[BETA] Fortnightly

TWO YEARS HAVE ELAPSED SINCE CONGRESS PASSED THE Telecommunications Act of 1996 to "provide a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans." %n1%n

Today, however, telephone deregulation has reached an impasse. Few customers enjoy competitive alternatives for local exchange service. Concentration in long-distance markets appears to be increasing.

At its core, the Act still offers its quid pro quo - the Regional Bell Operating Companies would gain interLATA authority (for long-distance service) by allowing entry into their local markets. Nevertheless, that trade has not proven attractive enough to force open the local exchange. The two sets of players, the RBOCs and the interexchange carriers, have fallen into a war of words. Each side (and its paid experts) blames the other for the stalemate that has arisen.

So far, the RBOCs could count themselves fortunate to have found a sympathetic ear at the Eighth Circuit Court in St. Louis in their appeal of the Federal Communications Commission's local exchange market rules, which would have placed competition on a fast track. %n2%n However, the U.S. Supreme Court may not prove so obliging. Recently, it agreed to hear the appeal filed by the FCC and the IXCs challenging the eighth circuit's ruling. %n3%n The FCC's local competition rules may yet rise from the ashes.

The Supreme Court has scheduled arguments for fall 1998, but that may not be soon enough for some. In any case, the potential reincarnation of telephone competition cannot occur at least until sometime in 1999. Given the gridlock, observers have suggested another way out: Divest the RBOCs of their network assets.

Would a second divestiture bear fruit? Many problems have arisen in carrying out the Telecommunications Act. More would arise with a second breakup, as illustrated here in the context of a concrete proposal filed recently at the FCC to separate each RBOC into two business units - a network company to own the lines and a retailer to sell calling services to customers. A forced divestiture might lead only to a rate rebalancing that could boost rates for residential callers while trimming charges for businesses. The broader question remains: Can the telecommunications industry move forward with real technological change that might bring benefits to customers beyond a mere reallocation of current costs?

The Proposal:

"Dismantle the RBOCs"

The Telecommunications Act created a conflict for RBOCs by making them sellers of both wholesale inputs and retail service. However, given that corporate management holds a fiduciary duty to shareholders, it should come as no surprise that the RBOCs have showed a reluctance to forego the large profit margins earned from retail business service to become low-margin sellers of network inputs.

Dividing RBOCs into two business units - one to sell inputs, the other to provide retail service - could eliminate this conflict of interest. Such a separation, in theory, would result in one business unit (the network provider) selling inputs on a wholesale basis to all retail service providers that need unbundled inputs to provide services.