[November 6, 2003]

"Despite their proud boasts of introducing competition into local telephone markets, regulators are once again taking aim at an exciting new competitive entrant."

...

"The problem for regulators is that local telephone rates today include a bloated package of regulation-induced charges. Such taxes (hidden and explicit) are generally doled out in subsidies for below-cost rural services and cheap residential connections for low-income households, and to fund such "public interest" goals as information technology for schools. The costs associated with padding users' bills—particularly in long-distance charges and business services—are ignored. The perverse outcomes embedded in this system are legion, exemplified by the poor urban-dweller who pays artificially high long-distance bills to underwrite subsidised local phone service to a CEO's Aspen ski chalet. This system constitutes what is universally known as "good politics."

Unregulated competitors wreak havoc on this jumble by injecting a dose of economic rationality. The entrants target customers paying prices fattened by regulation. Vonage's phone service, which lays atop a cable modem or DSL connection, offers home users unlimited local and domestic long-distance calling for about $35 a month. With a similar bill for broadband service, residential customers pay about a $75 monthly tab. That is far above what most households pay for phone services, but for users paying high long-distance charges— i.e. those funding the subsidies—it can be a bargain. Customers held hostage to regulation-by-taxation (as Richard Posner famously described the regulatory temptation to block competitive entry, directing the profits generated to fund popular projects) are making a break. State regulators, vigilant in protecting cross-subsidies, want to block this exodus by subjecting the new technologies to the old rules."

—Thomas W. Hazlett, senior Fellow, The Manhattan Institute
in an editorial in the Financial Times