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Ma Bell's Legacy: Time for a Second Divestiture?

Fortnightly Magazine - June 15 1998

The network provider would deal at arm's-length, on a nondiscriminatory basis with the RBOC's retail provider. Rochester Telephone in New York (now Frontier Communications) %n4%n and Southern New England Telephone in Connecticut have pursued such a restructuring. %n5%n

These are the ideas that lie behind a recent proposal by LCI International Telecom Corp. to split the operations of the RBOCs into units that, because of their structural separation, would neutralize the conflict of interest that haunts the 1996 Act. However, the LCI plan does not solve all problems and may introduce a few more.

On Jan. 22, LCI petitioned the FCC for an expedited declaratory ruling that would offer RBOCs "fast track" approval for entry into the in-region interLATA long distance market if they divest their retail local exchange business into two separate subsidiaries within the holding company. LCI deemed these subsidiaries "ServeCo" and "NetCo." %n6%n ServeCo would offer retail services alongside any other competitive LEC. NetCo would be a wholesale provider of unbundled network elements. LCI's proposal includes balloting for the customer's primary choice local service provider. This balloting would be similar to the process that took place after the AT&T monopoly was divested. %n7%n

The LCI proposal requires that the ServeCo, while potentially remaining a subsidiary of the RBOC, must establish "substantial public ownership" of 40 percent or more. %n8%n This outside ownership would, according to LCI, lead to management responsibility to sources other than the holding company. This ServeCo would compete in retail markets while pricing "its retail offerings to reflect the actual prices of the inputs it obtains from NetCo, and demand the best prices and quality for network inputs from NetCo." %n9%n

The LCI proposal would leave NetCo bound by the pricing provisions of the Act as NetCo would remain an incumbent local exchange carrier.

LCI's proposal would potentially avoid legal implementation problems by making the "fast track" optional to the RBOCs. Whether any RBOC would voluntarily adopt such an approach is unknown. However, given recent activity by a federal district court concerning the legality of the Act's exclusion of RBOCs from the interLATA business, a policy of watchful waiting might suit RBOCs best. %n10%n

The Result: Another Monopoly

LCI's plan serves as an admission that economies of scale in the local exchange market remain too pervasive to allow for meaningful facilities-based local competition. Yet under its plan, NetCo would remain a monopoly and would have no incentive to move its prices toward cost or to invest in new technologies. %n11%n NetCo would require regulation of prices, service quality and infrastructure investment and deployment, introducing five distinct problems.

First, technology deployment would become more complicated in the environment envisioned by LCI's "divestiture." Infrastructure deployment might require a higher level of regulation with NetCo than with today's RBOCs, which have market incentives to invest in new technology and offer new services. New services have received more lenient regulatory treatment by regulators and thus offer the potential for increased profit margins. %n12%n

This link would be broken with the structural separation of the network facilities and service providers and