The Monopolist's Lament

A state watchdog gets suckered again.

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SBC Ohio, formerly Ameritech, doesn't engender much trust. Three years ago, it was bitch-slapped in an independent audit for repeatedly lying. Among other sins, the company tried to blame its service problems on earthquakes and blizzards in the summer.

The audit was ordered by the Public Utilities Commission of Ohio, which had received so many complaints about the company that it began charging Ameritech for the extra work. From August 1999 to May 2001, customers complained of bad repair service more than a million times.

So skepticism would have seemed the order of the day when SBC asked the PUCO for an emergency hike in wholesale rates -- the price charged to competitors who use its phone lines. SBC claims Ohio's wholesale rates are among the lowest in the country and that it loses $14 per month on every line it leases.

Without a rate increase, SBC won't have cash to invest in the infrastructure that keeps Ohio's communications network humming, says spokeswoman Caryn Cadisky. "Whatever company you are, if you are selling a product below your cost to provide it, it can't go on."

But its cries of poverty aren't upheld by financial statements. On Forbes's list of the world's most profitable companies, SBC ranks 24th, with $5.97 billion in profits last year.

The PUCO, however, didn't seem interested in the apparent contradiction. Showing the discretion of an old lady offered a free Florida vacation, it spent less than a week deliberating and didn't bother to hold public hearings or evaluate evidence from SBC's competitors. Instead, the commission took the company's word and jacked wholesale rates by an average of $2.30 per phone line.

"There's not adequate evidence in the record to support what the commission did," says Ryan Lippe, spokesman for the Ohio Consumers' Counsel. "You should never take a company's word for its costs, unless they demonstrate it through the appropriate paperwork and accounting."

For years, SBC enjoyed a monopoly over local phone service. Then came deregulation. SBC agreed to open local markets to competitors -- who would use the monopoly's phone lines -- in exchange for being allowed to expand into other lucrative areas, such as long-distance and internet service.

The deal required SBC to lease its lines to competitors at a fair rate. But what constitutes "fair" is a matter of debate.

SBC, quite naturally, wants that price to be as high as possible. Which is where the PUCO comes in. Its mission is to help foster competition -- and keep SBC from having its cake and eating it too. "The competitors are the one force [consumers] have in order to make the monopolists behave," says Hugh Donahue, an advisor to telecommunications companies, including AT&T, that opposed the rate hike. "If they're eliminated because the wholesale rates are too high, there's no incentive for SBC to upgrade."

SBC wasn't the best steward of the local network before it started leasing lines. The same audit that found the company inventing bizarre weather patterns also noted that SBC allowed its infrastructure to deteriorate.

Rather than keeping a close eye on the company, the PUCO now seems to be carrying SBC's water. After Competition Ohio, a coalition of 1,300 consumers and businesses -- including SBC competitors -- began airing commercials asking consumers to complain to the commission, the PUCO went on the attack. It adopted SBC's line that Competition Ohio was a front for competitors and released a fact sheet attacking the group.

"Competition Ohio is bringing consumers into this fight to protect the profit margins of the companies they represent," says PUCO spokeswoman Shana Gerber. "We believe, quite frankly, that they're more or less scaring consumers that they're going to see higher phone bills."

It's an odd position for a supposedly neutral watchdog. "It's like you went into court and, before your case is heard, the judge looks at you and says, 'I don't like you,'" says Bill Schuck, Competition Ohio's spokesman.

The PUCO also asserts that its rate hike won't have an impact on consumers. "This is a wholesale issue," says Gerber. "This is an issue between SBC and the competitors, like AT&T, MCI, and others. This is not something that consumers are directly involved in."

It would seem a sensible argument -- if it didn't violate every law of economics. By the same logic, the price OPEC sets for a barrel of oil has little impact on drivers, because they don't buy oil by the barrel.

"As a result of SBC's unwarranted . . . 16 percent increase in the wholesale rate they charge competitors, AT&T unfortunately is having to take the action of dropping two of our very popular basic-local-service calling plans and raising rates for those existing customers in those plans," says Mike Pruyn, an AT&T spokesman.

"That's their decision," Gerber responds. "We view that as strictly their business decision to increase rates."

Not coincidentally, SBC also raised rates on nearly 30 calling plans -- just as the ink was drying on the PUCO's ruling. This, too, was merely a business decision, according to Gerber. But by allowing SBC to increase its competitors' overhead by $2.30 per line, the PUCO essentially gave SBC a hike-up-your-rates-free card, since its competitors would be forced to raise theirs as well.

"They're two completely separate issues," protests SBC's Cadisky. "We notified customers 30 days before those rates were made effective. We had no way of knowing in advance when the commission would make a decision on our wholesale rates."

Unlike the retail-price hike, the increase on wholesale rates is temporary -- for now. A permanent decision is expected in November. "The commission is doing this with a very watchful and vigilant eye," Gerber maintains.

In the meantime, the PUCO might be wise to direct a vigilant eye toward the audit that revealed how SBC does business.

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