TCS Daily


Telecom Countdown

By Duane D. Freese - February 7, 2003 12:00 AM

Iraq wasn't the only one recently facing a countdown from a man named Powell. Competition in the vital telecommunications sector faces one, too.

Just as Secretary of State Colin Powell has said time is running out on Iraq, his son, Federal Communications Chairman Michael Powell, has promised to meet a largely self-imposed Feb. 20 deadline for issuing new rules governing wireline telephone services.

But will it be a case of like father, like son? Most press reports say not.

Secretary of State Colin Powell wisely has refused to accept the false promises of Iraqi dictator Saddam Hussein that he has disarmed. Show me the proof, he's said, or we'll disarm you.

Michael Powell reportedly appears ready to accept the word of the local Bell phone monopolies that they will deploy broadband networks if only, first, the FCC will limit state oversight of the rates they charge competitors to access their networks.

Powell has argued that appeals court rulings have left the FCC no choice but to act on rules - called UNE-P for unbundled network element platform - that allow competitors to the Bells to lease their whole system at wholesale rates set by state utility commissions.

Maybe so. But legal scholar Robert Bork has noted that the modifications needed to comply are tiny compared to those that Powell has indicated he may seek. State regulatory commissions are well situated to decide when there is sufficient competition to release the Bells from provisioning various elements provided under UNE-P. Powell would limit their oversight and just release the Bells from their obligations. That could create such huge barriers to entry in some areas that consumers in much of the nation will be left without a choice of local carrier now or ever.

Why would he do that? Well, just as the Bells litigated for years against meeting the requirements of the Telecom Act of 1996, they've also lobbied hard for more than a decade in state houses, Congress and before the FCC. Their primary claim: that only by releasing them from regulatory controls and oversight will they have the incentive to invest in high-speed connections.

The Bells have told Powell, you disarm consumers first, and we'll do what you want. What is their proof?

Well, they can't exactly point to their own sorry history, so they point to a small batch of economic studies that pretend to demonstrate that monopolists - freed from regulation - will do great things.

Last week, economists Jeffrey A. Eisenach and Thomas M. Lenard of the Progress and Freedom Foundation summed up a series of such studies, claiming that they showed that lifting of UNE-P would increase investment in advanced telecommunications services by $12.74 billion a year. More than that, they calculated that regulatory relief would boost the national GDP by $14.3 billion to $33.9 billion.

One thing to say about economic studies: the more exact the numbers, the more suspect the study. There is no way to know such numbers. Economists have a hard enough time forecasting the direction the economy will head, much less precise amounts that a particular set of regulatory actions will achieve.

In the case of the Eisenach and Lenard study, it is doubly suspect because their estimates rely upon what very well may be a false premise. They say: "Economic theory suggest that firms will invest in new facilities only to the extent they believe the net present value of the returns from those facilities exceeds the cost. If the UNE regime forces incumbents to lease facilities at prices below cost, neither incumbents nor competitors will have an incentive to invest in new infrastructure"

That's one big "if." It is based almost entirely upon assertions by the Bells, not the facts that the Bells presented state regulatory commissions, which set the wholesale rates. These economists thus are asking us to believe that the state utility commissioners, who generally support keeping UNE-P, are deliberately bankrupting the Bells. And if Powell and the FCC limit the states' regulatory role, another big "if," he will in effect endorse that misguided view.

Meanwhile, history has amply demonstrated that the Bells can't be taken at their word. Ask Pennsylvania, or numerous other states where the Bells promised to deliver high-speed digital services in return for rate relief.

In 1993, Pennsylvania's legislature gave BellAtlantic, Verizon's premerger predecessor, rate relief to allow it to maximize profits. BA/Verizon raked in millions, possibly billions in subsequent years. It promised to deliver broadband to all homes in the state at 45 Megabits per second. Then in 2000 it lowered what it would deliver to 1.544 Mps. That's about 30 times current 56 Kilobit per second rates. But not fast enough to provide the streaming video the legislature had hoped. Indeed, all it amounts to providing is what Bell competitors forced out of the closet - digital subscriber lines, or DSL.

Karen Kornbluh, a scholar at the New America Foundation who formerly worked in the FCC, has shown that the Bells only brought out DSL after competitors spent $90 billion on building out the phone systems' backbone.

As two other respected economists Robert E. Hall of Stanford and William H. Lehr of Columbia's Graduate School of Business have pointed out in Rescuing Competition to Stimulate Telecom Growth, the Bells will do nothing without the stick of competition.

And Michael Powell has to know this. In his first press conference in 2001, he noted that it took AT&T doing "something extremely bold" - buying a cable company - to bring "DSL out of the closet," and for the right reason, "out of fear - fear of losing customers."

Until Bell competitors through line-sharing, another competition promoting rule set up by a pre-Powell FCC, small businesses faced paying $3,000 a month to get a high-speed connection.

The implementation of UNE-P and line sharing has increased DSL use from 369,000 in 1999 to nearly 5 million by the end of last year, according to the FCC. Availability of DSL that was at about 20 percent of households then has surpassed 70 percent last year.

That's competition, not theory, working.

The oddity now is that the Bells, who balked at providing DSL from competitors over their own lines, now balk at providing DSL over competitors' lines. The goofy turnaround demonstrates only that they will do anything to discourage customers from switching their local service, which is why state regulators need to remain on guard.

Powell needs to follow his father's lead - demand that proof of competition exists before giving the Bells the relief from regulatory oversight they seek. Trusting monopolists is like trusting dictators, a foolish proposition, either for regulators or economists. Better that they put their trust in competition instead.
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