Explaining State Regulatory Actions
We have seen that jurisdictional fragmentation could cause the FCC to set wholesale prices below cost. We have also seen that the FCC’s “efficient-firm” standard rests on a weak theoretical foundation but is capable of producing low wholesale prices. We have presented evidence that the wholesale prices set as a result of the Act are below forward-looking costs, absent adoption of a speculative forward-looking cost standard—a standard fraught with legal, economic, and practical difficulties. It is the state regulators who set these wholesale prices. Why would state regulators have chosen this cost/price standard? This is particularly surprising given that these wholesale prices threaten to unravel an elaborate system of politically-sensitive retail cross-subsidies that state regulators have constructed over the past decades. We believe the answer lies in the unwitting role played by a decade of regulatory reform.
KeywordsEntry Barrier Incumbent Firm Wholesale Prex Moral Hazard Problem Competitive Entry
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