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Verizon forbearance and the FCC

There's an interesting regulatory battle going on south of the border. "Forbearance" is a provision in the 1996 Telecom Act that allows the FCC to set aside the competition rules when enforcement of the rule is not required to protect the public interest.  Incumbent's have learned how to use the forbearance provisions of the the act to systematically dismantle the competition provisions within the legal framework of the act itself.  Now they're applying that knowledge.

In the case currently before the FCC, the commission will make a final decision on December 5th in a forbearance petition by Verizon that would exempt it from UNE-P — the requirement to sell high capacity DS-1 and DS-3 connections on a cost-plus basis to competitors — in six eastern US markets including major metropolitan areas like New York, Boston, and Philadelphia.  The impact of this decision would be that CLECs who currently buy and resell those would, at minimum, see their costs rise and perhaps dramatically.  Consumers and small businesses would also see prices rise.  One study suggests that prices would rise by $2.4 billion, or $114 annually per household, in the affected areas.  In all likelihood local loop competition will disappear altogether, leaving just Verizon and the cable company to compete with each other.

Advocates for the incumbents will argue that there is enough competition in the market with two well financed competitors.  In this duopoly, however, there are high switching costs because of a requirement to replace equipment.  A duopoly of this type bears a strong resemblance to a monopoly since neither competitor can appreciably better its position without substantial expense and risk.  The competitor who drops prices will harm itself without an appreciable gain in market share because of the barriers to switching.  Game theory predicts this outcome. 

The interests of consumers are best served by a critical mass of competitors selling like products and services.  The likely outcome of a successful petition by Verizon will be higher prices for 35 million people.  If you want proof, just look north to Canada and the situation within the mobile market.  In Canada, to switch between Rogers, Bell or Telus requires the consumer to purchase new telephones, and to pay substantial contract breaking penalties.  The result is a cozy arrangement amongst the carriers in which all can predict that pricing levels will stay approximately the same because it wouldn't be rational to compete by dropping price.  It's no accident that Canadians pay some of the highest cellular rates in the world.

The US incumbents understand this too.  Moreover, the rules of Telecom Act stipulate that the FCC must act on any forbearance petition within 12 or 15 months of receiving it. If the FCC doesn't respond then the petition is "deemed granted".

In the past the FCC dealt with few forbearance petitions.  Today, however, they are being bombarded with petitions as the incumbents have now discovered the power of the "deemed granted" rule.  Via the simple strategy of overwork, the incumbents are taking away the ability of the FCC to set its own policy agenda.  Wednesday's decision on Verizon forbearance is just the beginning.

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