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Fortnightly Magazine - February 1 2000

for CLECs, since they attracted large volumes of off-network traffic. Many RBOCs came to view CLECs as "traffic-sucking blobs."[Fn.3] The RBOCs claimed that unbalanced traffic flows to CLEC-based ISPs were costing the ILECs hundreds of millions of dollars per year.

The Federal Communications Commission addressed this issue in a Declaratory Ruling in February 1999.[Fn.4] In that ruling, the FCC determined that traffic carried from the end-user to the ISP was interstate, but should continue to enjoy the ISP access charge exemption. Will this exemption, granted as part of the ISP's enhanced service provider status, be sustainable in light of the FCC's ruling? Even an FCC commissioner has voiced this question.[Fn.5] The potential threat to the access charge exemption marks yet another unintended consequence.

The Phonesharks

Basic business sense dictates that any new competitor ought to charge no more than the ILEC does for local service. However, by identifying a market niche, the phonesharks dispensed with this conventional wisdom. "Phonesharks" are resellers of local exchange service who offer prepaid local exchange service to individuals who have been disconnected by the ILEC, typically for unpaid bills. For the most part, individuals who have been disconnected have low incomes. Thus, for marketing purposes, phonesharks target check-cashing and rent-to-own furniture stores.[Fn.6] Phonesharks charge prices for their prepaid service in excess of the ILEC's retail rates - in some cases double the rate.

State regulatory commissions must decide whether phoneshark entry serves the public interest. Customers who become disconnected often are in arrears due to toll-call charges. Some states do not permit disconnection of basic service for non-payment of toll; in these states, it is difficult to imagine how phonesharks offer any public benefit. In states without disconnection protection, the phonesharks might be seen as providing some public benefits by allowing disconnected customers an opportunity to reconnect. This benefit only highlights a failure of policy in not protecting customers from disconnection in the first place.

All told, this phoneshark phenomenon threatens to gouge the poor in local calling markets - yet another unintended consequence.

The Global Behemoths

Since the Act was passed, the long-distance market has been marked by mergers. The rationale for these deals, as stated by the companies involved and even by the regulators approving them, is the need to bulk up to compete against the RBOCs.[Fn.7]

Long-distance markets already were concentrated prior to the Act, with the four largest firms controlling more than 80 percent of revenues. Mergers that followed the Act have combined three of the four largest long-distance carriers. In 1997, WorldCom, the fourth-largest long-distance carrier, acquired MCI, the second-largest long-distance carrier. MCI WorldCom in 1999 announced its merger with Sprint, the third-largest long-distance carrier. Assuming approval of the MCI WorldCom-Sprint merger,[Fn.8] concentration in the long-distance industry has increased, when measured by the Herfindahl-Hirshman Index, from about 2,780 in 1996 to about 2,975 in 1999. Given that the U.S. Department of Justice uses a benchmark of 1,800 to identify markets that are highly concentrated and subject to the exercise of market power, competitive performance in the long-distance industry would be expected to