Volume 71, Number 4

October 1996

Deregulatory Takings and Breach of the Regulatory Contract

J. Gregory Sidak, Daniel F. Spulber

Over the past century, as the regulatory state steadily expanded its reach, courts frequently addressed claims that regulatory actions amounted to an unconstitutional taking. Recently, however, legislation in the telecommunications and electric power industries have brought deregulatory concerns to the fore.

In this landmark Article, Mr. Sidak and Professor Spulber present the first detailed analysis of the interaction between the Takings Clause deregulation, network pricing, and contract law. In the typical case of regulated industries, firms and their investors agree to bear considerable “incumbent burdens” in exchange for a regulated rate of return. Sidak and Spulber first demonstrate that this arrangement represents a regulatory contract and find that recent deregulatory measures constitute breach. The authors then argue that whether or not a regulatory contract in fact exists, recent mandatory unbundling in the electric power industry and open-access regulation in the telecommunications field effectuate a taking without just compensation. Finally, relying on concepts such as investment-backed expectations and the efficient component-pricing rule, the authors not only demonstrate that damages would be equivalent under either contract or takings theory, but also warn that governments could face enormous liability for their deregulatory measures.