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Wednesday, June 16, 2004

Crocodile Tears for the TRO
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The negative response to the Administration's decision not to appeal the DC Circuit's USTA II decision has been the normal sky-is-falling, sun-won't-come-up tomorrow, repeat the word 'monopoly' countless times stuff. I shed no tears for the TRO's demise for its legal incoherence alone.

In letting the DC Circuit flush the unbundling rules for the third time, the administration is exchanging a static form of competition for a dynamic one. This is to be celebrated.

UNE-P competition was all about manipulating wholesale rates to induce entry under already-distorted retail rate price points. Hence, the goal was to create margin attractive enough to get competitors to enter and take market share from the incumbent. So far, so good. But there was no consumer welfare enhancement from this. The retail prices stayed intact and there were enormous dis-integration and regulatory costs associated with this regulator-created, intra-platform competition. Further, the wholesale rate manipulation game induced reliance interests -- witness AT&T's tantrums, MCI's desperation and certain (but not all) state PUCs' apoplexy -- that could not ever abide any changes to the regulator-ordered property rights given to non-facilities owning CLECs.

The end game here was only market share apportionment. The reliance interests that low wholesale rates created lead up a cul-de-sac where no one has the incentive to innovate or invest, and where the regulator has no exit strategy. UNE-P competition silently went from a transitional measure to a permanent fixture. Further, UNE-P became a disincentive to the very inter-platform competition that was desirable because low wholesale rates reduced the value of existing facilities and made it unattractive for any firm to invest in new facilities when riding on the old ones was so cheap because of low wholesale rates. Thus, UNE-P competition became a self-justifying way for regulation to perpetuate itself. By making facilities-investment relatively unattractive, low wholesale rates meant inter-platform competition wouldn't emerge. Consequently, the low wholesale rates needed to be maintained to make sure competition existed. It all has a cat-chasing-its-tail quality.

By contrast, the administration has now embraced Chairman Powell's view of dynamic competition between platforms. In this view, competition does not happen because the regulators "manage" it into existence, but rather because a true and free system of prices gives private actors the signal to invest. And further, that investment is backed by the certainty that, if they succeed, the fruits of success will not be expropriated by the regulatory apparatus. That said, this does not mean that regulators do not have a role to play. Because it is a network industry, it is necessary that would-be rivals cooperate on interconnection, customer hand-off and the like. And of course, not all players incentives are properly aligned to do this, ahem, well and seamlessly. Perhaps if the current regulatory regime was not so preoccupied with price regulation and manipulation, there would be time and resources to focus on policing disputes over legitimate interconnection concerns.

Dynamic competition is not an easy choice, though, and that is another reason why last week's decision is to be applauded. Embracing dynamic competition requires a predictive judgment that other platforms will emerge to compete with incumbent platforms. Of course, in this case, this was not blind judgment. Multiple platforms like cable and wireless already exist to compete with the legacy phone system. And new platforms like VoIP are emerging with great vigor. What's more, the very definition of the relevant market is changing before our eyes. While it used to be voice telephony, where there was legacy market power; it is now broadband, a market where there are no incumbents. Furthermore, our experience with deregulation of other industries teaches that the welfare gains from a free-entry, free-exit, uncontrolled price system are greater than predicted; e.g.,see trucking, airlines, natural gas.

A final salutary effect of the (partial) interment of the pervasive unbundling regime is that it brings much more relevant and interesting issues to the regulatory fore. The continued unregulation of VoIP -- its potential mis-regulation -- are huge issues for the coming year. Likewise, the rickety premises and structure of universal service policy are in dire need of repair. Maybe, to borrow a phrase, we can just "move on" now.

posted by Ray Gifford @ 7:00 PM | General

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