Wednesday, December 17, 2003 - The Progress & Freedom Foundation Blog

John Windhausen Replies

John Windhausen took the time to reply to my earlier post wondering (that may be the gentle description) why facilities-based CLECs don't embrace retail rate deregulation:

I'll try to clarify my point about pricing, but I'm not sure I'm going to succeed: My point does not depend on the existence of an artificially high "umbrella." CLECs must price 10-15% underneath the RBOCs whether they are the "correct" prices or not - that's the only way we can get traction in the market. Personally, I don't' believe that there is anything such as a "correct" price when you have several services being provided over the same network. The cost allocation process strikes me as inherently arbitrary, and how you allocate fixed costs seems to me more of a political than an economic decision. My point is this: CLECs were encouraged to develop a business plan, raise capital, and build networks because of a political decision to set business prices set at x and residential prices set at y. That's the hand we were dealt. Now that we have built those businesses and are trying to make money, it would be quite a "bait-and-switch" to suddenly change the entire pricing structure so that business rates are at y and residential rates at x. That's what might effectively take place if local rates were deregulated, because the ILECs have every incentive to lower rates in competitive markets and raise them in noncompetitive markets.

If regulators want for political reasons to change the dynamic to encourage more residential entry and reduce the incentives for business entry, that could be fine, as long as CLECs are given time to adjust their business plans accordingly. But an immediate retail rate dereg plan would effectively implement a flash-cut rate change. Most CLECs would simply go out of business if the ILEC business rates were to drop precipitously.

Fair enough. But I still think this boils down to wanting regulators force the incumbent to hold a price umbrella over competitors. Don't see how consumers win with this one.

posted by Ray Gifford @ 11:23 PM | General