Insufficient special access competition has led to overcharges totaling about $75 billion over the past five years, according to new research from the Consumer Federation of America. The report, titled “The Special Problem of Special Access: Consumer Overcharges and Telephone Company Excess Profits,” also estimates the resulting indirect macroeconomic loss to American consumers at more than $150 billion since 2010. The report is the latest volley in an ongoing battle over whether the FCC should regulate the prices that incumbent local carriers charge for TDM data lines connecting end user locations to carrier central offices.
“Reducing prices in the special access market to competitive levels will increase consumption, consumer surplus and output in the economy,” the CFA comments in a press release about the new report.
Special Access Competition
Perhaps surprisingly, the CFA research was not based on the huge volumes of special access pricing and market data that the FCC collected to inform its decision about special access regulation. The commission has guarded that data closely, releasing it only to a small number of stakeholders who must agree to keep the information confidential. Nevertheless, one might have expected an organization like the CFA to be able to gain access. Instead the CFA report is based on publicly available data such as historical data and data filed by various parties in the special access proceeding.
For years incumbent carriers had to get regulatory approval for changes to special access pricing but several years ago the FCC ruled that approvals were not required in certain markets where incumbents provided evidence of competitive offerings. More recently, however, the commission stopped approving any new markets for deregulation pending a review of special access competition, which has now dragged on for several years.
According to the CFA research:
- Large incumbent local telcos account for at least five-sixths of the special access market and probably closer to nine-tenths.
- The CFA gauges the state of special access competition using the Herfindahl-Hirschman Index, calculating a national average HHI for special access between 7000 and 8300. A highly concentrated market is defined as one with an HHI of 2500 or more.
- The last time the FCC made cost and profit data available, local phone companies were earning rates of return almost 10 times what the FCC had determined to be reasonable.
- Three factors determine the cost of providing service – dramatically declining equipment costs, a reduction in the costs of capital and declining operating costs. The authors argue that as a result incumbent carriers’ cost of providing special access service has declined but the prices charged have not.
USTelecom, which represents large and small incumbent carriers, argues that the confidential data collected by the FCC will show that special access competition is strong, particularly considering the large investments that cable companies have made in data connectivity in recent years.