TCS Daily

Appeal to Reason

By James K. Glassman - June 2, 2004 12:00 AM

On March 2, the D.C. Circuit Court reversed a landmark telecom decision by the Federal Communications Commission. The next step seemed obvious: file an appeal with the Supreme Court.

Instead, the FCC asked for time to bring two groups of contending telecom parties together to work out their own solution in individual negotiations.

On one side were the four giant Bell networks, which control about 85 percent of local phone lines. The key Bells are Verizon and SBC Communications, with a total market capitalization between them of $176 billion and cash flow last year, according to Value Line, of $33 billion. On the other side were their smaller competitors, including AT&T, the largest long-distance company (market cap: $13 billion), Covad and Sprint. These are called competitive local exchange carriers, or CLECs.

Anyone who had observed the eight years of strife that have followed the passage of the Telecommunications Act of 1996 had to be skeptical of the prospect that the gap between the parties would suddenly be closed. The table, after all, was slanted. The Bells' control of the last mile, the wire into homes, gave them all of the bargaining chips.

Last weekend was crunch time. Negotiations produced nothing - with the exception of a single agreement between Qwest, the tiniest (market cap: $7 billion) of the Bells, and MCI. Qwest's CEO, Richard Notebaert is an outlier among Bell executives. "My peer group is not thrilled with me," he says.

The Qwest deal seems an anomaly, and, after working over the holiday weekend, the bigger Bells appear nowhere near a deal. Now, time is running out. By the end of the week, the Circuit Court's stay will be lifted, and by mid-June, the court's ruling will take effect. When that happens, all hell will break loose.

The best chance for success in the negotiations is an immediate appeal by the Solicitor General. The possibility that they could lose in the High Court would give the Bells the incentive to deal. The Bells and their competitors could then bargain seriously, either with a mediator or through binding arbitration, the preferred method of solving such an impasse on Wall Street. If an agreement is reached, the appeal can be withdrawn.

What's at stake? Only the future of low-cost, high-quality telecommunications - the web that connects and invigorates the U.S. economy.

The Circuit Court decision nearly three months ago reversed an FCC ruling that had affirmed that CLECs should be able to lease local telephone networks, owned by the Bells, at reasonable rates.

The debate has focused on rates for UNE-P ("unbundled network elements platform"), the key to competitive phone service in the local market. Predictably, that competition has caused phone bills to fall as the Bells and their new rivals vied for customers. Let the D.C. Circuit ruling stand and UNE-P, as well as serious competition, will end. Local phone rates will rise. In some cases, service will be discontinued and monopoly will run rampant.

As the Wall Street Journal's Annemarie Squeo wrote in a news story on May 14, "Without the rules to keep rates in check, regional phone companies could well boost the prices they charge rivals to use their phone lines. That cost would likely be passed on to consumers, industry and government officials say.

"With Americans already outraged about paying $2 a gallon for gas, the prospect of a phone-bill increase has Bush administration officials worried about the election fallout if customers vote with their pocketbooks."

An article in the Los Angeles Times on June 1 carried the headline: "Could Telephone Rates Become a Campaign Issue?"

Some background: In their March ruling, the Circuit Court judges overturned the basic principle of the Telecom Act of 1996, supported by every conservative member of Congress. It was aimed at bringing competition to the part of the telecom system that was still a monopoly: the last mile that connects your home to the greater wired world.

In the Triennial Review Order, issued in August 2003, the FCC not only upheld the basis for local competition, the commission also handed the Bells a big victory by allowing them to deny competitors access to their more advanced networks - for high-speed Internet connections, or broadband.

In desperation, however, the Bells and their allies are arguing that the FCC's UNE-P decision has to be overturned in order "to help get more Americans hooked up to broadband," as the Wall Street Journal put it recently in a strident pro-Bell editorial.

In fact, the current debate is not about broadband at all. That issue has been resolved - incorrectly, in my view. But it's a done deal.

At any rate, there is no broadband crisis. The Bush Administration can be proud of its record. By encouraging competition, broadband subscriptions have quintupled during the President's term. Broadband - either through phone lines, over cable or by satellite - is currently available, according to the SEC, in 91 percent of all U.S. zip codes, inhabited by 99 percent of the population.

At the end of March, 26 million American households were subscribing to broadband services. The two largest Bell companies - Verizon and SBC - now have 7 million subscribers, up from fewer than 3 million two years ago, and UBS Investment Research reports that DSL (that is, telephone-based) broadband providers added more subscribers than cable providers "for the first time."

Instead of broadband, the current debate concerns the last mile.

In 1996, Congress agreed on a blueprint for ending the local-service monopoly, and, naturally, the legislators decided to use the line-leasing model that had worked so well in long distance, driving down prices, vastly improving services, and leading to facilities-based competition.

The deal was that the Bells would be freed to go into long distance as they unbundled their local loops and leased them to competitors. The plan, after lawsuits and foot-dragging by the Bells, is finally working. Today, the Bells, with offerings in all 50 states, have grabbed about 40 million long-distance customers while their competitors have won about 20 million local customers.

The key to local competition is use of unbundled network elements. Deny new competitors access to these elements and a retail rate increase is certain - a fact that even The Wall Street Journal editorial page now admits. Rates will rise, not only for customers who now get their services from Bell competitors, but also for nearly everyone else - because, without the pressure of competition, the Bells, like any monopolist, will be free to boost prices.

The CLECs, of course, will have to raise prices to absorb the new costs. A likely scenario is that many of them, facing bankruptcy, will make the logical business decision and go down swinging. They'll fire their marketing departments, hike rates and collect as much revenues as they can in their final days. The result for U.S. consumers: confusion, cancellations and higher bills to pay. Not a happy combination a few months before an election.

Some say that UNE-P is "broken," but that's nonsense. The truth is that the Circuit Court threw a monkey wrench into a process that was working well, providing Americans with more choices, better service and lower costs. The logical solution is to appeal that ruling. A report May 13 by Schwab Soundview Capital Markets concludes that, as a result of the stalemated talks, the Solicitor General "will probably seek review on behalf of the Commission" and that "the Supreme Court is likely to be more deferential to the FCC's rules than the D.C. Circuit."

Even as they pledged to negotiate in good faith, the Bells have continued to attack their opponents, usually through surrogates. Among their tactics is the accusation that free-market conservatives, including Grover Norquist and me, are closet socialists, favoring heavy regulation and backing what a Journal editorial on March 26 called "an Al Gore-Reed Hundt industrial policy."

That's laughable. The policy enshrined in the Telecom Act of 1996 is not left-wing. Many, many conservatives take the side of the Bells' competitors in this debate for a simple reason: We believe in competition, and we agree with the blueprint that was approved overwhelmingly by a Republican Congress.

Right now, the only way to level the playing field and produce positive results is to make clear that the issue will be placed in the lap of the Supreme Court, where, as the Schwab analysts say, the Bells' chances of denying access to their networks are greatly diminished: "The Supreme Court is likely to be more deferential to the FCC's rules than the D.C. Circuit.

Appeal and negotiate. Apply for a writ of certiorari and go into binding arbitration or mediation. That's the answer to the telecom impasse. It's the best strategy for American consumers and the economy.


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