What happens when local phone service is deregulated?

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After more than half a century of monopoly and public utility–style regulation of retail telephone rates, in the early 1980s the United States embarked on a path of regulatory liberalization. Monopolies on long distance service and, later, local service were eliminated, allowing new entrants to compete for customers by lowering prices and offering new and improved services. As competition has developed, price controls have been removed gradually, allowing both entrants and incumbents to compete head-tohead to win customers. The evidence strongly suggests that the combination of de-monopolization and price deregulation has generated substantial benefits for consumers. 

Nearly two decades after liberalization began, the process is now nearing completion. Federal price controls on long distance service are a distant memory and state-administered price controls on local services have been removed for most services in most areas. There are two main exceptions: First, most rural carriers, which typically face less robust competition than those serving urban areas, remain subject to either rate-of-return regulation or price caps. Second, most states continue to impose price controls on “basic” service, i.e., a local access line capable of receiving calls from anywhere and of making an unlimited number of calls within a local calling area (but not including either long distance service or “enhanced” services such as voicemail or call-forwarding). Since 2006, however, 12 states have removed price controls on basic service for at least some carriers in at least some areas.

What are the effects of liberalizing price controls on basic telephone service? Proponents of continued regulation charge that incumbent telephone companies—even in highly competitive urban areas—continue to have market power over basic service and, on that basis, argue that regulation should remain in place. They contend that the removal of price controls will result in substantial rate increases, making even a basic telephone line “unaffordable” or leading to “excessive” rates, despite the continued availability in all states of subsidized telephone service for low-income customers. Liberalization advocates, on the other hand, argue that the removal of price controls will facilitate entry, enhance competition, promote investment and innovation, and ultimately lead to both lower costs and prices. 

The removal of price controls in some states but not others constitutes a natural experiment that can be used to assess the actual effects of this policy change. In this article we do just that. We conclude that in terms of rates and utilization, consumers in deregulated states are at least as well off as consumers in regulated states.