The United States Government and Accountability Office (GAO) chose an innocuous enough title for their just released report [1] on voice and data competition: "FCC Needs to Improve Its Ability to Monitor and Determine the Extent of Competition in Dedicated Access Services."

But that opening won't stop readers from interpreting the study as a devastating critique of the Federal Communication Commission's implementation of the Telecommunications Act of 1996, or from seeing it as a historical analysis of a series of practices and policies that, in the end, have failed to deliver competitive telecom access to big cities in the United States.

Here is a timeline summary of the GAO audit.

1991 through 1999

The review begins with a recap of the FCC's telephone regulation policies in 1991. At that time, the Commission implemented caps on the prices that carriers could charge on long distance service - that is, until the Telecommunications Act of 1996.

The Telecommunications Act allowed the big regional phone carriers to get into long distance service, but it also required them to share their networks with competitors. In 1999 the FCC issued a Pricing Flexibility Order that authorized the dismantling of those 1991 price caps, under certain conditions:

The Commission decided that when enough telecommunications infrastructure had "aggregated" or "colocated" in an urban area with more than 50,000 people, "it was a good predictor that competitors had made significant, irreversible sunk investments in facilities, and indicated the likelihood that a competitor could eventually extend its own network to reach its customers."

That meant, to the FCC, that the agency could lift price caps in those areas depending on how much competitive development they had determined had been achieved. The Commission established a set of price flexibility tiers ("Phase I and II," etcetera) that relaxed charges to varying degrees.

But the industry wanted more.

2000 to 2005

In 2000 six big carriers created a lobby called the Coalition for Affordable Local and Long Distance Service (CALLS). The group included four of the five biggest incumbent firms of the time, including AT&T and BellSouth.

They asked for, and got, yearly reductions in price cap levels based on agreed-upon percentages: three percent in 2000, and 6.5 percent for the next three years. Four incumbents - AT&T, BellSouth, QWest, and Verizon - received full price deregulation in over 100 major metropolitan areas.

But by 2005, the GAO notes, many firms began raising concerns that "in places where FCC has granted phase II pricing flexibility, prices have incongruously risen." Critics began wondering out loud whether the FCC's "colocation" formula accurately gauged market competition.

Two more FCC actions complicated the picture. First the Commission conditionally approved the SBC/AT&T merger (now called AT&T) and the Verizon/MCI merger, despite Department of Justice concerns about the anti-competitive nature of these unions. Second, the FCC established a set of rules similar to the "colocation" formula under which big carriers must open their infrastructures, or Unbundled Network Elements (UNEs), to smaller providers . Where sufficient colocation had taken place, the FCC required less UNE access.

Where are we now?

From this point of departure, the GAO selected 16 metropolitan areas where the FCC gave those "price cap incumbents" (again, AT&T, BellSouth, QWest and Verizon) varying degrees of regulatory relief, and four metro areas dominated by one of the four. The study analyzed prices for high capacity dedicated access at 1.544 Megabytes per second ("DS-1") and 45 mbps ("DS-3"). It came to the following conclusions:

• "In the 16 major metropolitan areas we examined, facilities-based competition for dedicated access services exists in a relatively small subset of buildings." Competing firms serve no more on average than 6 percent of these buildings with DS-1; about 15 percent of facilities that need DS-3 service get it through competitive vendors.
• "Since phase II pricing flexibility was first granted, list prices for dedicated access that apply under phase II, on average, have increased." This suggests that the more flexibility the FCC gave incumbents, the more they charged their customers.
• "Based on the data available to us, facilities-based competition for dedicated access services to end users at the building level (i.e., analogous to channel terminations to end users) does not appear to be extensive in the MSAs [Metropolitan Statistical Areas] we examined . . . " On the contrary, the GAO found declines in competition in some wire centers, and suggested that the FCC's "colocation" methodology may not accurately predict competitiveness in a given metropolitan area.
• The GAO report also found that colocation, regardless of its significance in determining competitiveness, has declined in many metropolitan areas. "In fact," the report says, "in many MSAs we examined, some wire centers that had competitive colocation several years ago, appear to no longer have any competitive colocation."
• The GAO predicts that the recent mergers between AT&T and SBC and between Verizon and MCI will likely accelerate these trends.
• The GAO also concludes that competition may not be a realistic goal in all markets, especially in small markets where demand for dedicated access is relatively light.
• Finally, the GAO study suggests that the FCC is working with insufficient data to validate its "colocation" methodology. "Regardless of where competition may come from in the future," the report suggests, "it is clear that FCC does not regularly monitor and measure the development of competition, which will affect how FCC responds to emerging trends, and the actions it takes to encourage and foster such competition. We have consistently noted the need for better data at FCC to track competition and deployment of telecommunications services to a variety of consumers."

Reaction from the FCC

The GAO report includes an appendix with FCC Managing Director Anthony Dale's response to the study, which was not positive.

"The GAO Draft Report," Dale wrote on November 13th, "appears to imply the need for a return to price control policies that the Commission abandoned in 1999 during the previous Administration."

Dale also suggested that a more rigorous analysis of competition than the FCC's colocation system would require an "extremely narrow" focus. " . . . the GAO study seems to suggest that at least each individual building and perhaps each floor of a building needs to be considered a separate market," Dale argued, an approach that he says the FCC could not implement.

But the GAO rejects the charge that the agency advocates a return to price controls, and urges the FCC to seek better data on the industries that it regulates:

"Thus, the report calls for FCC, serving in its capacity as the federal regulator of interstate communications services, to better define effective competition and then collect meaningful data on the state of competition in the marketplace," the GAO audit concludes.

Perhaps what matters, however, is not what the GAO or FCC thinks about these conclusions, but what Congress, soon to be controlled by the Democratic Party, decides when it returns to Washington, D.C. on January 4th, 2007.

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