FCC Cost Misallocation Raises Bills, Undermines Competition, and Widens the Digital Divide

By Mark Cooper, Apr 17, 2019 | Original Press Release here.

Appeals Court Must Stop Billions of Dollars of Illegal Costs Dumped on Local Telephone Customers

Washington, D.C. – Mark Cooper, Director of Research for the Consumer Federation of America, joined a law suit challenging the decision of the Federal Communication Commission¹ to extend the allocation of costs between federal and state jurisdictions that was adopted in 2000 for another six years.

Statement of Dr. Mark Cooper
Director of Research, Consumer Federation of America

The consumer pocketbook impact of the misallocation of costs is huge, totaling $150-$250 billion ($200-$300 per household per year) over the next six years.

By misallocating costs and recovering them from the wrong people – not the cost causers – the allocation that the FCC seeks to freeze for six years, wreaks havoc on consumer pocketbooks with hundreds of billions of dollars of misallocation and over-recovery of costs. In addition, this misguided position:

• Raises local rates, by claiming that local service is unprofitable, which imposes a huge burden on low- and middle-income consumer pocketbooks;
• Facilitates the cross-subsidization of vertically integrated services, which allows the local telephone giants to undermine potential entrants and competitors, diminishing the benefits of competition that all consumer can enjoy; and,
• Hides excess profits in the transfer of wealth from consumers to communications giants.

The most effective first step in dealing with these problems is to cut them off at the source. Without the misallocation and over-recovery of costs, the goals of the Communications Act –

1. Universal service
2. Just and reasonable rates,
3. Increased competition

. . . will be much easier.

Convincing the court that the FCC allocation is illegal will force a more realistic, 21st century separation of costs between the intrastate and interstate jurisdictions. Costs that are shifted into the interstate jurisdiction cannot be recovered in the intrastate jurisdictions, which will trigger a huge scrum between incumbents, competitors and consumers over the resources that are “made available” by the correction of the allocation error in both the federal and state jurisdictions. Predicting how that will come out is difficult, but one thing is certain, it will be more favorable to consumers and competitors than the current frozen rip-off.

The true rate of profitability of local services will be revealed as follows:

• States with continuing regulation of local rates will be forced to lower them to ensure that they are just and reasonable.

• States that have shifted to some form of price cap will have to adjust the caps in recognition of the dramatic reduction in costs.

• States that have deregulated will be under immense pressure to lower rates so that consumers enjoy at least part of the benefit of correcting the misallocation error.

At the federal level, the FCC will be confronted with the problem that the companies will want to raise rates to cover the costs that have been illegally charged to the intrastate jurisdiction. In the proceeding that follows the reallocation of costs, the FCC will be forced to comply with the 1996 Act with the following results:

• The FCC will be unable to “justify” rates with astronomical levels of profit.

• It will have to be attentive to prevent cross-subsidization of more competitive services that is undermined by the abuse of market power by vertically integrated network owners.

• It will have to acknowledge the negative impact that abusive pricing has had on universal service.

For several reasons, this is a key moment to act:

1. The FCC had begun to move in the right direction, which the Trump Administration’s FCC has reversed.

2. A range of ongoing proceedings that would make it much more difficult to deal with these issues are pending and the cost allocation question could stop them in their tracks.

3. We are about to incur another round of network upgrades to densified 4G and 5G, which will rival, or exceed the total of the past misallocations and make the abuse impossible to correct.

The individuals bringing the case, the IRREGULATORS, with whom I have been working for several years, represent a variety of viewpoints and have filed comments in this and other related proceedings at the FCC, as has the Consumer Federation of America. As this case moves forward, CFA will participate to the fullest extent possible under the Communications and Administrative Procedures Act.