WELFARE HAS NO PLACE IN BUSINESS

Earlier this week, the New York State public service commission instructed Verizon Communications to cut the price it charges competitors to use its lines by about 30%. AT&T, the self-appointed champion of CLEC rights—and the only competitive carrier with the money to effectively lobby against the allegedly evil Bell empire—received the news with glee. A spokesman said the former monolith would now be able to “compete and be profitable.”

Predictably, Verizon was less happy about the ruling. A spokesman for the incumbent called it “regulatory welfare.”

He has a point. The Telecom Act is clearly flawed. The Section 271 approval process is so arduous and burdensome it’s almost paralyzing. And the sanctions that are in place to punish incumbent carriers that violate the competition components of the Telecom Act are tantamount to a tap—not even a slap—on the wrist.

But Congress and the Federal Communications Commission got it right when they came up with the total element long range incremental cost (TELRIC) formula for determining what the Bell companies could charge for the use of their unbundled network elements. Though the incumbents moan about TELRIC on occasion, it is a fair formula. The voice networks were built under monopoly conditions, and the Bell companies recovered their investments long ago and have been reaping enormous profits ever since. They have nothing to complain about.

It only makes sense then that those networks should be made available to carriers based on the forward-looking cost of maintaining those elements. But let’s not forget that Congress’s goal in passing the Telecom Act was to create an environment for facilities-based competition. TELRIC is merely a bridge to that goal.

Competitive carriers have little incentive to build out their networks under current conditions—after all, why go to the trouble of constructing a network when you can simply use someone else’s at cost? The New York PSC cited “new evidence on switching costs” and the recognition that “costs are continually changing” as the reasons behind its order.

But a 30% reduction not only is a windfall for any CLEC doing business in New York State, it removes what little incentive competitors had to build out their own networks. According to Verizon, the ruling means it would “essentially provide 50 cents of every dollar” of service AT&T provides in New York State. Other state commissions will almost certainly look to New York as a precedent. That would be a chilling development for Verizon and the other incumbents.

To be sure, the Bell companies are no angels when it comes to competition in the local loop. Six years have passed since the passage of the Telecom Act, and incumbents have received Section 271 approval in just nine states. No matter how arduous the process, the Bell companies should be further along at this point in opening the local loop to competition. A monopoly, as it turns out, is a terrible thing to waste.

That’s why the broadband deregulation bill sponsored by Reps. Billy Tauzin, R-La., and John Dingell, D-Mich., is so distasteful. Despite their protests to the contrary, the Bell companies have dragged their heels on competition and should not be given a free pass into data long-distance through this legislation.

But to be fair, there is one aspect of Tauzin-Dingell that does makes sense. The Bell companies should not be expected to make new facilities—i.e., remote data terminals for DSL services—available to competitors at TELRIC prices. The Bell companies do not own a monopoly in this arena—cable does, and that industry faces far less regulatory scrutiny than the telcos. So let the competitive carriers build their own data facilities, if they can. If they can’t then the Bell companies should be allowed to charge market-driven prices for the use of those facilities.

Which is the whole point. The Telecom Act was written to ensure the existence of an environment in which competition could occur. It doesn’t guarantee that competition will actually exist. Most competitive carriers only have themselves to blame for their woes, which are driven in the largest measure by poorly conceived and executed business and capitalization plans. So if the New York PSC really wanted to do something meaningful to foster competition, it would launch an investigation as to why AT&T couldn’t compete effectively when it is getting facilities from Verizon at cost.