telephony. Regulation was clearly required, and Professor Littlechild was commissioned to propose a suitable form of regulation. Littlechild designed price-cap regulation as the natural solution to moving from an overwhelmingly concentrated market to what was anticipated to become a competitive telecommunications market in due course (Littlechild, 1983; Bartle, 2003). Price-cap regulation has the attractive property of simulating the competitive market even in the presence of market power.

In the United States, the Modified Final Judgement of the AT&T case in 1984 suggested that at least long-distance telephony might evolve to become a competitive industry. Long-distance telephony was no longer a natural monopoly with the advent of microwave transmission, the huge increase in capacity provided by fibre optic cables and the rapid fall in the cost of micro-electronics and switching capacity. This raised the question why telecoms should be subject to a sector-specific regulator, rather than being subject to normal competition law. Instead of imposing a price-cap, competition authorities could fine companies holding dominant positions in any market if they abused their market power by charging excessively high prices. The threat of penalties would, on this theory, deter utilities from exercising their market power, while minimising intrusive and costly regulation.

The case for minimising regulation is powerful. The US evidence suggests that regulation evolves in response to pressures from special interest groups. On this view regulators are invariably captured, and use their regulatory powers to redistribute rents rather than to drive down costs and benefit consumers. The theory of asymmetric information suggests that just as redistributive taxation is distortionary and therefore costly, so attempts to redistribute cost savings from utilities to consumers will produce inefficiencies and deadweight loss. Regulatory inefficiency does not end with overpricing or inefficient supply. Hausman (1997) argues that one of the most costly consequences of traditional cost-of-service regulation is the delay hindering the introduction of new services, caused by concern that these new services might be cross-subsidised from the captive customer base. Hausman gives two examples - voice messaging and cellar phones. AT&T originally wished to offer voice messaging in the late 1970s, which the FCC delayed until 1988, when it was immediately introduced. The estimated consumer surplus generated is estimated at US$1.27 billion per year by 1994, so the ten-year regulatory delay cost billions of dollars. Hausman further argues that a possible ten-year regulatory delay in introducing mobile phones might have cost consumers cumulatively as much as $100 billion, large compared with the 1995 US global telecoms revenues of $180 billion/year.

Avoiding unnecessary regulation is therefore to be desired. New Zealand was the first country to follow this logic when it came to liberalise its telecommunications market on 1 April 1989 (Bollard and Pickford, 1996). The state telephone monopoly that had been corporatised as Telecom in 1987, was sold in 1990 to a joint venture between local investors and the two American companies, Bell Atlantic and Ameritech, without establishing an independent regulatory body. The company was required to disclose financial and pricing information, and the “Kiwi share” obligation required Telecom to provide free local calls for residential customers and to not increase the (uniform country-wide) rental charge faster than