Commentary: Powell's Boost for the Bells Is Half-Right

By Steve Rosenbush

Is he crazy? In some quarters, Federal Communications Commission Chairman Michael Powell is derided as a madman for proposing to tamper with the local residential phone market. Seven years after the Telecommunications Act of 1996 was passed, competition in local markets that was once monopolized by the Baby Bells has finally begun to blossom. In the past 18 months, state regulators have forced the Bells to cut the wholesale prices they charge rivals to run their calls over the Bells' networks. Now that it's profitable for the likes of AT&T (T ) and WorldCom Inc. (WCOEQ ) to enter the local residential business, they have snatched away 8.8 million, or about 5.6%, of the Bells' residential customers.

Then along comes Powell, proposing a two-year phase-out of those lower wholesale rates. Critics say such a rollback would weaken competition and prevent prices from falling. "This will be horrible for consumers and good for the Baby Bells," says Marc Cooper, an analyst at the Consumer Federation.

Powell has got it at least half-right. He's correct in noting that the lower rates force the Bells to lease local phone lines to their rivals at a loss. But in exchange for phasing out those rates, he should force the Bells to get more serious about swiftly transferring customer lines to rivals when users opt to switch. Rivals say the process is too slow and expensive--and lets the Bells delay the transfer of crucial customer records for days or weeks. Such a deal has crucial support. FCC Commissioner Kevin J. Martin called for just such a compromise in a speech in December. Martin, a Republican, is likely to get support from his Democratic counterparts--and Powell would do well to follow suit.

State-imposed lower wholesale rates do hurt the Bells because they don't let them recoup the costs of building and maintaining their networks. The rates are based on regulators' estimates of what it would cost the Bells to rebuild their networks today, using the latest technology, which is much cheaper. So while SBC Communications Inc.'s forecasts of near-term bankrupcty if the rates continue are wildly overblown, over the long run, unsustainably low rates could plunge the industry into another round of turmoil. "Just as corporate scandals must be rooted out, regulatory foundations must be restored to reflect sounder economic fundamentals," Powell told a Goldman, Sachs & Co. conference six weeks ago.

Now about that transfer problem: AT&T says the Bells charge as much as $125 for each one, while, according to analysts, fees for transferring long-distance customers run about $5. If the process worked better, rivals would be willing to invest in their own networks and wouldn't need to rely on discounted wholesale rates. There's no question that upgrading their systems would cost the Bells billions--and the Bells deny that they stall or overcharge for transfers. But speeding them up and charging less for them is a fair exchange for phasing out low wholesale rates. Says the FCC's Martin: "The commission cannot ignore and must address the [access] problems that new entrants have highlighted."

Such an outcome would bring key changes to the home phone market. The Bells would no longer subsidize their rivals' access to their networks. And rivals, deprived of cheap entry to Bell wires, would have to invest hundreds of millions in their own switches. AT&T has already installed 156 of its own local switches.

Yes, the new system would wash underfunded discounters and other riff-raff out of the residential market. But there would still be competition from cable providers who have signed 1.5 million telecom customers and wireless, which has replaced landlines for 3% to 5% of consumers. Competition would be driven by innovation, not just price. That would avoid the destabilizing price war that accompanied earlier efforts to spur competition--and fulfill the original aims of the Telecom Act.

Rosenbush covers the telecom industry from New York.

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