May 24, 2004

May 24, 2004 | Commentary on Regulation

Property, Competition and Telecom: The Continuing Debate

Earlier this year, we published a paper attacking the notion that U.S. telecom networks actually belong to the public, rather than their shareholders. We didn't think this rather straightforward defense of property rights would engender much debate, but debate is exactly what's happened. First, economist Lawrence Kotlikoff-whose argument spurred our piece-published a "tutorial" on the Tech Central Station website responding to our critique. Now, George Ford of the Phoenix Center has weighed in (PDF link) with his own analysis to correct our "errors."

 

At the heart of this discussion is the old system of telephone regulation, under which the Bell System was given a legal monopoly and guaranteed rate of return. Because of this, argue Drs. Kotlikoff and Ford, the public that financed the system should now rightfully own it.

 

This line of reasoning is dead wrong. Among other things, we argued, today's network is hardly a legacy from the days of monopoly, preserved and enjoyed by today's telephone companies. It is in large part a new network, resulting from recent private investment by those private firms.

 

Dr. Kotlikoff's response questioned our numbers, arguing we used the wrong dataset. Yet, even his numbers showed today's network is substantially the result of new investment. Dr. Ford now argues that, even today, telephone companies' returns are guaranteed by captive ratepayers. Though regulators have abandoned old-fashioned "rate of return" regulation, he says, they still informally guarantee returns under the modern "price cap" model.

 

Such a guarantee would be news to telecom investors. While regulators take profits into account when rates are periodically adjusted, no returns are guaranteed in any particular year. Moreover, its not clear that regulators could guarantee profits even if they wanted to, since the "captive ratepayer" Dr. Ford refers to is-in today's world of wireless phones and VOIP-an increasingly endangered species.

 

This debate may sound like a technical one, of concern only to telecom policy wonks, but it should set off alarm bells across the U.S. economy. What about cable companies? They are also regulated, so surely their networks don't belong to them either. And why stop there? A portion of the profits made by movie studios, as well as the wages that their employees earn, are surely impacted by the regulatory regime-the prices studios are paid for programming is linked to the cable companies' bottom line. Should we put a portion of all of these dollars in a "public" fund?

 

This line of reasoning can be applied to a host of other industries, ranging from power transmission to railroads to taxicabs. In each, the result would be just as foolish and just as dangerous. Such casual dismissal of property rights is unfair at best, and dangerous at worst. A market economy cannot function under such policies, and the benefits that we reap from it would be in serious jeopardy. As we wrote previously, property matters. Even for telephone companies.

 

James Gattuso is Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies, and Norbert Michel is Policy Analyst in the Center for Data Analysis, at The Heritage Foundation.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

Norbert J. Michel, Ph.D. Research Fellow in Financial Regulations
Thomas A. Roe Institute for Economic Policy Studies