Washington, DC, June 19, 2002 - In a study released today, the New Millennium Research Council (NMRC) (www.newmillenniumresearch.org) investigates how price cap regulation (PCR) compares with the traditional model of rate of return regulation (RRR) in today's competitive telecommunications environment. The study, entitled Price Regulation: A Model for Consumer Benefits, demonstrates the positive impact of price cap regulation on consumers by encouraging reinvestment in the telecommunications sector as well as lower and overall more stable prices for consumers.

NMRC publishes this report at an important crossroads in the telecommunications regulatory environment. As the name implies, price cap regulation imposes limits on telecommunications rates, as opposed to restricting the profits of telecommunications carriers under the traditional rate of return regulation framework. Currently, most states operate under a price cap regulatory structure; however, in the coming year, approximately one-third of all states will be reviewing their current plans and evaluating the impact on consumers and the overall market environment.

The report includes the insight of four noted economists on the benefits of price cap regulation. They are:

• Dr. Johannes Bauer, Associate Director of the James H. and Mary B. Quello Center for Telecommunications Management and Law at Michigan State University;
• Stephen Pociask, President of TeleNomic Research;
• Dr. Trevor Roycroft, Associate Professor and Interim Director of the Warren J. McClure School of Communication Systems Management at Ohio University; and
• G. Mitchell Wilk, Managing Director at LECG, LLC.

The overall findings are clear. Consumers are the principle beneficiaries of the efficiency fostered by price cap regulation, as companies reinvest profits and create additional services to differentiate and compete in the market. Price caps mean:

1. Lower and more stable prices for basic services;
2. Incentives for companies to invest in new infrastructure;
3. Overall growth in the telecommunications market that is essential to job creation and retention; and
4. A positive impact on the creation and introduction of new products and services.

Providing an open dialogue on telecommunications regulatory issues is part of NMRC's mission. In this study, NMRC's hopes to educate the public on the benefits of alternative regulatory frameworks, such as price cap regulation, and provide individuals with information on how they can participate in the regulatory process.

Background on Price Cap Regulation
Since 1991, price cap regulation has been used by regulators to set limits on rates based directly on an indexing mechanism, without restricting or relying on measures of profitability to determine prices. This is done to simulate competition in an imperfect market. Under the price cap framework, companies can increase their earnings by improving efficiency. In addition, mechanisms can be created to ensure that these additional profits are reinvested and used to improve the quality and range of services for customers. In the past, many states imposed profit-sharing provisions in their price cap plans. Those provisions were intended to ensure consumers benefited from rate decreases in conjunction with the companies' increasing profits and to ensure that companies with unreasonably low earnings levels could receive relief in the form of rate increases. A system of price caps without sharing can be a more effective regulatory policy because sharing acts as a disincentive on investment and has the potential to lead to rate increases, if company earnings are low. As regulators gained experience over time in calibrating their price cap plans, nearly all have abandoned sharing.

Under the old rate of return framework, consumers were subject to price increases if a company did not meet earning projections, or worse yet, if the company was simply inefficient. However under price cap regulation, consumers can easily forecast their costs for service each year. This is especially beneficial for low-income consumers and those on fixed incomes. In addition, because price cap regulation sets prices without regard for costs, firms are prevented from cross subsidization and charging some consumers more to offset costs in other areas. This stability and predictability encourages planned investment in new infrastructure, technologies and improved customer services.

The study highlights success stories of states that have implemented price cap regulation and realized the benefits in overall improvements in the telecom sector. For example, in Indiana upon switching to a price cap model in 1994, increased rollout of new telecommunications service occurred including high-speed data services, caller ID and 3-way calling. In addition, the study highlights various states that are currently evaluating price cap regulation to determine if they will continue to employ the regulatory framework.

About NMRC
The New Millennium Research Council (NMRC) is an independent research arm of Issue Dynamics, a Washington DC-based consulting firm specializing in public affairs, issues advocacy, constituent relations and online public affairs solutions. NMRC’s mission is to foster policy research focused on developing workable, real-world solutions to the issues facing policy makers, primarily in the fields of telecommunications and technology. More information on NMRC and a copy of the report can be found at www.newmillenniumresearch.org.