The Impact of State Incentive Regulation on the U.S. Telecommunications Industry

We examine the impact of state incentive regulation on network modernization, aggregate investment, revenue, cost, profit, and local service rates in the U.S. telecommunications industry between 1986 and 1999. We find evidence of greater network modernization under price cap regulation (PCR), earnings sharing regulation (ESR), and rate case moratoria (RCM) than under rate of return regulation (RORR). Costs are generally lower under RCM. Costs are also lower under ESR and PCR when local competition is sufficiently intense. Some local service rates for business customers are lower under PCR. Revenue, profit, aggregate investment, and residential local service rates do not vary systematically under incentive regulation relative to RORR.