Statement on Recent Telecom Regulations

Published July 2, 2004

Major changes are coming in the way governments regulate telecommunications, thanks to a recent federal court ruling striking down Federal Communications Commission (FCC) rules that set the prices Baby Bells could charge competitors for access to their lines. Contrary to the wails of companies that benefitted from the old regime, this is a major step forward for consumers and the industry.

The Bush administration has decided not to appeal the D.C. Circuit Court of Appeals’ decision, and the U.S. Supreme Court has refused to hear a challenge brought by AT&T, the ruling’s chief critic. The old regulatory scheme, created by the 1996 Telecom Act, forced Bell companies to lease network components and cable connections to competitors at below-cost discounts. Not surprisingly, these regulations impeded the expansion of new cable, fiber, and wireless technology.

In the absence of federal price fixing, competitors must negotiate with the Bells for access to their lines. This is as it should be. Government agencies are notoriously ill-suited to finding the right price for goods and services, and the FCC and its 50 state counterparts have made a complete mess of things during the eight years these rules have been in effect.

Some of the companies competing with the Bells say the end of price controls on wholesale rates will cause consumer prices to rise. A trade association representing these competitors released a study claiming small and medium-sized businesses would pay about $4.9 billion more annually. This and other estimates are red herrings dangled by a small group of competitors who, for the benefit of their own bottom line, desperately needed to keep subsidized rates going.

Phone rates paid by consumers will not rise significantly because they are now far above and largely unrelated to the wholesale rates the Bell competitors are required to pay. At their various tiers, AT&T’s and MCI’s rates are roughly the same nationwide, even though they pay significantly different regulated wholesale rates in each state. AT&T and MCI’s profits, not their prices, will vary from state to state.

There is every reason to expect consumers will have broader choices in pricing, services, and value because a new crop of viable competitors will have built their own routes to consumers without relying on a subsidy scheme. It’s already happening. For example, Vonage, which allows broadband users to make calls over their Internet connection, offers basic phone service in Miami and more than 100 other cities for as low as $15 a month. For those without broadband access, prepaid wireless plans can be less than $10–with the added value of portability.

Already SBC has announced a $6 billion network upgrade plan. Expect more such announcements from the other Bell companies and the cable and power companies in the next few months.

Even AT&T, despite its petulant announcement that the new policy climate has forced it to stop competing in seven states, said it will aggressively expand its CallVantage service, which like Vonage is a facilities-based Internet telephony service, from 36 to 100 markets.

If it is competition, new technology, and new services you want, the new step toward deregulation is right on target.

The court’s ruling ends an elaborate, artificial mechanism that merely shifted customer accounts for basic dial-tone service from one company to another. We had competitors but not real competition. We had different brands, but no more supply and no brand differentiation. The FCC will now dismantle this zero-sum, redistributive structure and replace it with rules that foster competition and allow greater consumer choice. That’s a plan we should all support.

Steven Titch is Senior Fellow for IT and Telecom Policy at The Heartland Institute

For more information, contact Allen Fore, Heartland’s Vice President-Public Affairs at 312/377-4000 or email [email protected].