TCS Daily


By Duane D. Freese - August 27, 2003 12:00 AM

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.


After all, when the Supreme Court sings on policy matters, that ought to settle it. Consumers can only hope policymakers, including FCC Chairman Powell, don't act so as to force an encore, creating more legal chaos. Where's a good opera diva when need one?

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