MIDLAND — A new analysis of telecom data by the Mackinac Center for Public Policy has revealed that the vast majority of wire line telephone companies in Michigan are simply reselling the network services they purchase at below cost from SBC Michigan. This subsidized dependence on the incumbent network is depriving consumers of the benefits of new products and services.

"This regulatory regime has done little more than allow many new entrants to slap their names on existing services and call it competition," said Diane Katz, director of science, environment and technology policy for the Mackinac Center. "It is a policy misstep that has cost workers their jobs, shareholders their savings and consumers the benefits of a robust telecom market."

According to the study, "Crossed Lines: Regulatory Missteps in Telecom Policy," competitors utilized their own facilities to service a mere 10 percent of their local wire line customers in 2002, down from 29 percent in 1999. Moreover, 89 percent of the wire lines billed by competitors in 2002 actually were serviced in whole or in part by an incumbent network, up from 62 percent in 1999.

"Simply put, federal telecom policy and the substantial state regulation it spawned have proved to be a failure," Katz said. "Michigan consumers are paying too high a price for flawed regulations that restrict competition in local calling services. Regulatory reform is needed to foster greater choice, and to ensure the reliability and security of the telecommunications network."

The crux of the problem is the federal requirement that wire line telephone companies such as Verizon, BellSouth, SBC and Qwest allow rivals to utilize their networks at below-cost rates. Congress conceived such forced access as necessary to jumpstart competition in local calling services. Lawmakers assumed that once new entrants gained market share, they would build new facilities to compete against incumbent wire line networks.

Unfortunately, the access rates subsequently set by the Federal Communications Commission have failed, in far too many instances, to cover operating costs. Consequently, investors see little benefit in providing new telecom capital so long as the government continues to require that incumbent service providers subsidize their rivals.

"Predictably, these subsidies have badly skewed investment incentives," Katz said. "Capital spending on telecom facilities nationwide declined from $100 billion in 2000 to less than $40 billion last year. This inhibits innovation and potentially jeopardizes network reliability."

Meanwhile, the value of publicly traded telecom stocks on the NASDAQ index has plunged by 80 percent in the past three years, with devastating consequences: a $2 trillion reduction in the value of publicly traded telecom firms, a $1 trillion increase in corporate debt, and the loss of 500,000 jobs.

"Congress was right in wanting to end the monopoly franchise system in local calling," Katz added. "But the tremendous growth of wireless services, cable telephony and Internet communications present a formidable competitive challenge — all without relying on a form of corporate welfare that undermines consumers’ interests."

Most telecom law is dictated by federal statute, which complicates state-level reform efforts. "The optimum reform would be elimination of the forced-access regime by Congress," Katz said. However, she recommended that the Michigan Public Service Commission set limits on competitors’ use of forced access, and that it periodically review competitors’ eligibility for subsidized access, taking into account whether the competitor has attempted to invest in independent facilities, as Congress intended. She also urged Michigan’s congressional delegation to "Recognize the failure of the forced-access approach, and work to end it through reform of the Telecommunications Act."

"Crossed Lines: Regulatory Missteps in Telecom Policy" can be found at: http://www.mackinac.org/6029

The Mackinac Center for Public Policy is a nonprofit, nonpartisan research and educational institute headquartered in Midland.

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