Smart Regulation and Competition Policy in Electric and Telecommunications Markets Prepared for the Texas Public Policy Fo...
What is the goal? “If you don’t know where you’re going, any road will take you there.” -- George Harrison <ul><li>Consume...
Why consumer welfare? <ul><li>Treats electricity and telecom the same way antitrust treats other industries </li></ul><ul>...
When consumer welfare isn’t enough <ul><li>Accomplish other goals with least possible sacrifice of consumer welfare </li><...
Regulated monopoly paradigm <ul><li>Entry controlled </li></ul><ul><li>Prices regulated </li></ul><ul><ul><li>Price levels...
Competitive market <ul><li>Entry and exit relatively easy </li></ul><ul><li>Prices and contract terms set by competition <...
Texas electricity <ul><li>Customers within the Electric Reliability Council of Texas (70-75% of state) can choose retail e...
Texas telecom <ul><li>85% of cities have 3 or more telecom providers </li></ul><ul><li>79% of Texans have wireless phones ...
Smart regulation <ul><li>Grant a monopoly only when natural monopoly is proven to exist </li></ul><ul><li>Price regulation...
Understanding unseen consumer costs <ul><li>Higher prices = fewer consumers subscribe or use the service </li></ul><ul><li...
Example: Effects of Texas USF settlement <ul><li>High-cost subsidies cut by $144 million (36.5%) by 2012 </li></ul><ul><li...
Competition policy <ul><li>Ensure that licensing/registration requirements are no greater than necessary to accomplish pol...
For more information … <ul><li>Search for Mercatus Center studies on telecommunications, broadband, cable, and electricity...
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Smart Regulation and Competition Policy in Electric and Telecommunications Markets

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Jerry Ellig participates in a panel discussion before Texas policy makers in Austin, Texas at the Texas Public Policy Foundation's Policy Orientation on the future of the Texas Public Utility Commission and competition policy in electric and telecommunications markets.

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Smart Regulation and Competition Policy in Electric and Telecommunications Markets

  1. 1. Smart Regulation and Competition Policy in Electric and Telecommunications Markets Prepared for the Texas Public Policy Foundation 8 th Annual Policy Orientation for the Texas Legislature January 14, 2010 Jerry Ellig Senior Research Fellow [email_address]
  2. 2. What is the goal? “If you don’t know where you’re going, any road will take you there.” -- George Harrison <ul><li>Consumer welfare: Every unit of every resource employed in the use that produces the most value for consumers </li></ul><ul><li>Affordability: Every consumer has the opportunity to purchase some minimum level of service regardless of income or location </li></ul><ul><li>Public safety: Network must support certain services even if many consumers might not opt to purchase them </li></ul>
  3. 3. Why consumer welfare? <ul><li>Treats electricity and telecom the same way antitrust treats other industries </li></ul><ul><li>Good for consumers </li></ul><ul><li>Prices reflect costs; services offered when they pass cost/benefit test </li></ul><ul><li>Sustainable innovation and job creation </li></ul><ul><li>Forces companies to focus on satisfying consumers instead of wasting resources lobbying </li></ul>
  4. 4. When consumer welfare isn’t enough <ul><li>Accomplish other goals with least possible sacrifice of consumer welfare </li></ul><ul><li>Identify specific, concrete outcome sought </li></ul><ul><li>Measure it </li></ul><ul><li>Identify alternative policies </li></ul><ul><li>Assess how each alternative will affect amount of desired outcome </li></ul><ul><li>Assess how each alternative will affect consumer welfare </li></ul><ul><li>Decide how much consumer welfare is “worth” sacrificing to accomplish how much of the other goal </li></ul>
  5. 5. Regulated monopoly paradigm <ul><li>Entry controlled </li></ul><ul><li>Prices regulated </li></ul><ul><ul><li>Price levels based on average costs </li></ul></ul><ul><ul><li>Price structure promotes opaque cross-subsidies </li></ul></ul><ul><li>Service quality and other contract terms regulated </li></ul><ul><li>Exit prohibited (provider of last resort) </li></ul>
  6. 6. Competitive market <ul><li>Entry and exit relatively easy </li></ul><ul><li>Prices and contract terms set by competition </li></ul><ul><li>Policy focuses on monitoring and preserving competition </li></ul><ul><li>Consumer protection regulation focuses on providing information and preventing fraud </li></ul><ul><li>Subsidies are transparent and funded through efficient mechanisms </li></ul>
  7. 7. Texas electricity <ul><li>Customers within the Electric Reliability Council of Texas (70-75% of state) can choose retail electric providers </li></ul><ul><li>99.7 percent of these customers have more than 5 retail electricity providers available </li></ul><ul><li>Transmission/distribution remain regulated </li></ul><ul><li>Retail competition delayed indefinitely elsewhere </li></ul>
  8. 8. Texas telecom <ul><li>85% of cities have 3 or more telecom providers </li></ul><ul><li>79% of Texans have wireless phones </li></ul><ul><li>86% of counties have 2 or more broadband providers </li></ul>
  9. 9. Smart regulation <ul><li>Grant a monopoly only when natural monopoly is proven to exist </li></ul><ul><li>Price regulation incentivizes innovation </li></ul><ul><ul><li>Deliberate: Price caps </li></ul></ul><ul><ul><li>Unintentional: Regulatory lag </li></ul></ul><ul><li>Subsidies are transparent and funded through efficient mechanisms </li></ul><ul><li>“ Provider of last resort” can use low-cost technology (eg satellite phone) </li></ul>
  10. 10. Understanding unseen consumer costs <ul><li>Higher prices = fewer consumers subscribe or use the service </li></ul><ul><li>These consumers lose difference between what the service is worth to them and what they would have paid for it </li></ul><ul><li>Firms lose operating profit on these consumers </li></ul><ul><li>Loss is big when demand is sensitive to price (eg, wireless, video, broadband, long-distance phone) </li></ul>
  11. 11. Example: Effects of Texas USF settlement <ul><li>High-cost subsidies cut by $144 million (36.5%) by 2012 </li></ul><ul><li>Assessment fell from 4.4% in 2008 to 3.4% in 2009 </li></ul><ul><li>Phone companies can seek higher monthly rates </li></ul><ul><li>Increased usage due to lower prices on price-sensitive services will benefit Texas consumers, phone companies, and taxing authorities by $43.5 million annually even if basic local phone rates rise </li></ul>
  12. 12. Competition policy <ul><li>Ensure that licensing/registration requirements are no greater than necessary to accomplish policy goals </li></ul><ul><li>Price for “basic” or “POLR” services should not undermine competition </li></ul><ul><li>Competition should determine service quality and other contract terms </li></ul><ul><li>Consumer protection should encourage information disclosure and prevent fraud </li></ul><ul><li>Subsidies are transparent and funded through efficient mechanisms </li></ul>
  13. 13. For more information … <ul><li>Search for Mercatus Center studies on telecommunications, broadband, cable, and electricity at </li></ul><ul><li>www.mercatus.org </li></ul><ul><li>Read daily commentary on technology policy at www.surprisinglyfree.com </li></ul>

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