[February 3, 2005]

Here is what one of the RBOCs had to say on the subject of competition:

"UNE-P is not real competition. It is simply a subsidy for companies like WorldCom and AT&T that is totally dependent on companies like SBC being able and willing to make all the capital investment and absorb all the profit margin pressure. True competition invests in facilities. True competition innovates and provides a differentiated product to customers. True competition cares about service. UNE-P is simply false competition. It relies on subsidies, invests nothing, builds nothing and ultimately hurts everyone's ability to raise capital and invest." —Edward Whitacre, SBC Chairman and CEO

Mr. Whitacre conveniently forgets that the telecommunications plant for which his company is supposed to be the custodian was installed under regulations that guaranteed a profit for SBC. No such similar guarantee now exists for those he expects to string wires and install plant so they can compete with SBC.

Mr. Whitacre conveniently ignores the fact that his entry into Long Distance generated no new facilities investment. SBC is simply reselling InterExchange carrier services. In other words, Mr. Whitacre's company is doing exactly what he complains that others are doing. The difference is that competitive pressure among long distance carriers guarantees Mr. Whitacre a very attractive rate for wholesale long distance.

The reality is that UNE-P rates pay for the use of the lines and creates a competitive climate that Mr. Whitacre apparently doesn't like. Mr. Whitacre has no hesitation using someone else's investment to make money, so long as he is able to protect his own monopoly and deny access to those who would compete with him.

One area of interest is that most Local Exchange Carriers, especially the Regional Bell Operating Companies (RBOC) have proven to be totally inept at competing in the fast track, rapid innovation business climate as the Internet evolved. Services offered have been "me-too" and late in arriving.

But the RBOCs are adept at manipulating regulation and regulators. Here is one example:

About a decade ago, the RBOCs and other large ILECs moved from traditional rate-of-return regulation to new forms, generally known as rate caps.

Under rate-of-return, their expenses were subtracted from revenues and the gross profit was compared to the un-depreciated plant in service, the rate base, producing a rate of return. Aggregate rates were adjusted (in a General Rate Case) to create a rate of return within a set range. The good thing was that overall rates were kept in line. The bad thing was that there was incentive to pad the rate base, and little incentive to be efficient. Small rural ILECs generally remain under rate of return regulation, both at the federal and state level. Note that the ILECs love to point out that rates of return were never "guaranteed", but it was mighty close.

In the 1993-ish era, the RBOCs requested, both at the FCC (access rates) and states, an "Alternate form of regulation" (AFOR), as it is sometimes known. These generally took the rates in effect at that time (theoretically based on rate of return) and then allowed the ILECs to raise or lower the rates within a certain band, capped at the high end by inflation minus a productivity factor. Sometimes not all rates are equally flexible under AFOR—states can be protective of the 1FR rate, for instance, and not all state AFOR plans are equally flexible. But the key is that their rate of return is no longer capped.

So if they slash expenses (lay off lots of people, as they did) or if it turns out that their rate base records were hugely padded (as they were), they don't have to cut rates. Also this happened at the time when the benefits of new technology (cheaper switching, cheaper fiber optic transmission, DLCs replacing long loops) were beginning to outweigh increases in labor and related operating costs. Thus the RBOCs' typical rate of return has risen tremendously.

The only rates that I have personally seen drop are those where a CLEC exerted competitive pressure. But Mr. Whitacre's compensation has certainly benefited from the higher rate of return as can be seen in any SEC filing. In 2003, for example, he made roughly 20 million dollars, not counting stock options.

That was then. Now there is no doubt in my mind that at least three of the four remaining Regional Bell Operating Companies are attempting to take over as much of the Internet Service business as possible in addition to killing off as much other competition as they can get away with. There is also no doubt in my mind that they have the money, the lawyers and the lobbyists necessary to accomplish their business purposes.

 

1. Background

what the RBOCs really think about competition

>missing the Internet revolution

Robert Cannon

2. Pricing and Cost Issues: predatory prices crush competition

RBOC costs, for the record

3. Business Practices

4. Slamming and other dubious business practices

5. Networks

6. Customer Service

7. VNXX

8. Verizon's Petition for Forbearance

9. Unintended Consequences

10. Conclusion

RBOCs, why you need me