Dial ‘M’ for Morass
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A federal appeals court decision revoking rules regulating phone competition could be just the boost the telecom industry needs to help get more Americans hooked up to broadband. Unfortunately, the threat of more litigation still looms, and state regulators refuse to get out of the way.
The Baby Bells and their rivals are in the process of trying to reach commercial agreements on wholesale rates. The goal of this exercise, prompted by the White House and Michael Powell’s Federal Communications Commission, is to bring true competition to a broadband market that’s been distorted by price controls.
But because the Bush Administration has yet to rule out an appeal of the March decision, which is under stay until June 15, not everyone is bargaining in good faith. Long distance carriers such as AT&T and MCI prefer the status quo, a telecom universe in which they receive access to the Bell networks at regulated (low) prices. Reliance on this government intervention is what seems to pass for a business model at Ma Bell nowadays.
AT&T’s call for binding arbitration was promptly spurned by the Baby Bells and is further proof that CEO David Dorman isn’t really ready to deal. In any case, it’s a little late for arbitration, which usually happens before going to court, not after one side has already won. Besides, the FCC was just chastised by the appeals court for trying to delegate telecom decision-making to 50 state regulatory commissions. It’s hard to see how abandoning authority to an unelected arbitrator would pass judicial muster.
To its credit, the White House has finally begun to send helpful deregulatory signals. As the recovery continues, capital spending — and the attendant job creation — is poised to return to the telecom sector. In remarks last month, President Bush applauded Mr. Powell’s efforts to “eliminate burdensome regulations on new broadband networks.” But the best way to bring AT&T and MCI to the bargaining table would be for Solicitor General Ted Olson to announce that the Administration won’t seek a Supreme Court appeal.
Federal intervention might also help facilitate negotiations between the Bells and other local carriers. In such places as Michigan and California, the Baby Bell SBC has been pressured to submit agreements to state utility commissions for review and approval. Never mind that these are voluntary, commercial agreements that are being entered into. Or that companies negotiating with the Bells might want the terms kept confidential for competitive reasons.
The bigger problem is that giving a state commission final say means that something other than market forces is determining winners and losers. So long as state commissions are allowed to second-guess the terms of the agreements, the emphasis will be on paying lawyers and lobbyists to curry favor with regulators. States say the 1996 Telecom Act gives them a seat at the table. But the March appellate ruling vacated those provisions. Even if it hadn’t, the 1996 law always contemplated commercial deals that could be struck voluntarily outside the purview of regulators.
Nor are these mandatory state filing rules a simple matter of transparency or preventing “rate shock,” as some have claimed. Rather, states are trying to use the process to dictate the terms of agreements or reserve the right to change terms after negotiations have ended. This would leave the industry in the same regulatory morass of the past eight years.
Given that government intervention has kept wholesale phone rates artificially low, deregulation may well lead to higher prices in the near term in some areas. But dozens of local carriers are seeking deals with the Bells, and in the long run the competitive pressure could force prices downward as companies vie to serve customers more efficiently. One recent deal between a Bell company and several smaller carriers calls for no increase in wholesale rates in 2004 and a $7 hike spread over the next three years. That’s hardly “rate shock.”
The situation could use some clarification from the FCC. The Bells recently filed an emergency petition asking the agency to “preserve the viability of commercial negotiations” by ensuring an environment that’s conducive to them. An FCC ruling that pre-empted the states’ ability to review these deals would accomplish that.
Like any other market, telecom responds to incentives. Nearly a decade of micro-management and endless litigation have depressed capital spending and left the U.S. trailing Asia and Europe in broadband deployment. Removing those barriers is an essential first step in reversing these trends.