OK.
Where's the opera diva? Because while there was a whole lot of singing
in the wake of the release last Thursday of the Federal Communication
Communication's rulemaking
on local phone competition and Internet access, most of the notes were
discordant. And that sadly means this rulemaking likely is far from
over.
One of the leading groaners was the FCC's chairman himself, Michael Powell, who intoned: "I believe this decision will prove too chaotic for an already fragile telecom market."
What
he didn't like was leaving to state utility commissions decisions on
when to release the Bell local telephone monopolists from their
obligation under the Telecommunications Act of 1996 to lease their
networks to competitors. Those commissions have in recent years
aggressively begun to require the Bells -- Verizon, SBC, BellSouth and
Qwest -- to lease unbundled network elements, including their entire
platforms, at wholesale rates following FCC pricing guidelines. Such
UNE-P competition, as it is acronymed, has finally given consumers a
real choice for local phone service. And they've responded by doubled
the number of phone lines being served by competitive local exchange
carriers to the Bells. In New York State, a quarter of the phone lines
are now served by Verizon's competitors.
Another member of the FCC choir, Commissioner Michael Copps,
while singing the praises of that portion of the ruling, trilled about
other sections that will let the Bells limit access to their newer high
speed networks: "Make no mistake about it today's decision chokes off
competition in broadband. Consumers, innovation, entrepreneurs and the
Internet itself are going to suffer."
With
such division on the FCC, it is guaranteed that each of the sections
will be challenged in court before it goes into effect.
Beneath all the noise, the fact is that competition in telecommunications hangs by a tenuous thread now.
The
FCC has essentially given the Bells and cable companies substantial
control of the high-speed future. In three years, the Bells won't even
have to allow line sharing so consumers can choose who they want --
AOL, Covad or their local phone company -- to provide digital
subscriber line service, that moderately high-speed connection to the
Internet that using the higher frequencies of old twisted copper wires.
Bell customers will have to lease a second phone line into their home
to get service from a competitive DSL provider unless they also get
voice service from that competitor or its partner.
And
like cable companies, the Bells can close off access to alternative
Internet Service Providers, such as Earthlink and AOL, to networks the
Bells have upgraded with high-speed fiber.
Critics
fear that prices for high-speed services and Internet connections could
jump dramatically, by $10 or more a month, as a result of the
rulemaking fear. If so, consumers won't be happy -- not with the FCC
and not with those in Congress who have pressured it to give monopolist
phone and cable companies more unfettered control over their networks.
The
UNE-P ruling, though, at least ensures ISPs and line-sharing companies,
such as Covad, an alternative venue into the local market. They can
negotiate with Bell's local phone competitors for affordable and ready
access. And that should keep the pressure on the Bells to keep their
own DSL service prices in line and not shut out ISPs for the time being.
But
UNE-P competition depends on getting a rate from the Bells that allows
competitors a chance to really compete. And that means keeping
wholesale rates as close to what would be, in economic terms, the
incremental cost to the Bells for maintaining them.
The
methods for determining such rates have been developed by the FCC, and
are called Total Long Run Incremental Cost -- or TELRIC. And the Bells'
goal now is get those guidelines changed or overturned, either at the
FCC next month when the guidelines come up for review or before the
state commissions.
Their argument for doing so is that such rates are unfair to them -- "below cost."
That's
what Bell South President of Regulatory and External Affairs, Margaret
Green, called TELRIC, in complaining about the UNE-P portion of the
rulemaking. Qwest Vice President Steve Davis crooned to a Los Angeles Times
reporter: "It's unfair to Qwest customers that they continue to be
forced to subsidize these giant corporations. We will work with each of
our state commissions to do what the FCC was charged with doing but
failed -- eliminate these subsidies wherever possible, as soon as
possible."
The
Bells have even gotten some key members of Congress - House Commerce
Committee Chairman Billy Tauzin, R-La., Commerce Ranking Member John
Dingell, D-Mich., and Commerce Telecommunications Subcommittee Chairman
Fred Upton, R-Mich., to write Powell urging reform of TELRIC, saying, "(T)he
current pricing rules ... actively discourage investment, and, by doing
so, undermine the health of the telecommunications sector and the
national economy."
Most economic studies, though, have found the rates to be a fair reflection of the costs the Bells face in leasing the various elements of their networks, and even that they provide the Bells a fair return. Just not a monopolistic one.
University of California-Berkeley economist Yale Braunstein, in a study of phone rates in California, estimated SBC earned as much as $4 profit a month from a wholesale rate of just under $14, a margin of 28 percent. Competitive Telecommunications Association (CompTel) estimated the Bells earned $600 million a year in profits from wholesale sales.
State regulators who have reviewed the prices after long evidentiary hearings have found the same thing.
For example, New Jersey's Board of Public Utilities lowered UNE-P rates from $16.21 to $9.52 a month - a 41 percent drop. This enabled AT&T to enter the local phone market. Below cost? Not hardly. As NJSBPU President Jeanne M. Fox told the Asbury Park Press on May 6, "They are making less money then they would like to make. They are still making a profit, and they are still making their costs."
A
fair method for determining the cost to Bells for leasing their
networks is vital because otherwise the Bells have shown a tendency to
inflate their costs.
Indeed, as the Supreme Court
noted, in upholding the TELRIC methodology, the primary complaint by
the Bells that TELRIC pricing is below their historical cost actually
amounts to them not being able to pass along their mistakes:
"The
problem with a method that relies in any part on historical cost, the
cost the incumbents say they actually incur in leasing network
elements, is that it will pass on to lessees the difference between
most efficient cost and embedded cost. Any such cost is an
inefficiency, whether caused by poor management resulting in higher
operating costs or poor investment strategies that have inflated
capital and depreciation. If leased elements were priced according to
embedded costs, the incumbents could pass these inefficiencies to
competitors in need of their wholesale elements, and to that extent
defeat the competitive purpose of forcing efficient choices on all
carriers whether incumbents or entrants. The upshot would be higher
retail prices consumers would have to pay."
The
court also noted that if TELRIC was really "below cost," then the Bells
had a ready means to challenge it under the constitutional takings
clause. Instead, "[t]hey do not argue that any particular, actual
TELRIC rate is 'so unjust as to be confiscatory,' that is, as
threatening an incumbent's 'financial integrity.'" This, "despite the
fact that some states apparently have put rates in place already using
TELRIC."
The
Bells can't argue that because they are making money. All of which
argues for the FCC to leave its TELRIC rules in place, and for the
states to continue to apply them.