TCS Daily

Not So Fast, Grave Diggers!

By James K. Glassman - June 16, 2004 12:00 AM

The U.S. Solicitor General, the government's litigator, decided last week not to appeal a critical ruling against the FCC to the Supreme Court.

The decision by the SG was an unusual one -- a slap in the face to the majority of the Federal Communications Commission, which last year had affirmed that the four giant Bell companies, which hold a near-monopoly on local service, had to lease their lines to competitors at reasonable rates, as a law passed by Congress in 1996 required.

The Bells, which had won half a loaf in the FCC's Triennial Review last year, when they received permission to block competitors, called CLECs (competitive local exchange carriers), from their advanced broadband networks, now appear to have won a whole loaf. Wholesale rates will soar, CLECs will be forced out of business, the Bells will enjoy an end-to-end monopoly and consumers will have to pay a lot more and get a lot less.

There are reports that the Bells have agreed with the Bush Administration not to raise rates before the end of the year, in an attempt to mitigate damage to consumers before the election. But economic forces are stronger than cynical deals. As soon as it becomes clear that the lower court ruling will stick, rates are going to rise.

After fighting a nasty and bitter eight years' war against the Telecommunications Act of 1996, the Bells have proven not merely cynical, but ungracious and pusillanimous, in their apparent victory. They aren't what you would call good winners. Instead, they're dancing on their competitors' graves.

One of the most prominent of the Bell allies, Adam Thierer of the Cato Institute, wrote June 16 of AT&T, the largest of the CLECs:

"The writing is on the wall. AT&T's days are numbered.... This once-great company may soon meet its demise. I will...not be shedding any tears on the day that 'T' disappears from the stock market ticker and our telecom landscape."

As Thierer indicates, the aim of the Bells all along was not to promote "deregulation" -- or other high-minded goals. It was to kill off their competitors. Kill them and then gloat over their bloody corpses.

But not so fast!

This fight is far from over. There is too much at stake -- the vigor of the U.S. economy and billions of dollars in consumer welfare.

On Monday, Michigan Public Service Commissioner Robert Nelson said that the court ruling, left to stand, "undermines our recommendation" that the state's local Bell service provider, SBC Communications, be allowed into long distance.

Good point.

The Telecom Act of 1996 established a clear bargain: The Bells had been restricted to local service after the breakup of the original AT&T in the early 1980s. In order to move into long distance, the act required that the Bells open up their local networks to the CLECs, allowing them to lease their lines at reasonable rates, now generally called UNE-P, for unbundled network element platform.

Since they wanted to offer long distance as part of a package to consumers, the

Bells complied with the deal and are now allowed to offer long distance in all 50 states. The Bells, of course, did not build their own long-distance networks. Instead, they leased them from the CLECs.

Then, having gotten what they wanted, the Bells decided to withdraw their original offer of reasonable rates -- which won them long-distance permission in the first place.

The U.S. Circuit Court, in a misguided decision, agreed that UNE-P rates would be withdrawn.

But if UNE-P is withdrawn, then, says Commissioner Nelson, long distance permission would be withdrawn as well.

"We recommended that they get long-distance approval based on the fact that there was significant competition, especially through UNE-P. Now that the FCC is pulling the plug on UNE-P, we may need to re-evaluate."

To be clear: the FCC is only pulling the plug on UNE because the court has forced it to write new rules.

Gongwer News Service, which reported Nelson's statement, also reported, "Analysts have argued that the new rates SBC will be seeking...will likely be high enough that many competitors shut down." UNE-P in Michigan is "currently about $14 per line per month, and the company has asked to increase that to $25."

Now, back to Mr. Thierer, the fellow who is so happy about the putative disappearance of AT&T from the New York Stock Exchange.

Thierer argues, as the Bells have, that, if only the Bells could be free of the onerous constraints of competition, they will happily expand and improve their service. In other words, as a monopoly, they will be more likely to invest in infrastructure.

If the Bells do this, in my view, they merit a special chapter in every Economics 1 textbook. They will become the only monopolies in economic history to increase supply rather than decrease it.

The whole point of monopoly that is it gives you an opportunity to raise prices because you don't have competitors breathing down your neck, expanding their service, offering better products.

Thierer doesn't understand. "It doesn't take a Ph.D. economist," he writes, "to see the nagging flaw in this scheme," he writes, referring to the line leasing required by the 1996 law. "If everyone is encouraged to share the old networks," he continues, "who is going to build the new ones?"

A Ph.D. economist? How about Kevin A. Hassett, director of economic studies at the American Enterprise Institute, or Laurence Kotlikoff, chairman of Boston University's economics department and a research associate at the National Bureau of Economic Research. Along with Zoya Ivanova of B.U., they wrote a paper last September that showed clearly that competition, over a five-year period, would add "$71 billion more telecom investment than under the monopoly structure that prevailed prior to the Telecom Act of 1996."

They also wrote, "If prices for so-called UNE-P network access are set too high, competitors will be unable to provide service economically for customers. Thus, they will decline to enter the market -- leaving the field clear for monopolists to raise prices without the restraints of rate regulation."

That's what monopolists do. And the monopolists will reign, Thierer not only concedes but celebrates.

Look at history. When the Bell System was broken up by the court in 1982, the "baby Bells" (seven then, now merged into four, with two, SBC and Verizon, dominant) kept their local monopolies, but AT&T was forced into competition with any other firm that wanted to provide long distance.

How did AT&T's competitors compete? By leasing AT&T's lines, under rates set by the regulators. And were those competitors "encouraged to share the old networks" by this system and discouraged from building "new ones"? Absolutely not. The sharing continued for several years, but MCI and Sprint, having acquired a customer base through leasing, built out their own networks -- very good ones, as it turned out -- and those networks forced AT&T to improve vastly its own network.

This long-distance competition model was precisely the one that Congress chose in the 1996 law. It worked for long distance; it should work for local service.

And guess what? It was working. Service improved, rates fell. The Bells grabbed 40 million new long-distance customers; the CLECs grabbed 20 million new local customers.

Now, the future is unclear. Public service commissions are not going to fade into the night. They have every reason to rescind their grant of long-distance access to the Bells, and, at this point, they should.

Meanwhile, the notion that the Bells, by holding off on rate increases, can reduce political damage is laughable. Why would a CLEC, faced with certain UNE-P hikes in 2005, wait until then to raise rates for consumers? Economic forces will compel CLECS to do the obvious: stop marketing, strip down their operations and raise rates as quickly as they can against the day when they may, in fact, have to go out of the local-service business. This can't be described as anything other than sad.

Thierer apparently doesn't see it that way. He ends his article: "AT&T. RIP."

That may be the Bells' idea of a sick joke, but, if AT&T and MCI and Sprint and Covad and the other CLECs die, it won't be very funny for consumers -- nor for the U.S. economy, nor, I suspect, for incumbents running for office in an election year.


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