Opening Markets and Keeping Them Open:

A Contract and Antitrust Model

Ray Gifford, Chairman

Colorado Public Utilities Commission

Opening Markets

• Eliminate entry and exit barriers

• Deregulate retail prices– Correct price signals imperative to development

of competitive market

• Enforce interconnection and unbundling requirements of 1996 Telecom Act

• Rationalize wholesale and retail pricing

Contract Rights• Interconnection Agreement

– subject to traditional contract analysis– Commission must have full remedial authority to

discourage breach

• Intercarrier compensation must be efficient– Access Charges--Paid by interexchange carriers to carriers

for originating and terminating calls, 40-15-102(25), (28), C.R.S.

– Reciprocal compensation--required by 47 U.S.C. 252(d)(2) for local calls

Getting it Wrong

Access• Above cost for local loop cost support

– Promotes recovery of fixed cost through usage-sensitive charge

• Cross-subsidy from toll users to local users• Incorrect price signals distorts market

development– underpayment for fixed costs; overpayment for variable

costs

Getting More Wrong

Recip Comp• To the extent cost-based, makes

sense following a cost causation model

• Inherent difficulties of pricing correctly

– Commission can unintentionally create opportunity for regulatory arbitrage

ISP Recip Comp• Distorts business plans

– artificial inducement to acquire only terminating traffic

– disincentive to enter residential market

• Cross-subsidy

– from ratepayers to ISPs, their customers and ISP CLECs

• Facsimile of real competition– not consumer welfare

enhancing

Getting It Right--Model 1

• Truly cost-based pricing– Three-phase pricing for access and recip comp

• phases: set-up, capacity, usage-sensitive

• BUT– impossibility of getting the price right– information cost (metering and billing) is not 0, and

is dead weight loss– regulatory caprice and temptation– requires rate rebalancing

Getting It Right--Model 2

• Universal “bill and keep” for access and recip comp

– ease of administration

– forces Commissions toward second best efficiency for retail pricing

• Bill and keep assumes

– very small short run and long run costs for traffic termination and origination on modern network

– information cost of metering traffic is dead weight loss

• Would allow carriers to negotiate other arrangements and rates

• BUT– systematic undercompensation of carriers in access and recip comp

– forces retail rate rebalancing

Antitrust MonitorNow

• Commission oriented to regulating monopolies

– certification

– operating areas

– tariffing

– price regulation

– provider of last resort

– universal service

• Absent legislative command, none of these roles is warranted in a competitive market

State as Mini-FTC• search and mitigate residual market power

– FCC should go no further on UNEs and pricing than antitrust “essential facilities” doctrine would warrant

• Intervention and regulation of telecommunications market must be warranted based on established antitrust principles

• Costs of regulatory intervention must exceed consumer welfare loss from persisting market power

Carrier Dispute Forum

• Specialized, rapid and expert resolution of disputes between carriers– full panoply of contract and antitrust remedies

• Alternatives– courts, private arbitration– less fear of capture or systematic bias, but less

expertise and slower

Consumer Ombudsman

• Rapid, decisive and punitive actions against carriers committing consumer fraud

• Monitor, mediate and aggregate consumer claims against carrier

• Enforce quality of service standards for captive customers

The Goals

• Commission’s role recedes to that of referee instead of prescriptive bully

• Proper price signals for consumer welfare enhancing--not producer allocating-- competition

• Get Commission out of the pricing business absent market power problem

• Commission stops saying “maybe,” but gives yes or no answers so business plans can be made.