California’s Iron Grip on Telecom

Published September 24, 2004

Many believe that “as California goes, so goes the nation.” If that bit of popular wisdom is true, dark days await the nation’s telecom sector. The problem stems from the iron grip of regulators on telecom providers.

The 1996 Telecom Act set out rules that were supposed to create more competition by mandating that the dominant carriers share their telephone networks with competitors at rates set by the government. After eight years, it was clear the scheme wasn’t working. In March 2004, a Washington DC court threw out the bulk of the line-sharing rules known as Unbundled Network Elements Platform (UNE-P).

But even as the court invalidates the line-sharing rules, California marches on implementing them. For instance, a California Public Utilities Commission (CPUC) administrative law judge, after independently reviewing the already-controversial Total Element Long Run Incremental Cost (TELRIC) guidelines, limited a requested SBC increase in wholesale line rates to just 25 cents. This was a major disappointment to SBC and a big win for competitors who wanted to continue to have discounted access to the incumbent’s facilities.

The reason for this confusing chain of events is that everyone is still waiting for the Federal Communications Commission (FCC) to create new rules, and perhaps also because the UNE-P rate decision in California is so late it might be retroactive in any event.

Regulator decisions on how much a telephone company can charge its competitors to use its property might sound boring, but the issue is important. The idea that a company could be forced to open up its property for the use of another is antithetical to American values. If John Locke was right when he wrote that “government has no other end than the preservation of property,” then government is failing miserably in California and in other states around the nation.

Forced sharing of property harms the economy and consumers who rely on the services provided. That’s because businesses are much less likely to re-invest in their infrastructure if they know they won’t be able to reap the full benefits of their investment. In California, SBC chose to use its revenues to pay down debt, not invest.

As the Los Angeles County Economic Development Corporation put it, “by paying down its debt instead of investing in California, SBC is signaling that it does not believe it can earn a risk-adjusted return sufficiently higher than corporate bond rates to justify the investment.”

Less Development

Lost investment leads to lost jobs, and it is indicative how dire the situation in California’s telecom sector has become when labor leaders are teaming up with corporate bosses to tell regulators to lay off the rules.

“In 2001, I represented 50,000 members,” said Jim Gordon of the Communications Workers of America (CWA). “And now, in 2004, I only represent 33,000.” That’s a huge loss of workers, and poorly thought out regulations are a big part of why jobs are disappearing.

Less infrastructure development means less need for builders or engineers or maintenance people. It’s somewhat ironic that such a heavy-handed regulatory situation in the communications industry is happening in tech-friendly California. The Golden State is supposed to be the place where new technologies thrive. But as Lora Watts, president of external affairs for SBC in California, said, “this dilatory and illogical approach to policymaking is harmful to businesses and consumers throughout California.”

Watts is right, and time will tell if the state will change or go completely downhill. The immediate issue at hand is the reaction of CPUC commissioners to the administrative law judge’s proposed new UNE-P rates.

Government should not be forcing companies to share their property or setting rates for any kind of business partnerships. California regulators will soon face a choice of whether to be pro-innovation or not.

If CPUC commissioners want to do well for the state, they should allow a better deal for property owners forced to share their lines.

Sonia Arrison ([email protected]) is director of technology studies at the Pacific Research Institute.