The non-equivalence of accounting separation and structural separation as regulatory devices

Michael Hardt

Telecommunications Policy, vol. 19, issue 1, 69-72

Abstract: This note addresses the conjecture that accounting separation and structural separation may be viewed as equivalent tools in regulation. Results from a model incorporating informational asymmetries about the network operator's costs are presented as a counter argument. Incentives to misrepresent network operating costs under vertical integration with accounting separation in general differ from those under structural separation. Only if the regulator is able to ensure that the integrated firm's output quantities are based on the published costs and not on the true costs will accounting separation be effective. We argue that this assumption is unlikely to be satisfied. Benefits from structural break-ups exist and need to be compared to the costs.

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