Settling Accounts, Part 2

by on April 23, 2008 · 6 comments

Recenty I commented that the Federal Communications Commission  has an opportunity to relieve AT&T of several unnecessary, burdensome and anticompetitive accounting requirements.

I noted that the data derived from the legacy accounting procedures simply isn’t used anymore to regulate revenue or set prices.  That’s true, by the way.

This week a group which calls itself the Ad Hoc Telecommunications Users Committee filed a letter (in which it didn’t identify its members) claiming:

As we explained at the debate, the data produced by the cost allocations at issue have been used by the Commission and private parties in the past (CALLS), are being used by the Commission and private parties in the present (272 Sunset Nonstructural Safeguards, Separations reform and theSpecial Access Rulemaking) and will in all likelihood be used by the Commission and private parties in the future (Special Access Rulemaking, Inter-Carrier Compensation Reform  and monitoring the efficacy of the Price Caps formula).

What’s going on here?

Well, like I said, the commission doesn’t use the data to regulate revenue or set prices, but competitors apparently do use the data to argue that incumbent telephone companies can “afford” to charge lower wholesale prices.

The FCC doesn’t seriously consider these arguments, mostly, because it recognizes that the accounting rules became political long ago and lead to arbitrary conclusions.

What  Ad Hoc’s argument shows is the legacy accounting rules have become an unintended device for protecting smaller, possibly inefficient, rivals.  But remember, if we ensure that inefficient  rivals can be profitable we are requiring that consumers pay higher prices than they would have to in a competitive market.

The rivals want to argue that AT&T shouldn’t be allowed to earn more than legally prescribed rate of return for a legally protected monopoly.  In other words, the minimum profit necessary for a company which faces no competition and no risk whatsoever. But AT&T isn’t a monopoly anymore .  It faces competition from cable, wireless, satellite, municipally-backed WiFi and power companies.  Unwise investments by AT&T can fail.  And that’s good.

That’s why the traditional rate-of-return margin afforded to a monopoly is irrelevant.   Investors are going to want AT&T to be able to return a profit  which corresponds to the profit  their investment can make somewhere else.

The argument the CLECs make here is that regulation is needed to protect smaller and possibly inefficient firms from bankruptcy, because  without them there would be fewer firms to compete to lower prices for consumers.

But this is not a fair argument because it ignores cable, wireless, satellite, municipally-backed WiFi and power companies.  According to Noll and Owen, in The Political Economy of Deregulation (1983),

True competition – the kind that is in the interests of consumers – exists when a firm that tries to charge excessive prices, that offers a poor quality of service, or that has a high price because it is inefficient finds that other firms expand or enter by offering lower prices or better service.  The number of companies in an industry  is a poor measure of true competition.  Better measures take account of structural conditions affecting the incentives to compete or cooperate and the number of firms that could relatively easily enter if the incumbents did not charge competitive prices.

This is no longer a protected market where “competitive” local exchange carriers are the only competitors.   CLECS don’t include cable, wireless, satellite, municipally-backed WiFi and power companies.  The CLECs are simply new wireline entrants whose business plans depend on the artificial wholesale prices set by regulators.

Check out this argument made by Ad Hoc in its letter to the FCC:

AT&T claims (without documentation) to spend $11 million to comply with the subject rules.  We explained that $11 million is thousandths of percent of AT&T’s 2007 revenues of $118 billion, and that given 2007 revenues AT&T’s earns $11 million in about forty five minutes.

I don’t think there is a better illustration of what I am talking about: Force AT&T to overcharge its other customers $11 million so we, the CLECs, can make a profit.  We deserve it.


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