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The Brave New Telecom World Still Needs A Referee


Economic Viewpoint

THE BRAVE NEW TELECOM WORLD STILL NEEDS A REFEREE

The Senate's telecommunications bill, drafted by Commerce Committee Chairman Larry Pressler (R-S.D.), might seem a grand bargain. Freed from regulatory shackles, emerging super-industries will enter each other's markets: Local Bell operating companies will offer long-distance service. Long-distance carriers will contest local phone markets. Likewise, cable companies and even electric utilities. Phone companies may merge with cable operators, wireless competitors can access the local phone grid, and everybody can venture jointly.

But in its eagerness to promote competition, this bill could actually undermine it. The mistake is to assume that lingering market power will disappear overnight. A new era of competition in telecommunications is surely in the offing, but the devil is in the details. Huge areas of monopoly power survive in this business. The local phone monopoly, usually a Baby Bell, still controls over 99% of local markets. If you want to get into the telephone business, you first need access to its switches. Very dense areas such as Manhattan boast wireless options for basic phone service, but not in most of the country. Eventually, cable companies may become direct rivals. But that will take many years. In the meantime, cable companies and phone companies may merge, leaving one wire to the customer.

The danger is that regulated monopoly will give way to unregulated monopoly, especially in local phone service. The Senate bill tries to mandate fair competition by specifying a checklist of measures that must be met before local phone service is deemed fully competitive. Only then can the Baby Bells freely go into the long-distance business, and only then do other regulatory strictures come off.

The checklist is sensible as far as it goes. It includes fair access to interconnections for Baby Bell rivals, equal access to telephone directory listings, "portability" of phone numbers when one switches companies, a system of reciprocal payments among competing local phone companies, and so on.

NO WATCHDOG. But equal access on paper is not the same as actual competition. The Bells can meet all the checklist's demands and still control 99% of actual markets. Fair play is also a moving target. When new rivals must piggyback on a dominant company's facilities, the incumbent is sorely tempted to play cute. Just ask MCI Communications Corp. executives about the games AT&T used to play.

An incumbent local phone company with 99% market share can agree to Pressler's 14-point checklist now. But as technology changes, no agency is empowered to review fair play as there has been under the terms of the AT&T breakup. There is now ample consumer choice for long-distance service--but only because the Federal Communications Commission, the Justice Dept., and U.S. District Judge Harold H. Greene continuously supervised the terms of engagement to keep AT&T from using its dominance to strangle MCI, Sprint Corp., and other newcomers. Had there been a premature free-for-all a decade ago, when competition was in its infancy, AT&T's market power would have snuffed out all comers.

By contrast, the Pressler bill naively assumes competition is mostly self-policing. It would supersede the 1982 consent decree that broke up the Bell system, put Judge Greene out of business, and reduce the FCC's role. The approach followed by Ameritech Corp. and the Justice Dept. is more sensible. In a pilot agreement filed on Apr. 3, Ameritech, the Chicago-based Baby Bell, gets to offer limited long-distance service, but only as competition for local service develops, and under the continuing supervision of the Justice Dept.

Advocates of total deregulation contend that issues of equal access and fair play can be sorted out by the rival industries themselves. That happens all the time--it's called a cartel.

True competition in phone service is coming--but only if it is policed, as it was in long distance. In industries that have been regulated monopolies, with captive customer bases, the transition to fair competition is not self-executing. "There are just too many opportunities for anticompetitive behavior," observes FCC Chairman Reed Hundt. "The top cop on the Information Highway still needs to keep a nightstick." Congress has waited 60 years to rewrite the 1934 Communications Act. They might as well take a few more months and do it properly.BY ROBERT KUTTNER


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