The year 2006 saw significant changes in the retail rate regulation of the local exchange services provided by carriers (LECs) in the United States. Between October 2005 and December 2006, the period covered in this report, nine states adopted new state laws affecting the regulatory regimes of their local carriers; seventeen states reviewed or adopted new rate plans for one or more of their incumbents and eighteen states deregulated the rates of certain local exchange services, particularly bundled services and those provided in competitive urban areas.

The majority of states (33) apply some form of price cap regime to regulate one or more of their incumbent local exchange carriers (ILECs), especially their RBOCs. This number, however, has been decreasing since NRRI began this report in 2002, as more states move towards pricing flexibility and rate deregulation in response to regulatory findings of increased competition in their local telephone markets. Traditional rate-of-return regulation (ROR) is still used in 36 states, mostly to regulate their smallest, rural ILECs; of these, only five states still use this traditional form of regulation on all their incumbents. Eight states apply a mix of regimes to regulate their carriers, combining price cap regulation with ROR, rate flexibility or deregulation, especially for their smaller incumbents. Meanwhile, larger incumbents have obtained, either through legislation or regulatory decisions, greater pricing flexibility and rate deregulation for an increased number of services; in some cases, the adoption of new state laws or new regulatory plans resulted in the elimination of all regulation of retail service rates, except for rates applicable to single-line basic exchange service. Legislatures or state commissions have granted complete pricing flexibility or rate deregulation to the largest incumbents in five states and in seven others, they have done so for all their ILECs. While last year only three states in the Qwest region had approved rate deregulation of all their ILECs, this year the trend reached Iowa, and entered the AT&T (TX) and Verizon’s (RI) regions. The rates for stand-alone basic exchange services, which had remained regulated in most states until recently, are now beginning to be flexibly regulated in some states and scheduled to be deregulated in others. Based on statutes, rules, and AFOR plans now in place in several states, rate deregulation of all retail local exchange services provided by the largest incumbents or by all the ILECs in a state will be in effect in at least ten percent of the states by 2010. Competitive local exchange carriers (CLECs) are also obtaining greater pricing flexibility in their markets. This year the number of states no longer reviewing CLEC rates surpassed that of those applying flexible regulation on their CLECs, with 25 and 21 states respectively. The remaining five states (Florida, Michigan, Mississippi, New Jersey, and Virginia) apply some form of rate regulation to specific CLECs’ services. This report includes six tables that provide different levels of detail about the regulatory regimes of local exchange carriers in the United States, both incumbent and competitive. For a summary, refer to Table 6 at the end of the report or to the different Figures.