Implementing Price Caps in Telecommunications

Over the past few years, price caps have replaced rate-of-return regulation in many sectors of telecommunications. This article focuses on the key implementation issues raised in the Federal Communications Commission's formulation of price cap plans for AT&T and the local telephone exchange carriers. Specifically, it discusses company cost changes over time and the formulas employed to track costs; the multiplicity of prices and the structure of regulations designed to cap them; and the inevitability of errors in the long run and the disincentives likely to result from efforts to correct such errors. It concludes with an evaluation of the performance of these price cap plans, noting how the resolution of these various issues has affected plan success

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