More Begging Hands in Washington

Groups Calling for Increased Price Controls of Telecommunications Services Would Like Government Subsidies

The Federal Communications Commission (FCC) is looking into allegations of market failure and claims of high special access prices, even though no party or government agency has yet to produce any empirical evidence that demonstrates that a market failure actually exists.  Without any data on market failure, share or performance, how would the FCC ever evaluate whether some proposed remedy would produce more benefits for consumers than costs?  Without facts, these claims seem to be more motivated by self-interests than public interests.    

Show Me the Data

It seems like everyone wants something from Washington.  Now, some businesses are calling on the FCC to lower telecommunications costs by increasing price regulations on business services call special access.  Sold by phone companies, cable providers and other competitors, special access is a private line service purchased by businesses to transport communications traffic – including telephone and computer data – along private networks for the purpose of bypassing traditional telephone networks.  Special access links are also used for backhaul connections to major backbones by rural cellular service providers.  Currently, the FCC regulates prices for special access services in less competitive markets.  However, groups are now claiming that the price they pay for special access services are too high and urging the FCC to re-impose price regulations in markets that have already been deemed to be competitive by the FCC.

These calls come without any empirical evidence of market failure to justify increased regulatory intervention.  The absence of data and analyses to confirm indications of market failure has been cited by the FCC and in detailed reports by the GAO, NRRI and NERA.  We have reviewed the record and conclude that the FCC should avoid the temptation to make market corrections unless better data are collected to verify a market failure remediable without imposing unintended costs on other users.  Our review of the market’s demand and price show no evidence of a problem.

Demand is Healthy

            A common sign of market power is suppression of market demand through high prices or artificial rationing.  However, analysis of special access lines shows that the total demand for and output of services has grown at a healthy pace, suggesting that the market is functioning very well.[1]  Special access demand, shown in the appendix at the conclusion of this ConsumerGram, grew 1,500% from 1985 to 1996, when the Telecommunications Act was passed.  From 1996 to 2007, special access demand grew by 1,300%.  In contrast, real GDP grew 38% from 1996 to 2007.  Clearly, there is no evidence of output restriction and, instead, businesses appear unrestrained in its use of these business services.  Therefore, there appears to be no justification to artificially suppress prices in what appears to be a flourishing business market.

Average Revenue Per Line is Falling

The behavior of rates over time suggests no market power and helps explain the dramatic increase in demand just discussed.  An analysis of FCC data shows that special access rates (through price decreases and substitution effects) have and continue to decrease, providing further evidence that the market is functioning well.[2]  According to available FCC data, special access revenues per line, shown in the appendix, fell 90% from 1985 to 1996.  From 1996 to 2007, special access revenues per line fell another 65%.  While special access rates have plunged, the implicit price deflator for GDP (the most comprehensive measure of prices changes in the economy) grew 28% from 1996 to 2007.  These results are consistent with GAO estimates that real special access prices have fallen.  With these facts in mind, there is no evidence of monopolist price gouging or any justification for increased price regulations.

Just the Facts

            Allegations of market failure have not been supported by empirical evidence or market share data necessary to make objective assessments of concentration and competition.  Without clear evidence that special access rates are “too high” in any sense other than some users would like to have lower circuit costs, FCC action to force those rates downward would occasion losses in consumer welfare.  Current rates are lawful under the price cap regime.  Forced rate reductions for special access services would very likely boost profits for some large users, while cutting much needed network investments and possibly impelling carrier rate increases on other services used by consumers. 

 POSTED:  July 8, 2009

APPENDIX:

Equivalent Lines and Revenue Per Line

Source:  The FCC Price Cap Model, Revenues Worksheet, implicit prices, updated with latest FCC industry data as cited in footnotes 1 and 2 of this ConsumerGram.