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FCC Bandwidth Forum

January 23, 1997

Introductory Remarks

Lee Bauman, Vice President - Local Competition

Pacific Bell


My remarks today focus on regulation and pricing and the impact of current regulation on incentives to invest and innovate. These are subjects that are near and dear to the hearts of the incumbent LECs especially as we venture forward into the brave new world of competition and deregulation.

As I talk about regulation and pricing, I would like you to keep the following scenario in mind:

If you were given the choice of keeping a service that is essentially free or switching to a better, faster and more efficient service that you will have to pay more for, what would you choose to do?

This is the dilemma we face given the current ESP access charge exemption. The problem is made worse by the below-cost pricing of our residential basic exchange services. Our customers in California pay only $14.75 per month for basic service which includes the Subscriber Line Charge (SLC) and unlimited local calling. An Internet access provider pays $15.05 per month (SLC included) for measured business lines or $15.65 a month (SLC included) for Centrex lines -- both of which are used to terminate calls only. In other words, no usage charges from Pacific Bell since business lines only measure and charge for originating usage.

While some may have thought that the ESP exemption was an appropriate policy approach to encourage the growth of an infant industry, it has now become a critical roadblock to the development of new, more efficient products for the rapidly growing Internet market. ESPs, including Internet access providers have responded to the false price signal created by the ESP exemption by using the switched circuit network in an inefficient manner. To no ones surprise, end-users are responding in the same manner.

Our technologists and product development folks are working hard to come up with alternative arrangements that are acceptable to customers in terms of speed, flexibility and price. You can imagine the tough time were having given the scenario I asked you to keep in mind. While we may find faster and better alternatives, from a pricing standpoint, we cant compete with something that customers and competitors are used to having almost for free.

Now Id like to broaden the context and talk about the current regulatory framework for incumbent LECs. The Telecommunications Act of 1996 envisions that competition and deregulation would supplant the regulated monopoly model for the telecommunications industry. But, recent actions of regulators to implement the Act show clear signs that the old regulated monopoly model will continue to prevail in the new competitive environment -- at least for the incumbent LECs.

If we extend current regulation into the new environment, we will be discouraging investment and innovation because there will be no competition on a facilities basis. Let me explain why.

First, competitors will not invest where they cannot make a reasonable return. Regulation has kept the price of certain services artificially low through mandated price averaging and price caps. New entrants will not enter markets on a facilities basis if the price of the incumbents service is below cost.

Second, the incumbent LECs prices in the new competitive environment will always be the lower of regulated prices or competitive prices. That is, regulation will keep some prices artificially low while competition will drive inflated prices down. The company caught in this imbalance is in jeopardy and has no incentive to keep investing in its network.

Third, regulation requires the incumbent LECs to unbundle their networks (beyond what we think is essential) and to price the unbundled network elements at cost. In addition, LEC retail services must be made available for resale at discounts from prices that are already below cost (e.g., basic residential services). Given these favorable conditions, there is no incentive for competitors to invest in their own facilities because every customer is financially attractive to serve with minimal or no investment required.

What can we do to encourage investment and innovation? First, we should let the market decide whether the new environment will be a one, two, or three wire world or a wireless world. Today, regulation assumes that "the information superhighway" will be a one-wire world and the full force of regulation is being brought to bear on that single wire. Second, we should resolve existing price/cost distortions in ways that encourage investment by the incumbent LECs and by new competitors. And finally, we should allow the market to determine the winners and losers. Let us build a world on the assumption of competition rather than a one-wire world that assumes no competition.

Let me conclude with a quote from Chairman Hundt, who said back in 1994 that "[c]ompetition makes the most of every opportunity. Given a fair opportunity for a fair return, private resources will leap at the opportunity to build the modern communications network in all markets".(1) We agree.

1. 1 Wertheim Schroder/Variety Media Conference - April 12, 1994.


Saturday, November 15, 2008