Sound Policy or Bellfare?

Posted: 10/2003

Sound Policy or Bellfare?
Regulatory Uncertainties Could Impact Positive Momentum
By H. Russell Frisby Jr.

The sparks needed to re-ignite the telecommunications industrys flame are being seen as competitive services providers continue to increase their customer bases, improve their balance sheets and begin to seek out ways to expand their market shares and product offerings. However, will the distractions of possible significant policy changes and legal challenges to recent Federal Communications Commission actions put a damper on the advances in competition?

After about three years in a slump, the telecommunications industry is starting to perk up. Competitors that hunkered down and survived the downturn are showing signs of renewed life, achieving positive financial results and growing their customer bases quarter after quarter. At the end of the 2002, CLECs provided 24.8 million  or 13 percent  of the nations access lines.

Many members of the Competitive Telecommunications Association are achieving their financial milestones, reducing quarterly losses, reaching the points of free cash flow and becoming EBITDA positive. Consider New Edge Networks Inc., which reached positive EBITDA during the second quarter of 2003 and forecast it would be free cash flow positive during the summer.

Moreover, competitive service providers now are beginning to attract capital from investors and to discuss expansion through either network buildouts or mergers and acquisitions. A prime example is ITC^DeltaCom Inc., which announced in early July it would merge with BTI Telecom Corp. Not only will the combined company be one of the strongest competitors to BellSouth Corp. in the southeastern United States, the new entity also has a commitment for a $35 million equity infusion once the merger is closed.

Competitive service providers are not the only ones seeing an up tick. The Bell monopolies continue to post strong quarterly results, in obvious contradiction to their appeals for regulatory relief that would allow them to quash competition and retain their market power. BellSouth, SBC Communications Inc. and Verizon Communications Inc. generated combined operating income of more than $5.9 billion in the second quarter of 2003  almost $66 million per day. Moreover, SBC and Verizon both consistently rank in the Top 15 of BusinessWeeks most profitable companies.

Granted, the Bells are losing local access lines to wireline and wireless competitors, but they are more than making up the difference with significant growth in their long-distance, DSL and bundled service offerings. At the end of the second quarter 2003, these three Bells boasted about 27 million long-distance subscribers and almost 6 million DSL customers.

Even equipment vendors have expressed cautious optimism about the future, despite continuing financial struggles and limited capital expenditures by their customers.

Despite these positive signals, there is a lot of work still to be done to ensure that the engines driving the market to true competition do not stall. Competitors are concerned that recent FCC actions could hamper development of competitive markets and the nations overall economic recovery.

First, consider the historic six-month delay from the time the FCC announced its Triennial Review order until it released the massive text. Because of this gap, the entire industry has been in a holding pattern, unable to evaluate current business plans, chart future strategies or make purchasing decisions. Consumers, meanwhile, have been living with the day-to-day concern that the FCCs actions could drastically increase the cost of their telephone and data services and affect their ability to choose their preferred providers.

The scope of activity that follows in the wake of the Triennial Review is enormous. The industry must focus on the 90-day and nine-month proceedings in all the states. Time and resources will be dedicated to legal activities, rather than on using capital to improve networks or develop innovative services and packages that bring value to current customers and attract new ones.

Also, consider the inevitable legal challenges to various parts of the order. Using history as the guide, these details could be tied up in the courts for many years to come. Unfortunately, the Triennial Review is not the only regulatory issue that is weighing on the telecommunications industry now. More highly politicized, FCC-induced distractions are on the horizon.

Consider the wireline broadband notice of proposed rulemaking (NPRM), in which the FCC proposes seemingly benign definitional changes that could fundamentally alter the competitive landscape and impact the business plans of almost every established service provider. The suggested changes would effectively eliminate many of the unbundling requirements and other pro-competitive provisions of the 1996 Telecommunications Act, and in the process destroy the facilities-based competition that FCC Chairman Michael Powell so vehemently claims to promote. Moreover, the change would eliminate the principles of common carriage that have always been applied to critical, high-fixed cost services on which the public depends.

Moreover, this NPRM would tentatively exempt any packet switching service from the obligations of the 1996 act and the jurisdiction of state regulators. Given that packet switching is likely to be the technology over which most traditional and advanced telecom services will be provided in the future, the change would result in giving the Bell companies carte blanche to remonopolize.

The FCC also is expected to soon open a rulemaking on total element long run increment cost (TELRIC)  the formula used to determine the wholesale price of unbundled network elements (UNEs).

In agreement with the Bells and their supporters in Congress, CompTel says it is time for the FCC to take a hard look at TELRIC. However, CompTel and the Bells diverge on the reasons why. The Bells sole goal is to seek revisions that enable them to charge competitors more to access the public switched network. In forbearance petitions filed at the FCC over the summer, Verizon, BellSouth, SBC and Qwest Communications International Inc. all wrongly claimed that TELRIC prevents them from being adequately compensated for the use of their networks.

CompTel, however, says TELRIC must be revisited because regulatory changes have altered some of the premises on which the pricing methodology is based. For instance, the Triennial Review order indicated that the FCC has decided to limit competitive access to ILEC fiber plant and fiber-fed loops. CompTel noted in an Aug. 8, 2003, letter to Chairman Powell that the commission must therefore consider whether the UNE rate for the loop should be reduced by the costs associated with the parts of the loop plant that CLECs have no federal legal authority to access or use.

In short, CompTels letter noted, since competitors no longer have full access to and use of the incumbents facilities, it is imperative that the Commission revise its current TELRIC rules to ensure that they are not charged as if they do.

Many of these unnecessary distractions are part of Chairman Powells deregulatory agenda, which he claims will fan the flames of competition. However, CompTel says giving the Bell monopolies premature liberties will extinguish all progress made to date.

Chairman Powell promotes the incorrect idea that lifting many restrictions on the Bells means the monopolies will invest significantly in new technologies to deliver more services more efficiently to end users. The deregulatory abdication that Chairman Powell espouses will not cause competitors to invest in their own facilities. Although some initial investment is theoretically possible, over the long-term premature deregulation will lead to the concentration of potentially billions of dollars of purchasing power in the hands of a few heavily influential buyers  the Bell companies.

It is important to keep in mind the Bells have a long history of backing out of similar promises to increase their spending and deploy new services in exchange for regulatory liberty. Significant evidence exists about Bells back-pedaling on merger-related agreements to invest in advanced networks and deliver services outside of their historical territories.

CompTel says the economy would be better served by putting the spending power in the hands of hundreds of millions of consumers, rather than a few large monopolies. A CompTel study estimates full telecom competition could save consumers at least $9 billion annually. Small businesses could save an additional $6 billion each year on their bills, according to another economic analysis.

These savings could then be used to purchase other goods and services  the formula necessary for a thriving national economy. For example, CompTel member nii Communications Ltd. tells of one customer  a home health care provider  who saved enough money by switching from SBC to nii that she was able to buy health insurance for her employees. Another nii customer  a plumbing contractor  saved about $80 a month by moving to nii, which allowed him to purchase needed equipment that he otherwise could not afford.

Consumer and business savings will result in far greater economic development than giving incentives to the Bells to make investments in their network. Competition-related savings will trickle down to create demand for new products and services in many industries and will result in increased salaries and better benefits, which more widely benefit the economy and society as a whole.

CompTel hopes that policymakers will keep in mind these basic principles of Economics 101 as they move forward with their regulatory agenda. One misstep could have long-lasting impacts on the health of our nations economy and the well being of millions of consumers.

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