Creating Clear Signals on Telecom

The Michigan statute governing telecommunications expires this year — and none too soon. As recent events demonstrate, state regulators have interpreted the law to maximize their power with remarkable impunity. As lawmakers revamp the statute in coming months, priority must be given to enacting strict restraints on this regulatory abuse. Otherwise, investors will continue to take their business beyond Michigan’s borders.

As currently written, the Michigan Telecommunications Act authorizes the state Public Service Commission (PSC) to micromanage many aspects of telecom services, including rates, marketing and network access. As if emboldened by this considerable authority, the commission repeatedly has overstepped the limits of the law.

Regulatory abuse carries costly consequences for Michigan consumers and the state’s economy. Telecom firms are understandably reluctant to invest in markets where regulators wield power arbitrarily. Indeed, the commission’s tendency toward excess has marked Michigan as a difficult place to do business.

The most recent example of such excess occurred on Jan. 6, 2005, when Commissioners J. Peter Lark, Robert Nelson and Laura Chappelle declined to deregulate local telephone rates as prescribed by state law. Rather than employ the test for deregulation detailed in the Telecommunications Act, the commission instead based its refusal on little more than hearsay and conjecture.

Michigan’s telecommunications statute specifies the criteria by which a telecom service is to be declared “competitive,” and thus free from rate regulation. With uncommon specificity, the law lists the number and type of telecom service providers that must operate in a given market before price controls can be lifted.

Confident that market conditions satisfied this statutory test, officials of SBC Michigan petitioned the Public Service Commission in October 2004 to declare portions of Wayne, Oakland, Ingham and Kent counties as competitive markets in which basic rate regulation should be eased. Despite all evidence that the markets are indeed competitive, the commission ignored its statutory obligation to declare them so.

In its ruling, the commission only agreed to ease price controls on business lines in portions of Wayne and Oakland counties, and only for a one-year “trial” period. Telecom providers will be required to submit quarterly reports on market share and other proprietary data to monitor the effects of market pricing. The commission also ordered a hearing to determine whether to reclassify service as competitive in the other areas included in the petition. This despite the fact that competition is thriving there as well.

Nothing in the Telecommunications Act authorizes the commission to limit rate deregulation for a “trial” period, nor to require service providers to file quarterly reports on their business performance. In reality, counting wire-lines as demanded by the commission would provide a hopelessly skewed view of a market in which wireless, cable and broadband services are expanding rapidly. Nor did the Legislature empower the PSC to speculate about future market conditions in deciding whether to classify a service as competitive. Yet that is precisely what the commission has done.

It would be a mistake to regard the commission’s actions as mere caution on behalf of the public interest. The PSC has repeatedly ignored opportunities to loosen its regulatory grip. Last fall, for example, the commission refused to suspend regulatory proceedings on network access judged to be unlawful by the U.S. Court of Appeals in Washington, D.C. Meanwhile, Commissioner Nelson implicitly threatened to bar SBC from the long-distance market if the company dared to deviate from price controls overturned by the federal court — an action for which he holds no lawful authority.

Pervasive regulation has grossly distorted Michigan’s telecom market and thus ill-serves consumers. Most regulated rates bear little relation to the actual costs of providing services, or to basic economic principles of supply and demand. Service providers thus are forced to offset below-cost rates by increasing the prices of unregulated products and services.

Moreover, price controls actually impede competition by limiting the opportunities for new market entrants, and the flexibility of existing firms. For example, SBC has waited more than two-and-a-half years for the commission to finalize a rate change. By keeping rates below cost, regulators leave little room for rivals to compete on price.

Gov. Jennifer Granholm repeatedly has stressed the need to attract investment to Michigan. Trailing in job creation and economic growth, the state cannot afford its reputation for regulatory overkill. In revising Michigan’s telecom statute, lawmakers have a responsibility to rein in the commission to protect the state’s economic health.

Diane S. Katz is director of science, environment and technology policy with 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.