Analysis: Special Access Regulation Won’t Produce Investment, Jobs

Published June 1, 2009

In the current recession, policymakers should be pursing policies to promote investment and jobs, but competitive local exchange carriers and others have been pushing a telecom regulatory proposal that sounds enticing but would have the opposite effect.

CLECs—smallish telecom companies that compete locally with incumbent local exchange carriers (ILECs) such as the Baby Bells—would have the Federal Communications Commission reregulate the prices they pay for dedicated “special access” circuits purchased by high-volume users from ILECs.

Study Urged More Regulation

A recent study commissioned by the National Association of Regulatory Utility Commissioners (NARUC) concluded competition in the market for special access services is uneven. The study recommends FCC conduct rate proceedings for the purpose of closing any gap between published prices charged by ILECs and the discount rates paid by customers who make volume and term commitments.

Reregulating special access could lower the prices CLECs that don’t wish to make volume or term commitments pay for an essential input. That would enable CLECs to charge lower retail prices or pocket higher profits while retaining valuable freedom to switch vendors at will.

FCC initiated a process for deregulating special access during the Clinton administration. According to a separate report by the Government Accountability Office, the current policy has been a success as measured by falling prices for special access circuits.

Market Is Already Competitive
A NARUC press release notes that according to the report it commissioned, “there is no evidence to support any bright-line judgment on special access market power.”

That is because the market is highly competitive, as the NARUC-commissioned report concedes:

“Cable television and fixed wireless have low entry and exit costs where their networks are currently established, and each can provide suitable dedicated services to many customers. Overall, these competitors are still acting on the fringes of special access markets, but they have larger roles in some locations and their market shares appear to be growing. These newer technologies may be poised to become major competitors and are increasingly constraining ILEC behavior; but they have not yet grown beyond fringe competitors in most markets”

Reregulation Not Justified
I don’t think reregulation is justified just because some markets may be more competitive than others. If the prices charged by ILECs are too high, it will be that much more profitable for cable and fixed wireless providers to expand their networks.

If FCC arbitrarily reduces what ILECs can charge for special access, that also will reduce the revenue investors can expect to earn from these new competitive facilities, which, in turn, may affect their willingness to invest.

The primary headache facing CLECs isn’t the rates ILECs charge for special access. The CLEC trade association has acknowledged CLECs “do not have the scale and scope to compete with the ‘Baby Bells’ for the major purchasers of special access.”

Since the CLECs can offer high-revenue customers only limited facilities and a limited array of services, the trade association confirms its members “have to offer extremely steep discounts” relative to the prices charged by ILECs to remain competitive.

Higher Prices Could Follow
But if the CLECs succeed in persuading FCC to reregulate special access, it could mean residential and small business customers will have to pay higher prices for some services so high-volume users can get a break on their service. There is no free lunch.

Policymakers either can ensure investments may profitably be made in new facilities by letting the market set prices, or they can attempt through regulation to keep prices low, which will encourage competitors to share existing facilities instead of building their own.

In the latter case, competitive offerings will simply mimic the incumbents’ while the incumbents will search for investment opportunities that don’t require profit-sharing. This is not a recipe for innovation.

For FCC and state regulators, the choice is clear. Instead of additional regulation, FCC should set a timetable for the complete elimination of remaining price controls on special access services.

Hance Haney ([email protected]) is a senior fellow in technology studies at the Discovery Institute in Washington, DC.

For more information …

“Competitive Issues in Special Access Markets,” National Regulatory Research Institute: