Structural separation is not a new concept. In its simplest form, structural separation would require regional Bell operating companies to split into retail and wholesale operations.

by Patricia Fusco Managing Editor of ISP-Planet [February 4, 2002]

Under structural separation, companies like Ameritech, Bell South, Pacific Bell, and Verizon, among others, would have to separate into two parts. The retail arm would have to buy and provision services from the wholesale arm—just like ISPs have to buy data and voice services from them today.

States that are serious about bringing local phone and high-speed Internet competition to consumers consider structural separation the right means to a more competitive end. Over the past 24 months, public utility regulators and state legislators in Alabama, Florida, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Oklahoma, Pennsylvania, New Jersey, New Mexico, North Carolina, South Carolina, Tennessee, Virginia, and Wisconsin have considered structural separation as a means of breaking the monopoly that RBOCs have on local phone and high-speed Internet services.

Organizations like the Competitive Telecommunications Association (CompTel) have strongly endorsed structural separation. CompTel contends that the Bell monopolies have tried to circumvent the Telecom Act and its pro-competitive intent since it became law in 1996. The only way to prevent monopolies from competing unfairly is to separate the network from its ISP.

Long-distance carriers like AT&T and WorldCom also embrace the structural separation of RBOCs into wholesale and retail sales units. Of course, any move toward structural separation would result in less competition for these types of long-distance carriers.

Proponents of structural separation cite its many advantages. Structural separation would:

• Minimize or eliminate the current conflict of interest that results from RBOCs' dual competitor/supplier role.
• Create a level playing field because RBOCs' retail affiliates would deal with the wholesale arm on the same terms as any other competitor.
• Allow state commissions to focus their regulatory oversight on RBOCs' wholesale networks.
• Allow federal regulators to act in accordance with their legal mandate to foster local competition and spur the deployment of advanced telecommunications services.

In the long term, proponents of structural separation believe that it would actually reduce the need for regulation, since government oversight decreases when retail competition increases. In essence, structural separation embraces deregulation of the telecom industry.

Byzantine Bell balderdash
Naturally, RBOCs argue that structural separation would:

• Force RBOCs lay out of billions of dollars in unnecessary expenditures that would inevitably be passed on to consumers.
• Deprive RBOCs of their full economies of scale, rob them of efficiency, and increase operational costs that would ultimately be passed on to consumers.
• Lead to increased consumer confusion and a diminished quality of service.
• Eliminate investment incentives and raise troubling questions about future network management unanswered.

In a nutshell, breaking up RBOCs would hurt consumers with higher rates, lower service quality, and delay competition.

Additionally, RBOCs contend that:

• Local competition has taken hold across the country, so the last thing regulators ought to be considering is a mandatory breakup of local telephone companies.
• State legislators and regulators do not have jurisdiction to enforce structural separation.
• Another Bell divestiture would just beget years of additional litigation and paper-intensive rulemakings.
• Federal regulators should relax excessive unbundling and line sharing requirements that presently apply uniquely to the incumbent carriers as an incentive to invest in building new broadband facilities.
• A move toward structural separation would have profound ramifications for the economy as a whole. The harm that would come to the Bells and their millions of employees and shareholders is obvious.

This is nonsense, rhetoric pure and simple. It's plain, old-fashioned Bell bunkum.

Dispelling Bell bunkum
Is structural separation more regulation?

Not at all—structural separation paves the way to less regulation. Right now state and federal regulators have to watch over the Bells like hawks, setting prices on wholesale operations, issuing fines when they interfere with competitors, and holding hearings when telephone services breakdown.

Under structural separation, the wholesale companies would have incentives to behave like a free market enterprise. The more companies that use their system, the more money its wholesale operations will make. That will mean less regulation for the phone industry as a whole.

Is structural separation divestiture?

No. Divestiture requires a company to sell off operations and cease operating them. Under structural separation, the company is split, but both operations will continue to be operated by the same company. Indeed, they must operate. They just will no longer have the incentive to operate hand in hand to discriminate against competitors. Shareholders could take stock in both entities.

Unlike divestiture, which is used to remedy anti-competitive behavior and requires that certain lines of business be sold, structural separation is a less disruptive regulatory remedy that leaves RBOCs free to start delivering quality services at a fair price.

For consumers, the benefits of structural separation would be similar to what they experienced with AT&T split-up. In this case, divestiture resulted in more long-distance competition and lower long-distance rates.

If structural separation is the answer, why hasn't it been tried before?

It has, but not in the U.S. Structural separation has been self-imposed by British Telecom (BT) in the United Kingdom. BT began separating its wholesale and retail operations in 2000. "This will have two main advantages," BT told its stockholders. "First, regulation of BT in the UK will have greater clarity and should be concentrated primarily on the wholesale business. Second, management will be better able to focus on the different tasks of achieving continued growth in the two, distinct marketplaces."

All I am saying is give structural separation a chance. It's the only way to make regulation work, and to make Bell South, Ameritech, Verizon, and the like stop discriminating against competitors—like your ISP.

— End