Pooling, a missing element in the rate of return and price cap regulation debate: A comparison of alternative regulatory regimes

Abstract

Listen

Translate article

In March 2010 the Federal Communications Commission (FCC) issued the National Broadband Plan (NBP) detailing strategic proposals to increase broadband availability in the US. One of the sweeping suggestions of the NBP is to convert all incumbent local exchange carriers from rate-of-return (RoR) regulation to price cap regulation. Most of these RoR carriers are small Rural Local Exchange Carriers (RLECs) operating in sparsely populated, isolated territories of the US. Since AT&T’s divestiture they have participated in revenue and cost sharing pools which have served as an effective mechanism for reducing unsystematic business risk. We stress that pooling makes both rate of return and price cap regulation operational in RLEC territories and has to be considered in the policy debates. Using cost and demand data from RLECs, we show that if FCC’s suggestion was implemented under current price cap rules, many RLECs would likely face financial distress within 3years of the regulatory regime change. We further show that allowing pooling arrangements under any regulatory regime could improve market efficiency. We suggest that potential efficiency gains are greatest when RLECs within a pooling arrangement have the option of remaining under RoR regulation or volunteering to move to a form of incentive regulation.