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March 21, 2000, Tuesday

SECTION: PREPARED TESTIMONY

LENGTH: 2056 words

HEADLINE: PREPARED TESTIMONY OF JOHN B. HAYES CHARLES RIVER ASSOCIATES, INC.

BEFORE THE HOUSE JUDICIARY COMMITTEE SUBCOMMITTEE ON THE CONSTITUTION

BODY:
Good morning Mr. Chairman and members of the Subcommittee. My name is John Hayes, and I am an economist employed by Charles River Associates where I specialize in economic analyses of antitrust and regulatory issues in the computer and communications industries. I previously worked as an economist with the Antitrust Division of the U.S. Department of Justice. During that time, I also served as an Adjunct Professor of Economics at Georgetown University. A copy of my C.V. and a list of publications are attached. Thank you for the opportunity to discuss, on behalf of the Smart Building Policy Project, the economic issues surrounding the FCC's Competitive Networks rulemaking and building access generally.

The absence of federal rules governing access to multi-tenant buildings permits building owners to deny facilities-based competitive carriers access to space necessary for the provision of facilities- based telecommunications services. Competitive carriers cannot turn to a substitute for these intra-building facilities in order to provide facilities-based service to customers located in multi-tenant buildings. Consequently, if competitive carriers are denied access to multi-tenant buildings, they cannot provide facilities-based service to those customers. Absent a nondiscriminatory access requirement as contemplated by the FCC, building owners possess considerable control over the development of telecommunications competition in their buildings. By controlling the access bottleneck, building owners can influence both the pace and form of local exchange competition. They can control the pace of competition by limiting facilities-based service provision to certain favored providers or by slowing the rollout of competitive networks. And they can control the form of competition by denying access and effectively forcing competitive carriers to provide service through resale or unbundled elements, if they choose to provide service at all. The Telecommunications Act of 1996 contemplates three forms of competitive entry: resale, unbundled network elements, and facilities- based entry. Hence this control over access can impede a central goal of the Act.

From an economic perspective, building owners possess market power over competitive carrier access to multi-tenant buildings. This market power is most easily understood as the power to raise access prices above the cost of providing access. However, the market power also can be expressed in other ways, such as by restricting the number of firms that are allowed access to buildings. Elementary economics teaches us that building owners will undertake such practices if they are profitable. In fact just last week, the Wall Street Journal reported that some building owners intend to provide telecommunications services to tenants themselves while simultaneously restricting access to buildings by competing carriers.

The FCC and Texas PUC records together contain many examples of multi- tenant building owners demanding excessive fees for access to their buildings. These examples demonstrate that some building owners have found it profitable to exercise significant market power.

The exercise of market power by building owners imposes real costs on consumers in the form of higher telecommunications prices and reduced access to advanced telecommunications services. The ability of building owners to restrict access and raise access prices has slowed realization of the goals of the 1996 Telecommunications Act and will continue to impede the development of dynamic local exchange competition if allowed to continue.

A competitive telecommunications market will drive prices toward the cost of providing service. When competition is restricted or costs are increased by artificial barriers to entry, those price reductions that predictably result from competition are reduced or eliminated altogether. Experts agree that there is considerable scope for price reductions in local telecommunications service. Teligent, for example, routinely prices its service 30% below the incumbent's rates. Other competitive carriers offer similar discounts. Tenants in buildings where competitive carriers are denied access may not be able to realize these savings. Data supplied to the FCC suggest that nearly 10% of building owners have denied all requests for access received from competitive carriers. These same data further indicate that more than 50% of competitive carrier's requests for access are ultimately unsuccessful. Thus, the absence of a nondiscriminatory access requirement denies many tenants the full benefits of a competitive telecommunications market.

The effects of building owners' market power over access are not limited to the multi-tenant buildings where competition is directly limited. All telecommunications customers, including those not residing in multi-tenant buildings, are harmed if competitive carrier entry is slowed by restrictive access policies. As competitive carriers more efficiently utilize their networks, the cost savings predictably will be passed on to all customers as lower prices for service. Barriers to efficient network utilization -- such as eliminating access to a portion of the potential market -- will prevent consumers from realizing the full benefits of these efficiencies. Similarly, as competitive carriers obtain additional customers and deploy more equipment, equipment costs per unit should fall, resulting in lower costs and additional savings for all customers. Hence access restrictions to multi-tenant buildings can reduce the benefits of telecommunications competition for all consumers.

Finally, competitive telecommunications carriers are directly harmed when they are overcharged or denied timely access to their customers. Excessive prices for access are particularly damaging to competitors because the incumbent local service provider -- their main competitor typically is not assessed charges for access to multi-tenant buildings, placing new entrants at an immediate cost disadvantage.

Weighed against the potential benefits of a nondiscriminatory access rule, the costs of such a rule are comparatively small. The nondiscriminatory access rule proposals under consideration offer building owners reasonable compensation for the loss of use of the property occupied by the telecommunications carriers' equipment. As the carriers will pay this fee, potentially together with a bond to indemnify building owners against specified carrier failures to perform, the Federal government should incur no costs related to a taking. Moreover, the advanced telecommunications capabilities installed by competitive carriers can increase the value of multi- tenant buildings, further mitigating any potential harm to the building owner from a reduction in the space available for lease to tenants.

In addition, there is no reason to expect that a nondiscriminatory access rule will limit creative and innovative access arrangements, as some have argued. Investments in telecommunications facilities in multi-tenant buildings, like other investments in building features and functionality, can be recovered through rent. Moreover, there is no reason to expect superior innovation performance in telecommunications markets where competition is restricted. The real danger of reduced innovation is that multi-tenant building owners will exercise market power over access and thereby limit CLEC entry and investment.

Admittedly, some implementation and enforcement costs will be caused by a nondiscriminatory access rule, but these are likely to be comparatively small.

We are fortunate in this case to have direct experience with nondiscriminatory access rules in the states of Texas and Connecticut, and we can evaluate the experiences of those states to assess the magnitude of these types of costs. The evidence from Texas and Connecticut suggests that the implementation and enforcement costs of a nondiscriminatory access rule are quite limited. In those states, nondiscriminatory access rules have been or are being implemented with minimal disruption and cost.

There is no dispute that under the current regime, the only significant constraint on the profitability of restricting competitive carrier access to multi-tenant buildings is the willingness and ability of tenants to move to another building. A central question, therefore, in the policy discussion of nondiscriminatory access rules is whether tenant moves will prevent multi-tenant building owners from exercising significant market power over access. We can address the empirical importance of tenant moves as a constraint on building owner market power by assessing directly the costs incurred by tenants when moving.

The direct costs and other barriers associated with moving are prohibitively large. These costs may include relocation expenses, lost productivity, and potentially the loss of existing customers. In tight real estate markets, such as currently exist in many communities, tenants can expect to pay more for new space. In addition, leases average 5 to 10 years in length and seriously limit tenant mobility. Although it is difficult to quantify relocation costs precisely, one estimate is that the total cost to relocate could equal a full year's rent. Few tenants would find it economical to move in order to purchase a competitive carrier's service given these costs. A simple example can illustrate the problem. Suppose telecommunications expenditures are 20 percent of rent and that CLEC service can save tenants 30 percent on their telecommunications bills. Under these conditions, it would take more than 16 years (ignoring discounting) for the savings on telecommunications services to pay for a move that cost one year's rent. This is longer than the term of most leases and far too long for most businesses to cost justify the move.

The Real Access Alliance has argued that because a significant proportion of tenants move each year, there is on-going pressure on building owners to offer nondiscriminatory access. This argument assumes too much. While tenant churn likely does constrain the profitability of overcharging for access, it cannot eliminate it. Clearly, most tenant moves occur for reasons unrelated to telecommunications services. Such moves are unlikely to put significant downward pressure on building access prices. The evidence shows that, on balance, tenant churn has not been a sufficient constraint on multi-tenant building owner's market power. For this reason, the assertion that tenant churn will discipline the exercise of market power over access should be regarded with skepticism.

There are important parallels between the debates over number portability and nondiscriminatory access to multi-tenant buildings. In the debate about number portability, some opponents of a rule requiring number portability argued that local exchange competition could flourish without such regulatory intervention. In contrast, the proponents of a rule argued that if customers had to change telephone numbers to access competitive carriers, the development of competition would be slowed because changing telephone numbers was too inconvenient and costly for customers. Congress apparently agreed with this latter assessment, and included number portability in the Telecommunications Act of 1996. The cost and inconvenience of moving are substantially larger than the cost and inconvenience of getting a new phone number. Following the same reasoning underlying the number portability requirement in the Act, Congress should support a nondiscriminatory access requirement for multi-tenant buildings.

In conclusion, and based on this review of the facts regarding tenant moves, there is no realistic prospect that tenant moves are a significant constraint on building owners' market power over access to multi-tenant buildings. Under the current regime, market forces are unlikely to drive prices for access down to costs, and consequently consumers may not realize the full benefits of a competitive telecommunications market. The nondiscriminatory access proposals considered in the FCC's Competitive Networks rulemaking can correct this market failure and encourage the development of vigorous telecommunications competition in multi-tenant buildings.

END

LOAD-DATE: March 23, 2000

Document 115 of 383.


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