Costs and Consequences of Costs and Consequences of Telecom and Broadband Telecom and Broadband

RegulationsRegulations

Jerry ElligJerry Ellig

Senior Research FellowSenior Research Fellow

$105 billion annually at stake for consumers$105 billion annually at stake for consumers

Unbundled network elements

Local number portability

Enhanced 911

Satellite regulation

Resale of incumbent’s local service

Number pooling and CALEA

Long-distance access charges

Broadband regulatory uncertainty

Universal service

Spectrum management

Cost to consumers of these regulations…

How much?How much?

$11.1 billionUnbundled network elements

$1.7 billionLocal number portability

$1.2 billionEnhanced 911

UnknownSatellite regulation

$21 millionResale of incumbent’s local service

$800 millionNumber pooling and CALEA

$3.6 billionLong-distance access charges

$4.5 billionBroadband regulatory uncertainty

$4.4 billionUniversal service

$77 billionSpectrum management

Regulatory costs dwarf FCC Regulatory costs dwarf FCC spendingspending

FCC outlays 2004: $361 millionFCC outlays 2004: $361 million

FCC 2004 net cost of 3 regulation-FCC 2004 net cost of 3 regulation-related strategic goals: $1.2 billionrelated strategic goals: $1.2 billion

Excess burden of taxation: $144-480 Excess burden of taxation: $144-480 millionmillion

Potential effects of economic regulationPotential effects of economic regulation

Force monopoly to charge “competitive” priceForce monopoly to charge “competitive” price Transition from monopoly to competitionTransition from monopoly to competition Price below competitive levelPrice below competitive level Create market power/raise priceCreate market power/raise price Inflate costsInflate costs Reduce or redirect innovationReduce or redirect innovation Encourage expenditures to capture wealth Encourage expenditures to capture wealth

transferstransfers

What are costs of regulation?What are costs of regulation?

Wealth transfersWealth transfers+ Forgone consumer surplus+ Forgone consumer surplus== Total cost to consumersTotal cost to consumers

Forgone consumer surplusForgone consumer surplus++ Forgone producer surplusForgone producer surplus== Value of forgone output (“excess burden”)Value of forgone output (“excess burden”)

Wealth transfer + excess burden is widest Wealth transfer + excess burden is widest measuremeasure

How do the costs compare?How do the costs compare?

$120 billionTotal cost to society(Assumes wealth transfer is wasted)

$41 billion“Excess burden” (Forgone consumer + producer surplus)

$105 billionTotal cost to consumers(Assumes wealth transfer is wasted or goes to firms)

$25 billionForgone consumer surplus

$75 billionWealth transferred

Four kinds of regulationsFour kinds of regulations

Entry barriersEntry barriers

Taxes and subsidiesTaxes and subsidies

Network sharingNetwork sharing

Mandated services or functionsMandated services or functions

Entry barriersEntry barriers

SpectrumSpectrum

SatelliteSatellite

Taxes and subsidiesTaxes and subsidies

Long-distance access chargesLong-distance access charges

Other intercarrier compensationOther intercarrier compensation

Rural subsidiesRural subsidies

Low-income subsidiesLow-income subsidies

Schools/libraries programSchools/libraries program

Network sharingNetwork sharing

Unbundled network elementsUnbundled network elements

ResaleResale

DSL network sharing rulesDSL network sharing rules

Cable modem open accessCable modem open access

Mandated services/functionsMandated services/functions

911/Enhanced 911911/Enhanced 911

CALEACALEA

Local number portabilityLocal number portability

Number poolingNumber pooling

Compare costs with outcomesCompare costs with outcomes

Benefit: An increase in economic efficiency Benefit: An increase in economic efficiency (reduction in deadweight loss)(reduction in deadweight loss)

Outcome: A result policymakers and/or the Outcome: A result policymakers and/or the public seeks to achievepublic seeks to achieve

Excess burden %sExcess burden %s

61%Unbundled network elements

62%Local number portability

60%Enhanced 911

N.A.Satellite regulation

67%Resale of incumbent’s local service

62%Number pooling and CALEA

44%Long-distance access charges

N.A.Broadband regulatory uncertainty

43-62%Universal service

56%Spectrum management

Max 40%General federal taxation

Spectrum allocationSpectrum allocation

FCC allocation not necessary to prevent interference

Prevent signal interference

Tends to reduce consumer welfare

Consumer welfare

Implies no particular outcome

“Public interest”

Outcome AchievedIntended Outcome

Broadband unbundlingBroadband unbundling

UnknownReduce price

Appears to discourage investment

Encourage deployment

Outcome AchievedIntended Outcome

Universal ServiceUniversal Service

UnknownImproved educational outcomes

UnknownRedistribution to rural consumers

$5155-20,000 per added subscription

Increase rural subscription

Lifeline: $99/household

Linkup: $18/household

Redistribution to poor

$1581-2200 per added subscription

Increase low-income subscription

Outcome AchievedIntended Outcome

Long-distance access chargesLong-distance access charges

$24 average per low-income household

Redistribution to poor

Negligible or negativeIncreased low-income subscription

Negligible or negativeIncreased local subscription

Outcome AchievedIntended Outcome

Unbundled network elementsUnbundled network elements

Unlikely when reselling incumbent’s services

Innovative new services

Each $ gain costs $26Increased economic welfare

Substituted for facilities-based competition

Increased competition

$9.7 billion transferred,

but inefficiently

Lower prices

Outcome AchievedIntended Outcome

Local number portabilityLocal number portability

UnknownIncreased competition/

consumer welfare

Outcome AchievedIntended Outcome

Enhanced 911Enhanced 911

$1000 cost savings per cardiac patient

Reduced health/safety costs

Big reductions in cardiac mortality

Improved health/safety

Outcome AchievedIntended Outcome

Misc. wireless mandatesMisc. wireless mandates

UnknownCALEA – improved law enforcement/national security

UnknownNumber pooling – improved utilization of numbers

Outcome AchievedIntended Outcome

Resale of incumbent’s local serviceResale of incumbent’s local service

Unlikely when reselling incumbent’s services

Innovative new services

Has not been attractive entry strategy

Increased competition/ consumer welfare

Outcome AchievedIntended Outcome

Satellite regulationSatellite regulation

Neither costs nor outcomes for consumers Neither costs nor outcomes for consumers are well known.are well known.

Key questions to askKey questions to ask

Where has policy created barriers to Where has policy created barriers to competition?competition?

Is use of “taxed” services very responsive Is use of “taxed” services very responsive to price changes?to price changes?

What outcomes do we seek to achieve?What outcomes do we seek to achieve? How will we measure those outcomes?How will we measure those outcomes? What evidence shows whether changes What evidence shows whether changes

in outcomes were caused by policies?in outcomes were caused by policies?