It’s Time for Real Telecom Competition

January 8, 2003

Senator John McCain

SR-241 Russell Senate Office Building

Washington, DC 20510-0303

Dear Senator McCain:

In a few days you will hear testimony from the entire Federal Communications Commission. This historic hearing on January 14 will set the stage for policy changes in 2003. There are many different and opposing views on telecommunications policy and no doubt you will hear recommendations from numerous interested third parties. Citizens for a Sound Economy has been an interested third party on telecommunications policy since 1989. From the beginning we have advocated a deregulatory agenda that respects property rights, encourages investment, and understands that innovation and competition always benefit consumers.

The current rules governing the telecommunications sector are unsustainable. In a misguided effort to jump-start competition the 1996 Telecommunications Act inadvertently degraded the property rights of incumbent carriers by forcing these telephone companies to share elements of the network at regulated wholesale rates. New entrants to the telecommunications sector infrequently invested in new network construction and opted to rent facilities in order to reach customers. The ultimate effect of this was to stifle investment into last mile connections at the residential level.

Since the height of the Internet bubble, the U.S. telecommunications sector has shed $2 trillion in market capitalization, 500,000 jobs, and nearly 70 companies. Many telecom firms that have survived will not for long, as the typical company faces annual interest payments equal to its revenue and investors unwilling to provide another dime.

An overly simple analogy places a finer point on the problem. Virtually no one would make the required investment to build a new home if, upon completion, that person was compelled by government regulators to rent out rooms at set wholesale rates. The market for new housing would slow to a standstill.

Real competition in the telecommunications sector will require that any company seeking to provide local phone service must own its own network, the physical lines and switches over which information travels. The risks associated with investment and new business lines cannot be privatized if any gain associated with risk taken is subsequently socialized. Not only is this bad policy on its face, but it is anti-American and anti-capitalist.

Reports are encouraging that the FCC is seriously considering a policy shift in favor of renewed respect for the private property rights normally associated with networks. Such a move would reawaken the telecommunications giants that are capable of attracting the capital necessary to build-out broadband to many American homes. CSE believes that this committee should support the efforts of Chairman Powell and other commissioners as they seek to fundamentally alter the dynamics for investment in the telecommunications sector and restore its vigorous growth.

Thank you,

Paul Beckner

President and CEO

CC: Chairman Michael Powell, Federal Communications Commission