NRRI 14-01-Characterizing-Competition

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Legislation and commission rulemakings have resulted in reduced regulation and limited oversight of incumbent carriers in entire states, specific areas of states, or for specific products and services. These decisions have been a response to market developments and have been premised on the expectation that an increase in competition among telecommunications providers and products will benefit consumers by increasing choice, lowering prices, and ultimately increasing quality. Advocates of reduced regulation cite the theory that decreased regulation enhances competition by smoothing the path for new entrants, reducing prices, and increasing quality, because customers can "shop" for the plans and products that suit them best and providers can more quickly move to meet changing customer preferences. Others claim that reduced regulation disadvantages those consumers that depend on the Incumbent Local Exchange Carrier (ILEC) to serve as a carrier of last resort (COLR) and to provide standalone basic local service.
The states use four general methods to classify a carrier or a market as effectively competitive as a prelude to reducing regulatory oversight. In effectively competitive markets, no single carrier has the power to raise prices or lower quality, since customers may choose among multiple, substitutable products. In these markets, competition disciplines providers and the need for oversight is diminished.
Determining where competition has made markets competitive is a key task for state regulators and legislatures, since these decisions directly affect both customers and carriers. This paper reviews the processes the states use to test for effective competition in order to reduce oversight. These processes may be categorized as the legislative mandate, carrier election, the finite test, and commission review and decision. The implementation of these processes differs from state to state, but in each case has resulted in a less regulated market based on the level of competition and the availability of substitutable products.