TCS Daily

Monopoly Man

By James K. Glassman - January 6, 2003 12:00 AM

The Wall Street Journal today reports that Chairman Michael Powell will ask the FCC to vote early next month on changes that would force competitors to pay the giant Bell companies higher rates to lease lines - "a move," write Journal reporters Yochi J. Dreazen and Shawn Young, "that could reduce competition and price-cutting in the local phone market."

There's no "could" about it.

If the FCC goes ahead on Powell's plan, the huge gains that consumers have scored in the past year will be erased, and the chances for a high-tech recovery will diminish.

If there is one major consumer-focused achievement to which the Bush administration can point, it is in telecommunications, where rates have fallen significantly in many states. Powell wants to change that.

The White House finds itself in a difficult position. Although he is an appointee of the president, as chairman of the Federal Communications Commission, Powell is supposed to have a certain independence. But Democrats will inevitably blame higher telecom rates on President Bush, who will be accused of coddling the Bell monopolies.

The answer: The White House would be wise to intervene quietly - but immediately to block this disastrous policy.

To date, the consumer gains from telecom competition have been significant and they will intensify over the next year as the election approaches. The Journal itself reported Dec. 12, for example:

"Every day, nearly 2,000 Michigan residents switch their local phone service to AT&T and WorldCom Inc.'s MCI unit.... Bell challengers have increased their share of the state's local market to more than 20 percent from just 4 percent in 1999.

"The competition is reducing prices. Four months after AT&T entered the Michigan market, SBC Communications, Inc., which owns the local Bell, cut the prices on many of its local packages by as much as 30 percent."

Similar success stories are happening in New York, Ohio, Illinois and around the country. At the end of 2002, an estimated 10 million American families were getting local service from a non-Bell company, compared with 7.5 million in July.

Now, in one radical stroke, Powell wants to go back to the bad old days of monopoly. But it's worse. Rather than just owning the local telephone market, the Bells could easily end up with a monopoly in long distance and a near-monopoly in broadband, or high-speed Internet connections, as well.

No wonder the leaders of 22 conservative groups, including Grover Norquist of Americans for Tax Reform and David Keene of the American Conservative Union, reaffirmed their support for the deregulatory law, the Telecommunications Act of 1996, that brought consumers these benefits and that Powell now wants to gut.

The conservatives object strongly to the FCC trampling on the rights of states, whose encouragement of competition has served to contrast - and embarrass - the federal regulators. The state commissioners have required the Bells to live up to the Telecom Act by leasing their lines at reasonable rates.

The Telecom Act established a blueprint for wide-open competition. The deal was that the monopoly Bells (once seven, now just four) would be able to move into long distance if they opened up their local networks. The Bells now sell long-distance services in 35 states and have quickly grabbed a market share of 25 percent. But until lately, they have managed, through lawsuits and lobbying, to keep competitors out of their local bailiwick.
As the competitors began making inroads this year, the Bells screamed bloody murder, claiming that they were facing terrible financial problems - when, in fact, they have remained extremely profitable. SBC and Verizon, the two largest Bells, last year had revenues of $120 billion and earnings of $16 billion. Return on equity for each company is a whopping 22.5 percent.

Now, Powell, whose regime at the FCC has been marked by indecision, is responding to the Bells' entreaties. The result could be a debacle - not just for consumers but for technology companies. Higher rates for broadband, for example, will mean that high-speed applications won't reach as many Americans.

Here is the way the Journal reporters put it today:

"Critics charge the plan would derail the growing competition for local phone service without offering a viable alternative. They point out that the Bells promised to open their local markets to competition before they could gain regulatory approval to sell long-distance, and now that they have the reward in hand, the regional giants would essentially be gaining permission to choke off competition."

Powell, according to the Journal, believes that "real competition requires that any company seeking to provide local phone service must own its own network, the physical lines over which information travels."

Well, that may be his belief, but it is not the law.

The Telecom Act clearly calls for competitors to be able to lease Bell lines rather than building their own networks from scratch. This idea of leasing first, then building later was precisely the means to competition in long distance, which is now robust.

Back in the 1980s, AT&T was required to lease long-distance lines to MCI and Sprint. As they developed their own customer bases, these competitors then built out their own networks. Congress, the White House and state regulatory commissions envisioned the same process for local service under the Telecom Act. Powell, on his own, has decided on a different course, according to the Journal.

While the Bells disingenuously are lobbying to force their competitors to build their own local networks, the Bells themselves are leasing long-distance lines. Why not force the Bells to build their own long-distance networks?

That would, of course, be absurd and wasteful - just like Powell's vision for local service.
But worse is the devastating effect on competition.

The patron saint of capitalism, Adam Smith, wrote more than 200 years ago that policymakers should pay attention to consumers and let producers take care of themselves. The Powell Doctrine at the FCC has it backwards. The chairman wants to take care of a special group of producers - the Bells - and let consumers fend for themselves.

That's bad, not just for consumers, but for the economy and the president.

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