Competitive Telecom Industry Rallies Battle Cry

CLECs Hear Former Regulators Take Aim at RBOCs

The second day of the Competitive Carrier Regulatory Summit in Washington, D.C., at the end of February took on the air of an anti-RBOC pep rally and a class reunion.

It was also a chance for the industry to hear from former FCC Chairman William Kennard, who spoke frankly about the mistakes he sees his successor and Congress are about to make and heavily criticized loosening regulations aimed at RBOCs.

“Listen to these calls for faster deregulation,” he said. “These are calls from people who are still controlling 96 percent of the market share.”

Rep. Billy Tauzin (R.-La.), chairman of the House Energy and Commerce Committee, as well as new FCC Chairman Michael Powell, plan to ease restrictions on Section 271 of the Telecommunications Act of 1996 so Bell companies can enter the long-distance market sooner. But Kennard believes it’s much to soon to do that.

“You don’t deregulate before you have competition,” Kennard said. “Would it be fair to expect a startup or an early-stage company … to compete with a 100-year-old incumbent with [96] percent of market share, an incumbent whose success was assured by decades of monopoly regulation that gave them an exclusive franchise and guaranteed their success with a guaranteed rate of return?”

Kennard went as far as to say premature deregulation would harm the country. “Anything less than taking the [Telecom Act] and making sure that it is meaningfully implemented, is the worst of both worlds,” he said. “You have no competition, and you have no regulation, and you have no hope that consumers will ever have a choice. And that, by the way, is the scariest thing in America: an unregulated private monopoly. If you don’t believe me, ask those energy rate payers in California. They’ll tell you what happens when you deregulate a monopoly.”

Kennard also warned the audience that CLECs and ISPs had better learn to work the corridors of power in Washington if they hope to defeat the push for deregulation. Referring to such lobbying as “regulatory capitalism,” he gave a quick primer on the challenges smaller competitors face. “Washington is a town that likes to kick people when they’re down. You’ve got to be engaged, and you’ve got to stay engaged. Regulatory capitalism is when companies work the political economy instead of the market economy. What they do is they invest in lawyers, lobbyists and politicians instead of in new plants and new people and customer service—because sometimes it’s a whole lot easier to prowl the halls of Congress and the FCC than to compete in the rough-and-tumble marketplace.

“And of course, in this game of regulatory capitalism, Washington is Wall Street. And the companies who have been at this the longest and are the biggest, they’re the best at the game, make no mistake about it. But you have to engage it, play it, because you really have no choice. There’s too much at stake.”

H. Russell Frisby Jr., president of CompTel, mirrored Kennard’s sentiment after the speech. “Our biggest concern is that Congress and the FCC not help the RBOCs re-monopolize,” he said. “They’re trying to put Humpty-Dumpty back together again, and once it’s fallen apart, you shouldn’t put Humpty-Dumpty back together again.”

Frisby, the former head of the Maryland utilities commission, disagrees with Powell’s contention that regulations in the Telecom Act hinder innovation and competition.

“The only way you can have effective deregulation is if you have local markets. Monopolies do not innovate; they do not bring better, faster, cheaper services. Only competitors do that.”

In an earlier roundtable, panelists Frisby, John D. Windhausen Jr., president of ALTS, and commissioners from the Texas, Florida and New York utility commissions discussed separating RBOCs into wholesale and retail units, which they believe would prevent ILECs from provisioning their customers before provisioning competitors’ subscribers.

“You can’t [motivate] a monopolist to open up its monopoly—that’s why we’re supporting structural separation,” Frisby said. “There’s a real problem here: as long as the RBOCs are providing both wholesale and retail services, they are going to favor their own retail companies, and that’s going to delay innovation.”

Frisby and other regulatory experts believe Tauzin’s planned legislation to let RBOCs build out data lines across state lines will ultimately fail. It would allow RBOCs to run long-distance voice over broadband without meeting Section 271 requirements.

“I think the chances of it becoming reality are pretty slim,” Frisby said. “It may get through committee and may even get through the House, but I don’t think it will get through the Senate, and I don’t think President Bush will sign it.”

David Robertson, president of the Texas ISP Association, was also at the summit. He told Billing World Magazine that ISPs are being squeezed out of business on two sides: through RBOC pricing schemes, and by the belief that reciprocal compensation is on the way out.

“In the ISP arena, the danger of reciprocal comp going away is causing the CLEC community to withdraw from their expansion philosophies they’ve had in the past,” Robertson said. “Wall Street tells them they’re going out of business and the ISPs are taking some of that to heart, and making it harder for ISPs to do business with CLECs.” Robertson, who owns an ISP in Texas and has been “acquiring ISPs left and right as they fold,” had harsh words for Southwestern Bell’s Feb. 1 pricing policy change. He believes the RBOC is practicing “predatory pricing.”

“These Southwestern Bell or SBC folks have sent the granite tablets down from the mountain that are stating that ISPs will be forced out of business very quickly so the re-monopolization of the Bells can take place in a more efficient manner,” he said.

“They’re doing this through raising prices, lowering guarantees, … trampling on the DSL loop with such things as Broadband Capabilities Gateway in direct competition with the ISP. They’ve changed the definition of a DSL loop to a ‘virtual circuit’ so that they can trespass on that circuit even when purchased by the ISP.” By running data and other applications across that circuit, the RBOC can hurt quality of service, Robertson says.

“They do whatever they want to do, and while trampling on the service, they provide no recourse, because they’ve changed all the quality of service measures to ‘best effort.’ “

At the same time, Robertson says, “the same order raised the price in Texas from $27.50 per DSL circuit for an ISP, to $35. Though they also increased the commission rate for those DSL partners of SBC who are reselling their services from $30 to $50, they required an order entry fee of $50, on the same line, which means the commission rates they were paying for their partners to sell those became effectively zero.”

Sentiment toward Powell, who was not at the conference, was mixed. Frisby believes Powell will keep the FCC’s Enforcement Bureau strong and vows to keep a good working relationship with him. Others say they are not too keen on seeing Powell as FCC chief.