TCS Daily

Preemptory Strike

By Duane D. Freese - August 9, 2002 12:00 AM

The regional Bell telephone monopolies smell the opportunity in current scandals to kill competition, and they are quickly trying to do so.

Citing the bankruptcies of WorldCom, Global Crossing and Qwest, they have began pressing the Federal Communications Commission for the right to charge long distance and other telecommunications competitors upfront for connecting to their local loop.

"We have an obligation to protect our own customers, shareowners and workers from the fraudulent practices or poor business decisions of other companies and should be allowed to do so," SBC President William Daley intoned just as Congress was leaving town.

Congress and regulators have rightly focused their indignation on the fraudulent and deceptive accounting practices of some key telecom providers.

As FCC chairman Michael Powell told a Senate committee investigating the industry's problems just before Congress adjourned, "The degree of deception and malfeasance that has been uncovered in recent weeks is deplorable. There is no hope for any sector of the economy if corporate leadership and government do not root out and stomp out such deception and breach of public trust."

But stomping on deception and breach of trust ought not include giving a club to the Bells to kill competition, especially when they are among the major reasons for the current problems in telecommunications and among the greatest malefactors.

While Powell made much of the Telecommunications Act of 1996 inducing an "Internet Gold Rush" that created duplicative supply of high-speed fiber networks, the big flaw in many of the business models of those entrepreneurs was counting on the FCC, Congress, the courts and state regulators to fully enforce the act's competitiveness provisions.

Long distance companies and local competitors - competitive local exchange carriers (CLECs) - to the incumbent Bell monopolists were promised fair access to the Bells' $330 billion local networks. And they deserved it. The Bells have a right to get paid what they are owed, but the reality is that their networks have been paid for over and over again with government-mandated access charges. And the Bells promised competitors access to their systems in return for getting into long distance.

Instead, the Bells stiffed their competitors, using every means legal and otherwise that they could to stymie competitors' fair access, leading to regulators slapping them with nearly $2 billion in fines.

But as Powell touched on briefly at the Senate hearing, those fines were paltry compared to the Bells being able to keep control of 90-plus percent of their local lines.

"I respectfully urge you to pass legislation that would provide the commission with increased enforcement authority to attack illegal activities," he said, including raising current fines from $120,000 to $1 million for single violations and from $1.2 million to $10 million for continuing violations.

At the same time he would toughen up on the Bells for denying access, though, Powell also said there was a need for state regulators to provide the local carriers greater rate flexibility so as to encourage deployment of broadband, which Powell sees as the savior of the telecommunications sector.

"Local firms, many of whom are being tasked with the chore of upgrading networks to provide one of the platforms to deliver broadband services, have little pricing flexibility for retail services," Powell said, adding "we must consider rate rebalancing at the state level to provide carriers with greater pricing flexibility."

Pricing flexibility isn't a bad thing. Phone and cable companies should charge what the traffic will bear - as long as there is sufficient competition to ensure that consumers can go elsewhere.

That hasn't been the case with local telephone retail service, which is one reason "rate flexibility" granted the Bells by states in the past hasn't produced the broadband roll out they hoped it would.

Pennsylvania in the early 1990s went the flexibility route, granting Verizon predecessor BellAtlantic more freedom to set rates in return for its rolling out high-speed broadband. But instead of the truly high-speed 54 megabytes per second broadband lawmakers thought they were getting, Verizon, instead is offering to deliver nothing more than asynchronous digital subscriber line service (DSL). While five to 20 times faster than current plain old 58 kilobytes per second, it won't be fast enough to provide video on demand or other real time high-speed services. And what is true in Pennsylvania is true elsewhere as well.

The key to expanding broadband is opening up the local loop - the last mile.

Public utility commissions in such states as Ohio, Illinois, New York, Michigan and California have awakened to that need. They've begun reducing the wholesale rates the Bells' charge competitors for leasing elements of the local network for providing local retail phone services. And it's working. As a USA Today editorial noted, competition has sliced SBC's share of the Michigan market below 90%, leading the giant Bell to cut the price of its unlimited local calling service last month by a third. And on Aug. 6, AT&T announced that it would begin providing local phone service in California in response to cuts in wholesale rates there.

Any "rate rebalancing" that gives the Bells new flexibility at the retail level would need to make sure the Bells don't use it to squeeze rivals and smother competition for both old and new telephone services.

As Powell himself acknowledged in proposing rate rebalancing for new services: "We must also provide incentives for more effective and sustainable competitive entry through out network access policies by providing incentives to new entrants and incumbents to produce an efficient wholesale market and by providing a regulatory framework that promotes competition, investment ad innovation to deploy advanced networks."

Indeed, without competition, it's doubtful if "rate flexibility" alone would encourage deployment of truly advanced high-speed broadband.

WorldCom and Qwest deserve every word of opprobrium they have gotten. But Congress and the FCC will send a mixed message about appropriate behavior if they reward the Bells' foot-dragging on opening their local loops that helped set the stage for the current scandals.

As for preemptory charges for access to their loops, that's one bill that's already been paid.



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