Group Seeks FCC Action Against Ongoing Access Monopolies

The Ad Hoc Telecom Users Committee warned the FCC that local incumbents continue to dominate the market for access services, rebutting Bell claims of robust competition throughout the U.S. telecom industry. In a white paper released Wed., the group, which represents some of the largest enterprise consumers of telecom services in the U.S., said the lack of alternatives to ILEC switched and special access services costs telecom enterprise customers $15 million a day in excess special access prices. It asked the Commission to promote competitive alternatives to the ILEC business services and constrain the incumbents’ monopoly power over special access.

“Competition for switched access services is all but nonexistent,” the committee said: “While limited alternatives exist for special access, the [ILECs] remain the sole source of connectivity at roughly 98% of all business premises nationwide, even for the largest corporate users.” The group also urged the FCC to grant the AT&T special access petition filed Oct. 2002 -- after the prices for special access services increased significantly as a result of the FCC pricing flexibility order, which in 1999 lifted the 11.25% rate-of-return limit imposed on the Bells. AT&T had asked in the petition and later in a mandamus petition to the U.S. Appeals Court, D.C., that the FCC start a rulemaking to revisit the pricing flexibility order and come up with permanent solutions on the rates Bells can charge for special access services.

“The assumption that people have is that enterprise market is more competitive than others,” said Susan Gately, senior vp of Economics & Technology Inc. (ETI), which prepared the report for the committee. But she said “the reality is that there are no CLECs there providing service in that market and companies have to buy service from RBOCs.” She said competition that the FCC was hoping would develop “didn’t arrive.” The study said there were “numerous and well-recognized” barriers to competitive entry in access services, especially “the enormously high fixed-cost investments required to enter this market coupled with the increasingly uncertain future return on those investments.” It said those conditions, which were “not likely to change any time soon,” meant that prices for telecom services used by large and small businesses were “not being effectively constrained by competition, and are likely to rise as what little competition that now exists continues to falter.”

Referring to ILEC data filed with the FCC, Gately said the RBOCs were now earning 2-4 times the 11.25% rate of return level established by the FCC in 1990, and the average return on special access services has been rising steadily since 1996. The study said the reported average special access return across the ILECs for 2003 was 43.7%, with Verizon’s return 23.5%, SBC’s 62%, and BellSouth’s and Qwest’s at the “rarified” level of 56.6% and 57%, respectively. It said total interstate earnings for the RBOCs -- switched and special access, and common line combined -- averaged in excess of 17.1%.

The group proposed a plan that it said would: (1) “Curb the pricing excesses that have arisen in the absence of effective competition.” (2) “Establish a self- executing regulatory paradigm that will allow the ILECs the flexibility they demand while… relying upon regulation to continue to protect customers against excessive prices.” The committee said unlike other “incentive regulation” proposals, its plan was “self- executing,” meaning it would automatically remove operative pricing constraints as soon as marketplace forces took over that function.

The committee said its plan would initially retarget special access rates at the 11.25% authorized rate of return to “eliminate the monopoly prices that presently exist.” It said that would provide ILECs with “downward pricing flexibility,” enabling them to “respond to competition while assuring that prices remain at competitive levels where actual entry does not occur.” It said to ensure prices remain at competitive levels, the ILECs’ rates would be adjusted annually by a price cap rate adjustment mechanism including a productivity adjustment and an earnings sharing component.

ALTS Pres. John Windhausen said the study confirmed that “the government has not fulfilled its mandate to open the local market to competition… Wireless services and cable services are simply not an option for business customers.” He said ALTS didn’t necessarily endorse the committee’s pricing proposal, but “the study provides clear support for strong unbundling rules for loops and transport.” An MCI spokeswoman said “MCI agrees with the paper’s assessment on the state of competition.”