The Bandwidth Problem Follow-up — The other shoe falls.
From the NY Times January 28, 1999
ECONOMIC SCENE
Who Won in the High Court Local Phone Ruling?
By MICHAEL M. WEINSTEIN
"Judging from reactions, it was hard to figure out exactly who won this week's decision by the Supreme Court to uphold federal rules designed to open up the local telephone market to competition.
AT&T Corp. and other long-distance carriers declared victory, saying the decision would allow them to go after local customers as the Telecommunications Act of 1996 had intended. The Federal Communications Commission, which issued the rules, declared indication. Even some of the losing plaintiffs, the local phone companies, pointed with glee at the part of the decision that would require the commission to reconsider part of its rule making.
But no matter what the parties to the dispute say, the big winner, according to many economists and consumer advocates, will be ordinary phone customers. Gene Kimmelman, a top official at Consumers Union, said, "This decision will help small companies to come into the local market and take on the reigning monopolist." Robert Litan, director of economic studies at the Brookings Institution, said that "on balance, I'm happy that the court erred on the side of the commission rather
than the local Bell companies."
The commission's rules were designed to create competition in local phone service, breaking the monopoly of Bell Atlantic Corp. and the other regional Bell carriers. The Bells struck back and found a federal court willing to throw out the rules on the ground that the commission had strayed beyond its legislative mandate. This week the Supreme Court overturned the lower court decision, voting to let competition unfurl.
The idea behind the 1996 act was to give consumers a choice by inviting long-distance carriers like AT&T and cable and wireless concerns to enter the market for local phone service. In return, after
opening their sanctuary to competition, the local Bell companies would be allowed to enter long distance.
Congress left it up to the commission to figure out the rules. The problem was that no company was in a position to provide local service using only its own equipment. Entrants would need to use, at least initially, some or all of the Bell network, including wires into homes, switching equipment and operator services. The threat was that the Baby Bells would overcharge for their network or deny access to key components entirely, blocking entry into local service even as they drove hard into the long-distance market. That posed the danger that the Bells would exploit the 1996 act to dominate telecommunications markets, making a mockery of Congress' will.
In surprisingly short time, about six months, the commission came up, in Kimmelman's judgment, with "smart rules that compel the Bell companies to compete on fair terms with potential rivals." The
commission set down two key principles. There would be one national pricing policy, with 50 state variations to take account of regional cost differences, making it easy for companies to enter any and
all states at once. And the regional Bells would be required to rent all their network or any important component of the network. AT&T might need to rent wires into the home, but not signaling equipment. A wireless company might not need the wires, but might need to rent directory assistance.
Second, the commission ruled that the Bells could charge only enough to cover the costs that an efficient concern would incur to provide the switch, wire, operators assistance, or whatever other equipment or service the entrant needed to rent. Said another way, the Bells would not be allowed to pass along the bloated costs that they had actually incurred as an inefficient, government-protected monopolist.
Some state commissions have set prices at levels well above the commission's efficient-provider rule. But under the commission's rules, the Baby Bells would charge enough to cover legitimate costs --
the costs of a low-cost provider -- and not one penny more. That way, entrants could enter and drive down prices to the level of the lowest-cost producer.
The Bells challenged the rules, arguing that the 1996 act did not empower the commission to set prices. Though their position might not make a lot of economic sense, they could point to ambiguities and contradictions in the statutory language of the act that made their interpretation plausible. A federal appeals court sided with the Baby Bells. The Supreme Court sided with the commission. Whatever the pros and cons of its legal reasoning, the Supreme Court's decision gives,
after more than two years of legal deadlock, long-distance and other potential entrants a fair shot at the local phone market.
The court did accept one part of the Baby Bell argument. It ruled that the commission had forced the Bells to rent hundreds of components and software services without determining that entrants truly needed those components and services in order to compete. The commission was insucted to reconsider its list, dropping items, perhaps like operator assistance, that entrants could provide themselves or rent from non-Bell companies.
GTE Corp. points to this provision of the high court's decision as grounds to declare victory. Others say that this order for examination will delay efforts to open the local phone market. But these claims appear exaggerated. The commission took only six months to issue its entire package of rules in 1996. It surely needs less time to revise a small portion of those rules. So, at worst, the court has imposed a delay of a few months.
Besides, delay is of tertiary importance. If the court had gone the other way -- permitting states to set rental prices according to historical costs or permit the Bells to deny access to key parts of their network -- it would have risked putting some of the Bells in charge of telecommunications until Congress took up another bout of reform. Here, history is sobering. The 1996 act revised legislation
dating back to 1934.
Waiting a few months while the commission revises its rule making hardly matters if the result is to create a competitive maelstrom from which consumers should reap benefits for decades to come." |
