TCS Daily

Past as Prologue?

By Duane D. Freese - October 25, 2002 12:00 AM

Look before you leap has always been pretty good advice. Too bad the Federal Communications Commission didn't follow it more fully three years ago.

For when the commission freed the local Bell phone companies from price caps for so-called special access services, it appears to have dumped $5 billion a year from the purses of business and other consumers into the deep pockets of those monopolists.

That wasn't the FCC's aim. The agency had hoped that the existence of a minimal level of collocation of equipment for special access services by competitors to the Bells within metropolitan areas would mean that customers would have a real choice of providers. And that real choice would keep prices - and excessive profit taking - in check.

But that hasn't proven to be the case. AT&T alleges in an Oct. 15 filing with the FCC that recent Bell filings with the agency of their cost and revenues "indisputable proof" that the Bell's control of the special access market has led to "patently unjust and unreasonable rates."

The data showed Bell revenues for special access - services involving high-capacity connections from business customers to long-distance providers that bypass the public switched network - rising dramatically from $3.4 billion in 1996 to $12 billion in 2001, a huge chunk of it pure profit. As calculated by the long distance giant, the rates of return for the Bells from services rising from 7.5 percent under price caps to an average of 37 percent last year. SBC secured a whopping 55 percent return for such services.

If the rates or return for the services had equaled 11.25 percent, what the commission had previously found was just and reasonable, businesses and consumers would have saved $5 billion last year. And that's conservative, as AT&T President David Dorman told reporters in a teleconference at the time of his FCC filing.

"If the market for these services were actually competitive, as the Bells claimed in 1999, the prices for these services would be declining. Instead, prices have gone up and the regional Bells' profits have increased even as quality of services has declined," he said.

To remedy matters, AT&T wants the FCC immediately to place a moratorium on further special access deregulation and to roll back rates charged by Bells. Most importantly, it wants the FCC to take what happened into account before moving on further deregulatory matters, such as freeing the Bells from requirements for leasing elements of their systems to competitors and rate regulation for other services.

"The special access story shows the peril of prematurely deregulating companies with monopoly market power," Dorman claimed.

As could be expected, the Bells deny all of this, and say it is merely AT&T "goading" the FCC and trying to keep them tied up in red tape. They claim competitive providers now have 40 percent of the special access market, and that there are three competing fiber optic rings to service big businesses in all but nine of the nation's top 100 metropolitan areas.

Those numbers make it sound as if competition is ubiquitous throughout the nation. And if that were so, then what rate of return the Bells earned in such highly competitive markets wouldn't matter.

But those numbers present a false picture of the state of real competition.

A. Daniel Kelley is a senior vice president at HAI Consulting in Colorado and formerly a special assistant and senior economist at the FCC during the Carter and Reagan administrations. He argued back in 1999 when he studied special access services that a competitive market's limits are "determined by the degree to which alternatives are readily substitutable." In other words, a competitive market is one where buyers of services have real choices.

Evidence of a monopoly or collusive market exists for antitrust purposes under Justice Department guidelines, he noted, "if participants can raise prices by 5 percent and profitably maintain that increase for one year."

AT&T's complaint to the FCC finds that in every one of the markets the Bells were released from price caps on the basis that competition existed they have maintained or raised rates by as much as 15 percent, and maintained those increases.

The reason: Long distance carriers and their customers have no real choice but to buy Bell special access services directly or them from retailers that essentially are merely resellers of Bell services. Which means that without price caps, those Bell customers are getting gouged.

And the reason this gouging is going on is simple - the standards the FCC used to gauge competition within areas were simply to low. Collocation of equipment, fiber rings and retail market share simply don't measure the amount of market control that a truly ubiquitous monopoly can exercise.

For example, the fact that there is collocation of equipment in some facilities in a metropolitan area doesn't mean there is competition throughout a metropolitan area. The fact that three companies have fiber rings in the downtown doesn't mean that competition exists in a business park in the suburbs.

Granting pricing flexibility freedom to the Bells for whole metropolitan areas based on the presence of collocation and fiber rings in some of it, thus gave them the ability to exact monopoly rates in the vast majority of places where no real choice exists.

Of course, the Bells' simple answer to all of this is to blithely say, "Invest in your own infrastructure." In short, build what it took us decades to do in a couple years.

That is economically impossible, and they know it.

That's why the Telecommunications Act of 1996 - which they agreed to in order to enter competitive telecommunications businesses such as long distance - required them to lease various parts of their loops to competitors at wholesale rates. Only by doing so could competitors gain a foothold in the market justifying the investment in their own facilities.

The big mistake was to allow the Bells to remain as integrated operations in which wholesale and retail arms could work together to strangle competitors without adequate regulatory oversight.

In the case of special access services, the regulators appear to have let down the guard too much. That's let the Bells gouge customers and reap monopoly profits, which can help them thwart reform and real competition in other areas of their empires.

At the least, the FCC needs to quickly yet thoroughly review AT&T's claims to eliminate price gouging.

It needs to develop standards of competition that don't leave businesses and consumers under the control of monopolists to raise their prices and lower their quality of service at will.

And by taking this look back at special access services, it might not leap into further deregulation of the Bells without measures that assure that real competition is in place.



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