Regulatory Wrangling Stymies Telecom Competition

After years spent dutifully processing piles of documents representing millions of dollars in attorneys’ fees and lobbyist payments, the state Public Service Commission is preparing to decide at last whether local telephone competition exists in Michigan.

A decision is expected before year’s end, and the outcome is crucial to SBC Ameritech, its stockholders and workers. Only by convincing regulators that the telephone market is "irreversibly open to competition" can the company broaden its service offerings beyond local calling. Otherwise, long-distance remains off limits by law to Ameritech– along with the growing number of customers who prefer the convenience and cost advantages of a single supplier of all telecommunications services.

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For taxpayers, telephone customers and the economy, the tangled, costly process is a colossal waste. Internet, cable and satellite communications have all but rendered obsolete the distinction between local and long-distance calls. Flat rate calling plans are now common. Moreover, the form of competition contrived by Congress is largely illusory; unlikely to deliver the optimal cost savings and service quality that real deregulation would produce.

The competition called for under federal law requires Ameritech to offer various local telephone services at discount rates to rivals, who then market and resell those same services to customers at higher retail prices. In essence, Ameritech and its sister Baby Bells are subsidizing their competitors, a situation that hardly constitutes real market competition.

Beyond the confines of the Public Service Commission’s Lansing office, evidence of such "competition" is obvious. Last week, for example, telecommunications giant AT&T ran full-page ads in the state’s major newspapers to woo a larger segment of the customer base likewise targeted by dozens of other telecommunications companies. Overall, rivals manage an estimated 28 percent of the local telephone lines in Ameritech’s service region – a tripling in volume over the past two years. Indeed, Ameritech recently slashed rates by $26 million to stem the line hemorrhage – 450,000 in the first half of this year alone.

But it is the perversity of current telecommunications law that such market realities are largely ignored in favor of protracted regulatory wrangling. Ameritech still must convince the commission, the U.S. Justice Department and the Federal Communications Commission that local competition exists. Rivals, meanwhile, are lobbying relentlessly to undermine the company’s case. The actual competition is, then, is to win over regulators rather than customers.

The Public Service Commission will base its decision largely on the results of some 30 months of testing conducted by a private consulting firm at Ameritech’s expense. Posing as various wholesale customers, Bearingpoint Inc. sought network access and other services from SBC Ameritech, and then rated the company’s performance against benchmarks established by the FCC and the Michigan Public Service Commission.

According to Bearingpoint’s report to the commission, Ameritech met or exceeded performance measures in 428 of 482 points of study, such as filling orders, maintenance and repair, and billing. Whether the commission will be satisfied remains to be seen. But even a perfect score would not reflect the actual state of the market.

The fact is, today’s competitors remain dependent on the Baby Bell networks, without which they have no service to sell. No surprise, then, that the Bells still dominate in local service notwithstanding a considerable loss of lines. Rivals will only truly wield competitive strength when they circumvent the Bells’ networks with new technologies. And only then will consumers enjoy the price and service benefits of full competition.

As FCC Chairman Michael Powell told Wall Street analysts last week: "Only through facilities-based competition can an entity offer true product and pricing differentiation for consumers. Only through facilities-based competition can a competitor lessen its dependency on an intransigent incumbent, who, if committed to frustrate entry has a thousand ways to do so in small, imperceptible ways."

Many experts agree, in fact, that the current regulatory regime actually stymies meaningful competition. Forced to open their networks to rivals at discounted rates, companies like Ameritech have little incentive to invest in costly upgrades. Nor are would-be competitors developing innovative products and services with which to outshine the Bells. Consequently, telecom R&D goes lacking, further delaying the rollout of new technologies that would challenge Ameritech’s dominance.

Moreover, federal policy protects any and all rivals, which drains capital from the industry and weakens the competitive landscape. As Powell told investors: "No matter how weak or shoddy the fundamentals or poor business models were, and no matter how irresponsible the debt levels or exaggerated the growth expectations were, policy promised that all competitors would be salvaged and sustained in the name of competition."

During hearings before the Federal Communications Commission last week, some analysts cited government’s continued interference in the market as contributing to the industry’s financial distress. Lara Warner, of Credit Suisse First Boston, told the federal commission that the market has not responded well to government’s notion of competition. Investors, she said, want the FCC to "let the companies compete and let the market determine which management teams innovate and survive."

Fortunately, the FCC is undertaking what Powell called a "major" review of the network access policies. But until federal regulators unleash the industry, Michigan’s Public Service Commission would do well to advance competition by expediting Ameritech’s bid to offer long-distance services. To continue to restrain the company would only punish consumers by limiting competition in long-distance services.

For six years, the state and federal government have tried to tame Ameritech through regulation. But the more effective approach is to subject Ameritech to marketplace discipline, where competitors will force the company to offer choice, better prices and quality service.

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Diane S. Katz is director of science, environment, and technology policy for the Mackinac Center for Public Policy.