TCS Daily

Competition Now?

By Duane D. Freese - May 15, 2002 12:00 AM

Consumers won a big victory in the Supreme Court this week when it upheld the Federal Communication Commission's authority to set wholesale rates for leasing of local phone network elements.

The decision means that phone customers might finally get the kind of vibrant competition for local phone service envisioned when Congress passed the Telecommunications Act of 1996.
I say might because, as could be expected, the Bell operating companies plan to continue their fight before regulators and Congress to scuttle the obligations they agreed to when they pushed for that reform in communications regulation.

This case, after all, began barely after the 1996 was sent to the Congressional Printing Office finished its printing of the legislation. The Bells agreed to open up their monopoly control of the last mile of phone line -- built over decades with subsidies from long distance customers -- to competition, in return for getting into what was then lucrative and competitive long distance services. And the only way to open the local loop fairly was through discounts to those companies. But, hey, they still wanted a monopoly rate of return.

Now, six years of foot-dragging by the Bells later, Bell competitors -- known as CLECs, for competitive local exchange carriers -- serve a mere 9% of the local phone market. Only in states such as New York, where Verizon had to submit to competition so Bell Atlantic, its predecessor, could merge with Nynex, were consumers given real choices. Tens of billions invested on the promise of the 1996 act has gone up in smoke. And the Bells, having lost in court, turn to the FCC and Congress with new promises that if only they are freed from the 1996 act they'll invest in high speed broadband networks.

"We hope the FCC will correct this incorrect pricing policy and eliminate its unnecessary requirements to provide certain network pieces in dockets now pending before it," BellSouth said in a statement, echoed by its three sister regional monopolies, Verizon, SBC and Qwest.

That circumstance is why Michael Balhoff, managing director for Legg Mason Wood Walker investement firm may well prove right in declaring, "It's a Pyrrhic victory. The competitors are allowed to live to fight another day, but this is not the only question mark there is."

The House has already passed legislation, the so-called Tauzin-Dingell bill, named after its co-sponsors Billy Tauzin, R-La., and John Dingell, D-Mich., that relieves the Bells of obligations to lease so-called advanced network elements. And Sen. John Breux, D-La., has proposed similar legislation in the Senate. They say it's to encourage the Bells to put money into high-speed broadband networks, even though the FCC already can and does provide lucrative rates to the Bells for truly high speed elements.

Tech Central Station Host James Glassman and economist William H. Lehr of Columbia Graduate School of Business have found that this legislation has added mightily to the uncertainty for investors, discouraging the very kind of broadband deployment it pretends to promote.

Aberdeen Group chief research officer Peter Kastner put the result quite bluntly when he told E-Commerce Times: "It looks like we're heading towards putting Humpty Dumpty back together again, but instead of one big AT&T, we'll end up with four or five regional companies that will end up going national."

Deregulatory favors for the Bells push that remonopolization process along. Rather than pursuing that strategy, Congress and legislators need to pursue regulatory policies that carry out the intentions of the 1996 Telecom Act and engender real competition -- not in court, before Congress and at regulatory commissions, but for consumers.

What is happening abroad illustrates the need to force open local loops.

America isn't alone in facing the problem of telecommunications competitiveness and broadband rollout. Incumbent monopoly telcos in Europe have stymied both things there, as well. Yet, there is one instructive difference.

The FCC here was smart enough not to succumb to the Bells' pressure in the mid 1990s to allow them to charge per minute rates on Internet calls. As a result, 54% of households here are Internet connected, versus about 33% there. A Eurostat survey found only 35% of those 15 and older surf the net, compared with 98% who watch TV and 46% who read newspapers five times a week.

It is in part because of that lack of connection that Europe has about a quarter the proportion of high-speed broadband connections as the United States.

"The big problem for broadband in Europe is that there are few Europeans who have Internet connectivity from home," Lars Godell, author of a report for Forrester Research on broadband deployment in Europe. "Most broadband users migrate from being narrowband to broadband; they don't go directly from being offline to getting broadband at home. This type of migration is very important, especially in the early days of broadband."

If the Bells had gotten the relief they wanted in the mid 1990s, the Internet revolution here would have slowed to a similar crawl.

What's needed to get the Bells moving on broadband isn't giving them deregulatory carrots. It's finally allowing the stick of competition to ring home in local service.

McKinsey Quarterly noted earlier this year what Europe needs to do to promote improved service, and it is quite apropos for the United States too after the high court's ruling this week:

"To make unbundling work, regulators must ensure that incumbents don't suffocate attackers between wholesale and retail price levels. Regulators must look beyond simple access fees to other costs imposed by incumbents, such as charges for space in equipment buildings, leased lines, and other necessities. Stronger penalties for operators that clearly obfuscate the process are also needed."

With the right sticks in place, the Bells then might really look to building up high-speed networks for which they could charge competitive rates, rather than simply leveraging their old copper plant into modestly improved digital subscriber line service.

They might even decide to set up a separate retail company for high-speed, long distance and other competitive services, leaving the old copper loop in the hands of a wholesale company that would lease it and improve it at the same rate to all comers.

Then consumers would get real competition at every level of service.

The Supreme Court has finally given the FCC the switch to turn that competition on. The question is whether Congress and the commission will promote that end, or will they turn back the clock and, as Kastner warns, establish uncompetitive regional monopolies run by the offspring of Ma Bell.

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