TCS Daily

No Economic Sense

By Laurence J. Kotlikoff - February 11, 2003 12:00 AM

As Congress begins to consider new tax cuts, the FCC is debating what would amount to a major tax increase for each and every American household. I refer here to the very substantial telephone and broadband price hikes that will result from a pending FCC decision to roll back enforcement of the Telecommunications Act of 1996 (TA96).

TA96 cut a deal with the now four huge local Bell Operating companies (BOCs), Verizon, Bell South, Quest, and SBC, which control our local telephone lines. The deal promised the BOCS something they wanted - the right to market long-distance calls - if they provided something we wanted - the practical ability to buy local phone service from competing telephone companies. Practical refers to the requirement that the BOCs lease the use of our telephone lines and other infrastructure to competitors at reasonable rates and under reasonable conditions.

Ever since TA96 was passed the BOCs have lobbied like crazy to get into long distance. But they've also worked overtime to renege on their end of the bargain, namely providing competitors with timely and reasonably priced physical access to BOC-controlled telephone lines and related facilities. After failing, over several years, to get the BOCs to play nice, the FCC simply ordered them to place local phone calls for their competitors and charge wholesale rates for that service. This solution, called UNE-P, has led over 10 million Americans to switch their local phone service to BOC competitors. And, for good reason. UNE-P competition has cut the price of local phone service by as much as one third. Indeed, according to CompTel, Americans will save almost $10 billion this year on their local phone bills thanks to UNE-P based competition.

This economically sound policy - requiring the leasing of wholesale phone service where there is plenty of excess capacity on existing infrastructure - did not, by the way, originate with TA96. When the Bell monopoly was broken up in 1983, AT&T was required to lease the use of its long distance circuits to competitors. If one looks closely at what takes place in those lease arrangements, AT&T is effectively placing the long distance call for competitors and billing them for the service.

While the BOCs have been screaming about UNE-P, they have used the incipient local phone competition generated by UNE-P as grounds to gain entry into the long distance market. By the middle of this year, the BOCs will likely be offering long distance service to everyone in the country. But the BOCs aren't satisfied. Their goal is not to compete with long distance companies. It's to put them out of business.

How? In two steps: First get the FCC to eliminate UNE-P and its other methods of enforcing TA96. This will keep the long distance companies and other potential competitors from being able to offer local phone and broadband service to most customers. It will also allow the BOCs to reclaim their 10 million lost customers as their competitors are forced to exit the market. Second, bundle local phone and broadband in one package and throw long distance in for free or next to nothing. Voila! The current long distance carriers can kiss their customers goodbye. And, once the BOCs have monopolized long distance, we can kiss our cheap long distance rates goodbye as well as any hoped-for savings on local phone and broadband charges.

Think this is fantasy? Well, listen to the ads Verizon is now running in New England. Its Veriations package "includes savings on Verizon Local, Regional/Local Toll calling, Long Distance, Verizon Wireless, and Verizon Online Internet access services. By subscribing to a qualifying combination of Verizon services on a single bill, you'll save time as well as money."

Why would the current FCC want to re-monopolize telecommunications? Because the BOCs have promised to make huge new telecom investments, including stringing fiber to each of our homes, as long as they are freed-up from giving competitors access to our phone lines and all the other infrastructure we, the public, paid for over the last 100 years.

Just tune in BOC experts, Jeff Eisenach and Thomas Lenard of the Progress and Freedom Foundation. They claim that eliminating UNE-P and other pro-competitive FCC mandates will increase BOC investment this year by tens of billions of dollars, create close to a million new jobs, and ultimately raise GDP by more than $100 billion!

Would this were so. But in fact, it makes no economic sense. Why should the BOCs, freed from competition, expand capacity when they can make more profits simply by reducing supply and jacking up prices? Did Eisenach and Lenard forget the basic principals of monopoly behavior we teach in first-year economics courses? And did they bother to look at the investment data from the past decade? This record shows quite clearly that the BOCs invest in response to competition, not in its absence.

The Eisenach-Lenard BOC investment fantasy doesn't even fly with Ivan Seidenberg, Verizon's president and chief executive officer, who recently admitted that "Verizon wasn't likely to boost its capital spending this year in response to a favorable FCC ruling" (TRDaily, Feb. 4).

Here's the bottom line. The FCC needs to stay the course and continue to help the state public utility commissions enforce the Telecommunications Act of 1996. Competition is just now taking hold. The sooner the BOCs understand they can no longer monopolize our phone lines, the sooner they'll start providing access to our lines on the same efficient, electronic basis as the long distance companies provide access to their cross-country lines. At that point, we'll have a truly deregulated market in which all participants can compete on an equal footing.

The author is Chair of the Department of Economics, Boston University
and a consultant to AT&T.

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