Telecommunications Deregulation in Texas: An Analysis of the 2005 Competition Act

December 8, 2005

Download Background Paper No. 50

Background Paper No. 50

Executive Summary With the recent passage of an Act Relating to Furthering Competition in the Communications Industry, the Texas legislature has made great strides in telecommunications deregulation.

For many years, regulations have limited competition and innovation in Texas telecommunications markets. The 2005 Competition Act will promote competition by eliminating entry barriers in two markets and deregulating pricing in a third market. Taken together, the three major reform measures of the 2005 Competition Act will hasten the movement toward an innovative, efficient telecommunications marketplace in which multiple service providers compete to offer consumers a package of voice, broadband Internet access, and video programming services. This paper describes in detail the three major reform measures of the 2005 Competition Act, their synergistic relationship, and the ways in which they will enhance the Texas telecommunications marketplace.

The first major reform measure, Chapter 43, eliminates entry barriers in the broadband Internet access market by allowing, for the first time, incumbent electric utilities to offer broadband Internet access over their network facilities. This emerging technology shows great potential for growth: since the requisite network infrastructure is already built, the investment that utilities will be required to make to convert the network grid for Internet traffic is reasonable, and consumers will be required to use only a simple modem device to connect to the service. This new technology promises to intensify competition in the broadband Internet access market.

The second reform measure, Chapter 65, deregulates pricing in certain local-exchange telephone markets. Local-exchange service providers will now be free to set rates for residential telephone service according to market conditions—not according to regulatory mandates.

The third provision, Chapter 66, minimizes service providers’ entry costs in the video programming market. It eliminates the requirement that service providers must negotiate and obtain a franchise in each local area they wish to serve. This important change essentially eliminates a major entry barrier that exists in many video programming markets. Chapter 66 also eliminates build-out requirements, thereby encouraging entry into the video programming market and giving entrants an opportunity to start on a small scale in a large market.

This paper also examines the magnitude of the digital divide and discusses the potential effect of the 2005 Competition Act on that divide. Although a digital divide still exists with regard to income, population density, and education, it has narrowed considerably in recent years, and high-speed Internet services are now available in almost every zip code.

To the extent that the digital divide still exists, it appears to be a demand-side rather than a supplyside problem, and regulatory policies aimed at eliminating it via supply-side measures are not likely to be effective. The competitive provisions of the 2005 Competition Act, however, should lead to lower Internet service prices, facilitating access for low-income households.

While the 2005 Competition Act has been in effect for only two months, economic theory, combined with similar deregulation experiences in other markets, suggests that it will increase competition in local video programming markets throughout Texas. This increased competition should allow new technologies to emerge, offering consumers lower prices, increased quality and quantity of telecommunication services, and expanded product choices. The 2005 Competition Act also provides a model for policymakers in other states who want to transform their regulated telecommunications markets into competitive, innovative, thriving marketplaces that will better meet the economic challenges of the 21st century.


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