What Happens When Local Phone Service Is Deregulated?

October 5, 2012

The phone industry has been regulated by both federal and state governments for decades. Although regulation once served a purpose in breaking up monopolies, new entrants into the market means more competition and lower prices, effectively removing the need for government intervention in the phone market, say Jeffrey A. Eisenach, managing director, and Kevin W. Caves, director, of Navigant Economics.

While price controls on long distance services were removed long ago, local phone services are beginning to be liberalized, with two exceptions.

  • First, most rural carriers face less competition, which makes them subject to either rate-of-return regulation or price caps.
  • Second, most states impose price controls on basic services such as local access lines capable of receiving calls and making calls.
  • However, 12 states have completely removed price control on basic service.

As more states begin to liberalize telephone services, debates continue about the effect that deregulation has on consumers. Proponents of regulation argue that incumbent telephone companies will have market power, allowing them to increase rates and making it unaffordable for many Americans. On the other hand, liberalization advocates argue that removal of price controls increase competition which will naturally decrease prices.

The removal of price controls in some states but not others offers a way to compare the effects of liberalizing phone services.

  • The Florida Public Service Commission found that liberalization increased rates by less than 2 percent.
  • Furthermore, in California, the rate were less than or equal to prior rates after liberalization.

Proponents of regulation go on to further argue that ending price regulation would lead to higher basic local exchange telephone service (BLETS) prices, making phone services out of reach for some customers. However, data taken from a dozen states that liberalized price controls shows that BLETS prices remain stable after liberalization. Moreover, the data shows that demand did not change as a result of liberalization as people kept their phone services.

Source: Jeffrey A. Eisenach and Kevin W. Caves, "What Happens When Local Phone Service Is Deregulated," Regulation Magazine, Fall 2012.

 

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