TCS Daily

Is Anyone on the Line?

By James K. Glassman - December 10, 2004 12:00 AM

During the campaign, President Bush immediately sought to distinguish himself from John Kerry, who, throughout his Senate career, had switched positions on key issues. "I understand everybody in this country doesn't agree with the decisions I've made," Bush said in the first debate. But "people know where I stand."

A reputation for clarity and determination helped him win the election. Clarity is good for an economy too. It's excruciatingly difficult for businesses and investors to decide how to allocate their capital when policymakers steer a course and then suddenly change direction.

But that is precisely what has happened with telecommunications.

An uncharacteristic shift in policy by the Administration -- yes, let's call it a "flip-flop" -- has left investors befuddled and reluctant, millions of consumers and small businesses facing higher phone-service rates, and a sector critical to the economy languishing.

What went wrong? Faced this summer with a decision that it would rather have avoided, the Bush Administration chose a chimera posing as de-regulation over its original forthright policy of fostering real competition.

As a result, competitive local exchange carriers -- or CLECs, which are companies ranging from AT&T and MCI to small firms like QuickConnect U.S.A., based in Michigan -- are being chased from the market, leaving the field to the four giant Bells that have traditionally held a near monopoly on local phone service, nurtured by subsidy and regulation. The four are Verizon, SBC, Qwest and Bell South.

Read your economic textbook. Limiting competition can have only two results: first, higher rates and poorer service for customers and, second, reduced investment by the businesses that survive.

As a news story in the Wall Street Journal last week put it:

"Competing against the big Bell phone incumbents is tough enough but next to impossible when Washington is constantly changing the rules of the game. A 1996 law that scrapped the vestiges of the Ma Bell phone monopolies lured dozens of competitors to the $300 billion local and long-distance telephone industry. Many have since failed. While the stock-market bust dried up crucial funding, industry executives and investors say the new rivals' biggest obstacle to success has been legal and regulatory uncertainty."

And, now in the confusing aftermath of its decision not to the appeal a court ruling to the Supreme Court, the Bush Administration has made that "biggest obstacle" insurmountable.

Some background....

In 1996, a Republican Congress and a Democratic president settled on a blueprint to bring competition, at long last, to local telecom service, the last mile that links homes and businesses to the greater electronic world. That final connection is controlled by seven (now four) Bells.

The law required the Bells to lease their lines to competitors at reasonable rates. In return, the Bells could enter long distance, which had already become a competitive free-for-all with the break-up of AT&T.

The Bells balked, and, a few years later, their friends in Congress tried to roll back the 1996 law, but it stuck. And in 2002, it appeared the issue was resolved when the Supreme Court rejected the Bells' arguments. Separately, the Federal Communications Commission, in a split decision (with Chairman Michael Powell in the minority), upheld the system of lease rates.

But a court intervened, and the Administration -- in a shockingly poor decision -- decided not to take the case to the Supreme Court, where, if one judges from history, chances were good that ruling would have been reversed and policy placed on a stable course after nearly a decade.

With an election coming up, the FCC and the Bells delayed crippling rate increases, which will flow from the CLECs to consumers, but hikes are now in the pipeline, and, already, the CLECs have cut back their operations in anticipation.

Meanwhile, some of the nation's top investors, who have provided billions of dollars in the expectation that government would actually follow its stated policies, complain that the changes occur, "further investment will not be forthcoming, existing competitive investments will largely go to waste and monopoly will be reestablished for the foreseeable future in telecommunications markets."

Now, incredibly, USA Today is reporting that the FCC staff is ready to make matters even worse, raising rates sooner than expected and boosting them as well on CLECs that service small businesses.

With a new economic team in the wings, it's time for this Administration to bring clarity, determination and common sense back to telecom -- before it's too late.


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