We are witnessing in Illinois a high stakes game of hide-and-seek as SBC attempts to hide its profits and stifle competition. Ultimately, the game will cost the citizens of Illinois millions of dollars.
To appreciate the game, we need to go back 20 years. After the break-up of Ma Bell in 1984, the telecom world was divided into long-distance carriers and local telephone service providers (the Bells), such as SBC and Verizon. The court order prohibited local providers from offering long-distance service, while the laws of economics prevented long-distance companies from offering local service.
With the Telecom Act of 1996, Congress offered the Bells a deal: They could enter the long-distance market in exchange for allowing local competitors to lease phone lines at wholesale rates. Congress directed the Federal Communications Commission (FCC) to develop the rules of the game.
The FCC decided that the Bells had to base the rate for leasing their lines on their “forward looking costs.” In other words, the wholesale rate would depend on the cost of building and maintaining the local network using the best available current technology, therefore fully reimbursing the Bells for the complete cost of managing the network. The FCC left it to state commissions, like the Illinois Commerce Commission (ICC), to set the wholesale rate based on the Bells’ costs, including a reasonable profit for the Bells.
With the promise of competition beginning to unfold, the Bells began to play the game in two arenas. First, in state after state, the Bells entered the long-distance market as Congress provided. By any objective measure, the Bells have been successful. By the end of 2002, Verizon had become the nation’s No. 3 long-distance company. For its part, SBC said in January 2003 it had acquired 2.5 percent of California’s long-distance market in less than three weeks. SBC expects to obtain similar penetration rates in Illinois once the FCC grants its petition to enter the long-distance market.
Now comes the second part. With the Bells close to obtaining long-distance entry in every state they operate in, their new campaign is to deny rivals fair access to the local network by arguing that wholesale rates are set too low. The Bells argue that competitors should pay for the historical cost of the network, even when those costs bear no resemblance to the actual cost in today’s market. The Bells’ approach would charge competitors for outdated equipment, most of which consumers already paid for before the breakup of Ma Bell.
By using forward-looking costs, the FCC’s formula encourages the Bells to expend capital in the future while at the same time not allowing the companies to “double-recover” the cost of past investments or rewarding the companies for the costs caused by poor management or speculative investment.
Despite the Bells’ protests, the U.S. Supreme Court in May 2002 upheld the FCC’s cost-based pricing system.
SBC last year attempted to raise its wholesale rates in Illinois, but when it realized it was unlikely to succeed with the ICC, it turned to the General Assembly. The end result was that a federal judge struck down SBC’s rate hike bill, ruling that the ICC should set the rates. SBC now finds itself back at the drawing board. One can expect that SBC’s next move will be to try to use its political muscle with Gov. Rod Blagojevich to get its desired rates through the ICC. (Recall that the commissioners at the ICC work for the governor that signed SBC’s bill just minutes after it hit his desk.)
The ICC should not fall for SBC’s game of hide-and-seek. It should stay the
course and continue to require SBC to lease its lines at wholesale rates that
bring down consumer prices and spur future innovation.
This article appears in Oct 30 – Nov 5, 2003.
