What is Wrong with American Telecommunications?

After nearly six years of telecommunications "deregulation" in the United States, centering on the Telecommunications Act of 1996, there is little to which regulatory officials in charge of such deregulation can point in terms of benefits in the form of lower prices or innovative services. It is critical that other nations recognize the American mistakes in telecommunications and strive to avoid repeating them. Regulation of telecommunications in the United States has been embodied in a "regulatory contract" between the private carrier and the regulatory authority, which in the first instance is a state public utilities commission (PUC) and in the second instance is the Federal Communications Commission (FCC). In this piece, MacAvoy and Sidak examine how American regulators have shaped the regulatory contract in a manner that sacrifices the economies of scale and scope by designing the regulatory contract to capture network externalities and to use supracompetitive returns on exclusive service provision to fund various politically favored goals. They warn of the perverse incentives that can arise from mandatory network unbundling at regulated prices, and they recommend that such unbundling be confined to essential facilities.