Forces Behind Adoption of U.S. Telecommunications Act’s Section 271 by States

Causes and consequences of policy reform in utility industries continue to draw debate in US state legislatures. State commissions approve various deregulatory mechanisms in different industries at different times. In the telecommunications market state commissions adopted retail restructuring via Section 271 of the Telecommunications Act at different points in time. This study extends empirical evidence on factors behind restructuring in the telecommunications market, and in utility industries in general, by evaluating several economic and political hypotheses. Stylized capture model is used to illustrate state regulators’ problem, formulate predictions about regulators’ net benefits from restructuring, and identify factors conducive to restructuring. Empirical hazard model tests our predictions regarding factors responsible for the timing of restructuring decisions. Semiannual panel data on all continental U.S. states for 1996-2006 are used. Among state-level economic factors, development of the telecommunications network, economic prosperity in the state, price cross-subsidization from small-commercial to residential consumer classes, and populist leaning of state fiscal policy tend to favor restructuring. These patterns may imply preference for restructuring in regions with a sufficient potential for competition, and high expected benefit from restructuring. Demonstration effects from policy reforms in other utility industries contribute. Most interestingly, political processes are also found to affect the pattern of restructuring significantly. Reelections of state commissioners and involvement of public in them tend to favor restructuring. This implies that either commissions exert insufficient effort at promoting social welfare in non-election years, or that their policy objectives change in election years