From the International Falls Daily Journal

Guest Column: “Let Minnesota Dial in Savings”

By Dr. Michael D. Pelcovits

When Congress returns to work after the mid-term elections, it will doubtless place unfinished business from this past legislative session on its to-do list.

And while there is much to debate about measures to improve the economic well-being of Americans, there is one simple, bipartisan fix that law-makers could enact to benefit consumers: facilitating competition in the telephone industry by ensuring that telephone calls make over broadband lines – sometimes referred to as VoIP – can compete with the old telephone monopolies on a level playing field.

Such action could save consumers in Minnesota $1.9 billion dollars over the next five years.

To be sure, competition in the telephone industry has been an elusive goal of policymakers for over 20 years.

The old AT&T (a.k.a. Ma Bell) was broken up in 1984 by antitrust action in hope of spurring competition in the long distance phone industries. Congress stepped in to spur competition in local phone markets in the 1996 Telecom Act by giving competitors access to the monopoly telephone company lines running into customers’ homes. In 1996, this was seen as the only way to bring competition to monopolies that controlled over 95 percent of the pie.

But the telephone monopolies were highly sophisticated at manipulating the legal and regulatory process and were able to effectively kill the 1996 Act provisions and thereafter reassemble, through a series of mergers, the old Ma Bell.

Today, incumbent telephone companies still control over 85 percent of the residential and small business marketplace.

Now, thanks to new broadband technologies, the once dim hopes of true, meaningful competition in the telephone industry are shining bright. New facilities based competitors – like your local cable companies – and non-facilities based providers are bringing to the marketplace a new service called VoIP (Voice over Internet Protocol), which offers more features and is made available at prices as much as 20% less as the Bell services.

All told, Kagan Research estimates that more than 20 million customers will switch to these services by 2010.

But there is one hitch. In order to make VoIP competition a permanent part of the market, Congress must require that traditional telephone companies “interconnect” their networks to their competitors, which allows calls to be “handed off” between one provider and another. This requirement has been a time honored right for other local telephone competitors for cell phones, enabling calls to move seamlessly between networks.

But because VoIP providers transmit calls by “Internet Protocol” the calls are classified differently under the law and, according to some traditional telephone companies, don’t have the same “interconnection” rights as do say, cell phones.

We are now seeing the beginning of a potential major effort to deny interconnection. For example, in South Carolina, several telephone companies have argued that no “interconnection” right need be extended to VoIP providers, including cable companies that offer phone services using VoIP technology. Instead, the telcos have said, VoIP providers should be required to negotiate with them the “price” for interconnection – if they choose to interconnect at all. The problem is that the telephone companies, controlling roughly 85 percent of the lines, hold all the cards in that negotiation, and could use their market power to set unfair terms of interconnection for the young VoIP industry, thereby suffocating it.

For average customers, this is a big deal. By comparing the prices of both traditional phone company and cable Internet phone services and then using a well-recognized and respected formula to calculate consumer adoption of Internet phone service, our firm conducted a study that protected the consumer savings from competition from cable’s Internet phone service and other competition into the voice market. Our study showed that competition will save consumers $100 billion over the next five years.

Consumer savings would come not just from the considerably lower price of competitive telephone service provided by the cable companies and others, but also by the responsive price cuts that telephone companies would have to make in order to retain customers.

For a working middle-class America struggling under the weight of high gas prices and climbing interest rates, $100 billion in savings is desperately needed relief. The new phone competition from cable companies would also inject a jolt of energetic innovation into the industry.

But this all depends on ensuring basic interconnection rights for these new phone providers. In Congress, both House and Senate versions of pending telecom bills protect interconnection rights for cable phone competitors and would secure the foundation for this vital form of competition without a new round of regulations and litigation.

Let’s hope that, as Senators and Representatives get to their Washington offices after the election, this simple policy is one that doesn’t get lost in the legislative shuffle.

Pelcovits is an economist with Microeconomic Consulting and Research Associates, Inc.