November, 2004

The Opportunity Costs of Unbundled Network Element Regulation

  • Jerry Ellig

    Research Professor, George Washington University Regulatory Studies Center
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Summary

Federal Communications Commission regulations require that incumbent local telephone companies must lease to competitors the entire platform of network elements necessary to provide local phone service. This working paper assesses the effects of the platform requirement on economic welfare by examining the efficiency with which it transfers income from incumbent telephone companies to consumers.

In several large states where platform regulation has stimulated significant competition, consumers receive only a fraction of the wealth transfer that they would receive if the wealth taken from incumbents were used to reduce access charges and universal service contributions from long-distance and wireless service. Using the wealth transfer to reduce access charges and universal service contributions would also generate larger increases in consumer welfare than platform regulation, because it would reduce the "tax" on services with relatively high elasticities of demand.

Nationally, these alternative policies could have increased consumer welfare by $3.3 billion and social welfare by $5 billion in 2003. These results suggest that transferring wealth to consumers by passing it through competitive local exchange carriers involves significant opportunity costs to consumers and society.