- The Washington Times - Monday, September 1, 2003

We can all breathe now — the Federal Communications Commission has finally released its long-awaited order on local phone competition, the so-called “Triennial Review.”

What does the order really mean? Some predict investors will flock to broadband, which the FCC deregulated nationwide. Others emphasize parts of the order affecting ordinary voice phone service, hailed as a victory for states and federalism. The FCC gave state public utility commissions the final choice (with some guidance) of which parts of the voice network would be freed from price controls.

But public utility commissioners nationwide should brace themselves; they have just one more chance to get the rules right. Maybe, just maybe, if they move quickly and act wisely, they can reassure investors that regulation by 50 states is workable after all. In reality, the FCC has handed the states a very thorny rose indeed.

To see this, start with what the FCC has been doing at the federal level. For mobile phone service, the FCC has mostly let market forces and consumer demand set prices and shape choices. With the Triennial Review, the FCC confirmed that broadband networks would remain free from price controls. The FCC’s intention was to spur investment in broadband, and some analysts (about one-third) think it will work.

The remaining analysts wonder where on Earth the telephone companies will get the money to invest in broadband because revenues from local and long-distance services continue to fall, and investors are nervous. For residential consumers, then, the widest range of new voice messaging choices will probably be wireless, with Internet telephony playing a smaller role.

But this creates a potential trap for unwary state public utility commissions (PUCs). Many regulators hesitate to recognize the vigorous competition going on between wireless and traditional phone service. Following older FCC rules set in 1997, they want to create competition for the local phone company another way, by requiring it to share its lines with competitors like AT&T;, MCI and other companies offering local phone service for the first time. These new phone companies (CLECs — Competitive Local Exchange Carriers) lease parts of the original local phone company’s networks at below-cost prices set by the PUC. The new companies then repackage and resell the service.

The problem is this: One cannot end reliance on a single aging phone network by endlessly reselling the same network in different packages. That isn’t really competition. To have real competition in telephone service, the CLECs must build their own networks (some, like Covad, have done so). But most people won’t put their own capital on the line if they can get someone else to risk theirs instead. And that is just what the rules have led to.

The FCC’s data show there were fewer local phone lines owned by CLECs in 2002 than in 1999. The CLECs are piggybacking on the old networks instead of building new alternatives. They are even abandoning facilities they once maintained.

State regulators now have the authority to turn this situation around — for now. To do so, they should follow these rules of thumb.

First, they should take a realistic view of competition. Competition means that consumers have choices. It doesn’t take a lot of companies in a market to make those choices real; Coke, Pepsi and RC are enough in the world of cola drinks, a couple of car dealers in a small town, or two or three airlines are enough in a regional airport. But the competitors should be offering a real difference — a different service over a different network, not just a price cut magicked up by regulation.

Second, PUCs should remember what every economics student knows: price controls discourage investment. So those different networks needed to give consumers real choices will only be built by companies free to charge market prices.

Somewhere, sadly, there is likely to be a PUC that decides to treat telephone service like plain old water out of a pipe instead of fast-changing high-tech. That PUC will maintain its viselike grip on prices for voice phone service, wholesale and retail. And five years from now it will wake up to find itself in command of a network that just doesn’t matter any more to anyone who needs to make a phone call.

It will matter to telecom workers who lost their jobs. It will matter to investors that didn’t get out of wire-line telephony fast enough. But an increasing number of voice messages will go over less-regulated wireless or over the Internet.

For now, the FCC has handed the states a very shiny, noisy toy indeed. But batteries are not included.

Solveig Singleton is a lawyer and senior analyst with the Competitive Enterprise Institute’s Project for Technology & Innovation.

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