NCPA - National Center for Policy Analysis

Benefits Of Bell Break-Up And Regulatory Reform

September 13, 1999

The 1984 breakup of American Telephone & Telegraph and accompanying state regulatory reforms increased the efficiency of the system, resulting in substantial cost savings, concludes a recent study.

Divestiture left AT&T as a long-distance carrier and its former regional Bell operating companies as independents. The court- ordered breakup encouraged the states to reform telecommunications regulation, including moving from fixing rates for access to local exchanges and for toll calls that assured local telephone companies earned a specified rate-of-return on their capital investment to incentive-based rate-setting formulae. The incentives allow phone companies to reap the benefits of reducing costs, and discourage them from passing cost increases on to consumers.

Based on cost data from 1978 to 1993, researchers found divestiture and regulatory reform led to sizable cost efficiencies:

  • Cumulative savings from divestiture over the 10-year period, in 1993 dollars, were $115.4 billion for a savings of 11.2 percent from what costs otherwise would have been.
  • Total savings from state regulatory reforms adopted during the period were $96.7 billion, or 9.4 percent.
  • Specifically with respect to regulatory reforms, each 1 percent increase in local operating companies' allowed rate of return was found to decrease costs by 0.5 percent.

Where only one state had initiated incentive-based ratemaking prior to 1985, by 1993, 39 states had adopted such reforms.

Source: Celemnt G. Krouse, et al., "The Bell System Divestiture/Deregulation and the Efficiency of the Operating Companies," Journal of Law & Economics, University of Chicago Law School, April 1999.


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