Potemkin Competition

Editor

The Wall Street Journal

200 Liberty St.

New York, NY 10281

Dear Sir:

In the light of the California electricity catastrophe, we are surprised by Michael Armstrong’s continued support of forced structural separation of Bell company wholesale and retail services (Break Up the Baby Bells!, March 28, 2001). As was discovered in California, whenever regulators forcibly dismantle an integrated network enterprise, they ignore the law of unintended consequences at their own peril.

Perhaps worse, despite Mr. Armstrong’s pro-competition rhetoric, his policy prescriptions would hinder, rather than enhance, true competition in the telecommunications industry. Sure, divestiture and bigger wholesale discounts would make it easier for other firms to lease parts of the Bell networks. The resulting competition, however, would be of a Potemkin kind, ultimately based on regulatory fiat, not market forces. Efforts to build true facility-based alternatives to the Bells – based on cable TV systems, wireless, or other promising technologies — would be undercut.

Armstrong does hit on a real problem, however, when he references low residential rates. Residential rates are typically kept artificially low through cross-subsidies, resulting in a barrier to competition. The answer, however, is not to mandate equally artificial wholesale rates. Instead, retail rates should be rebalanced to make economic sense. That’s a politically painful step, but one that may be necessary to bring the benefits of real competition to consumers.

James L. Gattuso

Vice President for Policy

Competitive Enterprise Institute

www.cei.org

(202) 331-1010

Kent Lassman

Director of Technology & Communications Policy

Citizens for a Sound Economy Foundation

(202) 783-3870

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