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.
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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)