May 17, 2004

May 17, 2004 | WebMemo on Regulation

Property and Competition in Telecom: A Response

Lawrence Kotlikoff has offered a spirited response[1] to our criticism of his startling claim that telephone networks belong to the public[2]. Still, he fails to justify his argument.

 

In his original article Dr. Kotlikoff made the following sweeping claim: "Whether the regional Bell companies and their lobbyists want to hear this or not, the local phone system is not their property." In his response, he backs away from this statement, writing, "I never claimed that 'legally' the local networks are not the Bells' property. I claim that … use of these networks by the Bells is subject to public interest regulation." The original phrase "not their property," however, leaves little room for equivocation. We won't quibble, though, and accept Dr. Kotlikoff's withdrawal of a rather Argentine-like claim on property.

 

Legalities aside, Dr. Kotlikoff questions our claim that "[t]oday's telecommunication networks were not built by the government, but by private investors with private capital." As a first matter, he questions our choice of 1996 as a starting point for local exchange carrier (LEC) investment; although the Telecommunications Act was passed in February of that year, it wasn't fully implemented until much later. The elimination of legal monopolies, however, was immediate. Moreover, reform began in many states well before the '96 act. Critically, traditional rate-of-return pricing was abandoned in most states several years earlier, breaking the link between rates and telephone company profits. If anything, our 1996 break point was too late, not too early.

 

He also suggests use of the FCC's Statistics of Common Carriers as a database, rather than the Computstat numbers we used. Based on the FCC statistics, Kotlikoff concludes "…the Bell's capital expenditures on this wireline plant totaled $149 billion-or barely half its value." The FCC statistics must be used with a grain of salt, though, because they are based on regulatory, not financial, accounting. Depreciation, for instance, is longer under regulatory accounting, exaggerating the value of assets.

 

In any case, even using the FCC figures, the new investment by local exchange carriers since the '96 act has been substantial, totaling approximately half of 1996 (and 1997) total plant and more than 100 percent of 1996 and 1997 net plant. Any way you look at it, it is hard to sustain the claim that today's network is a legacy handed to LECs.

 

There is one point on which Dr. Kotlikoff and we would agree: This debate is not really one about accounting, of who spent what on what equipment years ago. The real question is whether forced access rules are needed to protect consumers in today's telecom marketplace. Dr. Kotlikoff argues that they are, saying that in today's world, telephone companies have no real competition. In so doing, however, he dismisses two of the most vibrant sources of competition: wireless and Voice-over-Internet protocol.

 

He says that "… neither wireless nor VoIP (voice over internet protocol), which is in its infancy, are substitutes for wireline service." This "fact" likely would shock many in the telecom industry, as well as many consumers. Some eight million U.S. households, including that of one of the present authors, have already disconnected their landlines in favor of wireless. And his easy dismissal of VOIP is certainly not shared by all. Broadcasting and Cable magazine, for instance, recently carried a page-one story on new cable VOIP services. The headline: "Cable Will Eat The Phone Company's Lunch."

 

Should there be even more competition? Of course. But you don't encourage that with policies that subsidize leasing of the existing wireline network and undercut investment in new facilities. Dr. Kotlikoff dismisses this argument, comparing it to Marie Antoinette "depriving peasants of bread." But this specious answer ignores basic economic principles. To paraphrase an even older bit of folk-wisdom, if you provide milk at regulated, below-cost rates, fewer people will invest in cows.

 

In other words, incentives matter, and for that reason, property matters. We stand behind our conclusion that dismissal of property rights, even for telephone companies, is deeply flawed.

 

James L. Gattuso is Research Fellow in Regulatory Policy in the Thomas A. Roe Center for Economic Studies, and Norbert Michel, Ph.D., is Policy Analyst in the Center for Data Analysis, at The Heritage Foundation.



[1] Lawrence Kotlikoff, "A Telecom Tutorial for the Heritage Foundation," Tech Central Station, April 23, 2004.

[2] James L. Gattuso and Norbert Michel, Ph.D., "Are U.S. Telecom Networks Public Property?," Heritage Foundation Backgrounder No. 1745, April 8, 2004.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

Norbert J. Michel, Ph.D. Research Fellow in Financial Regulations
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Regulation