Market power and the deregulation of special access service by the Federal Communications Commission

In 1999, the Federal Communications Commission adopted an order granting complete deregulation of the rates for special access service for specific metropolitan statistical areas based on an objective showing that there was potential competition in that market. This was done in an environment where the local exchange carriers (LECs) subject to price caps were earning a rate of return in excess of 22% with the rate of return on an upward trend. By 2002, the average rate of return across all price cap LECs topped 35%. The questions investigated in this article are whether the price cap LECs have market power in supplying special access service and whether they have taken advantage of this. The data clearly show that this is the case. Given the prevailing situation, there is a clear need to revisit the pricing flexibility order. First, the product market for special access service needs to be more carefully examined and, second, the metrics used to define the potential for competition need to be revamped.