Closing Address, 1994 ITS Conference Sydney, Austrailia Regulatory Reform for Exchange Carriers: Competition through Regulatory Symmetry

The Federal Communications Commission is at a critical juncture in telecommunications regulation. Four years ago the Commission introduced price cap regulation for local exchange carriers. This marked a major improvement over traditional cost of service regulation because it streamlined regulatory procedures and introduced incentives for efficient firm behaviour in place of regulatory micromanagement. However, technological developments and the associated rapid growth of competition have outgrown the existing regulatory framework. The Commission needs urgently to fashion a more comprehensive regulatory reform that will enable the full social gains from these developments to be realised. To accomplish this, price cap reform must be based on a longer range vision of market competition in provision of facilities and services, and must be designed to promote development and efficient utilisation of a modern and flexible telecommunications infrastructure at minimum cost. Above all else, this requires that the regulatory framework supports the market in providing appropriate price signals to induce efficient investment in this infrastructure. In the Notice of Proposed Rulemaking,1 the Commission took the important step of extending the price cap review to encompass regulatory reform for the "transition" to competition. This paper reviews important principles that should guide this wider reform effort. The central recommendation in the paper is that the Commission should base reform on the principle of regulatory symmetry, and that deviations from symmetry should be adopted only in special cases that meet two conditions: (i) there is a demonstrated ability of incumbents to deter entry strategically (i.e. in ways that do not reflect their relative efficiency levels) and (ii) there is no less costly way to redress the imbalance. Section 1 discusses the importance of adopting regulatory symmetry as the benchmark for regulatory reform, with focus on socially inefficient (uneconomic) entry and the associated technical efficiency losses. Section 2 discusses possible strategies to deter entry and analyses whether they warrant countervailing asymmetric regulatory treatment. The focus is on the design of regulatory instruments that