By Joe Mettner
In the next few weeks, the Wisconsin Public Service Commission (PSC)
will revisit the economics of how SBC Wisconsin’s telecommunications
network will be shared with competitors.
Lessons have been learned since the last PSC network element pricing
case. The lessons suggest that taking real-world data more into account
will produce pricing that more accurately reflects SBC’s costs. Such
an approach is required by law and will – and should — ultimately
require wholesale customers to pay more of the cost of using that
network.
This current case allows the PSC a new and more focused look at certain
parts of its 2002 network element pricing decision. That decision, made
two years ago, was based on 5-year-old data and does not reflect
current costs, cost models or regulatory thinking.
Network elements are the pieces of SBC’s Wisconsin’s network of wires
and central office equipment which, under federal law, are priced
individually or in combined packages and used by competing local
exchange companies to provide service to their customers. The use of
these SBC network pieces by other providers has offered Wisconsin
telephone customers the choices of competitive landline alternatives.
Consumers can also choose from other types of technologies, including
wireless, cable telephony and VoiP.
The most important parts of the commission’s pending pricing decisions
will concern how and over what time periods SBC Wisconsin’s network
investments are to be recovered, and what SBC Wisconsin’s appropriate
costs of capital to support that investment should be. One central
theme to these disputes will be the reasonableness of relying upon
current accounting information and network use data in setting new
prices, as opposed to using hypothetical, and sometimes fantastic,
approximations of these real-world business concerns.
As a former PSC member, I cast one vote during the last network element
pricing decision in 2002. That particular case was the most complex,
and data intensive, of any decided during my six years as a state
regulator, with a factual record numbering in the thousands of pages.
Included among the more speculative determinations in the final 2002
order were: (1) how much of the excess capacity prudently built into
SBC Wisconsin’s network should be paid for by competitors, (2) over how
many years should a futuristic telephone network provider be permitted
to recover its investments in cable, fiber and switches, and (3) what
is a reasonable estimate of the network provider’s cost of the capital
used to build the network?
Some lessons have been learned in the two years since the commission’s
last network pricing proceeding. One, in particular, is that the
greater distance regulators depart from real-world accounting data in
setting prices, the greater the risk that those prices will not
accurately provide for cost recovery to service providers. If SBC
Wisconsin is properly considered to depreciate, that is, recover its
network asset costs, using the same number of years over which the rest
of the communications world, including SBC’s competitors, write off
their own assets, a critical miscalculation from the last network
element case in Wisconsin may be corrected. The same reasoning should
apply in imputing the capital costs of SBC Wisconsin. There is no
earthly reason why a network provider that has lost over 30 percent of
its subscribers to competition should be considered on a similar plane
of risk as monopoly electric utilities. The real risks of competition
faced by SBC’s investors must be met with a commensurate return on
their investment.
Another lesson learned is that competitors should pay for the actual
customer growth capacity built into SBC’s network, just as SBC’s own
retail customers do. In the last proceeding, the commission posited a
futuristic world in which much less spare capacity was assumed to be
built into SBC’s network than any existing provider currently
experiences or plans. This failure to accurately account for actual
customer growth capacity allows competitors to ride much more lightly
on the scale of SBC’s network, permitting them to enjoy its reliable
service, but not at the costs of its actual design and operation.
Federal law requires SBC to be adequately compensated for the costs of
providing wholesale elements to its competitive providers. The law does
not contemplate or allow below-cost subsidies of competitors. Along
with investors, labor unions and business groups, I look forward to
watching the Public Service Commission’s debate on these critical
issues, knowing the complex challenge that the data will present. I
believe that a decision founded upon real accounting data will bring
pricing up to actual costs and build a better future for customers and
investors alike.
–Mettner is the founder and principal of Found Lake Consulting, and
served on the Public Service Commission from 1996-2003. SBC Wisconsin
is a client of Found Lake Consulting.
