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Democracy & Technology Blog Don’t Re-Regulate Special Access

Rep. Ed Markey

Rep. Ed Markey (D-MA), chairman of the House subcommittee on telecommunications, wants the Federal Communications Commission to re-regulate “dedicated special access” services (the telephone services provided to businesses and institutions, as opposed to residential customers). He recently sent a letter to the five commissioners, which said:

My concern is that significant concentration in the special access market through mergers and bankruptcies, combined with the [FCC’s] deregulatory pricing regime, has resulted in higher prices and little competitive choice for special access connections. These are also the conclusions of a November 2006 Report by the General [sic] Accountability Office (“GAO”) ….
I respectfully request each of you to respond to me by close of business on June 11, 2007, as to whether you support or oppose completing any review of special access issues necessary to adopt an Order revising such rules by no later than September 15, 2007.

Markey’s facts are wrong and his prescription will harm rather than promote competition.
The Government Accountability Office report Markey cites carefully acknowledges, on pg. 13, for example, that it is talking about average list prices. Actual contract prices have declined.

[O]ur analysis shows that most contracts (emphasis added) provide discounts that, coupled with CALLS Order decreases in phase I areas, can eliminate any increases in the list prices and result in an overall decrease in price when compared with prices that existed prior to pricing flexibility …. Average revenue for channel terminations and dedicated transport for DS-1 and DS-3 has generally decreased over time, although the decline in average revenue for channel terminations is larger in phase I areas compared with phase II areas.

The report notes on pg. 32 that rates have declined 5-6%.
What about the bankruptcies of many competitive local exchange carriers and the mergers of the super-carriers? They are simply a sign that the market is becoming more efficient, which is good for consumers. Fewer suppliers can be a problem if barriers to entry are high, but the GAO report notes that a competitor need only sign up a couple customers to justify the cost of extending their own facilities to a building:

[R]epresentative from one firm estimated that they would need three to four DS-1s of demand, while representatives from two other firms estimated demand of greater than 2 DS-3s was required. However, one incumbent firm and one cable company noted that the necessary revenue to extend a nearby network into a building is relatively low.

Cablevision and Time Warner are making “major pushes” to offer packages of phone, TV and high-speed Internet service to small and midsize businesses, according to the Wall Street Journal, and Comcast has said that offering services to small and midsize businesses will be its top new priority of 2007 and 2008.
Markey’s letter notes that special access pricing is of particular concern to his friend Sprint Nextel — it’s trying to cut costs, like everyone else. Somebody should have told Markey that Sprint already has a plan for dealing with this issue. As noted in Business Week, Sprint Nextel is building its own WiMAX network to reduce the backhaul costs it pays to route calls from cell towers to switching centers. In many cases, Sprint Nextel uses special access services provided by other carriers to carry this traffic, and the investment in its own WiMAX network may enable Sprint Nextel to reduce its network operating costs by a staggering two-thirds.
The investments in new facilities by cable companies and Sprint Nextel are the direct result of the FCC’s current focus on deregulation. For example, the re-designation of DSL as an “information service” and franchise reform have empowered AT&T and Verizon to aggressively compete for the cable companies’ TV and broadband customers. The cable companies, in turn, are looking for new markets to enter to sustain their growth. Similarly, the FCC’s deregulation of dedicated special access services has led Sprint Nextel to invest in network construction, rather than buy more lobbyists in an attempt to preserve favorable regulation.
Policymakers should applaud these developments, and set a timetable for the complete elimination of all remaining special access price-controls. Proponents agree they should be eliminated someday, when the market is “truly” competitive. But true competition is in the eye of the beholder.
Randy May at the Free State Foundation has written an excellent paper on the regulation of special access which talks about how it is impossible for regulators to, in the words of the FCC, “time the grant of pricing flexibility relief to coincide precisely with the introduction of interstate special access alternatives for every end user.”
If policymakers want to do something to help the CLECs, they may want to check out the GAO report at pg. 27. There, GAO underscores that competitors do face some serious problems that have nothing to do with incumbent phone companies: Some cities have moratoriums on the construction of new telecom facilities. And some building owners try to charge the competitors for accessing their buildings or deny access altogether. But the question is: should the investors, employees and customers of the incumbent phone companies be called upon to offset these disadvantages? The answer is no. Not when the FCC has authority to preempt local regulation which inhibits competition and when building tenants can demand from their building owners access to competitive alternatives.
See:FCC Needs to Improve Its Ability to Monitor and Determine the Extent of Competition in Dedicated Access Services,” GAO-07-80 (Nov. 2006)
See:Cable Firms Woo Business In Fight For Telecom Turf,” by Peter Grant,Wall Street Journal,” Jan. 17, 2007
See:Sprint’s Secret to Cost Cutting: WiMAX,” by Olga Kharif, Business Week, Dec. 27, 2006
See:Special Access and Sound Regulatory Principles: The Market-Oriented Case Against Going Backwards,” by Randolph J. May, Perspectives from FSF Scholars, Vol. 2, No. 16, Jun. 4, 2007

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.