The primary problem of a regulatory system that is based on costs is the creation of perverse incentives a firm can increase its costs and pass them on to consumers without diminishing its profit. To add insult to injury, a firm can earn even larger returns by simply spending more money. Recognizing this problem, more and more state regulators across the country have been moving to alternative methods of regulation in which prices rather than profits are regulated, giving providers an incentive to increase efficiency and to lower costs. Should a firm choose price cap regulation, it is also required to contribute to a state universal service fund and to invest in rural telecommunications infrastructure. Competition vs. Regulation.
Regulated markets are a poor substitute for competition.
Unlike a regulatory system, which is dependent upon the information and knowledge of five regulators in Washington, D.C., or a few in Salem, a competitive market harnesses the intelligence, expertise, and energy of every consumer and producer in the marketplace. Price signals generated by market transactions ensure that resources are allocated efficiently. The results are lower prices, improved quality, and an increased rate of innovation. This is why, when competition exists in any telecommunications market, policymakers should allow markets and consumers rather than regulators to determine prices and services. SB-142, in fact, would move Oregon in this direction by creating the opportunity for full price flexibility in the emerging markets of data transport.