Auctions of Last Resort in Telecom and Energy Regulatory Restructuring

Abstract

Regulatory and market structure for services in both the telecommunications and energy sectors has undergone a very significant transformation over the past several years. The starting point in both sectors was a vertically integrated monopoly provider of all services in each region. In both, under regulatory mandate, there has been divestiture of different forms, the advent of competition and in many, if not most, states, the same regulatory agencies have had jurisdiction. These regulatory agencies, as well as legislatures at both the State and Federal levels have stopped short of exposing end users to unregulated rates. The challenge facing regulators at both the State and Federal levels, and in both the telecommunications and energy sectors, has been to ensure consumers can continue to receive basic service needs at rates deemed affordable. This necessarily means sheltering consumers somewhat from market fluctuations during a deregulatory process under which incumbent regulated entities, incumbent local exchange carriers (ILECs), or local electric distribution companies (LDCs) are increasingly being put in a position of competition with unregulated entities. A last resort in deregulation has been auction to ensure competitive procurement of the basic services.

This paper has benefited enormously from two projects. The first was a collaborative research effort funded by the GTE Corporation, which also involved contributions of Paul Milgrom, Stanford University and Valter Sorana, University of Tilburg, Padmanabhan Srinagesh, Charles River Associates, and Dennis Weller of GTE. The second was funded by PSE&G and included contributions of Sam Dinkin of Alkera, Inc, Chantale LaCasse of NERA, Colin Loxley of PSE&G and Paul Milgrom.