The Special Problem of Special Access

As digital technology spreads through society, the communications sector and the internet have become the core of our digital economy. As many of the activities that once took place in physical space now take place in cyberspace, consumers—perhaps unknowingly—depend more than ever on the underlying communications infrastructure to support those activities. Substituting digital communications for physical activity has lowered transaction costs and increased economic efficiency, but these services are not free.

Communication networks have real costs for the businesses that use them as intermediate “transport” inputs to produce and deliver their output – and those costs don’t disappear. They are recovered from consumers in the prices they pay for the goods and services they buy. Nowhere is this more apparent, and more problematic, than in the special case of special access.

Special access services are vital for wireless communications and a wide range of businesses and public agencies including Internet service providers, area networks with widespread outlets (like ATMs), hospitals, schools, libraries, and public safety offices. They need secure, dedicated high-speed, high-capacity wireline connections to function.

Special access, a regulatory term for these connections, was among the first telecommunications services deregulated by FCC action after the passage of the landmark Telecommunications Act of 1996. Still in the glow of 1996 Act, the FCC relied on little more than theory and hope that competition would develop. What we now know is that the special access market never became competitive because you can’t deregulate a critical communications input on a promise and have it turn out well.

The FCC, coming off the most comprehensive data collection in its history, now joins the rest of us in the hangover, as that data shows the special access market is not competitive and the broadband business and wireless markets will suffer if they don’t fix it.

Today, we are releasing a report, “The Special Problem of Special Access” that demonstrates that as much as half of the current $40 billion bill for special access is overcharges that result in excess profits for the dominant local phone companies. Draining consumers’ pocketbooks has spillover effects that reduce economic activity, so the total cost of the overcharges for consumers and the economy is well over $150 billion in just the past five years.

The report shows that the abuse of market power in the special access market is particularly troubling on both the supply and demand-side. On the demand side, the costs are hidden from consumers, affecting a wide range of services that are crucial to the functioning digital economy. On the supply-side, deployment of facilities to compete with an incumbent communications network is costly and difficult, and gaining reasonable access to incumbent networks is nearly impossible.

The 1996 Act’s competition policy, of course, was launched from a condition in which monopoly power existed, having been built behind decades of government-granted monopoly that shielded the incumbents from competition and endowed them with vast communications networks whose sunk costs had been paid by captive consumers. This advantage combined with the economic fundamentals of communications networks, like economies of scale and scope, network effects and other barriers to entry give the incumbent local telephone companies an insurmountable advantage. Anticompetitive practices of the dominant telephone companies made matter worse, by locking in special access customers.

Indeed, one of the great ironies in the debate over the abuse of this market power is that until 2007, the FCC collected and published data on the costs and profits of special access services, which consistently showed that competition had failed to restrain pricing abuse. The response of the FCC, who was wrong about the growth of competition, was to stop collecting the data.

Hidden behind a veil of secrecy and embedded in consumers’ bills, the billions of dollars imposed on consumers as the result of this abuse of market power has not received the attention it deserves. However, given the size of the market, the astronomical level of profits and the importance of special access services in the digital economy, the total economic harm is one of the clearest examples of deregulation gone wrong since the passage of the 1996 Act.

But now the FCC has a chance to get it right. It is armed with data that demonstrates the devastating effects of this market power and willingness to correct it. It’s time for them to finish the job.

Dr. Mark Cooper is the Director of Research at the Consumer Federation of America.