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

Fortnightly Magazine - June 15 1998

on a pure resale basis? Competitors depending solely on AT&T would not have offered innovative technology, such as the emphasis on fiber optics pursued by Sprint and then emulated by all other carriers. Also, innovative billing, such as MCI's "Friends and Family" would have been more difficult to set up if MCI had not controlled its own network facilities and had instead relied on AT&T's.

Resale-based local exchange competition will not offer customers the benefits of facilities-based competition for similar reasons. This lack of facilities-based competition points to a major difference between development of competition in long-distance and local exchange markets. In the long-distance industry, new technology (microwave transmission) lessened economies of scale enjoyed by the incumbent AT&T. MCI was leading regulation in its efforts in both the private line and message toll service markets. MCI had the network facilities deployed and was ready to offer the services before regulatory approval was granted. %n16%n

On the other hand, in the local market, regulation is being asked to find a solution to a technological problem. Outside high-density urban areas, no evidence exists of alternative technology deployment in the local exchange. Competitors (and incumbent RBOCs) have asked regulators (and legislative bodies) for help in overcoming the technological barrier by unbundling incumbent networks. Congress obliged with the Telecommunications Act, which superimposes a regulatory framework over a market that is not technologically ready for competition. If competition will continue to depend on the facilities of the incumbent LEC, either on an integrated or NetCo basis, local competition will not lead to significant downward pressure on prices because the underlying technology will be similar for all providers.

Simply put, a second divestiture to correct the perceived deficiencies of the post-Act environment does not appear to offer a means of achieving the benefits of competition anticipated by Congress when it passed the 1996 legislation.

The issue of rate rebalancing remains a particularly thorny question for the states. If raising residential rates and lowering business rates was the ultimate goal of Congress, it could have achieved this outcome much more directly simply by legislating its own rate rebalancing. By contrast, competition should bring tangible benefits (read "lower prices") to all customers. Raising residential rates to encourage "resale" competition is undesirable as public policy.

Granted, if it were mandated for the RBOCs, LCI's proposal for a divestiture of assets would likely increase the pace of local exchange choice, especially for residential customers. However this divestiture plan might lead only to a rate rebalancing that could boost rates for residential callers while trimming charges for business. And the price paid by residential customers for the ability to choose between local carriers may be high if rate rebalancing results.

Until technology allows for the delivery of local service in a way that is better and cheaper than that currently available from incumbent LECs, most local exchange customers will not see the benefits that Congress hoped the Telecommunications Act would deliver.

Trevor R. Roycroft, Ph.D., is assistant professor at the J. Warren McClure School of Communication Systems Management at Ohio University.

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