The California Public Utilities Commission on Tuesday proposed relaxing 13-year-old price caps on basic telephone service. Yielding to the demands of public interest groups, regulators currently force telecommunications companies to offer the cheapest basic rates in the nation. Yet, if artificially low prices are necessary to protect consumer welfare, why are consumers abandoning these plans in droves?
By dictating prices for traditional phone service, the PUC eliminates incentives for companies to expand their networks or offer new services. The result is an unexciting product known as “plain old telephone service” (POTS), which has changed little in 100 years. Free from these regulatory constraints, however, innovative new options known as “pretty amazing new services” (PANS) are rapidly expanding to bring voice communications into the information age. Old regulated POTS cannot compete with flexible and advanced PANS such as mobile phones and digital voice.
Since state regulators froze basic landline phone rates in 1995, the wireless industry has grown by 700 percent. Today, nearly eight out of every 10 Californians has a cell phone. Consumers flock to mobile technologies because providers are free to adjust prices and plans as market conditions change. In the absence of price controls, companies innovate and cut prices to win over customers and beat out competitors. As a result, while regulators held POTS prices in place, mobile rates plummeted more than 600 percent.
The rise of creative and unrestricted new technologies could soon render POTS completely obsolete. Customers are rapidly trading in their POTS for shiny new PANS. The number of “cell phone only” households nationwide has increased three-fold in the past three years. Digital voice services offered by cable providers have grown more than ten-fold since 2001, and 75 percent in the past year alone. While most Californians prefer these thriving and competitive 21st century technologies, some regulators believe that price-controlled POTS may still be necessary to protect low-income households.
Contrary to this assumption, however, low-income families are leading the migration away from regulated phone service. According to a Centers for Disease Control survey released last month, adults living in poverty are nearly twice as likely to replace their landline with a cell phone. For these customers most interested in overall value, obsolete POTS fail to measure up. Because price caps discourage innovation and excellence, regulated plans are often plagued by long outages and poor customer service. In the last three years, for instance, the PUC has fined AT&T California $2 million for failing to meet basic levels of service quality.
Removing arbitrary price caps will empower telecommunications companies to modernize their basic service and enhance competition in the market for advanced voice products. More competition will benefit consumers with more choices, higher quality, and better value. For low-income Californians, the state’s $300-million LifeLine program already provides financial assistance to help make essential services affordable.
Ultimately, however, unfettered competition will spark innovation to serve the state’s poorest residents. Just as Google pioneered the use of advertising to offer customers free online services, the company’s CEO predicts that soon, “your mobile phone should be free.” As companies such as Google design creative advertising-supported mobile products and services, tools for voice communications could soon be as free and plentiful as sites on the Internet. None of this will be possible with regulation and price controls.
For new services to thrive, regulators must resist the temptation to turn PANS into POTS. Price controls create stagnation, while competition spurs innovation. The PUC cannot possibly anticipate how voice technologies will evolve, yet artificial price caps substitute the judgment of bureaucrats for the will of consumers.
The PUC should eliminate price caps, not expand them. Nearly all recent innovation in voice communication has taken place outside the Commission’s reach. This is not a coincidence, and policy makers know it. The legislature began deregulating the industry in 2006, and slated all price controls for expiration at the end of this year. The dramatic growth of PANS is a testament to the success of this commitment, but it cannot continue unless the PUC cuts the cord and hangs up on telecom regulation.
Daniel R. Ballon is a Public Policy Fellow in Technology Studies at the Pacific Research Institute.