Still Seeking Advantageous Regulation in Telecom

by on July 9, 2012 · 2 comments

One of the most egregious examples of special interest pleading before the Federal Communications Commission and now possibly before Congress involves the pricing of “special access,” a private line service that high-volume customers purchase from telecommunications providers such as AT&T and Verizon.  Sprint, for example, purchases these services to connect its cell towers.

Sprint has been seeking government-mandated discounts in the prices charged by AT&T, Verizon and other incumbent local exchange carriers for years.  Although Sprint has failed to
make a remotely plausible case for re-regulation, fuzzy-headed policymakers are considering using taxpayer’s money in an attempt to gather potentially useless data on Sprint’s behalf.

Sprint is trying to undo a regulatory policy adopted by the FCC during the Clinton era.  The commission ordered pricing flexibility for special access in 1999 as a result of massive investment in fiber optic networks.  Price caps, the commission explained, were designed to act as a “transitional regulatory scheme until actual competition makes price cap regulation
unnecessary.”  The commission rejected proposals to grant pricing flexibility in geographic areas smaller than Metropolitan Statistical Areas, noting that

because regulation is not an exact science, we cannot time the grant of regulatory relief to coincide precisely with the advent of competitive alternatives for access to each individual end  user. We conclude that the costs of delaying regulatory relief outweigh the potential costs of granting it before [interexchange carriers] have a competitive alternative for each and every  end user. The Commission has determined on several occasions that retaining regulations longer than necessary is contrary to the public interest. Almost 20 years ago, the Commission determined that regulation imposes costs on common carriers and the public, and that a regulation should be eliminated when its costs outweigh its benefits. (footnotes omitted.)

Though many of the firms that were laying fiber during that period subsequently went bankrupt, the fiber is still in place.  According to the 1999 commission,

If a competitive LEC has made a substantial sunk investment in equipment, that equipment remains available and capable of providing service in competition with the incumbent, even if the incumbent succeeds in driving that competitor from the market.  Another firm can buy the facilities at a price that reflects expected future earnings and, as long as it can charge a price that covers average variable cost, will be able to compete with the incumbent LEC.  In telecommunications, where variable costs are a small fraction of total costs, the presence of  facilities-based competition with significant sunk investment makes exclusionary pricing behavior costly and highly unlikely to succeed. (footnotes omitted.)

Although many of the cell towers that require special access services today did not exist in 1999, investment in new fiber has resumed.  Citing research firm CRU Group, the Wall Street Journal reported in April that

Some 19 million miles of optical fiber were installed in the U.S. last year, the most since the boom year of 2000.  Corning Inc., a leading maker of fiber, sold record volumes last year and is telling new customers that it can’t guarantee their orders will be filled. (references omitted.)

Sprint nevertheless argues that “[r]easonably priced and broadly available private line services are particularly important for wireless carriers who depend on affordable backhaul to offer their wireless services,” and alleges that incumbent providers charge “supra-competitive rates” and “impose unreasonable and anti-competitive service terms that many purchasers of private line services are forced to accept because in many areas there are insufficient competitive alternatives.”

The last time someone looked carefully at this was early 2009, when Peter Bluhm and Dr. Robert Loube examined whether it was true that AT&T, Qwest (now CenturyLink) and Verizon were earning 138%, 175% and 62%, respectively, on the special access services they provided, as specialized accounting reports maintained by the FCC implied.  In the report that Bluhm and Loube prepared for the National Association of Regulatory Utility Commissioners (NARUC), they concluded that these figures were virtually meaningless and that the actual returns were more likely in the range of 30%, 38% and 15%, respectively.

These rates are higher than the 11.25% rate of return that telephone companies were entitled to earn when they were fully regulated.  On the other hand, the authorized rate of return was an average that concealed tremendous cost shifting from residential to business subscribers and from local to long distance.  Therefore, it is doubtful whether Sprint could have expected to purchase special access
services for no more than 11.25% above cost even during the old days of fully regulated telecom markets.

Speaking of those days – celebrated by some as a golden era when regulators “protected” consumers – it is worth remembering that there was a dark side to telecom regulation, as Reed E. Hundt, chairman of the FCC when Congress passed the Telecommunications Act of 1996, referenced in his book (You Say You Want a Revolution: A Story of Information Age Politics, 2000).

Behind the existing rules, however, were two unwritten principles.  First, by separating industries through regulation, government provided a balance of power in which each industry could be set against one another in order for elected figures to raise money from the different camps that sought advantageous regulation.  Second, by protecting monopolies, the Commission could essentially guarantee that no communications business would fail.  Repealing these implicit rules was a far less facile affair than promoting competition.

Sadly, this sort of thing is still alive and well.  Re-regulating special access pricing is one of the issues that may emerge at Tuesday’s FCC oversight hearing in the Subcommittee on Communications and Technology, and the FCC is reported to be working on an order that would require collection of additional data to evaluate the current regime, according
to a majority committee staff background memo.

Based on the available evidence, Sprint appears to be looking for a handout.  The facts don’t justify re-regulation.  Why should taxpayers pay for gathering evidence that may or may not support a corporation’s plea for advantageous regulation?

Policymakers have much better things to do than entertain this vacuous debate.  If, as Sprint alleges, it is profitable for AT&T and Verizon to provide special access services, competitors will provide them, too, and competition will discipline prices.  If the current prices are not unreasonable, re-regulation will discourage private investment and diminish competition.

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