REGULATION UNDER INCREASING COMPETITION Topics in Regulatory Economics and Policy Series Michael A. Crew, Editor Graduate School of Management Rutgers University Newark, New Jersey, U.S.A. Previously published books in the series: Rowley, C., R. Tollison, and G. Tullock: Pechman, C.: Political Economy of Rent-Seeking Regulating Power: The Economics of Frantz, R.: Electricity in the Information Age X-Efficiency: Theory, Evidence and Gordon, R.K.: Applications Regulation and Economic Analysis: A Crew, M.: Critique over Two Centuries Deregulation and Diversification of Blackmon, G.: Utilities Incentive Regulation and the Shogren, J.: Regulation of Incentives The Political Economy of Government Crew, M.: Regulation Incentive Regulation for Public Utilities Hillman, J., and R. Braeutigam: Crew, M., and P. Kleindorfer: Price Level Regulation for Diversified Commercialization of Postal and Public Utilities Delivery Services Einhorn, M.: Abbott, T.: Price Caps and Incentive Regulation in Health Care Policy and Regulation Telecommunications Goff, B.: Crew, M.: Regulation and Macroeconomic Competition and the Regulation of Performance Utilities Coate, M.B., and A.N. Kleit: Crew, M., and P. Kleindorfer: The Economics of the Antitrust Process Competition and Innovation in Postal Frantz, R.: Services X-Efficiency: Theory, Evidence and Thompson, H.: Applications (2nd edition) Regulatory Finance: Financial Crew, M.: Foundations of Rate of Retum Managing Change in the Postal and Regulation Delivery Industries Crew, M.: Awerbuch, S., and A. Preston: Economic Innovations in Public Utility The Virtual Utility Regulation Gabel, D., and D. Weiman: Crew, M., and P. Kleindorfer: Opening Networks to Competition: The Regulation and the Nature of Postal Regulation and Pricing of Access and Delivery Services Zacour, G.: Oren, S., and S. Steven: Deregulation of Electric Utilities Service Opportunities for Electric Young, W.: Utilities: Creating Differentiated Atomic Energy Costing Products K.A. Lawrences, W.B. Tye, and S.C. Myers: Regulatory Risk: Economic Principles and Applications to Natrual Gas Pipelines REGULATION UNDER INCREASING COMPETITION edited by Michael A. Crew Center for Research in Regulated Industries Graduate School of Management Rutgers University Newark, New Jersey, U.S.A. "1iIIr... Springer Science+Business Media, LLC ISBN 978-1-4613-7328-5 ISBN 978-1-4615-5117-1 (eBook) DOI 10.1007/978-1-4615-5117-1 Library of Congress Cataloging-in-Publication Data A C.I.P. Catalogue record for this book is available from the Library of Congress. Copyright © 1999 by Springer Science+B usiness Media New York Originally published by Kluwer Academic Publishers, New York in 1999 Softcover reprint of the hardcover 1s t edition 1999 Ali rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+ Business Media, LLC. Printed on acid-free pap er. This book is dedicated to Horace J. De Podwin, distinguished economist, dean, and colleague. CONTENTS Authors and Discussants ix Preface and Acknowledgements xi 1 Regulatory Governance and Competitive Entry 1 Michael A. Crew and Paul R. Kleindorfer 2 Monopoly Leveraging, Path Dependency, and the 17 Case for a Local Competition Threshold for RBOC Entry into InterLATA Toll T. Randolph Beard, David L. Kaserman, and John W. Mayo 3 Lowering Prices with Tougher Regulation: 45 Forward-Looking Costs, Depreciation, and the Telecommunications Act of 1996 Michael A. Salinger 4 Stranded Assets in Network Industries in Transition 63 Michael A. Crew and Paul R. Kleindorfer 5 Comparing "Stranded Cost" Arguments in 79 Telecommunications and Electricity Timothy J. Brennan 6 An Economic Analysis of the Stranded Cost Issue 95 Facing Electric Utilities and Policymakers Today Colin J. Loxley viii PRICING AND REGULATORY INNOVATIONS 7 Performance Measurement for Price-Cap 105 Regulation of Telecommunications Using Evidence from a Cross-section Study of United States Local Exchange Carriers John R. Norsworthy and Diana H. Tsai 8 Computable General Equilibrium Models and 137 Electricity C02 Emissions Yoonyoung Kang and Menahem Spiegel 9 Customer Response to Rea 1-Time Prices in the 155 England and Wales Electricity Market: Implications for Demand-Side Bidding and Pricing Options Design Under Competition Robert H. Patrick and Frank A. Wolak AUTHORS AND DISCUSSANTS Christopher T. Babb, Manager-Network Modeling, NECA Mark C. Beyer, Manager, Office of the Economist, NJ Board of Public Utilities Joel Brainard, Chief of Regulatory Research, New York State Department of Public Service Timothy J. Brennan, Professor of Policy Sciences and Economics, University of Maryland-Balitmore County Janie Chermak, Assistant Professor of Economics, University of New Mexico Michael A. Crew, Professor of Economics and Director of the Center for Research in Regulated Industries, Rutgers University Stephen M. Friedlander, Manager, Law and Government Affairs, AT&T Jiong Gong, Member of Technical Staff, Bell Communications Research Yoonyoung Kang, Fellow, Energy and Environmental Policy Division, Korea Energy Economics Institute Paul R. Kleindorfer, Universal Furniture Professor of Economics and Decision Sciences, Wharton School, University of Pennsylvania Robert Levin, Senior Vice President, New York Mercantile Exchange Colin J. Loxley, Director-Resource Planning, PSE&G John Mayo, Professor of Economics, Georgetown University Glenn Meyers, Senior Consultant, Economic Studies Richard A. Michelfelder, Vice PreSident-Marketing and New Business Development, Comverge Technologies William R. Moore, Independant Consultant; formerly Government Affairs Director, AT&T John R. Norsworthy, Professor of Economics & Management, Rensselaer Polytechnic Institute Robert H. Patrick, Associate Professor of Economics, Rutgers University Carl Pechman, Director, Law and Economics Consulting Group Mark Reeder, Chief of Regulatory Economics, New York State Department of Public Service x PRICING AND REGULATORY INNOVATIONS Michael Salinger, Visiting Professor, Sloan School of Management, MIT, and Associate Professor of Economics, Boston University Joseph C. Schuh, Rutgers University Richard E. Schuler, Jr., Associate Economist, New York State Department of Public Service Richard Simnett, Director, Strategic Alternatives Analysis, Bell Communications Research Menahem Spiegel, Associate Professor of Economics, Rutgers University Diana H. Tsai, National Sun Yat-Sen University Frank A. Wolak, Associate Professor of Economics, Stanford University PREFACE AND ACKNOWLEDGEMENTS This book is a result of two seminars held at Rutgers-The State University of New Jersey on October 24, 1997, and May 1, 1998, entitled "Regulation under Increasing Competition." Twenty previous seminars in the same series resulted in Problems in Public Utility Economics and Regulation (Lexington Books, 1979), Issues in Public Utility Economics and Regulation (Lexington Books, 1980), Regulatory Reform and Public Utilities (Lexington Books, 1982), Analyzing the Impact of Regulatory Change (Lexington Books, 1985), Regulating Utilities in an Era of Deregulation (Macmillan Press, 1987), Deregulation and Diversification of Utili ties (Kluwer Academic Publishers, 1989), Competition and the Regulation of Utilities (Kluwer Academic Publishers, 1991), Economic Innovations in Public Utility Regulation (Kluwer Academic Publishers, 1992), Incentive Regulationfor Public Utilities (Kluwer Academic Publishers, 1994), and Pricing and Regulatory Innovations under Increasing Competition (Kluwer Academic Publishers, 1996). Like the previous seminars, these seminars received financial support from leading utilities. The views expressed, of course, are those of the authors and do not necessarily reflect the views of the sponsoring companies. AT&T, Atlantic Electric Company, Bell Atlantic (and, separately, NYNEX in 1997), Elizabethtown Gas Company, GPU, New Jersey-American Water Company, Orange & Rockland Utilities, Public Service Electric and Gas Company, Sprint, and United Water Company provided funding for the seminars. Company managers freely gave their time and advice and, on several occasions, provided information about their industries. I especially thank, Lawrence Cole, Frank Delany, Alan Friedman, Gary Gatyas, John Graham, Frank Gumper, Robert lacullo, Patricia Keefe, Daniel Kelleher, Steve Levinson, Dennis Lombardi, Joel Lubin, Colleen McCloskey, Arthur McGrath, Richard Michelfelder, Don Myers, Lou Peoples, R.S. Plender leith, Richard Perniciaro, and Joseph Schuh. Horace J. DePodwin, Dean Emeritus, Graduate School of Management, Rutgers University, and President, Economic Studies, Inc. was the keynote speaker at the Seminar on October 27. Fred Grygiel, Chief Economist, New Jersey Board of Public Utilities, was the keynote speaker at the Seminar on May 1. Horace's and Fred's interest in the program, which originated with the first Research Seminar in 1978, has continued ever since and has been a major factor in the success of the program. Both have been extremely helpful to me with their advice over the years, and both were highly instrumental in getting the program off the ground.