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

Fortnightly Magazine - June 15 1998

would require regulatory oversight of conflicts that would likely arise.

For example, if new switching technology were offered by switch manufacturers that introduced new calling services, the customers of NetCo (i.e., ServeCo and other retail providers) would need to convince NetCo to make the necessary investments to deploy this technology. Regulators might need to decide whether the deployment was justified and who should bear the risk of the deployment (i.e., NetCo or the retail providers). A regulatory requirement for NetCo to offer the new technology at "economic cost" might not be sufficient to induce investment from NetCo's shareholders. Thus the regulator would need to select compensatory wholesale pricing, which in turn would affect the ability of the retail providers to experiment in pricing the new service.

Given its continuing monopoly position, NetCo might also force unwanted (or unmarketable) technology on its customers (i.e., the retail providers). NetCo might use technology in its network in a way that proves most profitable. Through its monopoly position, it could then try to force the retail customers to purchase unwanted network upgrades. %n13%n

Second, national pricing standards would not govern prices for unbundled network elements offered by NetCo under LCI's plan. Rather, states would continue to have jurisdiction over these prices (absent action by the U.S. Supreme Court that might reinstate the FCC's local competition rules). Thus, the development of local competition may still be subject to a quilt of regulation that leads to an uneven development of local competition nationwide.

Third, LCI's proposal would introduce "rate rebalancing" between residential and business rates. The plan would require NetCo to offer unbundled network elements at "economic cost." Economic cost studies do not distinguish between business and residential customers. Thus the cost structure of the retail service provider (i.e., NetCo's input prices) would provide pressure for a "balanced" rate structure between business and residential rates. LCI suggests that the retail providers would not be subject to regulation. %n14%n

Unregulated retail providers could introduce "rate shock" for many residential customers. LCI's proposal would also require that issues relating to subsidizing universal service to either high-cost areas or to low-income customers be established and functional before the transition to an unregulated retail service environment.

Fourth, LCI's proposal ultimately does not compel the desired behavior from the RBOCs. The RBOCs would not have to accept the optional fast track. AT&T's divestiture was successful only because it voluntarily agreed to strip itself of its BOC assets. Absent some mechanism to force the RBOCs to break up their retail operations into a network provider and retail service provider, it may be a long wait. %n15%n

Fifth, easy access to, and reliance on, NetCo's facilities would not encourage deployment of alternative network infrastructure. Competition on a resale basis in the local exchange will not offer the benefits of facilities-based competition. This imbalance would exist regardless of whether retail providers are reselling the services of an integrated RBOC or of a NetCo as proposed by LCI.

The Question:

More Sellers or More Lines?

What would have happened to the long-distance industry if competition had been