Quality & Quantity 38: 291–318, 2004.
© 2004 Kluwer Academic Publishers. Printed in the Netherlands.
The Impact of Incentive Regulation on Service
Quality in Telecommunications in the United States
NOEL D. URI
Industry Analysis Division, Media Bureau, Federal Communications Commission, Washington, DC,
Abstract. Incentive regulation in the form of price caps was adopted for interstate access service
in 1991 as a way to provide local exchange carriers with an incentive to improve their productive
efﬁciency. An issue that has arisen with the adoption of price cap regulation is whether deterioration
in service quality for interstate access service has been an unintended consequence. The analysis
in this paper uses several different measures of service quality, including the average installation
interval, the percent of commitments met, total trouble reports, and the average repair interval for
both switched access service and special access service, to investigate empirically whether there
has been a decline in service quality between 1991 and 2000. The results are conclusive. Overall
service quality has fallen. To rectify the situation, a proposal is offered to adjust the price cap index
to penalize LECs who fail to provide an acceptable level of aggregate service quality.
Key words: incentive regulation, interstate access service, local exchange carriers, and service
A number of factors led away from rate-of-return (cost-based) regulation in the
telecommunications industry in the United States and toward a regulatory approach
that ostensibly provides incentives for increasing productive efﬁciency thereby al-
lowing ﬁrms to share in the social gains from efﬁciency with increased proﬁts. The
basic structure of incentive regulation as it has most commonly been adopted in
the telecommunications industry in the United States is in the form of price caps.
While the productive efﬁciency issue has been explored in a number of previous
studies (Uri, 2000, 2001a), one area that has received scant attention is the impact
of price caps on service quality, at least at the Federal level.
Before exploring this
issue, some background is needed.
The views expressed are those of the author and do not necessarily represent the policies of the
Federal Communications Commission or the views of other Federal Communications staff members.