TCS Daily

Which 'Legacy' Regulations?

By Duane D. Freese - May 6, 2004 12:00 AM

Whenever someone calls for unburdening telecommunications of old legacy regulations, the best thing to do is ask: Which ones? Your safety, your wallet and your telephone service may be on the line.

Last week, in two days of hearings reviewing the eight year old Telecommunications Act of 1996 and the possibility of its overhaul, leaders of various segments of the telecommunications industry and some outside telecom experts each gave the Senate Commerce Committee ideas about regulations they would kill, and others they would protect.

David Dorman, CEO of AT&T, for example, would dispatch with the access charge regime that has saddled his long distance customers with billions of dollars in per minute fees annually to the local Bell operating monopolies for starting and ending long distance calls.

The regime is a legacy from AT&T's break up in 1984 to help subsidize universal service. Other fees for universal service have replaced most of the subsidy. And Federal Communication Commission studies have demonstrated access charges wouldn't exist in truly competitive markets.

Yet, the Bells continue to get them. And it is interfering with innovation. The FCC recently rejected AT&T's petition to exempt its phone-to-phone Voice over Internet Protocol service from the access charges. VoIP, which makes use of digital data transmission to more efficiently use phone lines, holds hope for myriad new services as well as lower prices. But not if access charges hike its costs.

"VoIP must be allowed to develop free of burdensome regulation," Dorman said. "The intercarrier compensation and universal service systems must be reformed to ensure that universal service is preserved while at the same time not requiring new and innovative competitors to contribute disproportionately to universal service or otherwise subsidize incumbent carriers."

On another regulatory front, meanwhile, the head of one Bell so subsidized, Richard Notebaert of Qwest, would pretty much do away with the Bells' unbundling requirements for leasing parts of their local networks to competitors, as they agreed to do in negotiating the 1996 Telecom Act.

"The bill, which was just over 100 pages, morphed into thousands of pages of decisions and rules. And those rules include complex -- and sometimes inconsistent -- procedures for achieving simple things," Notebaert said.

Notebaert argued that new technologies -- such as wireless and VoIP -- eliminate the need for such obligations on the Bells. He noted that the D.C. appeals court has three times rejected the FCC's rules for selling network elements, most recently last month, when it said that the FCC gave too much authority to the states to determine rates.

In the aftermath, the FCC has called upon all parties to "negotiate in good faith" interconnection agreements before the commission decided to appeal the ruling.

Notebaert, for his part, has said competitors to the Bells should give up any hope of getting that decision reconsidered and negotiate with the Bells instead. "We consider CLECs to be our distributors," he said. "If they aren't buying from us, it is a lost distribution channel and customers might go to a cable company instead," he claimed. "We would rather get something than nothing."

In any event, Notebaert argued that a new act should treat telecommunication services, or "at least voice services, as a commodity." Regulators should "eliminate the regulation of a single provider when others offer the same capability regulation free," he said, and states should have their role in regulation reduced or eliminated.

Notebaert's view was echoed the next day by Adam Thierer of the Cato Institute, George Gilder of the Discovery Institute and Raymond Gifford of the Progress and Freedom Foundation, who all said the Telecom Act had failed to open markets by failing to fully deregulate them.

"Pre-empt the states and localities," Gilder chided senators. "They just cause confusion, and balkanization, and paralysis."

"At the very heart of telecommunications lies the notion of transcending boundaries and making geography and distance irrelevant," argued Thierer.

The wholesale leasing regime in the regulations gets in the way of facilities based competition, they argued.

Sen. Ernest Hollings, D-S.C., who was a key negotiator of the act, had a less charitable view of why the Telecom Act hasn't created vibrant local phone competition.

"Specifically, the idea was to allow the Bells to compete in long distance markets, but to prevent them from providing 'in-region' long distance until after they had opened their local markets to competition. ... If everyone had played by the rules and kept their promises, the goal would be accomplished."

Instead of competing, though, Hollings intoned, the seven baby Bells "combined into four monopolists. ... They used every trick in the book to avoid meeting their obligations to competitors," being fined $2.6 billion as a result.

While the Bells had seven long distance providers to choose between to enter long distance, competitors to the Bells had only one, he said. "If the wholesale price offered by the Bell is too high, too bad," he mockingly responded to Notebaert.

As a result, though the Bells have succeeded in limiting market entry to competitors to 15 percent of the local phone market, they themselves got clearances that have allowed them to grab 30 percent of the long distance market, with one Bell, Verizon, "now ranking as the third largest provider," Hollings pointed out.

James Geiger of Cbeyond Communications, representing the competitive local exchange carriers to the Bells at the hearing, echoed those complaints. He noted that the 200 percent and 300 percent increases in wholesale rates being sought by the Bells in current negotiations for leasing network elements, would force almost every competitor to the Bells out of the market, in the process depriving some 20 million Americans of the phone service of their choice.

Geiger pointed out that facilities-based CLECs have spent $75 billion building out their networks over the last eight years. And, he said, "even as they (the Bells) complain to regulators about the local competition rules, their latest reports demonstrate that they are experiencing huge margins and profits.

Both he and Dorman held out little hope that negotiations with the Bells would succeed.

As if to prove Hollings', Geirger's and Dorman's point, three Bell companies immediately rejected an AT&T offer on Thursday that would have paid them higher prices for access to network elements if, in exchange, it and other Bell competitors "would be able to obtain operational and economic access to 'last mile' loop facilities on terms that are reasonable and fair."

FCC Chairman Michael Powell praised the offer as "significant and important" with AT&T signaling "it plans to use more of its own facilities to provide local phone service. In the long run, the transition to facilities-based competition holds out the best promise of real benefit to America's telephone consumers."

Yet, Qwest, Bell South and SBC dismissed it out of hand.

To be sure, a lot of old rules in telecommunication need to be put aside. Simply providing a VoIP service, for example, shouldn't require a provider to submit tariffs in every state to which a call might travel. No small company can afford to do so. Their obligations to law enforcement and the handicapped should match the technological realities of Internet technology, not those of old phone circuits and switches.

But as long as some parties have the market power to impinge on otherwise robust competition and innovative services in other markets some regulation limiting their ability to distort those markets and opening their own to competition is needed.

Before throwing out the '96 Telecom Act, senators need to be clear about their goals in deregulation. It ought to promote better services for consumers, not simply give a blank check to monopolists.


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