Communications

Viewpoint: Price and quality are keys to real competition

Gail Garfield Schwartz

In any competitive marketplace, consumers select goods and services on the basis of retail price and the quality it buys. Once local-exchange service markets are fully competitive, telephone service customers will also be making that kind of price/quality choice.

Before then, however, the price that a carrier new to a local exchange offers its customers will largely depend on the rent it pays the incumbent carrier for use of the latter's network facilities. Likewise, until its own facilities are built, the newcomer--and its customers--will also depend on the incumbent for quality of service.

The Telecommunications Act of 1996 sets clear standards for both pricing and quality of service offered by incumbents to newcomers. The standards are tailored to the degree of "monopolization" now enjoyed by the incumbent in its market. They are also designed to encourage newcomers to build their own physical network facilities--the Act's fundamental intent.

Regarding quality of service, the 1996 Act explicitly requires the established carrier to offer competitors at least the same level of local-exchange service as it makes available to itself or any other entity to which it already provides interconnection. No matter the price, an incumbent's failure to meet this performance-quality standard defeats the act's objective and denies consumers a choice.

Regarding price, the Federal Communications Commission has established firm guidelines for interconnection of peer competing local-exchange carriers. State regulatory agencies can legally interpret those standards independently, however, and in many states arbitration has led them to do so.

For unbundled (individual) network elements, the 1996 Act's standard for pricing is a "cost which may include a reasonable profit." Only forward-looking costs are relevant to a competitive market. Each element must be priced at its actual cost, with a reasonable allocation of overhead, so that the company selling the network elements may recover all its expenses. Otherwise, incumbents could price more competitive elements below cost to deter competition and recover the shortfall from above-cost prices on less competitive elements. Therefore, state regulators must require forward-looking cost studies for each unbundled element.

Now watch what happens. A low price for unbundled elements will encourage newcomers to buy local-exchange carrier facilities from the incumbent, thereby combining their own facilities with the incumbent's. High prices for unbundled loops, on the other hand, will fuel the efforts of competitors to reach a mass market using their own alternative facilities exclusively. So long as performance standards are enforced for interconnection, there is no serious long-term problem. Even if the price paid should for a time yield too great a profit to the incumbent, most of the unbundled elements can be supplied by competitors and excess profits will soon evaporate.

The alternative to using unbundled network elements of the incumbent is for competitors to resell the incumbent's entire service. The 1996 Act removes incumbents' restrictions on resale and requires wholesale prices. Here, the act establishes that the states must set the wholesale price at the retail price minus whatever costs the incumbent will avoid by selling the service at wholesale instead of operating it itself.

But states must beware of setting wholesale prices so low as to make facilities-based competition uneconomic. Resale (which is actually rebranding) of an incumbent's ubiquitous service does give newcomers a soon-to-market opportunity. But rebranding also turns the rebrander into a sales agent for the carrier already there instead of producing a real physical alternative for customers. Thus, resale does not constitute real competition.

The most significant cost item for competing facilities-based local exchange carriers is the price of call completion--whatever an incumbent and competitors charge one another for transporting and terminating traffic that has originated on the other's network.

Call completion is in fact the last monopoly bottleneck. Newcomers cannot attract customers if they must pay an incumbent more than the actual cost to connect customers to end-users served by the incumbent. Therefore, the 1996 Act's pricing standard for transport and termination does not explicitly allow an incumbent to charge a profit or overhead. In point of fact, the Act ensures that the rates for transport and termination will be based only on the additional cost caused by a local exchange carrier originating traffic on its own network and terminating it on the incumbent's network.

Because such costs generally will be trivial or nonexistent, the Act permits "bill and keep" arrangements. Bill-and- keep simply means that there is an exchange of service rather than fees. The reciprocal service of terminating traffic without charge is a "reasonable approximation" of the added cost required in the Act.

The price issue is by no means closed. The prices in most interconnection agreements are conditional, subject to change after incumbents' forward-looking cost studies have been reviewed. Interconnection agreements nonetheless must be implemented now, and quality of performance becomes the critical issue.

Quality standards for interconnection are critical because a new entrant, which must live up to its contractual service quality goals for its customers, cannot do so if the incumbent fails to turn up circuits on time, resolve trouble reports, or provide pole attachments in a timely fashion. Such behavior by telephone monopolies has been so pervasive as to suggest a clear pattern of anticompetitive intent. Incumbents cannot be permitted to degrade competitors' service by sins of either omission or commission.

At the same time, an incumbent carrier wishing to use a competitive local-exchange carrier's services--for local-exchange access to its long-distance subsidiary, for example--will not want to be held hostage to poor performance by the other's facilities.

In a fully competitive market, it is in the interest of both interconnecting peer local carriers to adopt performance standards--and penalties for failure to meet them. Explicit quantifiable objectives must be established, benchmarked against the incumbents' own time intervals for installation and repair. Also, competing local exchange carriers must be assured that no incumbent is awarding another carrier or customer superior service. Resistance by the incumbent local-exchange carriers to such performance standards and penalties strongly suggests a desire to preserve monopoly power.

With the 1996 Act, the United States took giant leaps toward real competition in local phone service. Until there is full facilities-based competition, competitors must still be able to compete on price and quality, even while using incumbents' network elements.

Gail Garfield Schwartz is vice president, public policy and government affairs for the Teleport Communications Group Inc. (TCG) in Staten Island, N.Y.--the United States' first and largest competitive local telecommunications provider. She is a member of the board of directors of the Association for Local Telecommunications Services, the trade group representing competitive local exchange carriers and competitive access providers.

(c) Copyright 1997, The Institute of Electrical and Electronics Engineers, Inc.