Sender: "Craig A. Johnson" <•••@••.•••>
On 8 Oct 95 at 1:03, Richard K. Moore wrote:
>
> Dear CR,
>
> I wrote the piece at the bottom in response to a question Rob
> Frieden posted to telecomreg.
>
> He evidently found it useful, given his response, immediately below.
>
> I hope it is of interest to this list.
For those of you not following the thread on other lists, below is my
response to Richard, his response to me, and my followup reply.
Craig
===================================================
On 7 Oct 95 at 1:30, Richard K. Moore wrote:
> >Date: Wed, 27 Sep 95 09:40 EDT
> >From: "Rob Frieden" <•••@••.•••>
> >Subject: Incumbent carrier access pricing policies
> >To: •••@••.•••
>
> >Recently the issue of efficient component pricing was raised. I'm
> >hoping one of more members of the list can provide some broader
> >insights on what constitutes "fair" and "cost-based" access
> >pricing, particularly when the incumbent carrier provides the
> >underlying transport services for both affiliated and unaffiliated
> >enterprises who provide both basic and enhanced services.
>
> Dear Rob,
>
> This looks like a very crucial issue as regards whether cyberspace
> will be a truly competitive marketplace, whether or not there will
> be a level playing field for multiple vendors -- especially
> independent providers of services and content.
>
> There seems to be an ambiguity in the definition of "fair" -- do we
> mean "fair" to the transport provider, or "fair" to the secondary
> purchaser of transport? Certainly a primary transport provider (as
> we see below) may consider it "fair" that his costs be covered
> according to the most favorable formula he can cause to be adopted.
> But to a purchaser of transport services, "fair" clearly means that
> he can buy transport at a price that allows him to compete
> effectively in the service or content business.
The definition of "fair" pricing is one of the great unexamined
questions of the pending telecom legislation. The definition and
terms however vary according to types of "transport providers."
While common carriers are subject to a set of "checklist" items which
govern "equal access and interconnection to the local loop for
competing providers," no such requirements pertain to "information
service providers."
In other words, cable operators, satellite providers, and Internet
providers are not governed by any determination of "fair" pricing
under the proposed communications act, unless these are stipulated in
local franchise agreements and the like.
With regard to common carrier pricing of transport, the intent of
the legislation is to phase out both price cap legislation and
rate-of-return regulation upon the arrival of competition in the
local loop.
In Sec. 247(c), "Termination of Price and Other Regulations," of
H.R. 1555, it is stipulated: "Notwithstanding any other provision
of law, to the extent that a carrier has complied with sections 242
and 244 of this part, the Commission, with respect to rates for
interstate or foreign communications, and State commissions, with
respect to rates for intrastate communications, shall not regulate
prices for services that are determined...to be subject to
competition that effectively prevents rates for such services that
are unjust or unreasonable or unjustly or unreasonably
discriminatory --
"(1) regulate the prices for such service
"(2) require the filing of a schedule of charges for such service;
"(3)require the filing of any cost or revenue projections for such
service;
"(4) regulate the depreciation charges for facilities used to
provide such service; or
"(5) require prior approval for the construction or extension of lines
or other equipment for the provision of such service.
In other words, with the entry of competition, price regulation goes away,
except in cases where the Commission determines that rates are "unjust" or
"unreasonable" or "unjustly or unreasonably discriminatory."
So, discriminatory pricing is not only permissible under the
proposed legislation, but can be considered a prominent effect of
the act. The determination of "unjust," "unreasonable", etc., will
be determined by a Federal-State Joint Board which will, among other
things, administer "a plan adopted by the Commission and the States"
in order to "ensure the continued viability of universal service by
maintaining quality services at just and reasonable rates." (Sec.
247(b)(1).
H.R. 1555 goes even further however. In the cynically-named Sec.
248(d), "Ability To Continue Affordable Voice Grade Service," it is
is stipulated that "each State commission shall, for a period of not
more than 3 years, permit residential subscribers to continue to
receive only basic voice-grade local telephone service equivalent to
the service generally available to residential subscribers on the
date of enactment of this part, at just, reasonable and affordable
rates."
However, and this is the kicker, "Determinations concerning the
affordability of rates for such services shall take into account the
rates generally available to residential subscribers on such date of
enactment and the pricing rules established by the States. Any
increases in the rates for such services that are not attributable to
changes in consumer prices generally shall be permitted in any
proceeding commenced after the date of enactment...upon a showing
that such increase is necessary to ensure the continued availability
of universal service, prevent economic disadvantages for one or more
service providers, and is in the public interest."
In plain language, rates can be hiked by state commissions if they
think "service providers" are suffering "economic disadvantages" or
if they deem that universal service offerings are endangered.
Perhaps even more importantly, the scant protection offered to
consumers with regard to voice-grade service is eliminated
completely after three years, and of course all universal service
protection sunsets after five years when the Joint Board goes
bye-bye.
This brings us full circle to Rob's original question regarding the
nature of "fair" or "reasonable" pricing. The whole question of long
run incremental cost (LRIC) pricing should be intensely examined now,
before all price regulation goes by the wayside in the next few
years.
It is important also to note that the only guarantees that ISDN will
be offered on a "fair" and "reasonable" basis to consumers lie within
the Commission's interpretation of ISDN price schemes in its current
proceeding on ISDN and subscriber line charges (SLCs). The intent of
the regulation is, within five years, to move ISDN and other
transport services, out from under the umbrella of the Joint Board.
Already, under the Crapo amendment on "affordable voice-grade
service" cited above, ISDN is excluded by virtue of the fact that ISDN is
not currently "generally available to residential subscribers."
>
> Any tarrif which permits a transport vendor to both discount his
> internal transport usage and surcharge usage to others will
> obviously create a very un-level playing field.
The answer as to whether this can occur depends on the nature of the
services provided. Common carriers cannot discriminate "among video
programming providers with regard to carriage" and must "ensure that
the rates, terms, and conditions for such carriage are just,
reasonable, and nondiscriminatory." States *may* prohibit
cross-subsidization.
These provisions also apply to cable operators that have installed "a
switched , broadband, video programming delivery system," and the
Commission is directed to "conduct a study of whether it is in the
public interest to extend [these requirements] to any other cable
operators."
>
> Under these circumstances, it would be nearly impossible for an
> independent service provider to create a product that could compete,
> or to reach a potential audience with it. And even if he did, the
> big guys could discount their own similar products until he's driven
> out of business. This is classical Predatory Economics 101, and very
> common in actual practice.
I am unclear as to what this passage is suggesting. Yes,
discriminatory pricing will exist under the new communications
regime, and it may very well disadvantage "independent service
operators," depending upon the market segment involved.
>
> >Having finally been
> >convinced that incumbent carrier should have the flexibility to
> >price end user services on the basis of long run incremental
> >costs,(LRIC)
>
> This is still another tilt to the playing field. The big guys can
> price expensive new services cheaply, capture market share, and make
> their profit in volume over time. This practice is difficult for a
> start-up independent, even given equal transport costs. I'm not
> opposing LRIC costing, but if it is operative, then there's even
> more reason to provide "fairness" by other means to independents, if
> our goal is to have a marketplace that encourages competition and
> innovation.
It is not even clear that LRIC costing *will* be operative, or some
form of legal "discriminatory" pricing based on "economic viability"
or some such term of art will prevail. This is the point of the
Crapo amendment.
>
> How our legislators come down on these issues is a litmus test as to
> whether they really want competition, or whether they are using
> competition rhetoric to disguise a pro-monopoly agenda.
Well, they've pretty much already "come down" on the issues, and
unless there is a concerted public interest effort to lobby the
conference committee on some of the items, such as the absurd Crapo
amendment, which Markey called a trigger to "rate shock," then the
game is already over.
> We must be
> sure they are made to see the issues clearly, so their decisions
> will be based on their actual intent.
Any suggestions?
> Universal service legislation is dubious in principle, IMHO. Market
> forces can be expected to expand service availability widely.
I must have missed something. I thought you just argued that "market
forces" would so tilt the "playing field" that independent, small
vendors would not have a chance.
You are now suggesting to remove one of the few remaining levers that
the FCC and state commissions will have on pricing?!
Either
> the big guys will pursue marginal consumers so as to maximize market
> size, or else the little guys will be left an opening to seek
> untapped markets among the "unserved". Look at how widely cables
> have promulgated, even in low-income neighborhoods. (Not to mention
> twisted pair and radio-spectrum distribution.)
This sounds like the Republicans on the House and Senate Commerce
Committees arguing that "competition" will take care of everything;
just leave the market alone. George Gilder redux.
It's an inappropriate and nonsensical argument in light of your
previous concerns about unregulated pricing by oligopolists.
>
> We must be on guard for "universal service" being used as a ruse to
> subsidize capital investments that should rightfully be borne by the
> profit-seeking entrepreneur (large or small). The above argument of
> "some economists" clearly shows this danger is real.
>
Yes, this is a concern under the Crapo amendment..
> If universal-service cross-subsidy is adopted as a principle, then
> the costs should burden those services which cause the least tilting
> to the playing field. Applying those costs to the transport layer
> causes maximum market distortion, and that is well known to the big
> guys.
Of course universal service applies to the "transport layer," and
rightly so. What else would you apply it to? The Repubs. are
adamantly opposed to expanding universal service to offerings
beyond basic voice-grade transport, though this debate is not yet
over.
>We'd be better off if such costs burdened premium services
> instead, or were applied across the board to all services at all
> levels at a single percentage rate. We would also be better off if
> they were charged at the consumer level, as a "universal service
> surcharge", as is the practice among RBOCs today.
Universal service is only partially "charged at a consumer level."
The universal service fund must be contributed to by "essential
telecom carriers," and has virtually nothing to do with "premium
services" or "all services at all levels." This doesn't stand a
chance.
More on some of the other points later.
Craig
----------------------------------------------------------------
Date sent: Sun, 8 Oct 1995 02:28:23 -0500
Send reply to: •••@••.•••
From: •••@••.••• (Richard K. Moore)
To: Multiple recipients of list <•••@••.•••>
Subject: Re: Incumbent carrier access pricing policies
At 12:53 AM 10/08/95, Craig A. Johnson wrote:
>I must have missed something. I thought you just argued that "market
>forces" would so tilt the "playing field" that independent, small
>vendors would not have a chance.
First of all, Craig, I'd like to say I appreciate your post, and am glad to
see I wasn't off base on most of the issues -- your evident grasp of the
legislative agenda is certainly impressive.
Yes I do think small vendors will have niche opportunities, but I'm
concerned that they will be pushed out of major markets -- I think we need
more opportunity for competition across the board, and that tilting the
playing field to large operators is bad for the industry and bad for
democracy.
>You are now suggesting to remove one of the few remaining levers that
>the FCC and state commissions will have on pricing?!
I don't have a doctrinaire attitude toward regulation, but look at each case
on its merits. Do you think it's an accident that common-carrier subsidies
are the one area where regulation is being preserved, that it somehow
slipped through the cracks? I think not. It appears to be an opportunity
for operators to tax consumers and secondary vendors to cover capital
investments they should bear themselves. And I don't think it's necessary,
but that it's yet another corporate welfare rip-off, and steals one more
market opportunity from small players.
>It's an inappropriate and nonsensical argument in light of your
>previous concerns about unregulated pricing by oligopolists.
Don't think so.
-rkm
-------------------------------------------------------------------
Date sent: Sun, 8 Oct 1995 08:42:52 -0500
Send reply to: •••@••.•••
From: "Craig A. Johnson" <•••@••.•••>
To: Multiple recipients of list <•••@••.•••>
Subject: Re: Incumbent carrier access pricing policies
On 8 Oct 95 at 2:28, Richard K. Moore wrote:
>
>
> At 12:53 AM 10/08/95, Craig A. Johnson wrote:
> >You are now suggesting to remove one of the few remaining levers
> >that the FCC and state commissions will have on pricing?!
>
> I don't have a doctrinaire attitude toward regulation, but look at
> each case on its merits. Do you think it's an accident that
> common-carrier subsidies are the one area where regulation is being
> preserved, that it somehow slipped through the cracks? I think not.
> It appears to be an opportunity for operators to tax consumers and
> secondary vendors to cover capital investments they should bear
> themselves. And I don't think it's necessary, but that it's yet
> another corporate welfare rip-off, and steals one more market
> opportunity from small players.
I don't know what you mean by "common-carrier subsidies." If you
are referring to the point Rob raised regarding self-granted
subsidies to compensate for competition, that, as I think both Rob
and I explained, is the subject of current debate. BTW, George
Gilder is among the most strident of those arguing that telcos will
be flailing around helplessly in the marketplace unless we give them
the ability to combine with any cable company in their service area,
let them price as they see fit, and offer unbundled services to the
max.
If, OTOH, you mean "universal service subsidies" then you must
realize that the legislation requires "all providers of
telecommunications services" to "make an equitable and
nondiscriminatory contribution to the preservation of universal
service" -- H.R. 1555, Sec. 247(b)(4).
The so-called "tax" on consumers that you rail about from universal
service payments is minimal compared to the extreme societal results
if universal service requirements were to be eliminated today.
The telcos in general want to restrict and eliminate universal
service plans, as competition develops, which appears to be your
position as well. The Joint Board will be abolished within five
years, and federal guarantees over universal service *will*
dissipate.
In the meantime, to suggest that this is a form of "corporate
welfare" is just plain silly, and again, is reminiscent of the
arguments of the arch-conservative economist George Gilder and his
gang, with one important difference: Gilder argues that the
payments are a form of corporate taxation and on this basis should
be eliminated.
It was a great effort to pass the Snowe-Rockefeller-Kerrey amendment
on universal service in the Senate bill, which guarantees to citizens
in "rural and high cost areas" "access to the benefits of advanced
telecommunications and information services for health care,
education, economic development, and other public purposes" "at rates
that are reasonably comparable to rates charged for similar services
in urban areas" (in the case of health care) and at "discounted"
rates for educational providers and libraries, as determined by the
Commission and the states.
So, Richard, are you really advocating robbing the sick, the poor,
and the children in order to offer aid and comfort to your vaunted
"small players?" What an extraordinarily jaded and warped argument!
Should we merely abandon schools, hospitals, and libraries to the
vagaries of the marketplace. If, for instance, a telco did not want
to provide access to advanced telecom services to Deer Isle, Maine,
then it would not have to do so. And that evidently is just fine by
you.
Once again, universal service is *not* an unwarranted tax; it is a
guarantee of comparable access to high cost areas which otherwise
might not be served. The pie-in-the-sky dreams shared by you and George
Gilder about satellite and wireless service ubiquitously covering all
the remote areas in America will remain exactly that for the
foreseeable future. Indeed, even Senator Stevens (R-AL) expressed
his deep concern about remote Alaskan Eskimo communities receiving
the benefits of telecom service access.
The argument on universal service, as you have presented it, is
neither logical nor informed.
Craig A. Johnson
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Telecommunications/Information Policy Specialist
Transnational Data Reporting Service, Inc.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
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