State, Industry Experience Shows Competition Disciplines Prices

In Neb. -- first state to deregulate nearly all retail rates, in 1986 -- “we were expecting to see dynamic price movement right away, but it just didn’t happen,” said Gene Hand, Neb. PSC telecom dir. He said introduction of local competition didn’t bring price wars. “Pricing of local service from 1986-96 was stable, with no huge changes upward or downward,” he said. Since Neb. created its state universal service fund in 2000, he said, local service pricing by all local carriers has been static, hovering near the universal service fund’s affordability benchmarks, now $17.50 monthly for residential and $27.50 per business line.

Wireless and VoIP threats to landline may invigorate price competition, but with local service already at or below cost, there’s no room for reductions there, Hand said. He said telephone rate deregulation can’t be viewed in isolation. Consumer perception of price and value are affected by service innovations such as “triple play” bundles of voice, Internet and video service, he said: “Our retail rate deregulation law didn’t have the dramatic impact everyone had expected. Its main effect was ending rate cases.”

Ida. deregulated rates for all but basic exchange in 1989 and last year extended deregulation to basic exchange. But Joe Cusick, longtime PUC telecom section supervisor, said: “We never experienced sharp price changes. Qwest, our biggest incumbent, has always kept its rates for deregulated services in line with its prices in other states.” He believes Qwest at first was constrained by politics, he said: “It wouldn’t have looked good to lawmakers if they started raising rates right after being deregulated.” But the past decade, the main restraint on Qwest and Verizon has been competition, he said: “These companies are effectively price capped by wireless for local service and by cable for broadband service. And now cable is getting into local service as well.”

Ida. rural incumbents have had the legal right to choose rate deregulation for years but none have done so, he said: “They have no reason to opt for deregulation. Their universal service support is based on their residual revenue requirement, but if they deregulated they'd have no revenue requirement anymore so they might lose their support but be unable to raise rates enough to make up for that loss.”

Art Stuenkel of the Ark. PSC research & policy development staff, on hand in 1997 when the state deregulated nearly all retail rates, said: “There are too many factors affecting the market to be able to single out just the effects of rate deregulation.” Technology seems to be having more effect on telephone rates than deregulation policy, he said. Wireless technology’s huge drop in price and its spread into rural areas is affecting markets, along with VoIP’s gaining a foothold and broadband over power lines on the horizon, he said: “It’s only fair to allow incumbents to compete on an equal footing with unregulated competitors.”

“I haven’t seen any real detrimental impact that we could attribute to rate deregulation,” said Stuenkel. There hasn’t been great rate volatility or competitive cream skimming some feared when the state deregulated, he said. Ark. law allows for reregulation of rates by petition of a specified number of ratepayers, but the PSC hasn’t received a petition to resume rate regulation, he said. The Ark. universal service fund doesn’t have affordability rate benchmarks, “but if we ever do implement them, I wouldn’t be surprised to see rates cluster around them,” he said.

From the industry side, Ed Allis, AT&T Ark. vp- regulatory affairs, said Ark. “has been the deregulation poster child for the sky not falling.” Competition made deregulation feasible; market forces quickly took hold afterward to control prices; and technology opened new competitive playing fields, he said: “The only real adverse consequence of deregulation I can think of was lots of confusion among consumers at first as new companies entered Arkansas and advertised their services. But I can’t say consumers really suffered harm because of that.” Competition in Ark. more recently has centered on service packages, as each carrier tries to find the bundle that will attract and hold customers, he said. “Competition is still evolving,” Allis said. “Things are far from equilibrium. VoIP and rural wireless have had major impact in Arkansas and more things are on the horizon.”

There are 2 main reasons for a lack of rapid, dramatic basic service price changes in the wake of retail rate deregulation, Dennis Weller, Verizon chief economist, said: “First, presence of a competitive marketplace kept the extremes from happening. Market forces have proven to be strong enough to substitute for regulation. Second, the market drivers today are services other than plain old telephone service. POTS doesn’t drive the market the way it used to. Traditional phone service provided in the traditional way is in a holding pattern, at best. The market opportunities and new consumer choices all are in new services and service bundles.”

Basic exchange rates have been kept low as a matter of regulatory policy, and basic exchange has generally remained under state rate regulation even if everything else is deregulated, Weller said. It’s not reasonable to expect competitors to try to undercut an incumbent’s already-low basic exchange rates, he said. What competitors have done instead, he said, is bundle basic exchange into attractive packages with other services. New local entrants like CLECs, wireless and VoIP providers never were subject to state rate regulation, freeing them to innovate immediately, he said. Deregulation, he said, has allowed incumbents to respond in kind.

Regulators and lawmakers must feel comfortable in relying on market forces or they wouldn’t be deregulating, Weller said. “If market forces are working, we wouldn’t expect to see sudden, huge, dramatic changes following deregulation. And we haven’t. There are changes but they're taking place over extended time.” He said competition created an environment that allowed removal of retail rate regulation. The end of rate regulation, he said, has allowed all market participants to explore more possibilities. In rural areas, Weller said, wireless, VoIP and other new technologies have provided competition, giving consumers new choices and easing the need for continued rate regulation.

Retail rate deregulation is essential for effective competitive markets, but other considerations are as important in how AT&T approaches its markets and how it prices and positions its services, AT&T spokesman Michael Balmoris said: “We do care about rate deregulation but we also have obligations as an incumbent and provider of last resort. It may be easier to see the effects of deregulation by looking at where new entrants choose to enter markets. Look at VoIP providers. They don’t want to go where they face regulation.” He said the extent of regulation also affects AT&T as it expands into video services. He said AT&T prefers to bring video service first to areas with the most hospitable public policy.

“It’s not that rate deregulation doesn’t matter. It does,” Balmoris said: “But because of market competition, you haven’t seen big increases in prices, the horror stories predicted by some consumer interests. And because of universal service programs, we're not seeing market breakdowns in high-cost areas.” He said retail phone rate deregulation “puts a spotlight on universal service policies. Competition hasn’t change the reality that some places are just to expensive for free-market forces to work. It’s not reasonable to expect consumers to pay $200 a month for phone service, so there’s a continuing need for subsidies even after retail rate deregulation.”

From a consumer perspective, Ohio “has had a mixed experience with deregulation,” David Bergmann, Ohio asst. consumer counsel, said. In 2003 Ohio let incumbent telcos elect rate deregulation of everything other than basic exchange and caller ID, last year permitting basic exchange pricing flexibility. All major telcos there have chosen deregulation. Price competition seems to be working to constrain prices with respect to bundled services and with competition between technologies, such as wireless v. landline, he said.

For deregulated stand-alone services, Bergmann said, some carriers raised rates while others stood pat or cut rates. “We saw some instances of per-use rates on vertical services doubling, but the rate still was under a buck,” he said: “Our regulators recognized there’s a difference between POTS and the rest of the marketplace.” He said the PUC has limited basic exchange rate increases to $1.25, and AT&T and Cincinnati Bell recently won the right to make $1.25 increases in their competitive exchanges. He said AT&T’s residential basic exchange can rise to $15.50 from $14.95, and Cincinnati Bell’s will, to $18.20 from $16.95. But he said the carriers can add another $1.25 yearly. “We'll have to see if market forces constrain them,” he said.