Telecom Rules Mess Up Market

Last week the Federal Communications Commission handed down 1,500-plus pages of new rules and regulations "deregulating" the telecommunications industry. In these new rules, federal regulators find a way to micromanage nearly everything about the telephone business -- from the way telephone companies and, eventually, many cable TV companies that choose to get into two-way communications manage their networks to the prices that telephone companies can charge when others use their facilities.

Imagine the uproar if federal regulators came in and told the owner of a McDonald's restaurant that McDonalds must sell its buns to Wendy's and then dictate to them the top price they could charge Wendy's -- a price, by the way, below the cost of the buns in the first place.

But that is precisely what the FCC is doing through a new series of rules, the latest of which involve fixing prices for "access charges" that long-distance companies pay local telephone companies to complete their calls and to help pay for service to high-cost areas. The result is to further undermine the climate for investment in new and upgraded telecommunications infrastructure available to all Americans, no matter where they live, at more or less the same price.

When the FCC announced its new rules last week, its spinmeisters said that the process of "deregulating" a communications industry heavily larded with subsidies is a difficult task and that a shakeout like this always hurts some companies and benefits others. But the FCC misses a fundamental point, one that is often lost on those who do not understand or appreciate market economics. The winners and losers from last week's decisions are not the communications companies -- AT&T, British Telecom/MCI, GTE, Bell Atlantic or US WEST. As an executive of one telco told me last week, "We will be a winner no matter what the government does -- no matter what business rules political authorities impose on us. That's the job of a business leader, to figure out how to be a winner." So companies will figure out how to make things work for them and their shareholders once government has set the rules, but other elements of society may have more difficulties.

Last week the FCC did what the federal government is so good at doing. It gave goodies to some consumers -- urban dwellers, big business and heavy users of long distance services -- by taking $18.5 billion out of a pot that, up to now, has been used to help finance affordable telephone service and the improvement of telephone infrastructure for Americans who live in small towns, rural areas and other high-cost places to serve. And it left it to state public utility commissions and state legislatures to figure out a way to make up the difference.

Of course there are more voters in urban areas and big businesses give a lot more money to political campaigns, so the FCC decision is understandable -- at least from a Washington point of view. In the meantime, the real losers from last week's FCC decisions are small towns and rural areas, small businesses and small Internet access providers -- and state elected officials, who were left holding bag.

It's too bad the FCC does not understand that the Internet begins and ends with a phone line into a house or office -- and that most Internet traffic around the nation and, indeed, around the world is transported on the infrastructure of long-distance companies. Making the Internet work will require a lot of new investment. If the FCC continues to shortchange investment in high-speed infrastructure everywhere, not just big businesses in urban America, the computer industry is going to find a lot of "stranded appliances" out there, as people turn to other ways to communicate.