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Don't Let The Baby Bells Stall Competition


Economic Viewpoint

DON'T LET THE BABY BELLS STALL COMPETITION

When the first anniversary of the Telecommunications Reform Act of 1996 occurred last month, much of the press coverage treated the act as the dog that didn't bark. After all, over 99% of telephone customers are still stuck with a monopoly. Maybe the act was a giant misstep.

The real story is more complex. Mainly, it reflects fierce resistance by local monopolies--the Baby Bells and especially GTE Corp.--against cooperating with the spirit of the act. Its basic objective was to allow long-distance carriers and local phone companies into each other's markets. Local telephone companies, currently monopolies, could enter the long-distance market (from which they had been barred by the terms of breakup of the old Bell system) only after the Federal Communications Commission had certified that their local market was effectively competitive.

That meant the local monopolies had to do something no dominant company will willingly do: let in competitors on reasonable terms. The 1996 act and the FCC regulations issued last August require local phone monopolies to give competitors fair access to local networks. Rivals may build their own facilities and connect to the local network, lease portions of the local network, or they can buy services wholesale and resell them retail.

Under the law and regulations, the incumbent monopoly is required to charge reasonable prices to its potential competitor and not play technical games that result in a competitive disadvantage for the newcomer. For example, the customer of a competing phone company shouldn't have to dial a special access code or suffer delays in obtaining service. And there are innumerable, mind-numbing technical issues of fair access.

OLD HAND. Mandating that monopolies welcome rivals seems an improbable route to competition. But it is precisely the regulatory strategy that brought competition to long-distance service. AT&T and other long-distance carriers are currently indignant at the stalling tactics employed by GTE and the Baby Bells, none of which are expediting interconnection. AT&T, of course, knows just how this game is played. In the 1970s, before the landmark antitrust suit that led to the Bell breakup, AT&T used just these sorts of moves against upstarts such as MCI Communications Corp. Customers of fledgling long-distance carriers found that they had to dial extra digits, that the technical quality of the signal wasn't as good as AT&T's, and that they suffered other ingenious glitches AT&T could devise.

But once the courts resolved that AT&T was abusing its monopoly position and had to be broken up, both U.S. District Judge Harold Greene and the FCC moved aggressively to enforce fair terms of engagement. And AT&T, though it continued to bicker about the details, did not massively resist the entire approach. New long-distance companies did get reasonable access to customers and were able to both lease long-distance capacity on reasonable terms from AT&T and build their own networks. AT&T remained closely regulated as a recovering monopoly.

MANNING THE GATES. Unfortunately, the Baby Bells and GTE are not behaving in the same spirit. For the most part, they are delaying the entry of local competition. This is hardly surprising, since they benefit from at least $10 billion in annual overcharges for long-distance access to their local monopolies. By stalling, they can consummate mergers with each other, the better to resist competition when it finally arrives.

GTE, in particular, has resisted with litigation orchestrated by William P. Barr, formerly Attorney General in the Bush Administration. Last September, GTE obtained an order from the U.S. Court of Appeals for the 8th Circuit blocking the FCC regulations implementing the 1996 act. Oral argument was heard in January. If GTE loses, it will likely appeal to the Supreme Court.

GTE has a special incentive to delay, since the company was not part of the original consent decree breaking up the old Bell system and thus is not barred from the long-distance market. So it is currently the only phone company that has both local monopolies and long-distance service. GTE is also tying up the process in state regulatory proceedings. The states must implement regulations consistent with the 1996 federal law if local competition is to succeed.

Eventually, if the FCC and Congress stay the course, full competition will come to local telephone markets. After all, long-distance competition took more than a decade. The disappointing pace to date is no indictment of the 1996 act or of the FCC. Rather, it is a testament to the tenacity of local monopolies--and to the need for regulation that promotes competition.By ROBERT KUTTNER


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