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The Telecom Follies

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Never mind the war on terror or the economy. AT&T has convinced some in the White House that the November election will be about . . . phone rates.

How else to explain the Bush Administration’s anticompetitive approach to telecommunications, an industry that inside of four years has lost an estimated 900,000 jobs, $2 trillion in market capitalization and $280 billion in capital investment? Earlier this month, a D.C. Circuit Court of Appeals ruling gave the Administration yet another chance to update telecom regulations that support price controls and ignore property rights. So far, the White House is taking a pass. Amazing.

We would think that in an election year when it is being pounded daily for a “jobless recovery,” the Bush Administration would leap at an opportunity to revitalize an industry that was the source of so much job creation and investment during the 1990s.

Instead, the Administration is poised to make the same mistake it did on steel tariffs — choose a short-term political calculation over a free-market approach that would better serve the specific industry and the economy as a whole. Meanwhile, Federal Communications Commissioner Kevin Martin, another Bush mistake, splits his time between media grandstanding and undermining his fellow Republicans at the Commission. Mr. Martin might well become the first FCC regulator to get a President fired.

For the third time since Congress passed the 1996 Telecommunications Act, the appeals court has told the FCC to revise the unlawful rules that force the Bells to rent their phone lines to AT&T, MCI and other competitors at deep discounts. In the past, the court has bluntly told the Commission that its telecom policy “favors the interests of individual competitors instead of competition.” What distinguishes this latest FCC smackdown is that the appellate judges took the unusual step of scheduling the rules to expire in 60 days.

Which is fine by FCC Chairman Michael Powell, who recognizes that deregulation, not more litigation, would best serve telecom’s needs. That view, we’re told, is also shared by Treasury Secretary John Snow and economic adviser Steve Friedman. But on the other side you have Mr. Martin, who refuses to budge in the absence of firm White House direction.

Mr. Martin is pushing for a Supreme Court appeal that could easily put off resolution for another two years. Apparently, Ma Bell’s lobbyists have convinced some in the White House that AT&T must never be forced to pay what the market will bear for the use of those local lines, come what may. AT&T argues that unless it has access to the local phone networks at below-market costs, customer phone rates will rise. But there’s no guarantee this will happen, and the company’s own One Rate USA plan illustrates why.

In Missouri, AT&T charges customers $49.95 per month for the plan and pays a regulated wholesale rate of roughly $19 per month for use of the local phone network. Just next door in Illinois, however, AT&T pays only about $12 to access the local network, yet still charges Illinois customers the same $49.95 rate.

When you look at what the One Rate plan retails for around the country — from $48.95 in California and Arkansas to $59.95 in South Carolina and Kentucky — it’s pretty clear that market competition is determining what customers pay, not price controls. That’s something for the White House to consider the next time Ma Bell calls and says 19 million customers are threatening to vote for John Kerry if AT&T loses its subsidy and phone rates rise.

AT&T says that after costs for features like voicemail and long distance, profits aren’t as much as those numbers would suggest. But our point here isn’t to begrudge a company its margins, or knock AT&T lobbyists for playing hardball, which is their job. Our concern is with an Administration leaving in place what is essentially an Al Gore-Reed Hundt industrial policy that allows government bureaucrats to slice up the information technology pie.

In case no one in Washington has noticed, the largely unregulated and hence highly competitive wireless industry is flourishing. Meanwhile the broadband market has been left to the devices of state and local officials who have proceeded to regulate it into something close to inertia, at least by international standards. Wholesale prices have been set so low that incumbent carriers have little incentive to upgrade old networks, let alone build new ones.

Picking winners and losers and setting prices that discourage innovation come naturally to Democrats. But Republicans claim to believe it’s better to leave these matters to the free-market. What the economy needs right now is an all-clear signal for telecom, some indication that the big court battles are over. Instead, the White House continues to look the appellate court’s latest gift horse in the mouth — to the detriment of the economy, and perhaps to its own political future.