TCS Daily

Punish Monopolists,
Not Consumers

By Duane D. Freese - July 10, 2002 12:00 AM

"We have the right network - built for the explosive demand for high-speed data and Internet services - the right talent, and the right strategy at the right time."

So said a confident WorldCom CEO, Bernie Ebbers, on Sept. 15, 1998, after the Federal Communications Commission approved the $37 billion merger of his company with MCI, the agency itself saying that the merger fit the "pro-competitive, deregulatory" framework of the Telecommunications Act of 1996.

Today, Ebbers is only talking to the congregation at his church, where he was heard saying he did not "knowingly" commit fraud. Oops! Missed that $3.8 billion in expenses. It is now up to the Justice Department and the Securities and Exchange Commission to see that if he did, he ruminates on his wrongdoing in prison.

But what about WorldCom's network? Its people? What about a real strategy to put them to work again and achieve the "pro-competitive, deregulatory" goals of the Telecom act?

Some analysts are essentially suggesting that WorldCom provides a reason to end the foolishness of competition, and put the old Bell phone monopoly back together again.

Peter Huber of the Manhattan Institute, who has represented Bell companies in Washington, for example, seems to promote that cause. He argued in a July 1 column in the Wall Street Journal that WorldCom was "created in Washington."

To make the case, Huber goes back 20 years, to the break up of AT&T into a long distance company and the then seven RBOCs, or Baby Bells. He blames the FCC for keeping AT&T's long distance rates too high, allowing newcomers, MCI and Sprint principally, to undersell it and expand their networks.

But why was this so awful? After all, it ultimately resulted in lower long distance prices for consumers, from 52 cents a minute in 1984 to around 7 cents a minute today. What made it particularly terrible, apparently, was that it encouraged lawmakers to want more competition, leading to what Huber sees as the dreadful Telecommunications Act of 1996, which "handed the FCC sweeping new authority to force local carriers to lease parts of their networks to local competitors." Let's forget that the act also offered the Bells something they wanted, the right to get into long distance service once they satisfied requirements for opening their local networks to competition.

Echoing an SBC news release after WorldCom's announcement of accounting irregularities, Huber argued that the FCC, by not basing the price for leasing so-called network elements on "historical cost" but the "cost to build the network going forward" -- which one might refer to as replacement cost -- it encouraged too many competitors to enter the market. And that set the stage for the current boom and bust.

Furthermore, Huber even complained that the competitive upstarts "even found ways to get the incumbent carriers to pay them, under an obscure but lucrative set of 'reciprocal compensation' tariffs."

In short, Huber thinks that it is favors done for competitors that are to blame for the WorldCom mess. But that view is fanciful, at best.

On the niggling point of reciprocal compensation, for example, Huber neglects to mention that the "incumbent carriers" get such compensation, too. In fact, they negotiated what they assumed would be sweetheart deals for themselves to get such compensation because they had the lion's share of local lines - more than 90 percent. Thus they counted on terminating most local calls. Except that the upstart companies one-upped them, by signing up Internet Service Providers as customers. And when the Internet boomed, that led to a lot of terminated calls to ISPs that the Bells had to pay, until they got regulators to renegotiate their contracts for them.

Huber also forgets the fact that when the Bells lobbied for the Telecom Act in 1996 that they wanted something -- the right to get into long distance service. But to let a regulated monopoly get into a competitive arena without adequate allowance for local competition would have allowed them to leverage their monopolies to monopolize the competitive sector. So they agreed to open their local networks to competition. They only later objected to some of the terms.

Meanwhile, Huber totally neglects Bellfare, the welfare government has given the Bells, as Lee A. Selwyn describes it in an April report Subsidizing the Bell Monopolies.

The report was prepared at the request of AT&T, but it provides an accounting of 10 "corporate welfare programs," granted the Bells by government. The annual Bell subsidy? $28.86 billion. Items include:
  • Switched access rates in excess of economic costs, $9.92 billion;
  • free nationwide cellular, licenses, $4.68 billion;
  • dedicated access rates in excess of economic costs, $3.87 billion;
  • monopoly rents derived from Yellow Pages directory business, $2.81 billion;
  • ability to terminate ISP-bound calls at below-cost rates, $1.78 billion;
  • ability to offer interLATA vertical features without compensating interexchange carriers (long distance companies), $1.56 billion;
  • restrictions on competition for small business customers, $1.23 billion;
  • ability to preferentially market own long distance services, $1.11 billion;
  • unregulated provision of billing and collection services, $200 million.

Indeed, the fault of the Telecommunications Act of 1996 wasn't in giving too much to competitive local exchange carriers (C-LECs) who arose to compete with the Bells - but in not leveling the playing field enough.

A less fanciful account of the recent history of telecom can be found in the book by Annabel Z. Dodd of Northeastern University, The Essential Guide To Telecommunications:

"[T]he Telecommunications Act of 1996 did not mandate that the local telephone companies form separate companies to supply connections to the very companies formed to compete with them. This has been a major factor inhibiting competition for local service.

"In the years following passage of the Act, the Regional Bell Operating Companies challenged its legality in court. The courts denied the validity of these challenges. However, economic conditions and incumbents' delays in processing competitors' requests for services proved more effective in the battle for dominance in local services. Competitors have made the largest inroads by selling service to business customers in large cities. For the most part, the only viable alternative for residential local telephone service is from cable TV providers."

It is this history of recent years that reflects the real problem for consumers: Too little competition, not too much. And finally, with the court cases settled, states are beginning to wake up to the fact that their consumers are being overcharged and their state economies put at risk by the monopoly stranglehold that the Bells have enjoyed on communication. And they are now starting to order the Bells to finally open their local loops to competition.

In Michigan, Ohio, New York, Illinois and California, public service commissions have forced a reduction in the rates Bells charge competitors for leasing portions of their systems, and the result is finally getting some of the legitimate competition envisioned by the 1996 act.

Huber and some others suggest now that the answer, in the wake of WorldCom's debacle, is to simply "let market forces control the evolution of competition" - in other words leave the Bells alone. But this would lay waste to all of the effort and investment of the last few years.

Punish the wrongdoers at WorldCom, but don't throw consumers back under the control of monopolists. That's the wrong strategy no matter what the time.



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