Regulatory Governance and Competitive Entry

Abstract

Regulation of network industries, notably, telecommunications, electricity, gas and postal service, has changed significantly in recent years and has become increasingly complex. Although 1984, with the divestiture by AT&T of its operating companies, was seen as a landmark event, the process had begun several years earlier when competition in the long-distance market was first allowed on a small scale. The entry by MCI into long distance was initially minuscule. However, the camel’s nose was under the tent, and, despite valiant efforts by an exceedingly accomplished and regulatory-oriented AT&T management, the battle and the war were lost. AT&T and regulation would never be the same again. Not only was AT&T affected, but the impact was also felt on other industries formerly subject to traditional cost-of-service regulation. Allowing entry into regulated monopolies undermines the traditional structure of these industries and of regulation itself. The problem is that regulators and companies, to say nothing of regulatory economists, were flying blind. Once entry was allowed, the consequences were not clearly foreseen. The contradictions created are still to be resolved.

We would like to thank Mark Beyer, Janie Chermak, Andrew German, Jiong Gong, Jonathan Lesser, Steve Levinson, Roger Sherman, and Anton van der Lande for helpful comments.