We analyze performance measurement plans (PMPs) that have been implemented in the telecommunications industry to ensure that the quality of wholesale services and unbundled network elements (UNEs) are provided to competitive local exchange carriers (CLECs) in a nondiscriminatory manner by incumbent local exchange carriers (ILECs) and that CLECs are afforded a meaningful opportunity to compete in the provision of local exchange services. These plans were implemented as a means of promoting local exchange competition assuming that such competition would lead to improvements in consumer welfare. We show that existing PMPs may not be consistent with the development of an efficient local exchange market and that such plans, as currently designed: (i) result in taxes and subsidies that may distort economic decision making; (ii) provide little incentive for ILECs to continue to improve wholesale service quality; (iii) and have no defined relationship to changes in consumer welfare. We provide specific recommendations for measuring performance and structuring an appropriate remedy/reward structure that will move these plans toward ones that are based on sound economic principles.

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