TCS Daily

Fumbling on Telecom

By Duane D. Freese - June 10, 2004 12:00 AM

The Bush administration has just turned its back on a 20-year Republican legacy of telecommunication competition. What will it do now to put things back on track?

Bush Solicitor General Ted Olson decision not to appeal the D.C. Court of Appeals ruling on Federal Communication Commission local competition rules is as wrongheaded as the ruling itself. The so-called UNE-P rules have proven essential in accomplishing the primary goal of the Telecommunications Act of 1996 - creating local phone competition.

In return for being allowed into long distance under the act, the Bells agreed to open up their local loops to competitors when the act was negotiated. But then for eight years they litigated every requirement for their doing so, while also piling up $2 billion in fines and fees for violations. Since they were making hundreds of billions, those fines were just a cost of doing business. Result: almost no local competition at all.

Then the FCC established UNE-P by which competitors were allowed to lease parts or all of the Bells' local platforms at essentially replacement cost rates. Doing so lets competitors build up their customer lists, that then warrants their spending the billions needed to build facilities to compete head to head with Bells.

In just the last couple of years, more than 19 million consumers have migrated to competitors thanks to UNE-P.

Only now, an appeals court has ruled that the FCC exceeded its authority, not in setting rates for UNE-P, but in having state utility boards determine when they needed to be implemented in their areas. The court previously had said the FCC needed to make such findings on a local rather than national basis to be fair to the Bells. If it can't call on the states to help, it would have to set up local boards of its own, an impossible task.

If the court ruling is allowed to stand, not only will the customers of Bell competitors face higher charges. Only this week, Verizon, one of the four remaining Bells, indicated it might lower its rates for unlimited long distance and local calling in New York to match lower charges by AT&T. Without competition, it wouldn't have to think about it.

Olson, and the White House, by not joining in the appeal, are turning their back on support for competition in telecommunication dating back to the Reagan administration, whose antitrust chief in the Justice Department, William Baxter, broke up old Ma Bell, AT&T.

The administration didn't share the Carter administration's view that bigness was bad. Many even thought the administration would turn its back on the antitrust case against AT&T brought by the Carter Justice Department. But instead, it pursued it vigorously. And after District Judge Harold Greene refused to grant AT&T a summary judgment, saying the government's case had a good chance at success, Baxter negotiated in 1982 the largest antitrust divestiture since the breakup of Standard Oil.

In a return for freedom to enter other lines of telecommunications business, AT&T gave up its local phone services, which were spun off as seven independent local operating companies.

Why such harsh action? As legal scholars Lawrence A. Sullivan and Ellen Hartz wrote in 1990, "As viewed by Baxter, the 1982 decree was necessary because AT&T's control over the natural monopoly segment of the industry, local exchange service, had placed it in the position to leverage its power into other industry segments which depended on the local exchange network."

Baxter preferred market forces, rather than regulators, to set prices and determine rates. But to have market forces provide that kind of self regulation required competition.

Consumers were the big beneficiaries of his wisdom. The settlement opened the door to competition in phone equipment and in long distance, lowering prices and creating a wealth of new services. Coast-to-coast calls that in 1980 cost about $1.30 a minute have plummeted to under 10 cents. The local Bells, given free radio spectrum by the FCC, became encouraged to deploy wireless. Paging services proliferated. Coupled with an FCC decision that kept the Bells from charging per minute long distance rates and access charges on Internet Service connections, the action even helped set the stage for the Internet revolution. Seven national fiber optic long distance networks enable high-speed and high density Internet connectivity. Those networks also are why the Bells have been able to get into long distance themselves by leasing space at competitive rates rather than building their own systems.

Indeed, the AT&T breakup proved so successful by 1996 that Congress -- with the support of the local Bells at the time -- decided to extend competition to that "natural monopoly segment": the local exchange service. It was the reason for the Telecom Act.

If they had fully followed Baxter's market precepts, the act would have forced the Baby Bells to structurally separate their local service into wholesale and retail arms and then required the wholesale unit to provide competitors the same nondiscriminatory access as Bell retail company.

But the Bells never have liked that idea. So, they almost demanded rules instead -- rules they figured they could fix their way.

The appeals court fell into their trap. And now the Bush administration risks doing the same. It promises to put into effect interim rules to make sure that consumers are not harmed, but by failing to take the case to the Supreme Court they have taken pressure off the Bells to do as they promised in 1996 -- open their systems to competitors at fair rates. The president had better have a pretty good back up plan -- only the future of telecommunications, the vitality of the information economy and a Republican legacy dating back more than 20 years are at stake.


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