Wednesday, December 24, 2003 - The Progress & Freedom Foundation Blog

John Windhausen Replies to "Phone Politics"

I offered John Windhausen an opportunity to respond to my December 23 post on "Phone Politics" to close the local loop, at least for this year, and he offers the following:

"I appreciate the respectful comments from my friend Randy May concerning local rate setting. I was not surprised that we agree that local rate-setting has involved "socio-politics". I, too, believe that local
rates should be set at more economic levels. This could be rather easily done with regard to traffic-sensitive costs and direct costs. Of course, there is no agreement even among economists about the sound economic way to allocate fixed, non-recurring costs among a variety of services. These decisions are inherently political, because there is no "right" answer.

But I was surprised that we agreed on one other point -- the need to "implement rate-setting policies based on sound economics." Randy's point appears quite different from the point of the recent PFF paper that would totally deregulate rates. I have little confidence that deregulating local rates would yield a rate structure based on "sound economics" because the ILECs would simply shift arbitrarily the fixed, non-recurring costs to non-competitive markets and to lower prices in competitive markets whether they can drive CLECs out of business.

Yes, CLECs were "encouraged" to enter the market, by Congress, the White House, the FCC and state regulators. Now that we have entered, and have demonstrated the pricing and innovative benefits that competition can bring, policy-makers should transition to a more rational local pricing structure. But the transition should include consideration of the effect on facilities-based CLECs who took the market risk to fulfill the policy-makers' dreams of a competitive marketplace. Like it or not, for competition to succeed against ILECs that have a 100-year head-start, competition must be nurtured and our policies managed carefully."

Here's what I have to say in response. John, the PFF report, Trends in the Competitiveness of Telecommunications Markets, to which you refer makes a strong case, at least IMHO, that the local marketplace, including residential service, is now fully contestable, if not effectively competitive. If that is true, all of the points about the allocation of traffic-sensitive and non-traffic sensitive costs, which are relevant in markets in which a company retains dominant market power in one service segment but not another, become essentially irrelevant. I think competition already has been nurtured (witness the data in the report), and I am all in favor of reasonable transitions. But it is now time for everyone involved in telecom policy to work earnestly towards envisioning and implementing a real deregulatory end-game. Love might be, but transitions are not forever.

Here's what else I have to say to John: Happy holidays and best wishes for the New Year. We'll continue the debate next year...but let's hope, not forever.

posted by Randolph May @ 11:51 AM | General