October 03, 2003, 10:07 a.m.
How to fix the telecom mess?

	When Hurricane Isabel cut a wide swath through the mid Atlantic, electricity went out and cable went dark for millions in the region, most for two or three days; some for much longer. For most of those who lost power, though, one connection remained on — their old standby wireline phone. Even when the batteries of those cell phones that remained working died, the local phone line was alive. It was designed to be that way. Phone service is considered so vital for emergency purposes that local phone lines have their own little power system — the equivalent of a nine-volt battery per line — to keep phones up and running even when other electrical devices are cut off. Government protection and subsidization through regulated rates on business and long-distance services over decades created this $300 billion network that today's local phone monopolies inherited and maintain. That network places great responsibility upon local phone companies. And I commend their service. But it also provides them with huge competitive advantages. As the Supreme Court noted last year in upholding the Federal Communication Commission's pricing guidelines for the leasing of the local network to competitors, the networks provide the Bells with "almost an insurmountable competitive advantage," as access elements are extremely "costly to duplicate" even for "large competitive carriers" that might have the resources to replicate them. I am no fan of regulation. It can stifle innovation and produce huge economic inefficiencies. But to simply let a protected monopoly loose into other competitive telecommunications markets, including video, long distance, Internet, and wireless services, as Ms. Katz suggest, is an invitation to disaster. Unregulated monopolies can kill competition and stifle innovation, too. That certainly was the case in the early 1990s when then Pacific Bell and other Bell operating companies proposed treating calls to Internet Service Providers — the gateways to the Internet — like long-distance calls with 19-cents-a-minute charges. They said Internet calls threatened the viability of their networks. The FCC demurred, and wouldn't allow the per minute charges. As it turned out, the ISPs investments actually helped improve the local networks. Similarly, the Bells kept high-speed digital-subscriber technology in the closet for years until Covad and other local data telecom companies showed how to make it available over Bell lines to both residential and small-business consumers. The Telecommunications Act of 1996 was written in large measure at the behest of the regional Bell operating companies because they wanted the freedom to get into those competitive arenas. Seven at the time, they have since merged themselves into four. They still control 85 percent of the local-market phones. They have been granted permission to provide long-distance service in 42 states. Two — SBC and Verizon — are key players in the wireless market. Their failure to fulfill their promises of opening their networks to competitors in return was the source of the telecom carnage of recent years. Interim regulations finally being enforced to pry those networks open provide the best hopes for a telecom resurgence in a competitive telecommunications sector. It is the path to true deregulation. The Supreme Court noted that the Bells have an almost insurmountable monopoly. The advocates of rapid deregulation would get rid of the almost and spread that monopoly over the entire telecommunications landscape. What would happen then to innovation, jobs, and the economy would dwarf the devastation of Isabel. For the light of competition would go out not for days or weeks, but decades. — Duane D. Freese, formerly on the editorial board at USA Today, is a columnist and editorial consultant for Tech Central Station. Telecom socialists demand government control of the local calling network because companies like SBC, Verizon, Qwest, and BellSouth are, supposedly, just too darn profitable. In reality, federal regulation has eroded telecom stock values and destroyed thousands of jobs. The economic hardship that has roiled the industry for more than two years won't likely reverse any time soon. The release last month of revised federal rules — 576 pages added to the 10,000 already issued — perpetuates investment disincentives that undermine market growth and technological innovation. Corporate welfare is the crux of the problem. Under the guise of promoting competition in local calling, the so-called Baby Bells are forced by federal law to provide virtually unlimited network access to competitors at below-cost rates. Apparently lost on regulators is the ferocious competitive challenge posed by wireless and cable firms that have actually figured out how to do business without benefit of government-mandated subsidies. Regulators calculate access rates based on a complex formula devised by the FCC that assumes the costs of operating and maintaining a network built in the future. This hypothetical network is presumed to feature the most advanced technology and to operate at optimum efficiency. Of course, no such network actually exists. Consequently, the rates paid to the Bells by competitors do not cover the costs of operating and maintaining the existing network. AT&T and other firms that benefit from the forced-access regime insist that the regulated rates still enrich the major local service providers. But if profits were to be had, it's a good bet that competitors would not shun infrastructure investment in favor of interconnection. The Bells are not alone in decrying the heavy discounts afforded rivals. Wall Street likewise recognizes the revenue hemorrhage. On Feb. 20, for example, the day the FCC announced its new forced-access order, the regional Bells together lost $15 billion in market capitalization — more than the value of Ford Motor Co. Precursor Research characterizes the FCC regulations as "anti-investment" and "wealth destroying," concluding: "This order is horrible for shareholders of SBC, Qwest, BellSouth, Verizon and FON, and equipment suppliers." Jeffries & Company, Inc., refers to the below-cost rates as "sharp discounts." Anna-Maria Kovacs of Commerce Capital Markets has calculated that access rates fall "radically" below actual costs, by some 50 percent to 60 percent. J. P. Morgan Securities likewise reports that the Bells lose about 60 percent of line revenue when a competitor woos a new customer, but retain 95 percent of the service costs — a losing formula, even to the mathematically challenged. And Baird U.S. Equity Research concludes that competitors' exploitation of the forced-access scheme has "weakened the financial position" of the Bell companies. Even if it could somehow be shown that the Bells profit from forced-access, this regulatory seizure of private assets is antithetical to America's core values. Market competition is indeed beneficial, as is evident in the awesome growth of cellular and cable services. But there's little economic or social benefit to be derived from a telecom underclass dependent on subsidies to survive. — Diane Katz is director of science, environment, and technology policy for the Mackinac Center for Public Policy, a Michigan-based nonprofit, nonpartisan research and educational institute.

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