NCPA - National Center for Policy Analysis

Misguided Regulations May Have Harmed Phone Companies

September 27, 2002

Did federal regulators help put start up phone companies on the road to bankruptcy with misguided policies? Several recent studies say they did.

One of these studies, by the Progress and Freedom Foundation, concludes that the Federal Communications Commission may have pushed for too much investment in local markets. Congress passed the Telecommunications Act of 1996 to spur competition in local phone markets.

But when PFF analyzed the regulatory filings of 24 competitive local exchanges carriers (CLECs) from 1996 to 2001, researchers found:

  • Market exuberance and the FCC's 1997 decision to require low phone companies to rent phone lines and switches to rivals encouraged too many startups.
  • At least $30 billion was invested in local phone markets by 1999, and apparently that was too much.
  • Of the 300 CLECs that existed 3 years ago, only 70 remained as of mid-2002, according to the Association for Local Telecommunications Services.

New local players, the FCC said, couldn't afford to build networks similar to the Bells, at least in the near term. Local Bells sued, charging the prices were unfairly low, but the U.S. Supreme Court upheld the FCC's pricing method earlier this year.

But critics say the FCC rules led the CLECs to expand too fast via leased lines, rather than encouraging start-ups to build their own networks.

Source: Reinhardt Krause, "'Market Exuberance' One Factor In Failure Of Telecom Start-Ups," Investor's Business Daily, September 27, 2002.

 

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