Local Phone Choice Still Elusive
Critics of Telecom Act Say Ex-Bells Put Off Sharing Their Lines
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By Peter S. Goodman
Washington Post Staff Writer
Friday, February 2, 2001; Page E01
In the five years since Congress deregulated the telecommunications industry in the name of fostering competition, investors have poured tens of billions of dollars into a new generation of telephone and Internet companies. Thousands of miles of cables have been buried beneath the pavement to carry the traffic. Satellites have been launched into space and wireless towers have sprouted across the land, sending the goods of the information age nearly everywhere on Earth.
Yet despite this outpouring of investment and technological wizardry, the most basic commodity promised by Congress with the passage of the Telecommunications Act of 1996 has yet to arrive: Only a bare fraction of the nation's residential customers today have a choice for old-fashioned local telephone service. The former monopoly Bell companies and smaller rural systems together control more than 93 percent of the nation's local telephone wires, according to the Federal Communications Commission.
Consumer advocates complain that the Bell companies' enduring domination of the "last mile" of the global communications network -- the link to homes and offices -- denies millions of people the benefits of increased competition. Though long-distance and mobile telephone rates have dropped sharply for high-volume customers, local rates have roughly kept pace with inflation, and cable television rates have risen by nearly a third since the act phased out price controls, according to Consumers Union, the advocacy group that publishes Consumer Reports.
"We clearly have a failure to produce competition," said Mark Cooper, research director for the Consumer Federation of America. "The industry organization that Congress hoped would come into being just has not materialized."
The Bell companies argue that it is the Telecom Act itself, and the regulations that have spawned from it, that discourage further competition. They are gearing up to lobby Congress and the new Republican FCC chairman, Michael K. Powell, to lift the rules.
But as as the fifth anniversary of the Telecom Act approaches, its supporters accuse critics on both sides of shortsightedness. The investment and new enterprises unleashed by deregulation have permanently altered the competitive landscape, they say. Even if many "competitive carriers" go bust or are consolidated in the ongoing shakeout, their assets will endure for others to fashion into sustainable businesses, advocates of the act argue.
"The Telecom Act doubled the amount of investment into the information sector," said Reed Hundt, who oversaw the first two years of its implementation as FCC chairman. "In my view, the successes of the act are directly related to the growth of the American economy."
Rep. Edward J. Markey (D-Mass.) who wrote much of the act, said it has facilitated the spread of the Internet and delivered an era of unprecedented innovation.
"The core principle that I was seeking to build into the '96 act was the inducement of paranoia to the incumbent telecommunications companies," Markey said. "The goal of the act was to create marketplace incentives for each of the actors to move faster then they ever had in the past, because they were threatened by other companies moving into their businesses."
In simplest terms, the Telecom Act aimed to spur greater competition by creating incentives for the former Bell companies to open their local markets to new competitors. Once the Bells allowed their rivals to connect to their networks and reach customers over their lines, they would win the right to expand into the long-distance business.
Under two Democratic chairmen, Reed Hundt and William E. Kennard, the FCC took a hard line in implementing the act, adopting rules that forced the Bells to share their wires to homes and offices with the new crop of rivals. It set a high standard for allowing Bell companies into long-distance, scrutinizing closely how quickly and reliably they process orders from rivals for new lines.
So far, only two Bell companies have been allowed to enter the long-distance business, and only in a total of four states: Bell Atlantic (now Verizon) in New York and SBC Communications in Texas, Kansas and Oklahoma. The FCC rejected five other long-distance applications on the grounds that the companies have continued to impede their competitors.
The Bells say they have done considerable work to open their markets, portraying themselves as the victims of a federal bureaucracy unwilling to relinquish its regulatory role. Some accuse the rival carriers of peddling spurious charges of Bell intransigence to mask the real reason they are making such slow progress -- the sheer difficulty of building and running telecommunications businesses.
"There are a lot of things that have to be accomplished, such as ripping up streets and driveways," said Gene Michaelson, a partner at Arthur Andersen's technology, media and communications group in Seattle, who consults for the Bell companies. "It's a slow process and it's very costly. They're starting new businesses against those that are over 100 years old."
As the Bells portray it, more competition would develop if federal authorities simply allowed them into long-distance en masse, because long-distance companies would then be forced to offer local services to keep their customers.
"We're disappointed that after five years there have not been more [long-distance applications] granted," said Gary Lytle, interim president of the U.S. Telecommunications Association, a trade group that represents Bell companies. "Look at New York. Look at Texas. You have a choice. When we get into long-distance, there's more competition."
There is wide agreement that those states are competitive success stories. In New York, for instance, more than 2 million lines -- nearly 16 percent of the state's total -- were in the hands of competitive carriers as of last June, according to the FCC. A fierce advertising and price war for services has broken out.
But consumer advocates, Bell rivals and FCC officials say competition in New York would never have developed had state and federal regulators not forced Verizon to open its market by withholding long-distance permission. "It took heavy-duty regulation to deliver those gains," said Gene Kimmelman, co-director of the Washington office of Consumers Union.
That trade-off was the crux of the act. As the thinking went, the Bells would be compelled to do whatever was necessary enter long-distance markets in order to get lucrative business customers, which often prefer a single provider of telecommunications services.
But many analysts and competitive carriers have since come to see that logic as flawed: For the Bells, the cost of giving up dominance in local markets outweighs the benefit of entering the long-distance business, a market now under siege by new competitors who are driving prices and profits way down. Only in the largest states -- those home to the densest concentrations of big businesses -- do the Bells see it in their interest to take the steps needed to enter long-distance, the rivals claim. In the rest of the states, the Bells are dragging their feet, preferring to keep counting their local profits.
The upstart carriers say that only a more aggressive FCC can force the Bells to share their networks. But political currents seem to be running in the other direction. In public appearances, Powell, the new FCC chairman, has called for streamlining the rules while allowing market forces to distinguish winners from losers. The new chairman of the House Commerce Committee, Rep. W.J. "Billy" Tauzin (R-La.), has pledged to reopen the Telecom Act to make it easier for Bell companies to expand into long-distance.
"We're on the brink of major change," said John Windhausen Jr., president of the Association for Local Telecommunications Services, who helped write the Telecom Act when he was senior counsel to the Senate Commerce Committee. "If Congress were to consider some very pro-Bell legislation, or if Chairman Powell were to come out with a pro-Bell initiative, that could kill the competitive industry. Wall Street would say, 'Why am I going to sink more money into these money-losing companies?' "
As Windhausen tells it, far more is at stake than the future of local telephone competition. A recent paper drafted by his trade group asserts that upstart telephone and Internet companies spent more than $55 billion on equipment to build their networks from 1997 to 2000 -- investment that disappears if the companies fail.
"We're saying to the Bush administration, 'Look, you want economic growth? You need to keep these competitive forces working,' " he said. "This is a bigger issue than just local telephone competition. This has to do with the very foundation of the new economy."
Some argue that local telephone competition may never develop in much of the country -- particularly in its rural reaches -- because of basic geography.
"In the ideal world, everybody's got choices and there's widespread competition, but it just may not happen," said Michaelson, the Arthur Andersen consultant. "Just as we may not have competition for bus routes to rural areas, because there just aren't enough economic opportunities."
But those who have overseen the first five years of the Telecom Act maintain that the law created the proper conditions for competition to emerge. The solution may simply be more time. Though the new carriers control little of the market today, they are growing quickly, tripling their number of lines they control since 1997.
"We're making good progress," said Kennard, the outgoing FCC chairman. "There's a significant beachhead that has been established." |
