No Broadband Price War….elsewhere

One of the reasons that LUS has relaxed a bit about making its pricing commitments is that it is increasingly obvious that there will be no national price war on broadband. So LUS can confidently see that with its much longer pay-back time and with no need to chase large profits for impatient stockholders and investment firms it can easily undercut the pricing of corporations who have, essentially, decided to milk the customers of their established monopoly cows for the indefinite future. As AT&T and Verizion roll out broadband services that provide no advantage over cable for the same levels of speed it is increasingly obvious that the two industries have decided not to compete on price.

The latest in this “we-are-competeing-vigorously-but-not-on prices” noncompetition competition between the colliding telco and cableco monopolies in the broadband arena was AT&T’s decision to raise prices on its broadband DSL customers…except in former BellSouth areas where its prices were previously higher.

That wasn’t what “competition” between the cablecos and the telecos was supposed to bring. You may recall that when AT&T was trying to transfer local municipal property rights to the state level so it could get around the locals’ insistence that AT&T serve all of a community with their new services in return for using the community’s land they claimed that relieving them of that obligation would yield cheaper prices for the favored few that actually got “competition.” Even that half-a-loaf is NOT the way it is working out…and both the cablecos and the telecos like it that way. Two competitors are simply not enough to establish a competitive market and reality is taking its toll on that tale. A few are even noticing that we’ve been taken:

The announced price hike didn’t sit well with some observers.

Routers, modems and other equipment used to deliver bandwidth are dropping in cost as rapidly as bandwidth demands are rising, said Dave Burstein, who operates, an industry newsletter. “Total cost to the company for the bandwidth it delivers is about $1 a month per customer,” Burstein said. “AT&T is raising its rates because it can. It has the market power to do so. Increased costs aren’t the reason.”

AT&T still has to pay off the enormous costs of trying to absorb BellSouth, among others, a consolidation that our regulators allowed because it was also supposed to lower prices.

The only real price competition we here in Lafayette can expect to see will come from LUS. BellSouth and Cox exist to serve the interests of their stockholders and that means that we should pay as high a price as the company can extract from us. The industry is learning right now that they don’t have to compete on prices to maintain their margins–and so they won’t. Anything less would be irresponsible. LUS also exists to serve its owners…but their (our) intersts are best served by low prices for high levels of service. Both types of owners will, inevitably, get a company pricing policy based on their interests. But only LUS will actually be motivated to compete on price. (Six month specials like those you’ll see from Cox in both today’s Advocate and Advocate don’t count—that’s marketing, not pricing.)

2009, after the launch of Phase 1, will be an interesting and, I’ll bet, a satisfying year for Lafayette consumers of broadband.

“Cable TV may go à la carte”

There’s a little surprise for media watchers in today’s Advertiser: a media story that appears to have no immediate hook or sensational event to drive it to print. —A media story that seems simply to educate about an issue that consumers care about. And since Lafayette consumers will soon have a say about just how we structure our own cable offerings this is one of the few places where such an education might have practical consequences. Good for the Advertiser.

The issue is à la carte cable programming—the idea that you should be able to choose individual stations from a menu of choices instead of being forced to buy your cable programming in bundles determined by the seller. A short excursion into the phrase “à la carte” should be helpful in giving the cable story some context.


Á la carte comes from the French, and the restaurant trade there. It means “on the card”–on the menu. The contrast is between à la carte and prix fixe. The “fixed price,” prix fixe, is a full, usually multi-course, meal. There is no menu of choices. In the pure case all patrons eat the same meal and it is inexpensively priced for the courses offered. Some restaurants only offered fixed price—fixed choice menus. This option is rare in the states. Tujaques in New Orleans serves the same five course meal to all comers and is the only prix fixe restaurant I know of that survives—and it was an old institution when people now old were young. American’s don’t go for fixed price/choice restaurants when they have a choice. What American restaurants from McDonalds to Galatoire’s share is the à la carte menu format.

That contrast makes it easier to see why the current prix fixe cable programming model offends people. And it makes clear why the cable people’s objections don’t seem very important to most US citizens. Cable providers say, as the story demonstrates, that allowing people to construct their own cable “meal” from a menu of choices might end up causing their customers pay more.

They claim to object to that.

Sharon Kleinpeter, vice president of public relations for Cox Communications’ Greater Louisiana Region, says it may do more harm than good in the pocketbooks of cable companies and customers.

While it’s pretty much true that an à la carte menu means less income for cable companies like Cox it is also pretty clear that it does NOT mean more costs for most consumers. Fixed price formats make it easy for the seller to minimize the costs for a deluxe meal…you can buy only what materials you need in quantity, and waste, server, and cook time is all minimized. A huge pot of a savory soup costs little to prepare and keep ready. Keeping five soup choices ready for the 5% of people who order is considerably more expensive. Galatoire’s is understandably more expensive than Tujacques for the “same” meal.

But we don’t all want the same meal.

If we don’t want a desert or a soup we don’t want to be forced to buy it and watch it go to waste. That is the real trouble with current cable business model and the cable companies are in the position of the old fixed price restaurants. They know that they can’t provide the same fare they’ve been providing without charging more if people are allowed to refuse to pay for the soup or the salad course or the drink. And they can’t charge enough more for the main course to make up the loss from selling far fewer high-margin salads and drinks. It is true that a change is not a good deal for those few patrons who continue to order the five course meal; those patrons will pay more. But most, history shows, won’t. And the average customer will pay less and cable companies will have less income–and have to work harder to get that income. In fact the average cable customer watches just seventeen channels, according to the FCC, the article says.

What is revealed is that the folks who want to eat cable modestly have been subsidizing the patrons who want the deluxe version. Those who would order all the fancy trimmings get it for the cheapest possible price. But those who only want a quick sandwich at the end of a hard day pay more. The many have been subsidizing the appetites of the few.

Consumer advocates have noticed:

Consumer Federation director of research Mark Cooper points out that the current system forces subscribers to subsidize channels they don’t watch.

“The current system requires everyone to subsidize ESPN viewers,” points out Mark Cooper, Consumer Federation director of research. “Why is the cable company making these choices for people?”

Well, the short answer to Cooper’s question is the same as it is for prix fixe restaurants: They can make more money with less effort off a large volume of business, much of which is low cost, than they can if most of their clientle is transformed into price-conscious consumers of only the products they like best.

The equasion is pretty simple and the same, both for the cable companies and for consumers. Where they differ is in what they want out of the relationship. And in cable, restaurants, and marriage that makes all the difference in the world.

Something for us to think about here in Lafayette where the owners of the restaurant are the customers. How do we want to arrange our video world?

Lagniappe: If you’d like to look at the article in Gannett’s “The Tennessean” that apparently inspired this story you’ll find some interesting details about federal policy, the role of advertising in this game and other fascinating (to a few) bits and pieces neither I nor our local reporters bothered with.

LUS Franchise Agreement

Kevin Blanchard over at the Advocate reports that a franchise agreement between LUS and the Lafayette Consolidated Government (LCG) will be introduced at this Tuesday’s City-Parish Council meeting.

While it is 1) technical, 2) presented as an uninteresting “me too” copy of Cox’s, and 3) no doubt a terminally boring read this will be extremely important to Lafayette consumers and citizens—try not to let this slide by you. To understand why the franchise agreement is big deal and what shapes it I’ll have to provide some background from both the state and federal levels. Stick with it: It will have a lot to do with how much you pay for cable and internet—and it will have a huge effect on City-Parish revenues with an indirect effect on how much tax you have to pay for basic local government services. (This document should every bit as important to you as a sales or property tax ordinance–and will probably have a bigger effect on Lafayette’s future than any single tax ordinance ever has.)

As Blanchard points out, the oddity in this agreement is that it will require LUS to pay itself (for attaching to its own poles) and to pay its parent organization (LCG) a fee to access its own customers over the rights of way LCG owns.

That does sound a bit strange doesn’t it? Why bother? Doesn’t this just introduce odd inefficiencies and distort costs?

Yes, it does — and it is intended to. On to the story behind the story.

Some State of Louisiana Background:
Loyal readers will recall (1,2,3) that BellSouth (now AT&T) and Cox pushed a law through the Louisiana legislature back in ’04 shortly after LUS announced its intentions to build a fiber-optic network. That law was intended to stop Lafayette from building a network at all. That story is a long and ugly tale of corporate lobbying and legislative foolishness that LPF covered extensively. Luckily Governor Blanco forced a compromise on the legislature that let Lafayette go forward — but the rewritten-by-committee bill left Lafayette open to legal challenges and imposed a minefield of restrictions and regulations that apply only to municipal telecom utilities. Regulations, that is, that apply only to Lafayette.

Flying the flag of “free enterprise” the two enormously powerful wireline cable and phone monopoly enterprises played the poor-me role of disadvantaged competitors who needed protection from the competition threatened by the city of Lafayette’s local electrical, water, and sewer utility. Lousisiana’s legislature rushed to protect them from this threat. Prior to this law LUS and Lafayette could have simply started up a utility in this area–as it can in electricity or sewerage or natural gas–without any heavy-handed restriction by the state. There would have been no legal basis for a lawsuit to try and prevent it and no way to impose special costs or regulation only on a utility owned by the people of Lafayette. The Louisiana “Fair” Competition Act changed that.

The law provides for a way to drive up the “paper” costs and a regulatory mechanism for ensuring that those higher costs are actually paid by the customers of LUS’ Fiber division. LUS is required to, for instance, pay itself a fee for the use of its own poles and the rights of way that the community owns that is the same as it or the city would charge private companies. (Note that LUS already bears the real cost of building, maintaining, and replacing that property and that those costs are not subtracted from these state-imposed fees. We, and only we, pay twice.) These pay-it-to-yourself “costs” would merely be the silly imposition of a paper shuffle if the state had not required that those costs be passed on to the customer. But that is what the law does.

What is interesting is that the state constitution specifically outlaws using the Public Service Commission (PSC) to regulate publicly owned utilities. (Based on the presumption, I assume, that we as both owners and voters can do that for ourselves.) Since using the PSC to regulate public bodies is illegal, the tortured solution was to place the supposed responsibility in the hands of the state legislative auditor, who has neither the expertise nor the staff to do the job. Recognizing that “problem,” the (un)Fair Competition law directs the PSC to both suggest rules to the auditor and to then enforce those rules. This is pretty transparently an evasion of the state’s basic law but, hey, they write the laws, right?

Even more interesting, the regulations that the PSC are required to enforce are designed to raise the costs to the consumer. If that seems to you like a funny role to ask a PUBLIC Service Commission to play, I’d have to say it seems odd to me too. I had thought the role of the PSC was to protect the public from being overcharged or taken advantage of in other ways. I was not under the impression that it existed to protect large corporations from competition. Silly me. My guess is that the folks over at the PSC aren’t all that happy about it either. It is not the job they signed up for.

The central mechanism that these PSC/Legislative Auditor regulations use to raise your rates is to tote up all the costs to LUS from equipment costs, to billing costs, to interconnection fees, to salaries, to taxes, to pole attachment fees, to franchise fees (the latter two are the elements being considered by the Council Tuesday). The will use a baseline industry cost based in part on what the incumbents say their costs are to establish a “fair price” that must, by law, include the costs to “rent” property they own and fees to use poles that they have already paid to install and maintain. They will then set a minimum price that LUS must charge. Slow down and read that again: they set a minimum price. They will NOT allow LUS to charge you the least that it could…they will force Lafayette’s utility to charge more than it would have to without a set of regulations that force false costs on it.

This is all transparently designed, not to force “a level playing field” or “protect the public” as the incumbent providers claimed in the legislature; it is designed to limit the price competition that LUS will provide AT&T and Cox in Lafayette. Cox and AT&T don’t want to be forced to lower their prices to compete in Lafayette. They most especially don’t want to be forced to lower their prices to compete ONLY in Lafayette. That would make it all too obvious that public utilities like LUS could be a success and provide real value to its citizen-owners. LUS would be a “bad” example for other communities; one that might encourage them to do for themselves what Lafayette has done.

And that would never do.

The Federal Regulatory Issue at hand:
Now all this messy state law and regulation might be preempted by Federal regulation — without the benefit of an enabling law. (I know this is getting convoluted. Stay with me for a while longer; it’s important. 🙂 )

The FCC just this past Wednesday gave “relief” to cable companies on the issue of franchising in a partisan 3-2 vote. This ruling is yet another extension of the FCC’s decision to insert itself into the national franchising issue. The ultimate outcome is pretty disturbing in that the ruling will pretty much will allow a cable company to quit honoring any part of its franchise contract it doesn’t like beyond the monetary fee. Look for support for AOC and governmental networks to vanish. Whether it allows any cable company to immediately quit honoring its contract is in dispute. (Didn’t know the FCC could abrogate contracts? Me neither.) Earlier remarks by the FCC chair had indicated that it wouldn’t void current contracts.

The History:
State and federal franchise issues are also topics that have been covered on these pages, but in synopsis: The incumbent phone companies, lead by AT&T, are determined to get into the cable business. It is easy to see why since estimates I’ve seen show the profit margin at somewhere between 40 and 60% and their own year-to-year reports show that their core business, landline phone service, is declining every year even with margins cut to the bone. But the old Bell phone companies don’t want to have to follow the same rules that cable did in developing this lucrative market: they don’t want to have to go to the public bodies who own the land and negotiate a franchise contract to use the public rights of way. Their first tactic was to go to state governments and get them to take over the localities property rights and establish a state-wide franchise that allowed the state to control the money and disburse it to the localities. Not surprisingly state legislators found shifting this power into their hands an attractive “pro-business,” “pro-competition” policy. This state-level tactic worked in the early rounds but then the municipalities began to unite in opposition and the laws were more and more often either vetoed (as Blanco did here in Louisiana) or defeated in the legislature.

With the preferred state-level alternative failing the phone companies turned to the federal government. They first asked the FCC to establish a federal-level franchising regime. (This is essentially what they have for phone service–the feds reached down and simply “took” state and local rights of way and allowed the phone monopoly to use them for free. This was in an earlier, less ideological, time and for the “good” cause of universal phone service and no one much objected.) The FCC demurred as the Congress was in the midst of gearing up for a major rewrite of telecommunications law. At that point in time no one had any trouble believing that the incumbent providers would mostly get what they wanted. But then AT&T’s CEO went and started the big war over Net Neutrality and the whole bill went down in flames. (Comcast has recently restarted the controversy.) Congress considered but was unable to pass a law that would have redefined franchising.

The FCC then stepped in, and in the face of a obvious lack of Congressional support for the idea, decided to do for the phone companies what they had previously directed the Bells to ask Congress for: they instituted a regime that removed much of the control of rights of way from their local, municipal owners. As you might imagine, lawsuits are underway that argue that the FCC has overstepped its boundaries and is attempting to legislate by regulation. The FCC ruling forbade local governments from requiring cable franchisees to serve the whole community (“buildout” requirements); and basically it forbade municipalities from asking for asking for much of anything beyond money—which was already strictly limited by federal law. As a consequence all sorts of contracts between local governments that cut deals for schools or police or government office, and deals that supported local media like AOC with funds and channel space to provide coverage of city-council events and locally produced programming are all now on the chopping block. Those contracts, by federal fiat, don’t have to be honored. And the city cannot try very hard to negotiate a better deal (not that much is left to “negogitate”) since the FCC imposed a “shot clock:” if the city and the corporation cannot reach an agreement within 90 days the corporation can simply go ahead and provide services without finalizing a contract. (The room for abuse ought to be obvious–localities will have no leverage whatsoever and could easily be reduced to agreeing to whatever the company decided to hand out. Remember, generosity is not a trait of these fellas.) It goes without saying that without any real leverage the local clauses that insure that providers meet service requirements to customers goes out the door.

So does that mean that LUS could decide not to honor its contract too? No, there is no practical way that LUS is not going to meet the obligations it makes with the people of Lafayette…it is a public body and it will not desire to and will not be allowed to simply stiff the city-parish. But Cox, who you will recall, suggested the legislature fine the citizens of Lafayette $900,000 if they had the nerve to vote for fiber, is surely resentful enough to pull back from any contribution to our city that does not look good on a sponsorship form.

So that, as Paul Harvey might say, is “the rest of the story.”

LUS is going into the Council on Tuesday to discuss a franchise agreement for its fiber-optic based cable system that will be shaped by the requirements of a state law that was initially designed to kill the project. Instead of being a document that we could proudly point to as a one which sets out the unique and forward-looking obligations of LUS to the community and its customer-owners we will likely get a defensive document that promises no more than what the city fathers could extract from Cox in the last contract round. The strange franchise and pole attachment agreements that LUS will sign with itself are by-products of the (un)Fair Competition Act and its resulting, anti-consumer regulations that are designed to drive up the price of LUS’s services and so minimize the competition it can offer its citizens. To add insult to injury, federal intervention may well result in Cox deciding to abandon most of the very franchise agreement that LUS will be imitating while LUS will, regardless of federal “relief,” will be obliged by its ownership and the aforementioned law to fulfill its contractual obligations regardless of the competitive disadvantage at which it is put.

I think that’s all pretty sad and more than a little sick. I hope you do too. We’ve earned better than a me-too franchise with our local communications utility.

Welcome to topsy-turvy world of American Broadband Policy as it plays out in real local communities.

AT&T’s 10 dollar deal: Is it real?

I recently covered a $10 dollar DSL deal and a promise of a $20 dollar “naked DSL plan from AT&T that ought to be available locally. (It’s got some preconditions, see my post.) David Isenberg dug a little harder and made the case that these plans weren’t actually being “offered” in any real sense of the term. Now he (and I!) would like to know if anyone out there is actually getting this deal.

Background: AT&T agreed, as a condition of its merger with BellSouth, to offer these deals. As we in Lafayette know, the phone company doesn’t necessarily keep its word and this appears to be a case where the company is skirting pretty close to simply breaking the law. I dug around a bit for this post and discovered yet another very real obligation on Ars Technica: AT&T is supposed to make broadband available to EVERYONE in its footprint; it promised to provide at least 85% of its customers with DSL and would tie the last 15% in with satellite or WiMax. So if they tell you they can’t provision you — ask again.!

The question of AT&T keeping its word comes up following a small internet furor over a story popularized on engadget about a fellow that had a real hassle getting the $10 dollar deal from AT&T. I had similar issues when I tried to see how real the offer was locally.

Has anyone out there tried? What’s your story? Were you successful? Did you eventually give up trying and go for the “good” (but more expensive) “deal” that was easier to get?

I’d love to hear from you in the comments here or via email at John2_AT_lafayetteprofiber_DOT_com

AT&T’s $10.00 DSL Not “Offered”

David Isenberg at his exemplary Isenblog points out that AT&T is not really living up to the agreements it made to get the BellSouth merger approved. He uses a LPF post as a point of departure, noting that while it is possible to find the $10.00 DSL offer I referred readers to it is not easy to locate and, even more significantly, you cannot get to the offer from even the difficult-to-locate page I found. I had not realized that but, upon digging further, found it to be absolutely true. Mea Culpa! Following the link on the BellSouth page leads you to the general AT&T DSL page and after giving them your local phone number as part of the “order” process for the cheapest visible alternative they still don’t give the customer (you and me) any sense that there might be a legally mandated, still cheaper offer available. To go any further you have to complete the order and await contact by email….since I’ve no intention to order DSL service I stopped there. But the fact is clear: You cannot get to the $10.00 offer unless you already know it is there and are willing to interrupt the normal ordering process to demand it.

Isenberg correctly notes that this is not “offering” the service in the sense that the FCC required. Posting the offer on your website in such a way that only Google can find it and then adding insult to injury by funneling a person who has laboriously located the “good deal” for “Fast DSL Lite” to a page where a $10.00 offer isn’t visible but a “New Lower Price Fast DSL Lite” at $19.95 is, cannot be called anything but deceptive.

Isenberg goes on to note that this isn’t the only evasion of its merger “deal” with the feds that AT&T seems to be ignoring:

It agreed to offer “naked DSL” within six months of the merger agreement — that would be June 30, 2007, and there’s no naked DSL offer from AT&T I can find today, July 6, 2007, either. The FAQ still says, To enjoy FastAccess DSL [FastAccess is what AT&T calls all its DSL services], you’ll need to have local phone service with BellSouth.”

AT&T also pledged to make wireline DSL available to 85% of the households in its territory by the end of 2007. Will it, or is this yet another Kushnick?* (A Kushnick is what a Bell does when it gets a Quid for a future Pro Quo, which it doesn’t ever deliver.)

AT&T has already announced that it will be developing technology to violate its pledge of Network Neutrality;

I’ve long since gotten to the cynical spot where I automatically assume that any obligation that BS/AT&T or Cox make that can be evaded will be evaded. They simply don’t act in good faith. I’m so inured to such behavior that I barely notice it and simply assume that if you want a fair shake you’ll have to fight for it. But Isenberg is right. You shouldn’t have to.

AT&T should simply honor its word. That it casually declines to do so when it is not to its immediate fiscal advantage is the best possible reason for not doing business with them.

“Weather Channel to return to basic cable”

The Weather Channel is returning to Cox Communications’ basic cable lineup in time for hurricane season.

So says this morning’s Advertiser. That’s good news as we head into hurricane season.

Those with long memories will recall that Cox pulled the Weather Channel in the middle of hurricane season last year in a public relations gaffe that it is difficult to credit that ANY company, even Cox, could make a year after Katrina and Rita ripped across south Louisiana. That move caused a firestorm of criticism—that extended from letters to the editor to a command performance for Sharon Kleinpeter before the City-Parish Council. But last year Cox held firm.

It was part of a larger disturbing trend. Lafayette and the rest of Acadiana was being completely brought into line with the Baton Rouge market to create a single large entity dominated by the interests of Baton Rouge.

In both markets the channel guide was moved off basic onto a $30 dollar a month more expensive tier. In Acadiana the weather channel was also moved up (Rita not withstanding) to that tier. (Cox New Orleans, a different division, had the good sense to leave the weather channel alone in their area.)

Also at issue was the single French channel. It was moved up to a more expensive tier associated with sports. (Hunh?) This in a city where 13% of the population tells the census they speak a French dialect in the home. (The “large” Spanish-speaking population got a new 10-channel tier in contrast.)

Rates were raised on most services with Lafayette getting larger increases to bring them into line with Baton Rouge.

Local people were unhappy, to say the least.

The Advertiser story repeats Cox’s explanation that the channel was moved to make Lafayette more like Baton Rouge. While that wasn’t particularly well-received (Acadiana has no desire to emulate Baton Rouge, quite the contrary) there were other explanations at the time. A more complete explanation of the impulse to unify Baton Rouge and Lafayette lies in the size of the large new, unified advertising market Cox would create by combining Louisiana’s two most dynamic economic markets.

Moving popular and useful channels like the Weather Channel, the Channel Guide, and the French channel up into substantially more expensive tiers was meant to push as many people as possible off the cheaper tier which is still watched by regulators and whose valuable analog bandwidth is lusted after by the programmers. –Each analog cable channel can be made into many digital ones. Both short-term profits and long-term strategic goals make this a financially advantageous move for Cox. (If not for Lafayette.)

The changes to the lineup and the concurrent rate increases were all about increasing Cox’s bottom line.

The weather channel replaces an all-ads-all-the-time channel at 22 that often is used to promote Cox products–and had kept its privileged place in the basic tier when the French channel and the Weather Channel were expelled. This was a change that the Lafayette City-Parish Council suggested during the dispute but at that time Kleinpeter said legal issues made that impossible and her claim went unchallenged. Apparently it wasn’t so impossible after all.

At one point Kleinpeter explained the community’s vocal distress with:

“It’s just change. People don’t like change”

That was never anything but a breathtakingly arrogant response. One that only a monopoly could make. Apparently Cox is now taking the upcoming competition from LUS a tad more seriously as we head into this year’s hurricane season.

You can chalk the change up to the mere promise of locally sensitive competition.


Higher costs due to BellSouth’s law

The Advocate story, LUS to receive draft of PSC pricing rules, gives background for a set of draft rules the Louisiana Public Service Commission (PSC) is expected to issue this week.

The regulation is a result of language in BellSouth’s misnamed “Local Government Fair Competition” Act (Act 736) passed last summer as a compromise to the original BellSouth bill which would have made Lafayette’s fiber-optic project impossible.

The story, while well-written, tends to be a little confusing in part because of necessary technical language such as “in-lieu-of-taxes” and “cross-subsidizaton,” and in part because the concepts seem a little off. I think I can help clarify the matter by giving a little context. You need to clear your mind of the usual assumption that the PSC exists to ensure fairness for consumers and citizens—to make sure that rates are no higher than they must be. Act 736 is not about that. It is about ensuring “fairness” (cough, cough) for telecom corporations–by which the framers of the law (uh, BellSouth) meant that municipal providers should labor under any burden that they do and a number of burdens that no private corporation would ever tolerate. The purpose of this segment of the law is to artificially raise the cost to consumers and citizens above that which they would have to pay were there no such “fair” law.

Ok, stop for a minute and wrap your head around that. The purpose of this regulation is to ensure that you pay higher rates than you would otherwise. And the PSC is supposed to enforce it (don’t you know they hate this). Once you have this Alice in Wonderland concept firmly fixed in your mind the story makes a lot better sense.

Ready? Good. Let’s jump down the rabbit-hole.

One part of the regulations that we will see in draft form this week is that which results from the Act 736 requirement that the PSC make sure that rates to customers are set higher than the actual cost of LUS doing business. This requirement is supposed to account for taxes and fees that LUS doesn’t have to pay because it is a public body or because it already owns the rights of ways for which the fees are paid. (Honestly. That is really the logic of it.) LUS managed, as part of the compromise, to get its contribution to the city government (in-lieu-of-taxes) counted against this requirement. As it turns out, the in-lieu payment is already greater than all the taxes and fees that private providers have to pay, regardless of what sob stories we often hear from telecom corporations. But still, the PSC has to set up elaborate regulations–and LUS has to spend money to track of all this–so that the PSC can confirm that LUS is not saving its customers too much money.

Now if that isn’t strange enough, in addition to asking LUS to charge you for taxes it doesn’t pay and fees to use property it already owns, Act 736 also requires that the PSC impose conditions on LUS that no private business has to endure. The basic idea is that LUS should have to pretend that the new business is not a part of LUS and charge itself accordingly. Private businesses normally start new divisions and enterprises in areas in which their current resources make them better able to compete efficiently. That’s just common sense. You’d think. But in the world in which Act 736 forces the PSC to exist, it is illegal–for public entities. So there will be a “cost allocation manual” that controls what percentage of the work on a pole is assigned to the telecom division and how much to power. There’ll be “affiliate transactions” regulations that mandate that LUS charge open rate for work folks in the power division or sewer divisions do for LUS. There will be endless red tape to prove that they are doing these inefficient things. To what end? Well, to hear BellSouth tell it, to prevent the evils of “cross-subsidization,” which apparently is a bad thing when a public power company uses its resources to support telecom services but a good thing when a telecom company uses its immense technical resources and broadband backbone to muscle into the wireless business. (Cingular anyone?) “Cross-subsidization” is good, fundamental business practice and an important way in which the free enterprise system develops efficiencies to pass on to consumers and enrich owners. There is absolutely nothing wrong with the idea. Except when the efficiencies are earned by BellSouth’s competitors.

The truth is that the real purpose of these regulations is to force unnecessary inefficiencies and costs onto the telecom division. And the purpose of that is to make sure that LUS cannot bring your rates down as low as it would otherwise be able to do.

So, friends and neighbors, the coming rate hearings are not only an inscrutable bureaucratic nightmare, they will also determine just how much how much savings our utility will be allowed to pass on to us and how much phantom inefficiency it (and no private provider) will have to carry on its books when it comes time to determine the rates the PSC allows it to charge you. We will discover just how much BellSouth’s law will cost the consumers of Lafayette. It’s all more interesting than you think.

Incumbents Running Scared: An Economic Analysis

One thing that comes through in qoutes from Huval in the [not online] Advertiser Advocate article “LUS plan changes look of telecommunications,” and in the feasibility study itself is a pretty steely-eyed determination to out-compete the incumbents on both product and price. The LUS strategy will be simple and competitive: offer more for less. Should LUS do this consisitently, and I have no doubt they can and will, they will be the dominant carrier in their footprint. A footprint, incidently, which Huval hints may expand into the parish. (Mayor Langlinais of Broussard is undoubtably happy to “hear” this said publicly.)

This story implicitly raises the question of whether Lafayette will have multiple fiber optic networks in the end. My own thoughts on this are on the record: I believe that it is unlikely.

Consider: One thing that LUS’ strategy has done is to cut off a retreat into low-end products—analog telephone and video—for both incumbents. LUS’ projected equipment buys make it clear that they intend to provide these legacy services indefinitely. LUS has also cut off any attempt to colonize high-end services: LUS’ fiber, its committment to advanced services such as Voice Over Internet Protocal and Video on Demand make it clear that there will be no room at the top of the heap for the incumbents to reap special profits off of high-end customers. There will be no uncontested areas of profit for the established incumbents. None. They wil have to decide to compete head to head with an entity that has the trust of local people, that is pumping its profits directly back into the community (in the form of lowered prices, government revenues, local construction, and local jobs), that is offering a superior product in each category, and that is offering it for a lower price. In the face of such daunting competition it has to decide to dump a big chunk of change into a small town (by its lights) ahead of schedule (or face LUS being the established incumbent when it gets around to it). It will have to spend this money anticipating that it will never have the percentage of the market that it enjoys anywhere else it will choose to spend its fiber dollars.

In a nutshell: the incumbents will have to choose to invest heavily and early in a place where they can never expect their rate of return to equal what that same investment will garner almost anywhere else.

I don’t expect them to do it. No matter what they say in the next month or so… it just doesn’t make financial sense and that is all they are really about. (Unlike LUS which does have other, community-based values that might well lead them to persevere in a similar circumstance because they value low prices for citizens and the community development consequences.)

But, the objection can be raised, “They really expect LUS to fail; they will simply do what private enterprise does and out-compete the governmental body.” No. Honestly that won’t happen and the incumbents won’t believe it unless they’ve taken to drinking themselves the koolaide they’ve been offering the public. I know this flows against ideological correctness and may seem counterintuitive but that sort of reasoning substitutes ideology for a dispassionate analysis of what really is—and businesses like those the incumbent have haven’t survived by believing their press releases. If you need evidence look no further than the fact that the Cox and BellSouth have so frantically opposed the very idea. They know, they know very well, that once this is built LUS will hold all the cards.

LUS will not have to make a profit. Break-even is good enough. It isn’t good enough for any private enterprise. Not only that, private companies have to make their money back pretty quickly. They most certainly can’t wait twenty five years. LUS can. LUS will stretch it out that long without batting a eyelash.

The raw, and terrifying truth is that the competitive advantage that LUS holds over its competition is that it actually cares about its citizen/consumers. It is willing to cut its profit to naught to benefit them. It is willing to wait for a very long time to get its money out–if it benefits them.

And that is why the incumbents are running scared. As well they ought.

Attribution corrected 10:10 10/22/04