16. What are the pros and cons of the Michigan Telecommunications Act?

As currently written, the Michigan Telecommunications Act (MTA) still empowers state regulators to micromanage many aspects of telecom services. But the public interest would be better served by allowing competitive forces to keep rates low, service quality high and the choice of products varied.

The MTA, for example, prescribes rate plans that larger telecom service providers must offer. Given the dramatic changes in technology and consumer preferences in recent years, such mandates are anachronistic, if not downright irrational. The requirements constrain telecom companies from bundling services in response to consumer demand. But consumers are best served when their preferences, not those of regulators, dictate product offerings.

The act also defies basic economic principles by requiring that telecom providers service every customer segment of the market in which they are licensed. This prohibition on niche marketing curtails competition while robbing consumers of customized calling options.

State law also prohibits incumbent local service providers from raising rates more than once annually for basic local services. This provision was intended to protect consumers from rising rates. Over the long term, however, price controls harm consumers more than they protect them by inhibiting improvements in products and services.

This is especially true in Michigan, where basic local service rates and wholesale network access rates are set artificially low by state and federal regulators. The state formula that is used to calculate the rates, called “Total Service Long Run Incremental Cost,” assumes that networks consist of the least costly, most efficient technology currently available. But this hypothetical cost model, based on a similar federal model, does not reflect the actual network configuration or operating costs. Consequently, the incumbent service providers who own the network earn less revenue with which to invest in upgrades. Nor does it help matters that the Michigan Public Service Commission routinely takes months to resolve rate disputes — an eternity compared to the pace of market swings.

Price controls actually inhibit competition by keeping rates artificially low, thereby reducing opportunities for new entrants to compete. Consumers are left with fewer choices among products and service providers.

State lawmakers have followed their federal counterparts in requiring that incumbent providers subsidize rivals by providing access to the calling network at heavily discounted wholesale rates. Under the pre-emption doctrine, these provisions are superseded by federal law, but that has not stopped state regulators from attempting an end-run around the Federal Communications Commission.

Unfortunately, recent events highlight the troubling tendency of Michigan regulators to exceed their statutory authority. Following court rejection of federal rules on network access, the Federal Communications Commission urged incumbent service providers and their rivals to negotiate voluntary commercial agreements. In a letter to telecommunications firms and trade associations, the commissioners said: “After years of litigation and uncertainty, such agreements are needed now more than ever. … The best interests of America’s telephone consumers are served by a concerted effort to reach a negotiated arrangement.”[31]

SBC and Sage Telecom Inc. were the first to successfully negotiate a voluntary agreement. But no sooner had the companies announced their success than the Michigan Public Service Commission, without notice or hearing, demanded to review the entire agreement.

The Michigan commission was one of only five state regulatory agencies nationwide to claim regulatory power over rate changes in the absence of federal rules. In fact, Commissioner Robert Nelson implicitly threatened to bar SBC from the long-distance market if the company dared to deviate from the wholesale price controls overturned by the federal court. The Michigan commission also refused to suspend other regulatory proceedings judged to be unlawful by the federal appeals court.

Federal law does require the regional Bell operating companies to file with state commissions specific contract provisions delineated in the Telecommunications Act of 1996. However, state commissions appear to have no legal authority to approve or reject contract provisions in their entirety.

SBC and Sage have appealed the Public Service Commission order. As the petition to the FCC states, “If negotiations are tainted by regulatory overhand (sic), if a private commercial agreement is subject to approval or modification by regulators, if the terms of that agreement can be picked apart … no carrier will have much of an incentive to negotiate.”[32]

The reality is that incumbent wireline companies have an incentive to serve as wholesalers of network access without government interference. As incumbents continue to lose customers to competing technologies, they must nurture new sources of revenue. Indeed, in the weeks following the overturning of the federal “forced-access” rules, several companies negotiated private contracts.

Toll calling in Michigan supposedly is unregulated. Yet the MTA forces service providers to treat all calls to adjacent exchanges as local calls, as well as to offer a discount service plan for calls to exchanges within 20 miles of a customer’s home exchange. The cost of network restructuring required to implement this provision exceeded $30 million in the SBC territory alone.

Service providers are also prohibited from withdrawing toll service to an exchange unless an alternative provider offers the very same type of service. But high access rates among some local service providers can make toll service a losing proposition. Nonetheless, a toll provider may be forced to continue offering service that falls short of actual costs by millions of dollars.