The Michigan Legislature Should Finish Deregulating Telecom

(The following piece was originally published in the Sept. 1 Detroit Free Press.)

Michigan has had little to celebrate lately, given the state’s stubborn economic slump. But a recent breakthrough decision by the state Public Service Commission to end price controls on basic telephone service in 30 cities makes Michigan a leader among states in fostering telecommunications investment and innovation. The Michigan Legislature must now build on this success.

Rate regulation is a relic of the days when "Ma Bell" reigned as a government-sanctioned monopoly. Today, no less than 63 companies provide basic telephone service to 36 percent of the customers in the 30-city region, which covers most of metropolitan Detroit and parts of Washtenaw County, Flint and Grand Rapids. Competition also is fierce among wireless and Internet-based telephone services.

Consumers need not worry that their rates will skyrocket. The unparalleled choice of telecom options will impose rate discipline far more effectively than the state government bureaucracy, which has often inhibited firms from responding quickly to consumer preferences. Freed from price controls, service providers will be able now to offer a range of flexibly priced service packages as demand dictates. Innovation and investment are sure to follow.

The Public Service Commission has taken its fair share of lumps in recent years for routinely indulging in regulatory excess. But in this instance, Commission Chairman Peter Lark and newcomer Monica Martinez have benefited the public and demonstrated true leadership by providing the votes necessary to end the commission’s regulatory control.

Significant as this new rate deregulation is, however, it is limited to 30 cities and does not address the myriad regulations that frustrate broadband deployment and other telecom advances. It is now up to the Michigan Legislature to institute reforms that would enhance all telecom services statewide.

The sunset this year of the Michigan Telecommunications Act provides lawmakers the opportunity to remake the state as a model for technology investment. Michigan simply cannot afford the cautious approach advocated by those with a stake in the status quo. Indeed, researchers at the Massachusetts Institute of Technology recently concluded that incremental reform increases the likelihood of policy missteps.

"Quick and complete deregulation may not be risk free," said MIT professor Charles Fine, "but our research in other industries indicates it is preferable to stretching deregulation out over many years through a piecemeal and incremental process if vigorous competition already exists."

Legislation introduced by Michigan Rep. Leon Drolet and Sen. Shirley Johnson would, if enacted, dramatically improve Michigan’s regulatory environment. Both bills call for eliminating the authority of the Public Service Commission to control the rates and terms of telecommunications services. The commission would retain authority to regulate public safety services, such as "911" access, as well as consumer protection against fraud.

This is precisely the direction taken recently by the Federal Communications Commission in recognition of the robust competition in the telecom market nationwide. In a dramatic policy reversal, for example, the federal commission earlier this year largely eliminated the "forced access" requirements that compelled traditional wireline phone companies to share their local calling networks with rivals at below-cost rates. Subsequently, the commission likewise exempted both cable and wireline companies from having to share their broadband networks with internet service providers who lack lines and other transmission infrastructure of their own.

Congress conceived forced access as necessary to jumpstart competition in local calling services. Lawmakers assumed that once new entrants gained market share, they would build new facilities to compete against incumbent wireline networks. But as documented in a 2003 study by the Mackinac Center for Public Policy, most competitors in Michigan shunned investment in independent facilities, preferring instead simply to resell the network services they obtained at a discount, compliments of regulatory fiat. This outcome is precisely the opposite of what Congress intended. And it is a significant factor impeding telecom investment and economic growth.

By lifting price controls in Southeast Michigan, the state Public Service Commission has recognized the supremacy of the market in maximizing the availability and affordability of telecom services. Lawmakers would do well to follow suit and heed the advice of former U.S. House Majority Leader Dick Armey, who spoke on telecom issues at a May luncheon in Lansing.

"As you review telecommunications law in Michigan," Mr. Armey said, "you have the opportunity to bring your legal structure up to the promise of the electronic revolution in the 20th century. But if you’re going to have the same telecommunications regulations that you had after World War II, you are not going to be competitive with the rest of the world."

Just so. It’s time for the state Legislature to free Michigan’s telecom market and open the state to innovation, investment and job growth.

Diane S. Katz is director of science, environment and technology policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.