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OCTOBER 17, 2002 COMMENTARY By Jane Black Telecom: When Regulation = Competition Despite the Baby Bells' howls, states are wisely slashing the access rates that Bells charge their local-service rivals
The heavy hand of regulation? Yes. Bad news for the Bells? Definitely. But given the failures of the sweeping telecom deregulation measure that Congress passed in 1996, tough rules may be just what are needed to keep injecting competition into the industry at a crucial time in its development. Competition, after all, was the goal of federal deregulation from the get-go. ISSUE DU JOUR. The Bells' position is that what they're getting is actually cannibalism. And that's why the industry's arcane internal debate has become the issue du jour. Since November, New Jersey state regulators have slashed wholesale phone rates -- what the Bells charge the local providers -- by 43%, to $12.82 per line. This, despite howls of protest from Verizon, which holds a virtual monopoly on local-phone service. And in Texas, home to San Antonio-based SBC, Lone Star State regulators are expected to follow suit with dramatic rate cuts early next year. "Our attitude is let the chips fall where they may," says Texas Public Utilities Chairman Rebecca Klein. Nationwide, wholesale rates have fallen an average of 7.8% over the last six months, from $18.95 to $17.48, according to data compiled by the state regulators. Such policies are causing a mounting crisis for the Bells. SBC has lost nearly 3 million retail access lines year-to-date through August, and year-over-year revenue plummeted more than $1 billion in the first half of 2002. SBC says it could lose an additional $2.3 billion in anticipated revenues over the next year. "State regulatory commissions don't get it," fumes Verizon CEO Ivan Seidenberg. "They don't have a clue because they're trapped in an old view of regulatory policy." SIPHONING REVENUES? Similarly, SBC CEO Edward Whitacre lashed out at state regulators in announcing 11,000 layoffs on Sept. 26: "Under this pricing scheme, a century of regulatory policy has been turned on its head," Whitacre said. "Instead of subsidizing prices for average consumers, we now subsidize competitors who in turn siphon revenues out of the market." By keeping rates low, however, states aren't just keeping consumers' phone bills in check. They're fulfilling Congress' sweeping 1996 deregulation mandate. The law required that the Bells open their markets to competition, something they've resisted. In the absence of Congress rewriting the act -- a long shot given the controversy surrounding telecom deregulation -- the states should stick to their guns. "Market share and revenues are dropping. Well, that's what competition is all about," says James Bradford Ramsey, general counsel of National Association of Regulatory Utility Commissioners (NARUC), the trade association representing state regulators. "DOWN LIKE A ROCK." Nowhere is their resolve more clear than in Michigan. In August, SBC warned Wolverine State regulators that layoffs were unavoidable unless it was allowed to raise its rates. SBC, which employs 16,000 people in Michigan, says it has lost 1 million lines to competitors such as AT&T (T ) over the past several years. Low wholesale rates are squeezing SBC's profit margins and giving competitors an unfair pricing edge, the Baby Bell declares. "We are losing [thousands of] customers a day in Michigan," Whitacre complained on a visit to Detroit. "As a result, our profitability is heading down like a rock." Michigan's state utility commission wouldn't budge, however. On Sept. 16, it threw out SBC's request to even consider a price hike. The reason? Michigan's low wholesale rates (called UNE-P in industry jargon) had at long last brought competition to the telecom sector. Since January, AT&T has taken more than 200,000 local customers from SBC. In total, competitors have grabbed 600,000, or 12% of Michigan's lines, through the wholesale program. "After waiting six years, we're seeing a glimmer of hope [for competition], and they want to take it away," says Michigan Utility Commissioner Bob Nelson. "This is our last real hope." The states' resolve to cultivate competition stems from their own desire to compete with each other for business investment. Michigan Governor John Engler aims to create a broadband-service mecca in his state that will give it a competitive edge over other high-tech hubs, such as California and Virginia. The governor's plan, which the state legislature passed in February, is counting on broadband to create 500,000 jobs over the next decade and increase economic output by $440 billion. "States need competition to attract business and create an economic advantage. And they're willing to put policies in place to achieve that," says NARUC's Ramsey. CORPORATE DEATH MATCH. What the states give, however, the feds could still take away. The Bells have a heavy hitter in their corner -- Federal Communications Commission Chairman Michael Powell, who's openly sympathetic to their plight. Since he took office in January, 2001, Powell has made clear that he would prefer to see a corporate death match among phone, cable, and satellite giants, rather than allow small competitors to chip away at established corporations' profits. Plus, the Bells' argument that wholesale rates are set through a misguided regulatory formula based on theoretical, not real costs, is powerful: According to Verizon, if all phone lines in Pennsylvania were sold at the wholesale rate, it couldn't generate sufficient income to pay its employees and operate its network. The implosion of WorldCom -- once considered a shining example of competition's power -- has bolstered Powell's conviction. In an Oct. 4 speech at a Goldman Sachs' investor conference, Powell hinted that he believes wholesale rates may have sunk too low. "We must not confuse change that adversely impacts a particular competitor as synonymous with hurting competition," he told a crowd of anxious investment bankers and telecom executives. FINAL NAIL. He said the FCC was completing a major review of wholesale rate policies that would "provide a meaningful opportunity to improve the regulatory foundations of competition." Translation: The FCC may soon step in. That would be a mistake. State regulators -- and the Bells -- know all too well that eliminating or scaling back the policy on wholesale rates would be the last nail in competitors' coffins. With capital markets drying up and the dreams of unfettered competition fading, enlightened regulation may be the only way to give telecom upstarts a way into the lucrative local-phone biz. The rival providers shouldn't be given a free ride at the Bells' expense, however. If the wholesale rates are below cost, as the Bells claim, they should be reset. State regulators are right to use their power to promote competition. Powell should cede this issue to the states. All they are saying is give competition a chance.  Black covers the telecom industry for BusinessWeek Online Edited by Douglas Harbrecht Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | OCTOBER |
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