FOR YOUR INFORMATION.............................MARCH 9, 1993
ALLOWING NEW FIRMS TO PROVIDE LOCAL TRANSPORT SERVICES
FOR LONG-DISTANCE CALLS WOULD BENEFIT CONSUMERS, FTC STAFF SAYS
Allowing firms other than local phone companies to play a
role in providing the local transport portion of interstate long-
distance calls would benefit consumers by creating competition
that could reduce the price of these local transport services,
currently priced well above cost, staff economists from the
Federal Trade Commission said in comments made public today.
The FTC staff submitted their comments in response to a
Federal Register notice describing proposed Federal Communica-
tions Commission regulations to open the market for providing
local transport services for "switched access" calls. Currently,
when a consumer or a businessperson (an "end user") makes a
typical (i.e., switched access) long-distance call, the local
phone company connects the end user's call to its central office,
provides switching services at the central office, and then
transports the call to the end user's long-distance carrier. The
last of these services is termed "local transport." Currently,
local phone companies sell these three components of switched
access services as a package. In 1990, local phone company
revenues for switched access services on interstate calls were
approximately $11 billion.
As proposed by the FCC, local phone companies would be
required first to unbundle switched access services and second to
sell the local connection and switching services to any company
wishing to purchase them. If such requirements are enacted,
third-party companies could, for the first time, provide the
local transport component of switched access services. The
proposal also would give local phone companies greater flexi-
bility in pricing switched access services (these prices are
regulated by the FCC), to facilitate greater competition with the
new entrants.
- more -
FCC Local Transport Comments--03/09/93)
The FCC recently allowed third parties to provide local
transport services for "special access" calls -- those made by
high-volume long-distance users who have purchased a dedicated
line so that their calls are connected directly with their long-
distance carriers for a lower overall price. The FTC staff said
the benefits likely to flow from this action -- moving prices
closer to costs and encouraging competition to provide these
services more efficiently so that costs and prices go down --
also would flow from expanding access to the transport services
market for switched access calls. The staff estimated that the
current prices for the switched access services are at least
twice as high as their costs.
In support of its conclusion that the FCC's proposals are
likely to benefit consumers, the FTC staff said it believes there
are no economic efficiency grounds for denying third-party entry
into the local transport market -- the cost of one firm providing
the entire package of switched access services is not likely to
cost less than two firms each providing part of the package. The
staff agreed with the FCC that the local phone companies should,
nonetheless, be required to offer local connection and switching
services on a "common-carrier" basis -- that is, sold to any wil-
ling buyer -- for two reasons. First, according to the FTC
staff, it seems unlikely that significant entry will occur to
offer the local connection and switching services. Second,
because local phone companies currently price the third com-
ponent, local transport, well above cost, they have an incentive
to discriminate against third party local transport providers
when they provide local connection and switching services.
The FTC staff also cautioned that, absent quick enactment of
the proposed regulations for switched access calls, a significant
amount of long-distance traffic could migrate from switched ac-
cess to special access, or to Competitive Access Providers (CAPS)
-- companies that have constructed localized fiber optic networks
that permit them to connect end users with their preferred long
distance providers directly, that is, they "bypass" the local
phone companies altogether).
Finally, the staff said, a greater degree of pricing flexi-
bility for local phone companies is essential to ensuring that
only more efficient new competitors enter the market. Currently,
the regulated prices for local transport services are identical
even when marginal costs are different. Such costs depend, for
example, on the density of the population in an area. By allow-
ing local phone companies to set prices closer to the actual cost
of providing services, new entrants will have to compete on the
basis of providing more efficient and, thus, less costly,
(FCC Local Transport Comments--03/09/93)
service, rather than simply being able to provide service at a
price somewhere between its costs (which may be above those of
the local phone company) and the local phone company regulated
price.
These comments represent the views of the FTC's Bureau of
Economics and not necessarily the views of the Commission or any
individual Commissioner. The vote to send the comments was 4-0,
with Commissioner Roscoe B. Starek, III, recused.
Copies of the comments are available from the FTC's Public
Reference Branch, Room 130, 6th Street and Pennsylvania Avenue,
N.W., Washington, D.C. 20580; 202-326-2222; TTY 1-866-653-4261.
# # #
MEDIA CONTACT: Bonnie Jansen, Office of Public Affairs
202-326-2161
STAFF CONTACT: Michael Ward, Bureau of Economics
202-326-2096
or
Richard Shin, Bureau of Economics
202-326-3495
or
Timothy P. Daniel, Bureau of Economics
202-326-3520
(FTC Matter No. V930006)
(localcal)