Corporate Welfare in Telecom Harms Consumers

The Michigan Public Service Commission (PSC) is about to undertake a costly and contentious review of telephone rates. Whether the commissioners promote sound policy or merely succumb to special interests will have lasting repercussions for consumers and the economy.

At issue are the wholesale rates paid to SBC Michigan by rival companies using its local telephone network. At present, the government dictates a formula that allows SBC to collect from these service resellers an average of $14.50 per line each month for full network access — among the lowest rates nationwide.

Stay Engaged

Receive our weekly emails!

The rate is so low, in fact, that SBC reports losing about $17.50 per leased line each month, on average. Acknowledging the apparent gap between operational costs and the lease price, the PSC has wisely agreed to review its rate regulation. But it will take more than a simple rate adjustment to restore economic rationality to the telecommunications industry. Deregulation at both the federal and state levels would be the more effective remedy.

The cheap wholesale rates set by Michigan regulators in 1999 have allowed SBC rivals to market low-cost service plans. Consequently, the proportion of telephone lines managed by competitors here exceeds that of all other states with the exception of New York.

This may appear to benefit Michigan consumers in just the way Congress intended when it crafted the Telecommunications Act of 1996, which mandated temporary network access subsidies to promote competition in local services. In reality, however, the artificially low rates exploited by competitors such as AT&T and MCI WorldCom are simply a form of corporate welfare. Forcing SBC and its sister Baby Bells to subsidize their rivals threatens the reliability of the network and undermines technological innovation.

Bell rivals now manage some 25 percent of the telephone lines in Michigan, including a tripling of market share in SBC’s service region. But transfixed by the subsidies, new entrants have failed to develop the alternative networks envisioned by Congress. For example, competitors rely on the SBC network to service nearly 75 percent of their new customers. But as noted by Cato Institute telecommunications analyst Adam Thierer, “sharing is not competing.”

Meanwhile, SBC’s loss of lines to resellers and the concomitant revenue shortfall forced the company to slash network investment in Michigan by 30 percent between 2001 and 2002. Moreover, investors are unwilling to underwrite new telecom infrastructure or research and development given the dismal outlook on industry earnings. This lack of investment undermines service quality and network reliability.

The economic impact of such “network socialism” has been predictably devastating, according to Matthew Flanigan, president of the Telecommunications Industry Association. In a letter last November to the Federal Communications Commission (FCC), Flanigan noted the loss of 500,000 telecom-related jobs and $2 trillion in market valuation since 2000, as well as a 14 percent decline in telecom R&D. Regulatory reform, he insisted, is desperately needed.

“Should capital expenditures and research and development spending continue their downward spiral, the health and welfare of the entire high-tech industry — and the U.S. economy — will suffer potentially irreversible harm in the mid- to long-term,” Flanigan wrote. “This will only serve to erode the U.S. industry’s position as a recognized and proven worldwide leader in technological innovation.”

But those on the regulatory dole aren’t about to relinquish their subsidies without a fight. No sooner had SBC submitted cost-review documents to the PSC last week, than rivals unleashed a public relations campaign against a rate adjustment.

The Michigan Alliance for Competitive Telecommunications (MiACT), a group of SBC competitors, crafted a news release touting $200 million in savings that consumers supposedly enjoy under the current wholesale rate structure. But MiACT’s analysis is both simplistic and flawed. The “savings” were calculated by comparing the monthly bills of SBC customers to those served by rival firms. No adjustment was made to account for differences in the level of services, nor was service location considered, despite its impact on calling patterns, and thus costs. The study’s sample size was inadequate and the rates attributed to SBC were exaggerated.

Such political posturing is entirely predictable when government usurps the market’s function. And the FCC only exacerbated the problem by recently abandoning federal deregulation in favor of more state oversight authority.

It is instructive to note that the most dynamic sector of the telecom industry is also the least regulated. More than 129 million consumers now subscribe to cellular phone service and 18 percent consider this their primary telephone line.

An aging and outdated telecom infrastructure will rob consumers of quality service and undermine Michigan’s economy. In reviewing the wholesale rate structure in coming months, the Public Service Commission should consider the enormous benefits of full deregulation and wean the industry from the corporate welfare threatening our telecom network.

# # #

Diane Katz is director of science, environment, and technology policy for the Mackinac Center for Public Policy, a nonprofit research and educational institute.