Wednesday, June 15, 2005

"PSC rules for fiber plan expected" or (Un)Fair Competition Explained

This story takes a boring background issue and makes it...well, if not exactly interesting, informative anyway. The question at hand has to do with the Public Service Commission's being charged by BellSouth's "Local Government [un]Fair Competition Act" to develop and, with the Legislative auditor, enforce a series of rules which (in fact) force unfair restrictions on LUS that the private providers mostly don't have to follow.

What you really need to know as background is that the central purpose of BellSouth's law is to force higher rates on LUS customers. Without recognizing this unifying theme it is very difficult to recognize the pattern that ties together BellSouth and Cox's behavior in regard to this matter. The incumbents want you to pay more so that, should Lafayette vote to support building its own fiber-optic utility, the consumer will have to pay more to LUS than it would without the law. The point? To make sure that the state will step in to help to lessen the pain of competition. That's the point.

Issue: "Cross-subsidization"

From the article:
One set of restrictions are rules to be passed by the PSC intended to prohibit "cross-subsidization," or to keep LUS' overall utilities operations of water, electricity and sewer from propping up the new communications division.
"Cross subsidization" is where LUS is forbidden to use, as much as BellSouth and Cox can manage, the full value of its assets and the flexibility of using its assets across divisions to bring down its costs and hence the rate it must charge ratepayers. (You)

You'll note that nobody objects when private concerns "cross-subsidize"--even when it is to the deep disadvantage of their current customers. BellSouth, for instance, chose to use its profits from your telephone service to buy its way into the emerging cell phone business, and used its deep pockets to stay in the game when the little guys got forced out or bought up. The fortune they used there could have been used to build up the network that its customers were actually using. Had they done so we'd probably all have fiber to the home now. That is certainly what the FCC originally intended when it priviledged fiber builds in its regulations. But the Bells chose to stall there and spend elsewhere. That decision puts them at a competitive disadvantage vis-a-vis a potential LUS telecom utility. How to fix that problem? Get the state of Louisiana to give you competitive advantage by forbidding LUS from doing exactly what you did that left you at a disadvantage. That's more than a little ironic.

"Fair competition?" It's not "fair competition;" it's unfair advantage that BellSouth and Cox desire. And it is most unfair to you, the consumer who they intend to pay higher bills to subsidize their decisions to pursue business strategies that neglected their basic business in favor of corporate buyouts and other lines of business products.

Issue: Regulation

From the article:
The PSC would be responsible for enforcing those rules that deal with telephone service. Since the PSC does not regulate cable and Internet services, the state legislative auditor would be responsible for enforcing that portion of the rules.
What's with that? Cable and internet regulations are written by the PSC and enforced by the legislative auditor? If you think that odd, it is. Here's the trick: cable and internet are not regulated by the PSC or the state at all. So when BellSouth and Cox decided to place regulations on LUS (and not on themselves--oh, no!) they had to find someone to lean on to enforce them. The legislative auditor is an arm of the legislator so it has to do as the legislature orders. But, as you might infer from the article, they don't care for being used that way.

So the (un) fair competition act forces acres of red tape and cost onto LUS via new regimes of regulation that do not apply to the private providers who fought for the law. Will this cost the consumers of Lafayette money? You betcha. That, my friend, is the point.

Issue: "Unclear Regulation"

Not convinced by my exposition on regulation that the regulatory regime is organized to cost you money? --After all, you know that regulation usually protects you and the PSC normally holds your rates down. Normally, you'd be right. (And you gotta know that the PSC really hates upholding regulations that increase rates. That's not the way they think about things.) Feast your eyes on this little bit if you want to see how the incumbents plan to use the regulatory regime the devised to raise your costs:

Last month, BellSouth Louisiana Vice President Tommy Williams said a portion of last year's law allowing local governments to "pledg(e) the resources" of its other utilities to obtain the best terms on bonds for communications is unclear.

Williams said last month that BellSouth thinks the law means LUS can "pledge" overall utilities resources, but not necessarily use that revenue to actually make payments.

St. Blanc [PSC Executive Secretary] said Tuesday that portion of the law is "pretty doggone clear" that the law would allow LUS to make those payments using the overall revenue of the utilities, as long as the communications division reimburses the overall utilities system at market interest.

Williams said last month if the PSC doesn't make that issue clear, it could end up in court.

St. Blanc is right. The law even provides details about how this transfer is to take place. The intent of the framers is clear. It is clear nonsense to think that LUS could "pledge" but then not use its assets. What else could "pledge" mean? What the framers clearly intended (and what the incumbents agreed to in a grueling series of rewrites) to do was to enable LUS to use its excellent bond rating--a rating earned through its excellent record as an unusually strong utility company--to purchase low-cost, long term money on the bond market. The private companies use their history, size, and market dominance to a similar end on a regular basis.

But, they've clearly now decided, even though they agreed to allow this last summer, the very existence of the regulatory scheme gives them the opportunity to sue. The suit might prevent the bonds from being sold at all, or so scare bond issuers that a sale might be much more expensive than it would otherwise be. That would be good for BellSouth and Cox for the same reason that all the above strategies are good for the incumbents (and bad for you): they would force the rates LUS offered up and allow them to compete with less pain.

Your friend in the digital age? Hardly.

Issue: Imputed Taxes

Now something that might appear fair is the issue of imputed taxes. The (un)fair competition act required that the rates that LUS charged would have to be raised enough higher than they would otherwise be to factor in an amount for "imputed" taxes. The idea here is that LUS doesn't have to pay fees or taxes to the federal, state, or municipal levels and that gives them a price advantage. It would be a fair complaint, of course, it it didn't ignore the fact the city, through in lieu of taxes, has already erased that advantage. Lafayette got in lieu of taxes taken into account so this little clause has less effect than the Cox and BellSouth people originally had hoped. But their intent to use state law to force unnecessary costs on local rate payers who are not their customers is nonetheless clear. Kevin Blanchard's Advocate story is excrutiatingly clear:

Last year's law, for example, requires LUS and other local governments, when setting their rates for consumers, to "impute" federal, state and local taxes paid by other communications providers.

Without that law, LUS, as a government entity, would not have to pay taxes and pass them on to ratepayers the way private companies do.

The artificially increased rates have to include taxes, permit fees, franchise fees and pole attachment fees, private companies pay.

I've noted that this has less effect than the incumbents might have hoped due to the fact that LUS would already being paying back more to the local community than any of its competition will at any level. That is the way it will be--if things go well.

What this actually ends up doing is to make it a little easier for incumbents to engage in predatory pricing. It puts a floor --a very litigious floor-- below which LUS will not be allowed to go. The corporations are trying to both unfairly limit the resources available to just the telecom division of LUS (when the opponents can use the all of the vast resources of their companies) and to limit, by state law not the competitive market place, the amount of competition that LUS can offer by artificially installing "price controls" on LUS (but not, of course, on either BellSouth or Cox). So be aware that, even should prices begin to drop some, the reason they can't drop even further is due to a plan hatched by BellSouth last summer.

You might sense that I am outraged. I am. I suggest that you should be too. We're already seeing a raft of sweetness and light ads from BellSouth and Cox suggesting that they're your neighbor and your friend "in the digital age." But no amount of advertising will change the way they've setup all the citizens of Lafayette up to pay higher prices by using their influence on the state level. What matters is not what they say but what they do. The incumbents actions speak louder than words.

This is not the way that friends and neighbors act. At least not people from around here. You might want to let yourself feel a little outrage as well. And remember the facts the next time another one of those o-so-friendly ads filled with actors whose accents are not quite right show up on you cable channel. It's not your interest they have at heart.

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Regular readers will have noticed that I am pretty grumpy about what I consider poor reporting. I've been around local newspapering for much of my life and have a lot of sympathy and respect for the folks who do the necessary nitty gritty at the local level. By the same token, that experience also leads me to believe that good local reporting is probably more important to the proper running of the American system than the more glamorous national stuff. So I think it important enough to critique when it falls into mindless sensationalism or simplistic he said/she said formulas.

I value the educational and analytical aspects of reporting. I know it probably doesn't sell as many papers, and certainly it seldom gets the buzz that stories that "pump" the news do but it's of deeper and more lasting value. Perhaps this was underlined during my teaching years when I noticed that some stories, interesting as they might appear, lead to misconceptions about subject and others actually taught...For my money teaching is what justifies the institution--not selling underwear or cars.

This article educates and informs. I am mightily impressed. (Thank you for your patience)
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GumboFilé said...

unintended consequenses

John said...

Unintended consequences are always with us. (Though being aware that this is so is the best defense.)

But what concerns me most in this post are the consequences which are clearly intended.

Anonymous said...

John: that's a lot to read. However, what does it all mean? Lets assume all incumbant providers, all teleco's, all those sock puppets who oppose LUS plan must be evil and they will do whatever they will do. Are you saying that the PSC will restrict LUS Utilties from putting up money to support Communications and set the mininum rate LUS will be allowed to charge its customers. That's what I think I read. Lets say thats bad. Now what? All that being said, how will it effect the LUS FTTH buisness plan, its ablity to sell 20% cheaper then bell and cox and its ability to pay off the bonds?

John said...

Tim Supple,

First no straw men. I don't assume that all who oppose the LUS plan are evil and I've never said so.

Next, It is isn't the PSC that will restrict LUS Utilities from supporting the communications division--it is the (un)fair competition act that BellSouth and Cox put through the legislature. The PSC will have no choice in the matter. (Though they can do a poor or good job of implementing that firewall.)

Ditto for the minimum rate.

Indeed, let us do say that our legislature allowing huge out-of-state megacorps write state law to deprive local towns of the right to serve their citizens as their citizens see fit is "bad." Let's further affirm that failing to outlaw such service directly that putting in a series of constrants whose obvious purpose is to put the local challenger at a disadvantage to the outside incumbent is "bad."

About the 20%: I hope you are not being deliberately obscure here. I know you've read the feasibility study and I know you were at the town hall meeting where the issue was raised by a citizen. But to make it explicit: the 20% is only off the current, package rates. Or actually, the October rates. Terry Huval said so again last night, has said so every time it is asked, and this is laid out in writing in the feasibility study.

So LUS' business plan does not now and never has involved trying to stay 20% below Cox and BellSouth. It has involved driving the package price down 20% immmediately (and, if the people are at all rational, getting credit for that from the citizenry). After that the promise has been to stay competitive at every price tier and to offer more at every tier. More extras on the phone, more speed (easy), and better video packages. That, in combination with the home town advantage and trust factor, is what the feasibility study thinks will drive adoption. They've been clear. It makes sense. Opponents shouldn't imply that LUS ever said that the first 20% would ever be extended indefinitely as a way of casting unfair doubt on the business sophistication of LUS and its published business plan.

LUS has always planned on a combo of competive pricing tiers, richer tiers at each level, better & local service, and loyalty to a local, respected institution. It's a sensible plan that sounds like a winner to me. If it were a local business instead of LUS everyone would agree that such a conservative business plan makes sense.

That's a real response to your question, I think.

Now a question for you based on the main point of the post, a point you avoid: Do you think a law like this municipal fair competition act; a law whose main practical effect is to prop up prices for the incumbent providers is fair or unfair?

Anonymous said...

No, I don't think it fair. Nor do I think it good policy. Nor do I think it fair for government to use taxpayers money to compete with the private sector, nor do I think it good policy. I believe that government should pass laws and make policy which encourages competition in a free market. I believe that subsidizing one buisness over another or one consumer over another is unfair and bad policy.

I believe that no law or policy can be fair, just or moral, if it does not treat everyone the same.