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Professors Baumol and Merrill reply to Deregulatory Takings and Breach of the Regulatory Contract, published last year in this Review, which argued that the price incumbents may charge potential competitors for bottleneck facilities under the Telecommunications Act of 1996 should be based not on forward-looking costs but on historical costs. Professors Baumol and Merrill contend that pricing with reference to historical costs would depart from the principles called for by economic analysis for efficient pricing, and they further argue that neither the Takings Clause nor the regulatory contract precludes the use of forward-looking costs in setting prices. If a taking or regulatory breach does occur, they suggest that the proper remedy is not to interfere with the pricing decisions readied by regulators but to make the appropriate compensation, if any, after those decisions have been put into effect. Support for these legal observations is reinforced with the economic contentions that the competition introduced by the Act will have minimal effect upon incumbents which will generally receive a very valuable quid pro quo for any damage to their legitimate interests. Finally, they argue that compensating any firm for the loss of monopolistic prices threatens to undermine the most basic purpose of the Act, which is to bring the benefits of competition and competitive pricing to all electronic communications markets.

This Article concludes a series by these authors and Professors J. Gregory Sidak and Daniel F. Spulber, published last year in this journal. Here, Professors Baumol and Merrill address the issues surrounding the pricing of local phone services to long distance rivals, clarifying their points of agreement and disagreement with Sidak and Spulber. In their previous articles, Sidak and Spulber argued that the movement toward competition in local telephone service should be accompanied by substantial compensation to existing local telephone carriers, a view that Baumol and Merrill do not share. Rather, they note three points of disagreement between Sidak and Spulber and themselves. First, they maintain that Sidak and Spulber use an incorrect formula to determine whether the transition from regulated monopoly to competition requires compensation. Second, they argue that neither the Compensation Clause nor the regulatory contract requires compensation to take place ex ante. Finally, they do not believe that the magnitude of fixed and common costs will be significant in local telephony.