Lynne Kiesling
I have taken advantage of the relative liberty and calm of the past three days to work on an overdue paper with a co-author, to whom I owe my share of the work. The question is this: in a physical network that retains some natural monopoly characteristics while some of the rest of the vertical supply chain in the industry is increasingly competitive [gee, she can’t be talking about electricity, can she?], can ownership structure substitute for traditional “natural monopoly” regulation? Specifically, if competing retailers own shares in the wires network, and those shares give them use rights that they can use, sell or rent, will the beneficial tensions of those retailers exercise the “socially optimal” discipline on the capacity use, pricing, and construction in the upstream wires sector?
The more I think of this, the more I think there’s an untapped telecom application for this idea. Most sensible people agree that the idea of open access to essential facilities leaves a bit to be desired (i.e., is crap) for many reasons, including the difficulty of determining the price that competitors should be charged for the use of the incumbent’s physical network. In Illinois, for example, Ameritech/SBC had to accept a payment from competitors equal to the minimum long-run average cost if the network were being used at its optimal scale. I could draw you a bunch of simple graphs to show why this is a stupid idea, why it’s totally incentive *in*compatible, and why SBC rightly complained (although they egregiously and foully exercised their political muscle in late 2003 to rectify the matter). Plus, that LRAC is estimated; it’s not like SBC’s CFO has it tattooed on the back of the neck! If it’s estimated through a political process, then the whole panoply of rent seeking kabuki players come out onto the stage, and ya gotta wonder whether or not the LRAC the ICC uses is really LRAC*! I’m thinkin’ … not!
The competitive joint venture idea (CJV) would instead involve this: the FCC (or is it the state PUCs who have jurisdiction at that level? It’s such a muddle I can’t tell) holds an auction for the use rights of the wires network and switching capability constructed by the incumbent. Competing retailers bid for those use rights, using some well-thought-out design for the auction. The proceeds go to the incumbent, so there will be no sniveling or whining about so-called “stranded costs”. From that point on, the local wires+switching is a CJV, with periodic (annual?) auctions for the use rights for the following year. Or, you could just do one auction at the start, for the right to be a member of the CJV in which the use rights would be determined by the retail market share of each of the CJV members. No entry/exit barriers, no restrictions on the ability to build new wires (except for the usual construction and local zoning junk).
It sounds like a reasonable alternative to open access to me, and certainly worth discussion, scrutiny, and testing (experimental, of course). I’m going to hold off on more whimsical speculation until I’ve thought further through this paper and have a version ready to go up on SSRN or some such thing.