TCS Daily

Enforce The Telecom Act Or Face Telecommunications Remonopolization

By James K. Glassman - February 12, 2001 12:00 AM

"Who do they think is going to compete?" AT&T CEO C. Michael Armstrong asks of regulators. In an interview with TechCentralStation Host James K. Glassman, Armstrong says that the telecommunications system will end up remonopolized if state and federal regulators don't pry open the four remaining Bell phone monopolies' local loops to competitors. "The best way to do that," he says, "is for the state public utilities commissions and the FCC to enable structural separation so that we get the same treatment, terms and conditions, services and prices that the Bells get from the network."

James K. Glassman: You talked in your speech today at the National Press Club (in Washington, D.C.) about a depressive effect in the economy that the failure of regulators to enforce the Telecommunications Act of 1996 has produced. Is that right?

C. Michael Armstrong: I'm a great believer that the market system is a wonderful mechanism for economic growth. And when there is an absence of the market system at work and there is a monopoly that is entrenched, I don't understand how either the markets are best served or the economy is best served. It is as simple as that.

Glassman: How much evidence is there now of the effects of the non-enforcement or the lax enforcement of the Telecom Act? For example, is the fact that the competitive local exchange carriers to the remaining four Bell local phone monopolies - the so-called C-LECs -- are going bankrupt and running out of cash one piece of evidence?

Armstrong: It is a very striking piece of evidence. I mean, you actually have to ask yourself, why are all these very good companies with entrepreneurial people going into such financial straits? And you just look at the way the regional Bell operating companies (RBOCs) are interfacing with them so they are just not able to make it. Sprint, a long-distance competitor of ours, has walked away from its local business in four or five states and said, "They've got this thing locked up."

Glassman: Could you explain that further.

Armstrong: As I mentioned in my speech this afternoon, Sprint has decided that they are going to withdraw from California, New Jersey, Georgia, New York and Hawaii. And the reason they are withdrawing, in their words, is that the Bells have those businesses locked up and that there is no way to compete without a viable resale equation, both economic and operational. You can't stay in business if there is no margin between the wholesale rate at which you buy something and the rate at which you sell it. So, it is not only AT&T. The C-LECs are having difficulties, and many are going bankrupt. And the long-distance companies that would compete for the local business, both to grow their business and to defend their long-distance business, don't have a means in which to resell that local loop.

Glassman: What will this mean for telecommunications in the future if this continues?

Armstrong: We're just simply going to be turning the communications industry over to the incumbent local exchange carriers, which will simply re-monopolize the industry. The monopoly can't be beaten or even competed with if there is nothing economically or operationally viable potential competitors can do. We have seen that MCI has also retrenched in a number of states. We have seen my company, AT&T, saying that we may have to withdraw local service from Texas and New York. I don't know how much evidence somebody needs. Who do they think is going to compete? Who is going to provide the competition to open the local exchange market when there is only one physical way to do it, and that is with the twisted copper pair that is ubiquitous? And if that wire is not deemed to be a vehicle to open markets as it was for the long-distance industry, then there will not be any competition. The market will be re-monopolized, and the evidence is striking.

Glassman: Now, the incentive for the Bells under the Telecom Act to open up their local loops to competition was that they would be allowed into long distance once they did so. One of the latest tactics of the Bells is not simply to not comply with the Telecom Act, but, in fact, to roll it back or gut it. Legislation like H.R. 2420, sponsored by Reps. Billy Tauzin, R-La., the chairman of the House Commerce Committee, and John Dingell, D-Mich., the committee's ranking Democrat, for example, would allow them into what I believe is now a very lucrative part of long distance - data. Wouldn't doing so further undermine hope for competition?

Armstrong: Absolutely. They will be given the crème de la crème of the communications market, the high-speed broadband data. And with state of the art broadband technology, such as packets, the incentive for them to do the right things in order to open up the consumer local exchange market are going to be pretty much taken away. Unfortunately, Jim, packets do not distinguish in the bits they deliver between voice and data. So, if the Bells are permitted to get into long-distance data, they will, by definition, get into long-distance voice, video and data, and will simply bypass the telecom act. So, I think that the danger of those kinds of steps is that they probably further feed the recalcitrance of the Bells to open the markets to competition.

Glassman: Does that not give the local Bells the best of both worlds? You're not going to be able to compete with them at the local level, and they're going to be able to compete with you for long distance?

Armstrong: Absolutely. And after the Bells re-monopolization, they'll try to convince people that this really is good -- that they can re-monopolize at a fair market rate and that they will give better service.

Glassman: Now, you offered two remedies to this situation, one is enforcement of more reasonable wholesale prices for parts of their local loops by the Bells to competitors, so the competitors can have a margin to make a profit. But wouldn't that require just an enormous regulatory apparatus?

Armstrong: The Telecom Act of 1996 requires it. It is well known what kind of discount level one needs in order to be viable. I mean, look at Illinois and Michigan, they kind of figured it out. One has a discount in the mid-40s and another above 50 percent. It's consistent with what I have to discount my long-distance backbone in order to appeal to the resale market. I have to discount 55 to 60 percent in order for it to be both competitive for them and viable for them to afford to be in the business. The local exchange has to step up and do the same thing. I believe that the best way to do that is for the state public utilities commissions and the FCC to enable structural separation so that we get the same treatment, terms and conditions, services and prices that the Bells get from the network.

Glassman: That was what I was going to say was the second solution, but actually it's part of the first. In a true structural separation, you would end up with something close to a market discount, is that right?

Armstrong: We would end up at the same price from the network that the Bell retail operation has in order to compete in the market. If we have the same service and intervals and pricing from the network that we are reselling, then we compete on our merits. We then compete on our cost efficiency, on our brand, on our customer service. And that's called the market system.

Glassman: Isn't the determination on structural separation made at the state level, not the FCC?

Armstrong: Yes, at the public utility commission is generally at the state level. That is why I cited the Pennsylvania example in my speech, where they are -- at least at this stage -- requiring a structural separation of wholesale and retail. Not that the Bells have to split the companies into distinct and separate companies, but that they have to structurally separate so that it is publicly visible, so the operational conduct and the economic conduct as they deal with market forces enables non-Bells use of the network to be equivalent to Bell use of the network. That will foster consumer and business competition at that network.

Glassman: I am familiar with the Pennsylvania situation because I gave a talk to the Harrisburg Press Club a year ago and am giving another in two weeks on this subject. As good an idea as it is, it has been very difficult to get it implemented. Now, if this is what happens in one state, how do you know when the PUCs in 50 states will act? If I could offer one suggestion, is this an area where the new chairman of the FCC could say, "Look, this is the way that we're going to make the telecom act to work"?

Armstrong: I would love him to say that. And I would like the PUCs to kind of take notice that no one is showing up to compete where it otherwise would be economically viable to do so. If their purpose is to enable competition for the citizens of their state, and no competition is showing up, it seems to me that they're going to have to judge why not. Because they are going to be accountable in opening up the long-distance market in their state. And for the monopoly to take it over is only going to result to poorer service and higher prices in the long run.

Glassman: Actually, I was going to ask you that. The effect for consumers is what? Less choice, higher prices, lower service?

Armstrong: That's exactly what history has been and exactly what the future would spell.

Glassman: Yesterday, Cisco Systems announced some very disappointing earnings. Is what is happening in the high-tech economy being affected by the same kind of regulatory problems that you discussed today?

Armstrong: No, I don't think so. I think that the situation I discussed today is unique to the local telephone exchange marketplace. I think the things that are happening in the equipment industry are more a product of the rate of growth and the need for deployment of advanced communications equipment that is being affected by the economy, by capacity, by competition.

Glassman: But do you think that rate of growth would be faster if you were able to roll out broadband more quickly; if, for example, you didn't face regulatory caps on the number of homes your broadband cable network could serve?

Armstrong: If we were able to have more than 18 percent of homes passed with our broadband footprint so that we can bring competitive telephone service as well as high-speed data and digital video, the answer is, yes, Jim. We would be buying more equipment; we would be deploying in more communities. We would obviously be spending more money and growing faster.

Glassman: That's a very good point to end. Thank you, Michael Armstrong. 

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