Lawmakers, lobbyists and regulators will gather today at Wayne State University to ponder telecommunications policy. Arcane as the issues can be, they entail broad and significant economic consequences.
There is no more appropriate a state than Michigan for just such a forum. By federal standards, the competition in local services here exceeds all other states with the exception of New York. And yet the Michigan Legislature is now considering a radical reversal of the deregulation from which this long-sought competition has sprung. How Michigan navigates this policy crossroad will thus have lasting repercussions on service costs and quality.
Today’s forum will focus, in part, on whether the reigning regulatory regime has achieved the goals set by Congress in the Telecommunications Act of 1996. By even the most generous appraisal, the results should be judged as unsatisfactory. Nor will consumers benefit in the least if Michigan pursues a more draconian version of the same failed policy.
The principal aim of the 1996 act was to spur competition in local telephone service. As envisioned by Congress, the Baby Bells would open their local networks to rivals at discounted rates in return for the right to offer potentially lucrative long-distance services. Once competitors established a customer base, investment in new networks would result. Or so lawmakers reasoned.
Hundreds of rival companies have indeed captured market share from the Bells. According to the Federal Communications Commission, 93 percent of U.S. households now enjoy a choice of local telephone service providers, and competitors control nearly 22 million lines — an increase of 20 percent in 2002 alone.
The level of competition in Michigan is matched only in Rhode Island, and exceeded only by New York. Bell rivals now service more than 20 percent of the telephone lines in Michigan, including a tripling of market share in SBC’s service region. It’s no surprise, then, that the state’s largest telephone company reduced basic service rates by $29 million last year and will pare another $20 million in the near future.
But impressive as these numbers may seem, the competition spurred by the 1996 Act is largely illusory. In reality, the Bells are simply subsidizing their rivals, who thus have no incentive to establish independent networks that would constitute meaningful and lasting competition.
Not only has this regulatory approach failed to achieve the intended results, it threatens the reliability of the telecom network and undermines innovation. Forced to provide below-cost access to rivals, the Bells can ill afford system upgrades. Meanwhile, most rivals remain too dependent on the existing wire line network to pursue R&D that would otherwise yield new telecom technologies.
With no real hope of overtaking their network patron, these pseudo-competitors instead are lobbying both Congress and the Michigan Legislature for more regulatory advantages. Topping their wish list is so-called “structural separation,” which would require the Bells to sever their retail services from their network operations.
The goal of structural separation is to strip from the Bells the benefits of network ownership. Forcing the Bells to buy network access under the same rates and conditions as rivals is the only way to create a “level playing field,” proponents claim. But creating what essentially would be a new regulated utility would make the telecom network far less efficient, requiring rate hikes to cover higher operating costs.
Of the few states that have even considered structural separation, none have taken so radical a step. Its constitutionality, too, is in doubt given that structural separation would amount to a government seizure of assets. Nevertheless, state Rep. Ken Bradstreet, R-Gaylord, has introduced legislation to force the structural separation of both SBC and Verizon by no later than Jan. 1, 2004.
Enactment of any such bill would invite years of litigation and regulatory uncertainty — both of which would effectively halt telecom investment here in Michigan. Anyone doubting Wall Street’s distaste for regulatory wrangling need only consider the $12 billion loss in telecom market capitalization that followed a divisive decision last month over ratemaking rules from the Federal Communications Commission.
Bradstreet’s bill (HB 4044) is all the more misguided considering the recent finding of the state Public Service Commission that SBC has fulfilled its network access obligations. In announcing the commission’s finding, PSC Chairwoman Laura Chappelle called on telecom firms to focus on products and services rather than on more politicking. “Let the carriers duke it out rather than (the PSC) micromanaging rates,” Chappelle said.
Government interference in the telephone market is precisely what has inflated rates and stifled telecom innovation for decades. In considering the best course for telecom policy, participants at today’s forum in Detroit would do well to endorse deregulation rather than abide by the obsolete regulatory approaches that have failed to benefit consumers.
Diane Katz is director of science, environment and technology policy for the Mackinac Center for Public Policy.