Will the PUC Step in to Prevent AT&T Rate Hikes? 

A market can be "free" without being competitive. Welcome to the dilemma facing local telephone regulators.

The state Public Utilities Commission recently took a step back from its "faith-based deregulation" of the communications industry, restoring requirements that AT&T tell callers requesting new service what its basic rates are before marketing service "bundles." It also ordered the carrier to post those basic rates prominently on its web site.

An important question is whether the commission will take the next step — to prevent dramatic increases in those same basic local phone rates next January, as well as further radical increases in phone features, functions, and enhanced services whose prices AT&T has doubled, tripled, and more in the last year and a half despite the supposed restraint of market competition.

The commission has put its faith in the power of such competition to check prices without investigating in detail the nature of that competition. The commission has interpreted the existence of alternatives to AT&T landline phone service — whether cell phones, cable telephony, voice over Internet protocol, or resellers — as decisive evidence that AT&T lacks power to raise prices above a "free market" level.

These regulators declared California's voice-services market "competitive" in 2006, claiming that incumbent telephone companies lacked "market power" despite having nearly 90 percent of landlines and revenues. As a result, they almost totally deregulated the rates of AT&T and its peers.

AT&T also jumped on that decision to free itself from restrictions on its marketing practices imposed in response to its own history of abuse. Appealing to the commission's free-market faith, AT&T argued that this competitive marketplace effectively precluded it from future abusive marketing because any such activity would inevitably — per economic theory — send its customers straight to competitors.

Review of scripts used by company customer-service representatives and monitoring by the commission's consumer advocacy unit — which AT&T tried hard to prevent — highlighted how AT&T workers were confusing their customers. That persuaded the commission to require AT&T to once again offer basic service information up-front.

The next big question is what happens to the relatively low basic rates callers requesting new service will now be informed of. The price cap placed on them in 2006 expires in January. Consideration has centered on limiting AT&T to gradually raising basic rates, now among the nation's lowest (at about $11 monthly for flat service) to $19 over the next three years before more complete deregulation.

The longer-term outlook can be gauged by what has happened to AT&T's other deregulated rates. Without any relationship to the modest costs of providing service, the carrier has radically raised prices for enhanced features and functions from already profitable levels.

For example, from January 2007 to January 2008, AT&T raised residential rates for non-published numbers in California by 348 to 614 percent; directory assistance by 226 per cent; anonymous call rejection, 163 percent; call forwarding, 118 percent; distinctive ring, 103 percent; inside wire protection, 101 percent; call waiting, speed, three-way, and repeat dialing, 86 percent; caller ID, 62 percent; and local toll from 41 to 218 percent varying by time, day, and distance. These rates have in many cases been raised several successive times. There is no reason to think the increases are anywhere near over.

While communications services are no longer a monopoly, that does not mean they constitute a fully free market. Research firms that analyze the industry typically call today's home phone market a duopoly between telephone and cable companies. Profound differences in provider size, capabilities, reputation, and customer familiarity and access, along with fundamental differences in sound quality, reliability, availability, and coverage between multiple varied technologies, make competition in this market highly skewed and imperfect. Incumbents like AT&T continue to retain an overwhelming share of the landline market.

The mere existence of competition has not altered the dominance of incumbent telephone companies like AT&T, which can still largely raise prices and treat customers as they wish in the absence of regulatory intervention. Wireless, for the most prominent example, is a service with very different characteristics and higher prices, so it exerts little competitive restraint on AT&T's landline rates.

One can hope the commission's recent decision to better inform customers marks the start of a shift toward greater realism in California communications regulation as the scales of "free-market fundamentalism" begin to fall from the commission's eyes.

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