"Telecom industry battles over amendments to Telecom Act"
A Lightwave Magazine Editorial that I think is worth the time of a read.
From: broadband-guide.com
Regulation & Policy, May 1998
by Stephen N. Brown (Lightwave Magazine)
The Bell operating companies are still unable to offer long-distance
telephone service. Every company's application to offer such
service has been turned down by the Federal Communications
Commission (FCC). The agency judges the applications according
to the Telecom Act's Section 271, which the FCC interprets as
requiring the companies to give their competitors open and
irreversible access to local markets prior to approving the
application.
But the FCC may grant approval to Bell Atlantic regarding its
provision of long-distance service in New Jersey or New York. A
carefully conditioned approval of Bell Atlantic would not be a
blank check to other operating companies. At the same time, an
approval would protect the FCC from charges that it cannot make
impartial judgments about the Bells. The companies worry about
the FCC having an ulterior motive: After entry into one state is
granted and the agency shows itself to be supposedly impartial, it
will revert to its prior stance and delay the Bells' long-distance
entry in other states. To counter this possibility, the chairman of the
Senate Commerce Committee, Senator John McCain (R-Az.), is
proposing a bill to repeal Section 271 and replace it with a
one-year waiting period, after which the operating companies
would be able to enter the long-distance market.
New bills proposed
Senator McCain's bill is a return to the operating companies'
original proposal of 1995, when they wanted access to
long-distance markets by a " date-certain," such as January 1,
1999. The date-certain idea was opposed by nearly all non-Bell
parties. They argued that it gave the companies no reason to open
a local market to competition; thus, a date-certain would grant the
Bells access to long distance while they stone-walled their
would-be local competitors. AT&T, MCI, and others have not
changed their perspective. They oppose McCain's bill, and it is
unlikely to become law.
Another bill is being crafted to relieve the Bells' frustration.
Senator Mike DeWine (R-OH) and Senator Herb Kohl (d-wi)
have proposed that the companies be allowed to bypass the
Section 271 procedures and enter the long-distance market in
exchange for divesting themselves of key local assets that could be
used to block local competition. This latest proposal is named the
" Telecommunications Competition Act of 1998." It allows a Bell
company to submit a local facilities divestiture plan to the
Department of Justice (DOJ) for review by its Antitrust Division. If
the doj approves the plan, the company would be granted
immediate entry into long-distance markets.
For each state where the Bell company owns local networks,
"divestiture" means "to spin off the local network facilities of the
company with respect to the State by creating one or more
separate corporations that are unaffiliated with the company in
order to operate such local network facilities." To ensure that there
is no bond between the new local company and its former parent,
the bill requires that the local network facilities corporation " not
have any board members, officers, employees, assets, brand or
trade names, or network facilities in common with the [Bell]
company...[and] the directors, officers, or agents of the [Bell]
company [shall not] directly or indirectly own any stock of any
such local network facilities corporation."
The bill was discussed during a hearing conducted by the Senate
Judiciary Committee's Antitrust and Competition Subcommittee,
which is chaired by DeWine. The subcommittee heard from
several witnesses, including fcc chairman William Kennard, who
described the divestiture bill as "a very important issue to be
raised."
Naturally, the bill is supported by the established long-distance
carriers and the Bells' local competitors. But there appears to be
no good reason for such support because local divestiture is
voluntary rather than mandatory. Also, it would be irrational for
the Bells to voluntarily divest because local facilities provide
access to many other markets. The companies' one-stop-shopping
strategy, whereby they offer local, long-distance, Internet, and
video services, is predicated on control of local facilities.
DeWine's bill appears to be an empty exercise at first glance.
Credibility problem
However, if the Telecommunications Act of 1996 were amended
by DeWine, the Bells would face a long-term credibility problem
in Congress. They have argued for years that local networks are a
money-losing business. This theme was reiterated by SBC's
president of operations, Royce Caldwell, who told the
subcommittee, "The local-exchange market is characterized by
basic telephone service...which for the vast majority of customers
is priced below cost....AT&T Chairman Michael Armstrong
announced [that] AT&T needs a 50% to 60% discount to
compete [in the local exchange]....[I]t is impossible for a
local-exchange carrier to acquiesce... and remain financially
viable." This argument would be neutralized by local divestiture. If
the local exchange network is unprofitable, then it makes sense for
the local company to " spin off" these facilities and move into the
more profitable long-distance arena.
Apparently DeWine's bill can do no harm because it does nothing
more than give the Bells an opportunity to free themselves of
unprofitable networks. This is where the trap is sprung. The longer
the Bells hang onto local networks, the less credible is their
complaint about profit, and the more it seems that what they really
want is market control. If they resist DeWine's bill, the Bells
undermine their efforts to free themselves of Section 271 and
ensure that McCain's proposal goes nowhere.
DeWine and Kohl's bill is a response to a Texas federal circuit
court opinion that Section 271 is unconstitutional. In a letter sent to
the assistant attorney general of the doj's Antitrust Division, Joel
Klein, both senators expressed their disappointment with the court:
" We are especially concerned [the] decision will disrupt the
process explicitly designed...to open local telecommunications
markets to competition....[I]t is more important than ever that the
Antitrust Division show resolve in vigorously implementing all
aspects of the law....[W]e support you in your efforts."
It is no accident that DeWine's proposal places a substantial
amount of power back into the DOJ. This is a replay of an old
issue, as is McCain's proposal. When the Telecommunications Act
was first negotiated, there was great disagreement over whether
the fcc or the doj should have final authority to approve the Bells'
applications under Section 271. Senator Strom Thurmond (R-SC)
raised this issue in the subcommittee's hearing and asked Klein, "
You know that Congress decided that the fcc would make the
decision....How has this proven to be in practice?" Klein
responded, " Let me thank you personally for bringing about that
compromise, because I think it is the right structure. I think that the
fcc should be the ultimate decision-maker. From our part at the
[doj]...we are satisfied with it."
But Klein's response is accurate only to the extent that Section
271 is constitutional. If it is not, then the final decision-maker will
no longer be the fcc, as indicated in the DOJ's response to
DeWine's letter: "If the district court's ruling invalidating Section
271...is not reversed on appeal, the [DOJ] will consider all
possible options currently under review, including a possible
reinstatement of the AT&T consent decree, in order to protect
and promote competition in all telecommunications markets."
Under the consent decree, the DOJ was the sole arbiter of the
Bells' market entry.
Despite the potential reassertion of the DOJ's authority, DeWine's
bill has merit because it severs the tie between technological
advancement in local networks and a company's aspirations in
long-distance markets. Corporations that have only local network
facilities will have incentive to profit by increasing the networks'
carrying capacity so that every conceivable service could be
brought to users by someone other than the local company. MCI's
chairman Bert Roberts suggested this possibility when he told the
subcommittee, "We think that there will be a need for a
symmetrical network...capable of moving information in and out of
the home at the same speed...that will facilitate the creation of all
kinds of services." The best fit for a symmetrical network is
fiber-to-the-home, where profit is not necessarily based on a flat
rate, but on a bit-rate applied to traffic sent to and received from
the network. This would be a perfect pricing scheme if there were
sufficient traffic.
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