Can Public Utility Commissions Save Local Phone Competition?

COMPETITION AT THE CROSSROADS: CAN PUBLIC UTILITY COMMISSIONS SAVE LOCAL PHONE COMPETITION? TABLE OF CONTENTS EXECUTIVE SUMMARY ............................................................................................................ 1 LOCAL COMPETITION DELIVERS THE BENEFITS TO RESIDENTIAL CONSUMERS............................................................................................... 4 THE STRUGGLE TO OPEN LOCAL MARKETS AND KEEP THEM OPEN ............................................ 4 THE STAKES FOR CONSUMERS ..................................................................................................... 5 WHAT’S AT STAKE FOR THE STATES? .......................................................................................... 7 THE NATURE OF LOCAL COMPETITION............................................................................. 12 OPENING LOCAL MARKETS TO COMPETITION............................................................................ 12 THE TIMING OF ENTRY AND COMPETITION ................................................................................ 15 INVESTMENT BEHAVIOR CONTRADICTS RBOC CLAIMS .............................................. 18 UNE PRICES AND COSTS ........................................................................................................... 18 COMPETITION AND INVESTMENT: THE FACTS............................................................................ 20 COMPETITION AND INVESTMENT: THE THEORY......................................................................... 24 CONCLUSION............................................................................................................................. 26 ENDNOTES ................................................................................................................................. 27 LIST OF EXHIBITS Exhibit 1: Residential Market: ILEC Long Distance Compared to CLEC Local........................... 6 Exhibit 2: The Importance Of Bundle Competition In Major States.............................................. 8 Exhibit 3: SBC’s Campaign To Raise Une Prices Is Way Out Of Line...................................... 10 Exhibit 4: Residential CLEC Lines As A Percent Of CLEC Lines: Florida ................................ 11 Exhibit 5: Competition In The Local Telephone Market.............................................................. 14 Exhibit 6: The Level And Growth Of Competition Before And After RBOC Entry, New York And Texas, All Lines ............................................................................................................ 16 Exhibit 7: CLEC Penetration In Residential/Small Business Market........................................... 17 Exhibit 8: No Relationship Between UNE-P Rates and CLEC Reliance On UNES.................... 21 Exhibit 9: Telecom Capital Expenditures, 1996-2001.................................................................. 22 Exhibit 10: Incremental Telecom Sector Investment, 1996 As Base Year................................... 23 EXECUTIVE SUMMARY Introduction The 1996 Telecom Act was supposed to shake up the telecommunications industry, encouraging competition where there had been monopoly. The Act aimed to allow new companies to spring forward and compete with existing Regional Bell Operating Companies (RBOCs) to provide local phone services. It encouraged RBOCs to enter the long distance market and increase competition there, but only after irreversibly opening up local markets. The successful opening of local markets and expansion of competition relied heavily upon the state public utility commissions (PUCs) to create conditions that would foster local competition. First, PUCs forced reluctant RBOCs to adopt procedures for interoperating with competitive carriers, allowing for smooth operation and switching of customers. Second, PUCs set reasonable prices for unbundled network elements (UNEs) providing competitive carriers with access to the incumbent local exchange companies’ (ILECs) networks, and sufficiently compensated ILECs for the costs involved with providing UNEs. This system resulted in the emergence of an unprecedented amount of competition for local service, providing 50 million consumers with a choice of service providers and substantial savings. Earlier this year, the 1996 Telecommunications Act passed a milestone. After seven years, many state markets are open to local competition, and local exchange carriers are now authorized to also sell long distance in well over half the jurisdictions where RBOCs are the incumbent local exchange carriers. By the end of 2003, the Bells are likely to be selling long distance in almost all of their home states. Independent local exchange companies, never part of the RBOC system, have also been allowed to enter into the market for long distance service. The Stakes for Consumers are High Markets open to competition are able to offer competitive choices for long distance and local services. More recently, providers have begun to offer bundled long distance and local service at lower rates from a sole provider. Recent press accounts put the number of consumers in competitive markets that have switched to one-stop-shopping “bundles” of services at close to 30 million – 12+ million for the competitors and 18+ million for the incumbents. An additional 18+ million customers have switched local providers to secure better rates. In other words, there are nearly 50 million customers who are the direct beneficiaries of competition – 30+ million who have switched providers and 18+ million who have taken incumbent bundles. As a result, consumers are reaping sizeable savings. These consumers of bundles are likely to have an average bill in the range of $55-$65 per month for the services that make up the bundle. With bundles selling in the range of $40-$50 per month, the savings of $15 per month is substantial. As a result, the total consumer savings is now in the range of $5 billion per year. RBOC efforts to delay or halt competition by withholding access to UNEs pose a major threat to these consumer gains. If the RBOCs succeed in forcing regulators to withdraw the unbundled 1 network element platform (UNE-P), or raising the price that RBOCs can charge competitors, they will drive competition from the market and diminish consumer savings. The Key Battlegrounds The struggle to open local markets took seven years after the Telecommunications Act of 1996 was passed. Obstacles to fair competitive markets remain in some states and the implementation of the FCC’s Triennial Review Order places the competitive industry, and consumer savings, at great risk. In the major states that are likely to serve as the battlegrounds for the Triennial Review and UNE pricing, the stakes are huge. The fate of the competitive industry, and consumer choice, will effectively be decided in six states: Florida, California, Illinois, Texas, and New York. These states account for about 10 million CLEC bundles and 13 million ILEC bundles. Losing UNEs in these states would be a devastating blow to the CLEC industry and to consumers. Over $4 billion of consumer savings on bundles in these states could be lost annually. In Illinois, competitors serve about 19 percent of phone lines in the state. The competition that has developed suggests that as many as 3.5 million customers are taking advantage of bundled savings in Illinois, accumulating savings of over half a billion dollars per year. But, SBC secured legislation, now stayed in court, that would have increased UNE prices and erased these savings. Similar savings are at stake in other states like California, Texas, New York and Florida. The damage that would result from higher UNE prices or the dismantling of the UNE platform would hurt all consumers, as incumbents would no longer face effective competition in its territory, and would be able to raise prices for all its customers. Premature removal of UNEs or sharp price increases will lead to the re-monopolization of the industry, an end to emerging vigorous competition and cost consumers billions of dollars in the form of higher prices. Debunking the ILECs’ Claims The recent progress toward more open and competitive local telecom markets is important but fragile. Although competition has made significant gains, the Bells are working hard to undermine UNE-based competition and force weakened competitive local exchange carriers (CLECs) to build redundant telecommunications networks. A successful result for the RBOCs on this would put a swift end to local competition. This paper examines three arguments that have been advanced by the Bell companies in support of these anti-competitive aims. In the past RBOCs have employed these arguments to delay opening their local markets to competition. They are reviving them now in an attempt to reduce the availability of UNEs, or to raise UNE pricing to such exorbitant rates that competitors would be forced from the marketplace. This paper examines the current state of competition in 39 of the largest states where public data is available regarding residential competition. Our research shows that, in each case, the Bell’s arguments are both misleading and unfounded. 2 Argument One: The ILECs claim that competition would be stimulated if the Bells are allowed to enter the long distance phone market before new market entrants have real access to the existing telephone network. CFA Study Findings: This claim is false. The experience of early competition shows that when incumbents are allowed into the interLATA

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