The politics of regulatory discretion

Jun 1st, 1996

STEPHEN N. BROWN

The Federal Communications Commission (FCC) is giving the established long-distance telephone carriers a head start over potential rivals. The commission proposes to relieve the carriers of their obligation to provide the public with a list of prices for all the carriers` services. In the jargon of regulation, such lists are called "tariffs." Besides price information, they contain the legal terms and conditions that govern the provision of the service and are an excellent source of information. For decades they have been filed with the FCC, copied by customers and analyzed by competing companies. The undisputed practical value of tariffs begs the question: Why would the FCC destroy such a useful tool? There are two answers. One relates to economic behavior and is fit for public consumption. The other relates to the murky world of strategic deals and political alliances hidden from public scrutiny.

The economic answer stems from the FCC`s prima facie case that the tariffs are a means by which the carriers tacitly collude to set prices in the long-distance market. For example, Sprint and MCI have frequently been accused of setting their prices to match those of AT&T. To the extent that all or most carriers base their prices on AT&T`s tariffs, or vice versa, the long-distance market is just a comfortable oligopoly controlled by a few carriers that do not want to compete with each other. Therefore, eliminating tariffs disrupts the flow of information between the tacitly colluding companies and thereby promotes competition. This reasoning is exactly what the FCC offers to justify its so-called mandatory detariffing policy, proposed in docket CC 96-61 that commenced in late March. The FCC`s public notice of the docket says: "We also believe that, without pricing and other material information available from the public tariffs of their rivals, nondominant interexchange carriers are more likely to initiate price reductions and other competitive programs." Thus, the FCC appears to accept the standing claims of the regional Bell operating companies that the long-distance market is, in fact, an oligopoly and that the Bells` participation in the long-distance markets will help consumers.

Despite the FCC`s intent, its mandatory detariffing policy will not prevent tacit collusion. The policy incorrectly presumes that a tariff is the only way that the long-distance carriers communicate with each other. If they really want to collude in a tacit way, they could set up an Internet home page with prices, terms and conditions available for viewing by one another and the public. Another way is to publish a public notice in newspapers--a standard practice for many industries. The carriers also have the benefit of history. Having divided up the same market for more than 10 years, AT&T and the others may not need any overt communication because they already know each other`s plans. The companies could also communicate with each other legally and easily by having certain portions of their business operations purchase service from their rivals; it is perfectly legal for MCI to sell services to AT&T, and vice versa. Mandatory detariffing is a paper tiger that cannot stop or impede collusion.

Established carriers dominate

The FCC`s policy also needs to be understood according to the notion of a carrier being "nondominant," an important concept in the agency`s public notice. With regard to tariff filings, the FCC maintains a dichotomy between "dominant" and "nondominant" carriers. The agency requires dominant carriers to file tariffs, but nondominant carriers are exempt.

In recent years, only AT&T was officially classified as a dominant carrier, but last fall, the FCC reclassified it as nondominant. The commission`s past practice may seem to justify AT&T`s exemption from tariff filings. This is not correct because the FCC`s dominant/nondominant dichotomy is no longer valid. The Telecommunications Act of 1996 implicitly makes AT&T, MCI and Sprint the dominant carriers with respect to new entrants in the long-distance market for the next three years or until a Bell company is offering long-distance service in states where the Bell also provides local service.

This interpretation flows directly from the new law. U.S. Code, Title 47, Section 272, subsection (e) specifically prevents AT&T, MCI and Sprint from simultaneously offering customers local and long-distance service. The law says: "Until a Bell Company is authorized...to provide interLATA [long-distance] services in an in-region State [a state where the Bell also offers local service] or until 36 months have passed since the date of enactment [of the new law], whichever is earlier, a telecommunications carrier that serves greater than 5% of the nation`s presubscribed access lines cannot jointly market in such State" local and long-distance services. The phrase "presubscribed access lines" means long-distance customers. The law is clearly aimed at AT&T, MCI and Sprint because each serves more than 5% of the long-distance market. A legal argument could be made that the new law requires the FCC to maintain AT&T`s tariff obligation and to reinstate the tariff obligation for MCI and Sprint for the next three years, or until the Bells offer in-region service.

Unfortunately, the FCC is sanctioning the withdrawal of long-distance tariffs from the public domain at least two years before the Bell companies enter the in-region market, where the Bells will be the strongest competitors of AT&T, MCI and Sprint. Unless the Bells have already developed a market intelligence network not based on publicly filed tariffs, the companies will have a more difficult time finding out what their rivals are doing. At the same time, the Bells will continue to file tariffs for local service. But someone may seek a court injunction preventing detariffing because it deprives competitive markets of their life-blood: free-flowing information. It helps consumers make informed decisions and tells a competing carrier, whether local or long-distance, what prices and services to offer in response to those of a rival. Therefore, if the FCC were to require tariffs, tacit collusion between the established carriers would be highly visible and thus enhance the credibility of the Bells and their attractiveness as a provider of long-distance service. There is no doubt the FCC`s mandatory detariffing policy will make it more difficult for the regional Bells to compete in the long-distance market.

Public loses

Despite the Bells` difficulties, the biggest loser in this fight is the public interest because the FCC`s policy will be harmful in secondary markets. To the extent that communications services` contract terms and prices are withdrawn from public view, a business that purchases such services has no way of knowing whether it is receiving fair or discriminatory treatment. For example, IBM recently decided not to renew its contract with MCI and instead switched to AT&T. By the time that contract is consummated, the FCC`s mandatory detariffing policy may prevent any of IBM`s rivals from making a comparison between their contracts and those of IBM. Therefore, the FCC`s policy will upset the competitive balance for businesses that depend on communications to make and sell their products. If the U.S. is truly in the golden age of communications, then detariffing will have strong negative effects throughout the American economy and upset the competitive balance in many markets.

The FCC says the authority for its action comes from the regulatory forbearance language in section 401 of the Telecommunications Act, which states: "...the Commission shall forbear from applying any regulation or any provision of this Act to a telecommunications carrier. ...If the Commission determines that such forbearance will promote competition...that determination may be the basis for a Commission finding that forbearance is in the public interest." The agency`s action may carry over to the states because the law also says, "A State commission may not continue to apply or enforce any provision of this Act that the Commission has determined to forbear from applying..." Thus, long-distance tariffs may vanish throughout the country.

However, the FCC`s justification for its action--that the elimination of tariffs stops or impedes collusion--is barely plausible and borders on dissembling. The policy is more likely motivated by election-year politics. In fact, there is a substantial difference between the law and the legislation that passed the House and Senate in the summer of 1995. The latter was unfavorable to the established long-distance carriers, and the balance was righted only by President Clinton`s threat to veto the legislation. For that effort, the carriers are obliged to the Clinton Administration, which needs all the support offered to win reelection.

The FCC`s mandatory detariffing policy is a sign of a tacit alliance between the Administration and the established carriers, where a federal agency`s legally sanctioned discretion accrues to the benefit of a favored party. Nothing else explains why the agency`s first act of regulatory forbearance potentially eliminates long-distance tariffs throughout the country while all local service tariffs remain intact.

The Bell companies will not complain because the agency`s discretion might be turned against them. For example, the FCC could elect to treat a Bell company as a dominant carrier of long-distance services and force it to file tariffs when it enters the market. The agency clearly left this option open. The FCC`s public notice said: "We defer to another proceeding consideration of the appropriate regulatory treatment of [Bells] that provide in-region [long-distance service]...within the area in which they also provide local exchange service." The FCC`s discretionary action shows that how a law is implemented is nearly as important as the law itself. The 1996 presidential election will determine which telecommunications companies receive the continuing benefits of the agency`s discretion.

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. Tel: (615) 399-1239.

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