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Abstract:
After nearly six years of telecommunications deregulation in the United States, centering on the Telecommunications Act of 1996, there is little to which regulatory officials in charge of such deregulation can point in terms of benefits in the form of lower prices or innovative services. It is critical that other nations recognize the American mistakes in telecommunications and strive to avoid repeating them. Regulation of telecommunications in the United States has been embodied in a regulatory contract between the private carrier and the regulatory authority, which in the first instance is a state public utilities commission (PUC) and in the second instance is the Federal Communications Commission (FCC). In this piece, MacAvoy and Sidak examine how American regulators have shaped the regulatory contract in a manner that sacrifices the economies of scale and scope by designing the regulatory contract to capture network externalities and to use supracompetitive returns on exclusive service provision to fund various politically favored goals. They warn of the perverse incentives that can arise from mandatory network unbundling at regulated prices, and they recommend that such unbundling be confined to essential facilities.

Abstract:
The linkLine price squeeze case from the Ninth Circuit is the most important antitrust case that the Supreme Court could take during the Fall 2007 Term. Amici are professors and scholars in law and economics who have taught, or have conducted research on, antitrust law and the economics of industrial organization. They include William J. Baumol, Robert H. Bork, Robert W. Crandall, George Daly, Harold Demsetz, Jeffrey A. Eisenach, Kenneth G. Elzinga, Gerald Faulhaber, Franklin M. Fisher, Charles J. Goetz, Robert Hahn, Jerry A. Hausman, Thomas M. Jorde, Robert E. Litan, Paul W. MacAvoy, J. Gregory Sidak, Pablo T. Spiller, and Daniel F. Spulber.

We agree with the petitioners that the Ninth Circuit has generated an inescapable conflict among circuits, and that the Ninth Circuit's opinion below is incompatible with this Court's reasoning in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007), and Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). We agree with Judge Gould's dissent in linkLine that Trinko "takes the issues of wholesale pricing out of the case," such that the plaintiffs' only possible remaining theory of harm would be predatory pricing at the retail level - which the plaintiffs did not allege. linkLine Commc'ns Inc. v. Pac. Bell Tel. Co. d/b/a/ AT&T Cal., Inc., No. 05-56023, 2007 U.S. App. LEXIS 21719, at *28-29 (9th Cir. Sept. 11, 2007) (Gould, J., dissenting). We also agree with Judge Ginsburg's opinion for the D.C. Circuit in Covad Communications Co. v. Bell Atlantic Corp., 398 F.3d 666 (D.C. Cir. 2005), which in turn embraces the conclusion of the Areeda-Hovenkamp treatise that "'it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal.'" Id. at 673-74 (quoting 3A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 767c3, at 129-30 (2d ed. 2002)). The existence of a rule like linkLine has a pervasive impact on business behavior that, at the margin, affects competition and consumers. This deleterious effect extends beyond the telecommunications industry to affect all firms that do business in the Ninth Circuit. These reasons justify granting certiorari in linkLine and reversing the Ninth Circuit's decision.

In our minds, an even larger reason than those described above makes it imperative that the Court take this case. The Ninth Circuit's decision in linkLine implicates the normative foundation of modern Sherman Act jurisprudence: that antitrust law exists to advance consumer welfare. We have three points to make.

First, any rule of price-squeeze liability that threatens liability based on the claim that the difference between a firm's upstream and downstream prices leaves downstream rivals insufficient margin substitutes a rule of competitor welfare for consumer welfare.

Second, properly understood, a price squeeze is a regulatory issue, which makes sense only as a rule of price regulation in an industry already subject to duties to deal and to control by institutionally competent regulators. Attempting to implement regulatory policy through section 2 of the Sherman Act is ill-advised, both because it makes no sense for courts to re-regulate deregulated or lightly regulated industries, and because courts lack the institutional competence to implement regulation.

Third, the Ninth Circuit's rule is of pressing concern precisely because it will deter efficiency-enhancing conduct and competitive pricing. Vertical integration and partial integration are ubiquitous, and firms need to be able to make decisions about such integration without the threat of liability. Vertically integrated firms likewise need to be free to cut retail prices (as long as the prices are not predatory) without concern for rivals - the point of Brooke Group. Moreover, the Ninth Circuit's standard is so vague and open-ended that it creates uncertainty and invites litigation; it also permits imposition of liability based on apparently subjective evaluation of disputed and hard-to-prove facts, which will lead to a substantial risk of false positives.

Abstract:
Northeast Utilities System, an electricity generating and distribution company in Southern New England, adopted the low-cost dominant strategy fashionable in the management consulting companies in the mid-1980s and carried through with that strategy in the face of extreme employee, regulatory, and public resistance to the mid-1990s. Management achieved a significant measure of its strategic cost-cutting goals in that decade, but simultaneously took on ever-increasing risk that its operation of three large nuclear power plants subject to that cost cutting would be declared unsafe by the Nuclear Regulatory Commission. Management's strategy was not constrained by the company board of directors, even though nuclear shutdown could destroy the market value of the shares of the investors. The "worst case" scenario finally did take place, when the Millstone plants in 1996 were not allowed to operate until rebuilt and then relicensed by the Nuclear Regulatory Commission. Subsequent to this rejection of strategy by the regulator, the Northeast generation facilities were broken up and auctioned off, and the distribution facilities were put on the market.

Is this disaster just another in the long line of corporate failures? Our response is that the Northeast experience is different, and raises a basic question worth a detailed answer. The application of competitive strategy by Northeast Utilities management, even when faced with increasing risk of nuclear plant shutdown, increased in intensity and scope. Why did management in effect ignore the risk involved? The narrative of events supports the explanation that it was in management's interest to do exactly that particularly after 1992 and before 1996. The narrative also supports the argument that it was not in the investor's interest, and, contrary to the charter of the corporation, the investor's interests as represented by the board were not controlling when it came to the application of strategy by management. Management's implementation of strategy may not have deliberately destroyed the company, but its implementation took on the significant and apparent risk that the result would be the destruction of the enterprise. The implications for management, even in the worst-case result, were orthogonal to those of the board and the owners.

This competitive strategy was, for the most part, an application of generic low-cost-dominant positioning methodology. The application was in a corporation dominated by management, where downside risk would affect the shareholders, consumers, and the public, but least of all management. The "worst case" result was not certain, but could be tolerated by management, if not by the company's owners. The return-risk profile examined here would not seem to be unique to Northeast Utilities.

Abstract:
As economists, we believe that the Second Circuit's ruling, by not allowing the consideration of important information about the relationships between the benefits and costs of alternatives, is economically unsound. In particular, we believe that, as a general principle, regulators cannot make rational decisions unless they are allowed to compare costs and benefits and to use the results, along with other factors as appropriate, to choose among alternatives.

To the extent permissible under the statute and case law, EPA should be allowed to consider benefits and costs in establishing rules for implementing s316(b). The Court's allowing EPA to consider benefits and costs would improve both the decision making process - by making it more transparent - and the regulatory decisions by allowing important relevant information to be considered explicitly.

Abstract:
Terrorist disruptions of crude oil supplies anywhere in the world now pose a serious threat to the U.S. economy. Price shocks from terrorist acts could have a pervasive negative effect on producer costs and consumer behavior, with the potential to derail the current economic recovery. The authors propose insulating U.S. energy prices from world price volatility by gradually eliminating imports of crude oil from non-Western Hemisphere sources.

The U.S. now operates with half of its crude supply from offshore sources. As much as half of these imports could be replaced by expanded production from projects that have been shelved for political reasons or because prices are currently too low. The remainder could come from an extensive and currently untapped supply of crude oil substitutes, particularly bio-energy sources such as ethanol from corn and switchgrass. These sources would be much less vulnerable to terrorist disruption.

The authors also estimate that the costs of pursuing a strategy of eliminating imports would not be nearly as large as conventional wisdom suggests. Even though crude prices would be somewhat higher than current levels, they would also be much more stable, and this price stability would help promote a stronger and more secure economy in the long run.

Oil, National Defense, Terrorism, Bio-Energy

Abstract:
Fifteen scholars on auctions and telecommunications regulation urge the FCC to cancel bids made in, or permit winning bidders to opt out of, the reauction of the NextWave licenses in Auction 35.

For auctions to function efficiently, buyers and sellers must follow basic rules, including the rule that a seller deliver in a timely manner what the winning bidder has purchased. This rule has not been applied in Auction 35. The FCC auctioned something that it did not have - immediate access to the spectrum for the winning bidders. Thus, if the FCC forces the winning bidders to pay, they will sue the agency for forcing them to pay for something that they did not receive. Alternatively, their shareholders will sue the companies. Meanwhile, wireless carriers have invested in less efficient technologies to meet capacity needs.

The FCC has said that its current policy toward Auction 35 seeks to "protect the integrity" of the spectrum auction process. The opposite is already occurring. The FCC increases uncertainty in the wireless market if it holds carriers accountable for winning bids for licenses that the agency cannot deliver. Bidders will discount their future bids accordingly, and auction revenues will fall. That outcome does not benefit consumers, taxpayers, workers, or shareholders.

Abstract:
Three decade ago, federal policymakers - Republicans and Democrats - embarked on a general strategy of deregulation in the electricity, gas delivery, and telecommunications industries. The strategy called for restructuring to separate production from the transmission and distribution, followed by elimination of price controls. The expected results were lower prices and increased quality, reliability, and scope of services.

This book shows that we now have only partial deregulation, a mixture of oligopoly structure with direct price control. It explores why this system leads to volatile and high prices, reduced investment, and low profitability, and what policy actions can be implemented to address these problems.

Network Space, Lerner Index, Conjectural Variations, Bertrand Oligopoly, Basis Differential, Economic Value Added, EVA, Price Cap Regulation

Abstract:
This Article evaluates the regulatory treatment of windfall proceeds from a utility's purchase and subsequent sale of important assets. For service to be sustained, regulatory treatment of proceeds from all jurisdictional activities is such that expected returns to equity investment will equal the equity costs of capital. But over time, a utility's actual net revenues vary from expected net revenues, and that variation may be positive or negative. Economic efficiency requires that the regulator allocate these variations to the investor: Given symmetric treatment of unexpected profit and loss outcomes, the risks that the investor bears under the regulatory contract are properly compensated. The shareholder should receive any gain, as a result of a change in market conditions, including changes in technology that increase the demand for the utility's service or render its capital stock more productive. The exception is that the ratepayer should receive any gain that the utility experiences as a result of a change in regulatory conditions. On the utility's sale of an asset that has been used to provide regulated services, and that has appreciated in value, the utility's shareholders should receive the proceeds from the asset's sale. This rule, which follows from efficiency theory, is evident in the reported decisions by courts and regulatory commissions in the United States. In short, the jurisprudence on the allocation of windfall proceeds from a utility's sale of assets advances economic efficiency.

Windfall Gains, Stranded Costs, Regulatory Impact

Abstract:
The Tennessee Valley Authority, as a federal corporation governed independently by a three-person board, undertook excessive investments in the 1980s based on erroneous projections of technology and demand growth for electricity. These capital outlays have been financed to pay back loans on deferred depreciation by arbitrary price increases for electricity. Even with electricity markets now beginning to open up to competition, inside and outside the TVA regional monopoly "fence," TVA still expects to keep solvent and reduce excessive debt. But financial analysis undertaken here indicates that TVA's solvency scenario holds only under very narrow assumptions, and an array of equally plausible, and perhaps more realistic, assumptions leads to projections of insolvency for TVA within a very few years.

If insolvent, with realization of one of the more likely scenarios, TVA as a public enterprise would not go into bankruptcy. It might be able to generate increased revenues by price increases; if only in a limited range given newly competitive markets for power inside or adjacent to the "fence." It could call for the Federal Financing Bank to redeem TVA bonds at full value even though these bonds would be redeemed at discounted value in the market for bankrupt securities. The impending threat of insolvency then makes a pressing case for determination as to whether the Federal Bank should bail out TVA from the consequences as of investment errors with taxpayer funds. The alternative would be to treat this company the same as investor-owned utilities that made erroneous large-scale capital outlays over the last two decades. This would call for bankruptcy proceedings, following privatization of the Tennessee Valley Authority.

Public Corporations, Insolvency and Privatization

Abstract:
As we understand it, the D.C. Circuit did not allow the EPA to consider the costs of complying with ozone and PM NAAQS. As we further understand it, this legal ruling can be overturned only by this Court. As economists, we believe that the D.C. Circuit's ruling not allowing the EPA to consider important information relating to the consequences of its regulatory actions is economically unsound. Without delving into the legal aspects of the case, we present below why we think the Court should allow the EPA to consider costs in setting standards. In particular, we believe that, as a general principle, regulators should be allowed to consider explicitly the full consequences of their regulatory decisions. These consequences include the regulation's benefits, costs, and any other relevant factors.

EPA, D.C. Circuit, regulatory actions

Abstract:
The linkLine price squeeze case pending in the Supreme Court for the Fall 2008 Term is one of the most significant antitrust cases on monopolization law that the Court has taken in years. Amici are professors and scholars in law and economics who have taught, or have conducted research on, antitrust law and the economics of industrial organization. They are William J. Baumol, Robert H. Bork, Robert W. Crandall, George Daly, Harold Demsetz, Jeffrey A. Eisenach, Kenneth G. Elzinga, Richard A. Epstein, Gerald Faulhaber, Franklin M. Fisher, Charles J. Goetz, Robert Hahn, Jerry A. Hausman, Keith N. Hylton, Thomas M. Jorde, Robert E. Litan, Paul W. MacAvoy, Sam Peltzman, J. Gregory Sidak, Pablo T. Spiller, and Daniel F. Spulber.

We agree with the petitioners that the Ninth Circuit has generated an inescapable conflict among circuits, and that its opinion is incompatible with the Supreme Court's decisions in Trinko, Weyerhaeuser, and Brooke Group. We agree with Judge Gould's dissent from the Ninth Circuit's decision in linkLine that Trinko "takes the issues of wholesale pricing out of the case," such that the plaintiffs' only possible remaining theory of harm would be predatory pricing at the retail level - which the plaintiffs did not allege. We also agree with Judge Ginsburg's opinion for the D.C. Circuit in Covad Communications Co. v. Bell Atlantic Corp., which in turn embraces the conclusion of the Areeda-Hovenkamp treatise that "it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal." The existence of a rule like linkLine has a pervasive impact on business behavior that, at the margin, affects competition and consumers. This deleterious effect extends beyond the telecommunications industry to affect all firms that do business in the Ninth Circuit. These reasons justify reversing the Ninth Circuit's decision.

In our minds, an even larger reason than those described above makes it imperative that the Court reverse this decision. The Ninth Circuit's decision in linkLine implicates the normative foundation of modern Sherman Act jurisprudence: that antitrust law exists to advance consumer welfare. We have three points to make.

First, any rule of price-squeeze liability that threatens liability based on the claim that the difference between a firm's upstream and downstream prices leaves downstream rivals insufficient margin substitutes a rule of competitor welfare for consumer welfare.

Second, properly understood, a price squeeze is a regulatory issue, which makes sense only as a rule of price regulation in an industry already subject to duties to deal and to control by institutionally competent regulators. Attempting to implement regulatory policy through section 2 of the Sherman Act is ill-advised, both because it makes no sense for courts to re-regulate deregulated or lightly regulated industries, and because courts lack the institutional competence to implement regulation.

Third, the Ninth Circuit's rule is of pressing concern precisely because it will deter efficiency-enhancing conduct and competitive pricing. Vertical integration and partial integration are ubiquitous, and firms need to be able to make decisions about such integration without the threat of liability. Vertically integrated firms likewise need to be free to cut retail prices (as long as the prices are not predatory) without concern for rivals - the point of Brooke Group. Moreover, the Ninth Circuit's standard is so vague and open-ended that it creates uncertainty and invites litigation; it also permits imposition of liability based on apparently subjective evaluation of disputed and hard-to-prove facts, which will lead to a substantial risk of false positives.

Abstract:
On February 15, 1997, seventy countries working within the framework of the World Trade Organization agreed on a multilateral reduction of regulatory barrier to competition in international telecommunications services. The signatory nations to the WTO agreement, representing markets generating 95 percent of the $600 billion in global telecommunications revenue, are now legally bound to open their telephone markets to competition. Within months, however, the Federal Communications Commission injected controversy into the new multilateral arrangement by proposing to dictate the prices that other nations may allow their domestic telephone companies to charge to international long-distance carriers for terminating incoming calls from the United States. Those charges for terminating access, know as settlement rates, involve billions of dollars annually and are set pursuant to an international regime that is one of the more arcane niches in the foreboding sprawl of telecommunications regulation.

Our focus in this paper is not on such matters of jurisdiction and international comity, but rather U.S. domestic economic policy. As a matter of regulatory economics, the FCC's settlement rates order harms the very U.S. consumers that it purports to protect. In that sense, the order cannot be said to be in the public interest. It is true, as the FCC said, that the agency need not rely on multilateral efforts alone to lower prices for U.S. consumers making international calls. But there is a superior alternative to the FCC's policy of bilateral reciprocity. To achieve lower prices for U.S. consumers making international calls, the FCC should adopt a unilateral policy of opening U.S. outbound markets to entry by foreign carriers before proceeding to require foreign countries to place their domestic rate structure for terminating access services under FCC jurisdiction.

WTO, World Trade Organization, Settlement Rates

Abstract:
This book contains five semi-independent analyses of the performance of natural gasmarkets in Canada and in the United States in the recent past decade. The technology of natural gas, interacting with the economics, determines the inground gas discovery, development, and production. The second level, at the wellhead, consists of gathering, refining, and transfer of the product to pipeline nodes for transport to other intersecting nodes and ultimately to the third level, that of the distribution system at the point of use. At each point of transfer, there are buy-sell markets and also state and national agencies to regulate the buy-sell process. We carry out analyses of the response of service suppliers at these levels to changes in the extent of regulation in the early 1990s known as regulatory reform, or partial deregulation.

We concentrate on what we consider to be the building blocks for changing the performance of the supply side of salesmarkets. Decisions of the Federal Energy Regulatory Commission (FERC) required the separation of gas ownership from pipeline transportation services, the development of exchange markets for gas and (separate) transportation at hubs that were between field intake and city gate delivery. FERC also required the elimination of price controls on all transactions in product or line space except on firm contracts for delivery space. We seek the facts on changes in the geographic dimensions of the markets for line space, and on the extent of storage either at the wellhead or in reservoirs close to final sales locations. The focus, however, is on what happens to gas prices, both in the year-to-year markets and in the long run relative to what would have happened without this partial deregulation.

This calls for testing models of price behavior in monopoly or oligopoly (supplier interactive) transportation markets with data on prices and volumes. Data on gas shipped, basis differentials in spot prices on sales at different hub locations, and pipeline charges, costs and earnings are used to test hypotheses that pipelines increased their interaction with other lines, and increased short term and season-to-season space to meet volatile demands for services after partial deregulation. These hypotheses have been tested using co-integration techniques to define markets, and regression analysis to distinguish regulated monopoly from partially deregulated Bertrand oligopoly service provision. The emphasis throughout is on tests to support a statement that gas sales and transportation have become less monopolistic in character, with prices lower but more volatile over the summer to winter heating seasons.

Abstract:
The Gerald Ford Presidency demonstrated an amazing scope and expertise in the formation of economic policy at a time of numerous economic crises. the documents from that administration that come from the files of a member of the council of economic advisors indicate these conditions.

economic policy, council of economic advisors, administrative process

Abstract:
A significant negative trend in the long-term price of natural gas at the wellhead is revealed from simulations with a partial equilibrium model of the industry in the United States. The model framework consists of a simultaneous equations system for production from reserves and for demands for production in the residential, commercial and industrial sectors. We utilize a wide range of historical data to calibrate the model and then develop two sets of scenarios for future prices, one based on further industry development under current regulation, and the other based on deregulation and development of an open market for gas services. The key variables---price of natural gas, level of production and inground gas reserves---for the next 10 years improve for the consumer whether or not there is deregulation but the second scenario leaves the consumer better off sooner.

Regulation, Natural gas, Exploration, Development, Demand

Abstract:
Our working hypothesis is that a professional board which is independent of management should tip the scales in favor of higher returns to investors. Although this hypothesis is amply supported by observation and reasonable assumptions, no detailed analysis of corporate relative performance has been undertaken. Here we define returns to investors as the achievement of "economic profit," ie., operating earnings in excess of the costs of capital, and we posit the presence/absence of a professional board for each corporation in a reasonably comprehensive sample of large corporations. An empirical study based on such reasonable studies and 1991- 1995 data demonstrates that the added returns to investors associated with the presence of a professional board are positive and significant. Corporations with active and independent boards appear to have performed much better in the 1990s than those with passive boards.