3.3.4 Cost-based regulation

In the monopoly period before the start of the telecom reform process in the 1980s, rate of return regulation was used in, for example, the US to regulate end user prices of the national operator. The aim was to limit excessive profitability of the monopoly company, but rate of return regulation suffered from the downside that it did not create any incentive to increase efficiency, as there was a fixed rate of return added to whatever costs the operator would have. If an operator was inefficient and therefore had high costs, it would still be able to claim the same rate of return and, consequently, a higher profit than if it increased its efficiency.