The Real Solution to Illinois’ Telecom Woes

Published January 1, 2004

For all the headlines and editorials it generated this summer, few consumers understand what is at the heart of the battle between SBC and its competitors over the wholesale pricing of telephone lines. An obsolete regulatory model is costing consumers time and money and robbing the state of new and innovative telecom services.

The bill Governor Rod Blagojevich signed into law in May, overturned by a judge in June, was an effort to work around a deeply dysfunctional regulatory regime created by the 1996 Telecommunications Deregulation Act. The law tells the Federal Trade Commission (FTC) to take action to promote competition in the local phone service market. Forcing incumbent phone companies to share their lines was one means to facilitate that competition.

The FCC in turn allowed state public utility commissions–in Illinois, the Illinois Commerce Commission (ICC)–to determine the rates at which SBC and other Baby Bells must lease their phone lines to competitors such as AT&T and MCI.

The ICC chose to set those rates at approximately half the average rate chosen by other states. It did this by calculating the hypothetical costs of a firm operating at maximum efficiency and full capacity and using a depreciation rate much lower than private businesses use. So competitors pay SBC super-low rates for the use of its assets, rates that SBC claims do not even cover its variable costs.

It’s as if you drove your SUV from Chicago to Springfield carrying two passengers, and they agreed to reimburse you for their share of the gas–but they each pay you only for the gas you would theoretically have used if you were driving a Toyota Prius with four passengers. SBC asked, in effect, that the vehicle’s real fuel economy and number of passengers be used to determine what each passenger owed.

The fault lies in the misguided notion that regulators can measure or determine the costs of operating telephone networks. At best, they can get an approximate estimate of these dynamic and ever-changing costs. At worst, they will succumb to political pressures and set the rates too low. Our traditional cost-based regulatory approach is doomed to failure from the outset, because it is based on the false assumption that a political body can or would find the objective “true cost” of providing telephone service.

Cell phone and cable providers are not required to share their towers or lines. The number of competitors and growth in service in those markets stands in sharp contrast to what we see in the landline local service arena.

Instead of demonizing SBC or its competitors, we should ask why the FCC and the ICC have the presumption to claim they can amass all of the cost knowledge, actual or hypothetical, needed to make this bizarre regulation work.

Illinois policymakers, business leaders, and consumers should stop playing the “blame game” and demand that the ICC and the FCC revise their whole approach to telecom regulation. This isn’t a pipe dream: Federal courts have repeatedly rejected the FCC’s formulas for determining the lease rates, and in February 2002, the FCC came within one vote of rejecting the whole regulatory pricing scheme. Had it voted differently, there would have been no need for SBC to turn to the Illinois legislature for relief.

Illinois consumers deserve lower prices and new and innovative service offerings coming out of a vibrant and dynamic local telephone industry. Instead of SBC and its competitors spending their time and money lobbying legislators and suing one another in court, they could focus instead on providing high-quality customer service.

Lynne Kiesling ([email protected]) is director of economic policy at Reason Foundation and senior lecturer of economics at Northwestern University.