A caution flag for Illinois phone consumers

Federal regulators have just given Illinois consumers more choices in phone service by allowing SBC to sell long distance service, but that decision should come with a warning label attached. The fact is, SBC’s entry into long distance could pose a long-term threat to consumers if SBC is allowed to use its market power to drive out competitors

SBC still controls three-quarters of Illinois residential phone customers, and the FCC’s ruling means SBC can leverage its market dominance to offer a package price for local, long distance, cellular and Internet services.

With this bundle of services in SBC’s war chest, the Illinois Commerce Commission must say “no” to SBC demands for higher wholesale prices. Should the phone giant get its way, consumers can kiss goodbye $300 million in lower yearly phone bills and greater choices of providers made possible by competition.

As it fulfills its responsibility for setting fair wholesale prices, the ICC must guard against a revived SBC monopoly capable of dominating every niche of the Illinois telecommunications market. If wholesale prices go up, the cost of leasing local phone lines soars; competitors like ATT and MCI may be driven out of the state. Without competitive wholesale prices, SBC gets a huge advantage that would make the old Illinois Bell monopoly over voice phone service seem like kindergarten play.

Given SBC’s track record, the ICC faces a challenge in maintaining active, competitive phone markets:

• In an advisory opinion, the U.S Justice Department cautions the FCC that SBC consistently fails to meet rudimentary billing and service standards, making it unnecessarily more difficult for competitors to run their businesses.

• Since 1998, SBC has been hit with more than $1 billion in fines, settlements and charges rather than open the phone network to competition.

• SBC used its political muscle in Springfield to win a large increase in wholesale prices from the Legislature. Only a court ruling has prevented a steep rise in prices that would have wiped out local phone competition by pricing new entrants out of the market.

• SBC is reneging on promises to increase investment in broadband after the FCC eased requirements to share new fiber infrastructure with competitors. In February, the FCC said “yes.” Last month, SBC Chairman Ed Whitacre told a Wall Street conference he sees “no incentive” to invest.

• SBC’s recent deal with satellite TV provider Echostar shows SBC would rather buy and resell video programming from the satellite TV industry instead of building out fiber networks that would deliver high-speed video and Internet services and also create jobs.

SBC’s arguments for higher wholesale prices fall apart under review. SBC says it is forced to lease network access at a loss, but a number of studies find otherwise. A study earlier this year by the Competitive Telecommunications Association estimates that SBC earns about $275 million a year on its wholesale business.

SBC complains that rules that require network sharing at rates set by state regulators hurt the economy and wipe out jobs. But the U.S. Supreme Court in a May 2002 decision upholding the pricing rules said the investment claims were “contrary to fact.” A recent Phoenix Center study shows that SBC and the other Bell companies invest more heavily in states with fair wholesale prices.

Local phone competition is the best way to make sure that SBC competes fairly once it secures entry into long distance. Competitive wholesale rates, established by the ICC in an extensive and public review process, have given consumers more choices at lower prices. The ICC should stand by its earlier good work.

Hugh Carter Donahue, formerly associate director for the Information and Society Program at the Annenberg Public Policy Center of the University of Pennsylvania, advises telecommunications and high tech firms, including ATT, on regulation and business development. He is author of The Battle to Control Broadcast News.

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