Does Practice Follow Principle? Applying Real Options Principles to Proxy Costs in US Telecommunications
REAL OPTIONS: THE NEW INVESTMENT THEORY AND ITS IMPLICATIONS FOR TELECOMMUNICATIONS ECONOMICS, pp. 49-76, James Alleman, and Eli M. Noam, eds., Kluwer Academic Publishers, 1999
28 Pages Posted: 8 Feb 2010
Date Written: 1999
In this paper, I analyze whether current US practices in estimating incremental costs for telecommunications companies provide efficient investment incentives to regulated incumbent local exchange companies (ILECs). The implementation of the Telecommunications Act of 1996 (Act) has raised this issue.1 In implementing the Act, the Federal Communications Commission (FCC) and many state Public Utility Commissions (PUCs) are using incremental cost studies, with some mark-up for shared costs, for establishing prices for interconnection, reciprocal compensation, unbundled network elements (UNEs), 2 and universal service. 3 Regulators use these incremental cost estimates, which come from proxy cost models, 4 to set ceilings on these prices. This is a significant change in regulatory practices. Before the Act, regulators used incremental cost studies to set price floors for competitive or potentially competitive services.
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