TCS Daily

Railroading Consumers

By Stephen Schwartz - March 30, 2004 12:00 AM

Early in March, the U.S. Appeals Court in the District of Columbia overturned the Federal Communications Commission's 2003 decision that strengthened the hands of state regulators in deciding how access to services provided by the Bell networks could be cheaply assured to competing communications companies.

Under the 2003 rules, Verizon, SBC, BellSouth and Qwest were required to let competitors plug into their networks with the states setting rates for use. The method under which the competitors get access to the giants' facilities is called the Unbundled Network Elements Platform, or UNEP.

If the appeals court decision stands, some 75 percent of capacity used by the firms competing with the Bells will be knocked off by the big systems. At present, such capacity mainly provides services to residential customers and small businesses.

The upshot: reaffirmation of the Bells' power to monopolistically set prices in local markets. You can bet that prices will go up, just as the incentives for the telecom giants to invest in technological innovation will decline.

Absent Supreme Court intervention, the appeals court decision will also bolster the Bell monopoly over broadband services, by limiting DSL access for users of the Bells' telephones to the Bells' own DSL. Customers will be prevented from getting a competing DSL line even if it serves the building they live or work in.

This is particularly troubling at a time when the average U.S. household and small business continues to invest in technology and shops around for competitive rates and of-the-moment improvements like broadband.

The court also deviated from historical precedent in overturning the FCC's decision to delegate more authority to state, as opposed to federal, regulators. The FCC had held that individual state regulators, not the folks in Washington, should decide which parts of the Bell systems should be open to the use of competitors. Prior DC circuit court decisions affirmed that the states were the best-suited to determine what is appropriate for local markets within their jurisdiction. A national policy for so localized a phenomenon as telecom service makes no sense, except for those who want to centralize regulation, reduce consumer choice, and bolster a "Bell Cartel."

The FCC now faces a two-stage political battle, first, to decide whether to appeal to the United States Supreme court. In this area, the commissioners will probably vote 3-2, with commissioners Jonathan Adelstein and Michael Copps, who are Democrats, being joined by commissioner Kevin J. Martin, a Republican, to support the appeal. Commissioner Kathleen Abernathy will probably join chairman Michael Powell, both Republicans, in opposing the appeal. Such a division would reflect the vote for the original decision supporting state authorities.

Second, the Solicitor General must be encouraged to take the case - a key matter in convincing the Supreme Court to hear it.

So much is at stake that the Supreme Court should step in. Politically, it would be untenable to let the Bell Cartel run rampant in raising rates - especially since computer use and, typically, DSL access have increasingly become standard items in every American home. On March 16, a group of U.S. Senators called on the Bush administration to appeal a recent court decision overturning a rule that compelled regional telecom companies to lease their networks to long- distance carriers.

The FCC last year provided state regulators with authority to determine when the Bells may stop providing discounted network access to long-distance competitors such as AT&T and MCI. But that decision was overturned in federal court last month.

Senator Ernest Hollings (D-SC) and colleague Ted Stevens (R-AK), helped write the 1996 Telecom Act, permitting the Bells to enter to long-distance market. In exchange, the Bells had to provide discounted access to long-distance carriers seeking to offer local telephone services.

Hollings and Stevens have told Attorney General John Ashcroft, "At this point, to allow the Bells to offer long-distance using the long-distance networks while denying the long-distance companies comparable access to the Bell networks to provide local service would be patently unfair and anti-competitive."

The intent of the 1996 law was to provide temporary relief to the long-distance carriers. But they, along with the regional companies and the FCC commissioners, cannot reach consensus on ending that relief.

The regional companies claim they are compelled to lease their networks at below-market rates. They also argue that allowing competitors to lease service on their wires reduces the incentive to build long-distance systems.

According to AT&T and MCI the rules are necessary for them to maintain competition. Experts and entrepreneurs warn that if left in place, this latest example of judicial fiat will harm the economy and eliminate choice between carriers.

The average household bill for local and long distance telephone service has fallen some 23 percent, and consumers save about $11 billion per year, since local telephone competition was enacted in 1999, according to industry sources.

The real issue, however, is that regulation is supposed to discourage monopoly, not reaffirm it. That has been the doctrine of federal regulators since the end of the 19th century, when railroads dominated, and abused, entire states. In those dark days, California, for example, was the property of the Southern Pacific company. When, in 1910, an obscure labor lawyer named Hiram Johnson was elected governor of the Golden State, he proclaimed the liberation of California from the railroad interest.

Regulation was the foundation of the original progressive political movement in America, now forgotten, but, as in the telecom industry, necessary when the alternative is a monopolistic hold by one player that reduces choice and increases cost. DSL lines are today what railroad lines were 100 years ago; a technological innovation providing essential public services, which must not be so abused as to put the public interest at risk.

The point of creating the separate Bells was to promote consumer choice. The 1996 Telecom Act was intended to strengthen competition. The Supreme Court should assure that the appeals court's decision is repudiated, and the FCC's principles reaffirmed.

Stephen Schwartz recently wrote for TCS about nuclear technology proliferation.


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