BY ROBERT VAHID HASHEMIAN

The other day, I was going through some of the bills at home. I found a phone bill buried in a pile of them, so just for fun I started reading some of the itemized call charges. Something hit me: Why does a call to England cost 10 cents a minute (at certain times during the week) while I pay up to 20 cents a minute for calls made to a town 40 miles away in my home state? I don’t pretend to be an expert in tariff regulation, but the absurdity of this gross disparity should be obvious to a 5 year old.

DIVESTITURE’S LEGACY
For decades, consumers have complained about the unfair billing practices of the phone companies. In 1984, the Federal Communications Commission (FCC) enacted laws that broke up the behemoth Bell system into AT&T and 22 Bell Operating Companies. Since then, the effects of this move (known as the Modified Final Judgment or MFJ) have provided the American public with a number of long-distance service companies competing fiercely for a piece of the $90 billion long-distance market. The result in the majority of cases has been positive; most of us enjoy lower long-distance rates and improved service. One of the outcomes of the MFJ was the clear distinction between the local and the long-distance carriers — players on each side could no longer enter or influence each other’s territories. As consumers, we ended up with two carriers to reckon with: one for local calls and another for longdistance.

When it comes to consumer protection on the long-distance side, competition has been the driving factor behind favorable rates. On the local side, regulation by the state utility commissions has been the order of the day. State regulation has been necessary since the local market (also a $90 billion market) is largely controlled by monopolistic telephone companies in most of the country.

THE TELECOM ACT’S PROMISE
The Telecommunications Act of 1996 (perhaps the most comprehensive act since the creation of the FCC in 1934) was supposed to change all that. The act covered a wide array of telecommunications issues, including disabled access, broadcast services, cable services, obscenity and violence, and the right to privacy. The most notable part of the act was opening up the local telecommunications market to competition. This was a significant shift in telecommunications law, and it promised to change the local landscape as we knew it. The new law allowed the long-distance and local players to offer services outside their traditional scope.

WAR OF THE LECs
The act also facilitated the entry of local service newcomers, called Competitive Local Exchange Carriers (CLEC), into the market to compete with the Incumbent Local Exchange Carriers (ILEC). The ILECs were the established local phone company monopolies in the local markets. The state public utility commissions were tasked with fostering a competitive environment in their localities to prevent ILECs from blocking the CLECs’ entry into the local markets. That can only be done through regulation. The law required ILECs to unbundle their services and open up their networks to CLECs, so the CLECs could offer similar services. In essence, the ILECs had to sell usage of their lines and services to the up-and-coming CLECs at a wholesale discount (around 17 percent off the retail prices) so the CLECs would have enough price room to effectively compete with ILECs and other CLECs. The benefit to the ILECs was that once they satisfied competitive criteria for their local markets, they could offer long-distance services to their subscribers.

I don’t really have a problem with regulation if it is done correctly. When the FCC initially wanted to spur competition among long-distance carriers, it placed AT&T under significant regulation (some of which still partially remains) until competition could grow and flourish. The state public utility commissions used a similar approach towards their ILECs. The difference, though, is that there is little evidence the commissions’ stance has relieved consumers of the high local tariffs they bear. I get frustrated when regulation is ineffective — but imagine my surprise when I discovered the state utility commissions may actually contribute to the high prices we pay for local calls. How? In some states, antimonopoly regulations set forth by the public utility commissions do not allow ILECs to drop their rates beyond a certain point. Worse yet, many of these commissions must approve even small ILEC discounts before they can be doled out to customers.

Why would ILECs want to offer lower prices to consumers? One thing is for sure, they aren’t doing it for love. With many of them controlling sizable pieces of their markets (some as much as 97 percent), ILECs are getting increasingly nervous at the prospect of losing market share to CLECs. Price reduction is a formidable defense against market share erosion. The public utility commissions, on the other hand, argue that price drops could stifle competition, especially when CLECs are fledgling entities up against the enormous, influential, and resourceful ILECs. The idea is that given a long enough regulatory period, CLECs will eventually be able to stand on their own and compete with the ILECs.

HOW FAR HAVE WE COME?
The road to implementing the 1996 Telecommunications Act is littered with more bumps than the George Washington bridge during repair work. The local carriers’ entry into the longdistance service market has been mostly unsuccessful, and long-distance carriers have found the local market a tough nut to crack. There is enough political maneuvering, lawsuit filing, and finger pointing to keep the courts and regulatory bodies busy for decades to come. On top of this, new entrants such as cable companies and Internet Service Providers (ISPs) have made the situation even more chaotic. Some ILECs have gone so far as proposing their own CLEC companies to avoid the strict regulations. Meanwhile, the consumers who were supposed to be the ultimate beneficiaries of the Telecommunications Act rate reductions continue to pay a high price for their local services.

HOLD ILECs ACCOUNTABLE
The state public utility commissions claim they are doing the best they can to protect the consumers, foster a competitive environment, and allow the ILECs to make a reasonable profit. I think that they need to do more. They should look deeper (undisturbed by lobbyists) into the ILECs’ accounting practices to determine their true level of earnings. I suspect that many ILECs have healthier margins than they would have us believe. If, in fact, their earnings are not as bright, it may be the result of bad business practices. They would either have to find ways to optimize and streamline their operations, or face being taken over (partially or totally) by CLECs who can do a better job. In either case, a reduction in local rates would be a welcome change for the long-exploited consumers.

CTI MAY SAVE US
With Internet telephony gaining popularity, matters are likely to get even more complicated. So far, the FCC has adopted a wait-and-see attitude toward Internet telephony, but chances are, as telephone companies start to see encroachment in their territories, they will pressure for regulation of this emerging technology.

The Telecommunications Act of 1996 was signed into law to protect the consumers, but I’m afraid there is little evidence that we will be getting relief any time soon. We can hope that if new CTI technologies, such as Internet telephony, are allowed to enter the market unmolested, they will have a favorable impact for the consumers. Then I can go on complaining about the utility companies. Believe me — there is bill from them somewhere in that pile, too.