Getting Through the Terrible TELRICs

Published February 1, 2004

Like the hapless daycare provider to a hyper toddler, the FCC is grappling with the complexities of price regulation in telecommunications.

Under the 1996 Telecommunications Act, incumbent local phone companies (the ILECs) are under a mandate to share their networks with new entrants (competing local exchange carriers, or CLECs). The perennial question is, if negotiations and arbitrations fail, at what price? The FCC has found that its first answer, total elemental long run incremental cost (TELRIC–a price based on the cost of a hypothetical, perfectly efficient future network), has raised some thorny problems, many of which are being revisited in the present TELRIC proceeding.

But perhaps the most interesting question of all has been neglected. Why do so many negotiations and arbitrations between ILECs and CLECs fail? Put another way, why has no wholesale market in local phone network access emerged?

The Telecom Act was supposed to offer the ILECs a nice carrot, access to long-distance phone markets, if they granted access on reasonable terms. Negotiations between little-or-nothing-to-offer carriers and their larger competitors do succeed in other markets. Internet peering and transit arrangements are a good example. These are the deals that ensure that an email that starts out on one network (AT&T’s, say) can travel safely to another (Earthlink’s, say).

Why, then, has the wholesale market in local phone network access been so slow to get off the ground? For a start, here’s some plausible partial answers:

  • Maybe the Act’s “carrot” theory was just too late; with long-distance revenues falling, entry into the long-distance market just isn’t that enticing a prospect.
  • Maybe TELRIC, which both ILECs and CLECs know will be the default price if negotiations fail, is so enticing to one side that good-faith negotiations are impossible.
  • Maybe the fact that ILEC/CLEC arbitrations under the Telecom Act are not final but can be appealed to state regulators tempts one or both sides into gaming. Economist Pablo Spiller has urged that disputes between carriers be booted into final fast-track arbitration to avoid this.

The problems the FCC has raised in its TELRIC proceeding are important ones, and we wish the agency the best of luck in dealing with them. But in the big picture, the most important thing is how to transition away from price controls to real markets. And quickly–as with a toddler, by the time one gets the hang of things at square one, the toddler is a teenager. The FCC was quick to grasp the advantages of long-run pricing (serious questions about its relevance to today’s investment incentives aside). But can the agency, or Congress, offer a long-run regulatory policy?

Solveig Singleton ([email protected]) is a lawyer and senior analyst with the Competitive Enterprise Institute’s Project for Technology and Innovation.