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Friday, March 12, 2004

Regulatory Blackmail
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Yesterday, the Ohio PUC allowed SBC to increase the rates it charges for unbundled loops to competitors on an interim basis. The rate increases ($2 in rural areas, $2.50 in suburban, and $3 in urban) will be subject to a true-up after a full pricing proceeding. The press release and order (effective in 30 days) are here and here.

Then AT&T issued a press release proclaiming that it will no longer offer two of its local calling plans and will determine the rate increases that residential customers will need to pay for the company "just to remain in business in Ohio."

Please. The PUC's decision was based on the "ever-increasing risk of competition and its corresponding influence on SBC's cost of capital." By way of background, the existing loop rates were established in 1999, based on an Ameritech cost study from 1997. CLECs have captured 20 and 25 percent of the residential and business markets in Ohio, respectively. 96 percent of all residential CLEC access lines are serviced by UNE-P, with the other 4 percent by UNE-L or resale. In other words, there is virtually no facilities-based residential competition in Ohio.

Available data illustrates why. Billy Jack Gregg's latest update at NRRI reveals that Ohio's UNE-loop rate is the lowest in the country, with an average UNE-P rate behind only California and Illinois. And according to the PUC's order, the new interim rates would still be below the corresponding rate levels in the other states in SBC's region. If there is one state in SBC's region where the usual price squeeze argument does not play out, it is Ohio.

At bottom, AT&T's response reflects a classic public choice problem. So long as a certain segment anticipates a non-trivial chance to get something for nothing from regulators, they will try to do so. (For another example from this week's news, see the backlash to Chairman Powell's call for a compromise on the TRO. By taking a middle course, Powell allowed the opposition to stake out a more extreme position. If he had just said "the court has spoken," perhaps they would be the ones seeking a transition plan.)

Recall how we've gotten here. Due to political pressure, regulators sought to induce quick competition into the market after the '96 Act. UNE-P was the mechanism they concocted to do so, and cutting prices through use of the TELRIC methodology resulted in what Ray would call "a rent-seeking orgy." The dissent to the Ohio PUC order exhibits this exact rationale, stating that "[w]hile it is our goal to have facilities-based competition, we are currently in a transitional phase." Wrong. The transitional phase is over. The interest in seeing UNE-P persist ad infinitum is now entrenched.

Fortunately, the pricing aspect of the game appears to have run its course. Gregg's data shows that national UNE prices rose slightly during the second half of 2003. But as the Ohio PUC has discovered, trying to put the toothpaste back in the tube will inevitably lead to attempts at regulatory blackmailing. With the possibility of additional upward adjustments after the FCC concludes its TELRIC proceeding, expect more of the same from the "consumer protection" PR machine.

posted by @ 6:10 PM | General

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