The future of investment in business data services is at stake in the Federal Communications Commission’s investigation into the role of rate regulation in the business broadband market. These services are vitally important to the well-being of small and large businesses, particularly in rural areas where high-speed connections to the rest of the world are necessary for everything from agribusiness and e-commerce to mobile phone service. And the stakes are high: Getting the regulation wrong could cost the economy billions of dollars in investment.
Companies on both sides of the debate have weighed in with their views on how the proposed regulation should be drafted. Verizon has joined a lobbying group for competitive providers (Incompas) to hand the FCC a ready-made “solution.” The heart of the Verizon-Incompas proposal is to tighten and expand price caps on business data services offered by incumbent local exchange carriers (ILECs) and others. For the first time, next-generation business broadband services such as Ethernet would also be regulated. The mandated price discounts are arbitrary and large, amounting to about 21 percent after two years.
Simply put, this proposed solution is bad for the market and the economy, and the FCC should not adopt it.
The regulations could destroy a huge amount of the ILECs’ return on their investments in network infrastructure, particularly in rural areas. I find that an estimated $3.8 billion of ILEC revenue would be destroyed by the new price regulation. These losses do not even include potential revenue lost by competitive providers, even though all providers are potentially subject to the regulations, so the losses could be even greater.
James E. Prieger is a professor of economics and public policy at Pepperdine University School of Public Policy.