, banking) in the late 1970s and 1980s. As the oldest deregulated industry, analysts look to airlines for into other industries. Although the airline industry is a complex one, it is amenable to study because of the wealth of data --- a legacy of regulation --- the government continues to collect.

This paper chronicles and explains the evolution of the domestic passenger airline industry since it was deregulated in 1978. The second section presents a brief history of the industry. Following that are the two sections that constitute the core of the paper: an examination of evolution of the industry in term of concentration, fares, etc., and an analysis of some possible trouble spots in the industry. A summary concludes the paper.

Structure of the whole text

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  2. page45
  3. page45
  4. page47
    The Effect of Airline Deregulation
  5. page53
    Possible Trouble Spots
  6. page59
    Summary and Conclusions
  7. page61
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Part 1. Historical Background and Evolution of the U.S. Electric Power Sector

I. Brief history of the system

The U.S. electricity system has been, and continues to be, a patchwork of state and federal regulations in a system with both private, municipal, and other government ownership. In this section we summarize the origin and early history of the public and private sector activities.

A. Private sector activities

The first decades of the electricity industry were by rapid technology innovation and chaotic institutional development. Private ownership of electricity systems broke out of small scale municipal structures when the system economies of large scale transmission began to be exploited in the period just before World War I. By linking together separate systems, load diversity improved the efficiency of power production. Small plants could be shut down and only the most productive equipment used. This saved fuel and maintenance cost, which more than offset the extra costs of transmission lines. Thus, geographic economies allowed for both lower rates and increased profits compared to more isolated operations. This example of pervasive network economies drove the early growth of the large scale electric utility beyond the confines of major metropolitan areas.

Scale economies could only be exploited systematically in a political regime that was stable enough to make raising capital feasible. The early history of competition in electricity was frequently destructive. Many private firms failed financially and were taken over by government entities. These seldom realized the scale economies that the larger private firms demonstrated. But the private firms faced a constant threat of franchise revocation by local political authorities. The political structure of state regulation with well-defined long term franchise began with the first commissions established in Wisconsin in 1906 and New York in 1907. By the 1920s over half the states had adopted this framework. Therefore, natural monopoly conditions could be exploited without undue political disruption. Jarrell (1978) gives an interesting account of the origins of the U.S. regulatory system for electricity.

With favorable conditions for growth, financing expansion became a key constraint. Electricity is a very capital intensive industry. Retained earnings were insufficient to finance expansion. The need for external capital became critical. The mass sale of common stock to customers during the 1920s and the broadening of debt markets beyond the New York financial community were crucial steps. At the same time equipment vendors also acquired a significant quantity of securities from utilities as payment for goods and services.

B. Private sector activities

Throughout the history of the U.S. electricity system there has been competition among various forms of ownership. The investor-ownership model became predominant, but not without several different kinds of government ownership achieving significant niche roles.

The federal government has played a significant, but always limited, role in electric power. Federal authority functions principally at the wholesale level. Constitutional authority over interstate commerce evolved into an apparatus of federal regulation covering most wholesale transactions. Moreover, the federal government has ownership rights over most hydroelectric resources. The Federal Water Power Act of 1920 established federal authority to issue licenses for non-federal hydroelectric development, to regulate prices for wholesale transactions, and embodied the principle of preferential allocation of surplus federal power sales to municipalities.

In the 1930s the federal government encouraged the growth of rural electricity service by subsidizing the formation of rural electric co-operatives. The Rural Electrification Administration (REA) provides loans, federal power preference and tax exemption to electric power organizations in rural areas and small towns. REA co-ops are also exempt from state and federal regulation. The value of the federal power preference grew with the expansion of Bureau of Reclamation dams in the western states. Hydroelectric construction by the federal government continued during World War II, and only slowed during the 1950s with a change in public policy and a lack of new major sites.

Municipal ownership of utilities seldom evolved into large systems. As cities grew they typically gravitated into the domain of the investor-owned sector. Municipal ownership had long provided a competitive constraint on the price of private utilities. This constraint was limited by the municipality's opportunities to realize scale economies, which were largely determined by its geographical boundaries.

C. Balance Between Public and Private Sectors

Throughout the post-war period the struggle between government ownership and the investor-owned segment continued. The election of Eisenhower in 1952 signalled the end of expansion of the federal system, projects started previously were completed in the 1950s, but subsequent development stopped in the following decade. The public and co-operative segment continued to expand. The configuration of ownership structure in 1989 is illustrated in Table 1. This shows the dominant role of investor-owned firms. The small size of municipal and co-operative utilities is evident from either the average investor-owned firm in 1992 had 2042 MW, compared to 38 MW per publicly-owned utility and 30 MW per co-operative. A similar disproportion is evident by comparing average sales.

Table 1. Structure of the U.S. Electricity Industry, 1992

Part 2. Competitive Bidding and Independent Power

The creation of an unregulated independent power industry in the U.S. began incrementally, and without explicit central policy design, as a result of a number of separate legal, regulatory Policies Act (PURPA) of 1978. PURPA created a class of private suppliers, called Qualifying Facilities (QFs) that were exempt from profit regulation and entitled to sell their output to franchised utilities. In some states, the terms of purchase were so attractive that development of QF capacity overwhelmed expectations. In response, utilities and regulators sought mechanisms to ration the supply efficiently. The result was a competitive bidding process for long term power sales contracts. This mechanism has proved to be sufficiently flexible and attractive to both buyers and sellers, that it has been broadened to include a new classes of suppliers; first, Independent Power Producers (IPPs), more recently Exempt Wholesale Generators (EWGs). Together these new entrants are expected to sustain a significant share of the market for new generating capacity. In this part we describe the background and development of the private power industry and characterize its current state.

Part 3. Implications of an Open Access Regime

The Energy Policy Act (EPAct) of 1992 has opened the door to significant change in wholesale competition by greatly extending the powers of the Federal Energy Regulatory Commission to mandate transmission access. Prior to this Act, the FERC was prevented from mandating transmission access that interfered with existing competitive relationship. This has now changed. EPAct gives the FERC authority to mandate transmission access if

  1. (1) voluntary negotiations have been conducted by the requesting entity and transmission owner for 60 days;
  2. (2) the order would be in the public interest;
  3. (3) reliability of all utility systems affected by the order would be maintained;
  4. (4) third-party wheeling is not subsidized by utility's existing customers.

If the FERC has the objective of promoting wholesale transmission access, it appears that it will now have broad power to do so. The powers do not extend to transmission access at the retail level. There is substantial controversy in the U.S. over the issue of competition for end-use customers. Although some erosion of the franchised monopoly in distribution is likely to occur, for the most part there is a resistance to introducing retail competition on a wide scale, as is scheduled to occur in the British electric power market.

Structure of the whole text

  1. full text別ウィンドウで開きます。(PDF-Format 248 KB)
  2. page91
    Part 1.Historical Background and Evolution of the U.S. Electric Power Sector
    1. page91
      I. Brief history of the system
    2. page94
      II. Characterization of the U.S. Electricity System
    3. page100
      III. Political Economy of Regulation
  3. page105
    Part 2.Competitive Bidding and Independent Power
    1. page105
      I. Introduction
    2. page105
      II. The Public Utilities Regulatory Policies Act of 1978
    3. page108
      III. Competitive Bidding for Private Power
    4. page112
      IV. The Emergence of Federal Competition Policy
  4. page114
    Part 3.Implications of an Open Access Regime
    1. page114
      I. Introduction : The Energy Policy Act
    2. page114
      II. Transmission Pricing
    3. page125
      III. Retail Competition
    4. page130
      IV. Conclusions
  5. page131
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