All panelists, Noll, Litan, Geller, and Crandall, gave their opinions on
many of the familiar problems of thetelecom act , such as interconnection,
resale, unbundled network elements, and lack of incentives forcompanies to
become facilities based competitors.
Hellerstein & Associates believes that getting the price right for resale
and unbundled network elements iscritical to the success of local
competition. The lack of an accepted figure for the cost of local access
hasresulted in the continuation of market distortions. Until State
regulators can accurately determine the costs oflocal phone service, and
have sufficient time and the flexibility to initiate changes, incumbents
will continueto have the upper hand. All panelists spoke about the
difficulty in determining the actual cost for localservice; Noll remarked
that it was fundamentally impossible to get the pricing system right so
that prices donot distort an individuals behavior. The lack of agreement
on prices directly affects the calculation of the correct amount of
universal servicesubsidy to offer carriers. Arriving at an agreed upon
price for service is essential since without it there isknow way of
correctly calculating the prices to charge for unbundled elements and
network platforms. Litanand Noll suggest that the FCC rather than arrive
at a set price for unbundled network elements instead set theprice of
unbundled network elements at the average cost of incremental local access
investments made duringthe prior year. This calculation they believe is
the only way to maintain the principle of setting prices equal tomarginal
costs. They also suggested that the FCC should phase out UNE rates within
five years, rather thancontinue them indefinitely. All panelists agreed on
the problems and economic efficiencies that continuedsubsidization of
local phone service has on the marketplace and that any solution to the
problem would bebetter than what exists today.
Henry Geller stated he thought the current UNE platform structure was a
disaster and urged the FCC to startphasing out UNE platforms, subsidies
and of the current price structure until you reach completederegulation
after four years. Geller remarked that it was the States' or Congress'
role to decide jurisdictionalissues and not the Courts. This theme of
complete deregulation was picked up by Robert Crandall ofBrookings who
argued instead for a complete deregulation similar to what occurred with
the airlines. Heurged the FCC to completely remove all the regulations on
the marketplace and push for completederegulation. He found no evidence to
disprove why complete deregulation of all prices and regulationwould
result in higher consumer benefits and economic efficiencies, than any
other approach. Thus, heurged the FCC to grant all RBOCs the ability to
sell long distance in their region and also to be allowed tocharge
whatever prices the market allows. Crandall stated that although prices
would increase in some areas,the costs of operating this system would be
far cheaper on average than the costs of operating todays bloatedand
economically inefficient system and todays $15 billion Universal service
fund.
While Crandall urged a complete elimination of all price controls and
regulations, Noll and Litan arguedinstead for a phase out of subsidies and
price controls. They argued that controls should be gradually phasedout
over a four to five year period. Litan and Noll stated that although they
do not believe the presentstructure that relies on unbundled network
elements is correct and helpful to facilities based competition, it isthe
best process the FCC has to encourage competition in the local access
market. Hellerstein & Associatesbelieves that subsidies or price controls
should only be used for a limited time and then be gradually phasedout
once they are no longer needed. Subsidies and price controls were adopted
to correct a market distortionand once corrected should be removed before
they create economic inefficiencies.
Joel Klein, the Assistant Attorney General for Antitrust, in his remarks
reaffirmed that the Act was openingup the market to competition, but at a
slower pace than people had expected. The speed of implementation isslower
than hoped for two reasons, the lack of a second wire to all homes and
two, the problem of crosssubsidization. Within the next few years
technological developments and new innovations will take care ofthe first
problem, leaving the FCC with the difficult job of trying to correct the
thorny cross subsidizationproblem; a problem with no easy answers.
Klein's prediction that in the next few years there will be only a few
players in the market could be a signalthat the Department of Justice is
likely to approve the three mergers, AT&T-TCI, Bell Atlantic-GTE,
andSBC-Ameritech as long as each party agrees to a number of conditions
similar to those adopted in the BellAtlantic-NYNEX merger. This impression
was reinforced by the examples that Klein used to explain pastDOJ merger
decisions.
Hellerstein & Associates is interested in learning what its readers think
of these issues. Please send allcomments directly to Judith Hellerstein at
Judith@jhellerstein.com. If
you would like
more information on this topic please e-mail Judith Hellerstein at Judith@jhellerstein.com.
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This month's topic concerns a panel discussion on competition in the
telecommunications market held by the Brookings Institute on November 20,
1998. Robert Litan, Director of Brookings Economic Studiesprogram, and
Roger Noll urged the FCC and the Department of Justice to reject the
mergers of SBCCommunications with Ameritech and GTE with Bell Atlantic
because of the lack of progress in opening upthe market for local
competition. Litan and Noll argue that until there is ample competition in
the local phonemarket, all 271 applications by the RBOCs to get into long
distance should be rejected. This they claim is theonly protection
competitors have against the monopoly powers of the incumbents and their
control over thelocal loop.
Noll and Litan proposed a market test that all RBOCs must pass; they urged
the FCC to deny an RBOC longdistance approval until such time as there are
two other competitors to the RBOC in the marketplace.However, rather than
having to compete on a statewide basis, they propose that the RBOCs be
allowed tooffer long distance on a regional or subregional basis in those
areas where there are two othercompetitors.While the Telecom Act does not
prohibit regional or sub regional entry, it leaves this to thediscretion
of the State Public Service/Utility Commissions who will likely not look
kindly on this approach.This approach will likely be rejected by these
State Commissions because it encourages cream skimming andforecloses any
incentive to compete in rural and non-urban areas.
GETTING THE PRICES RIGHT
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