Where is Ida Tarbell when we need her?
The recent disclosure that Qwest, the largest telephone service supplier in the Upper Midwest, granted favorable treatment to certain firms is reminiscent of the charges the famous muckraker leveled against the Standard Oil Co. a century ago.
The Qwest situation shows that curbing monopolistic behavior is an ongoing battle, not one that disappears with technological change in an industry or with less regulation of utility companies that formerly were highly regulated.
One of the sins committed by John D. Rockefeller’s firm was to negotiate secret agreements with railroads giving Standard rebates on shipping costs paid. Competing oil companies did not get similar freight reductions, and in some cases Standard got rebates on oil shipped by its competitors.
These sorts of secret deals were fairly common in the late 1800s and certainly not limited to Standard Oil. But public outrage at the monopolistic price fixing fostered by secret deals between competitors led to passage of the Sherman Antitrust Act in 1890.
That legislation opens with the statement: “Every contract, combination in the form of trust or otherwise, or conspiracy in restraint or trade or commerce among the several states or with foreign nations is hereby declared to be illegal.”
These noble words are aims most economists would support. But the devil, as usual, is in the details. In the ensuing 112 years, we have put a lot of energy into arguing about what agreements restrain trade.
Major price-fixing clearly is banned. When a couple of dozen Minnesota paving contractors got together to rig bids on state highway projects in the 1980s, it clearly was illegal.
Minor deals with reciprocal benefits clearly are OK. Farmer Joe sells seed corn as a sideline and his neighbor Frank does custom combining in the fall. Frank combines all of Joe’s crops. Joe sells Frank all the seed he needs. Each charges the other a little less with no threat to free commerce here.
Qwest allegedly made secret deals with a few small telecom providers with which it has to interconnect. These deals gave some smaller firms preferential rates compared to what other, competing firms were charged.
Another gave McLeodUSA, an Iowa based telephone company, lower rates in return for McLeod’s agreement to not oppose an acquisition by Qwest that had to get by regulators. The deal might have stalled if McLeod had filed objections.
This smells suspiciously like what Sen. John Sherman had in mind when he set out to curb monopolistic activity.
The Public Utilities Commission and Commerce Department argue that any agreements of the type Qwest reached with other firms have to be disclosed and included in “interconnection agreements” filed with the state.
Qwest says these agreements were separate business deals not related to interconnection and that they did nothing wrong. The PUC referred the matter to an administrative law judge to sort things out.
The lesson is simple: Technological change is making competition in telecommunications inherently easier than was the case when all phone calls had to go through copper wire. Optical fiber, microwaves and cellular equipment mean that control of landlines isn’t as important as it long was. Barriers to entry are low. Small firms can get a toehold.
But as long as most telephones connect to the system through a few hundred feet of copper wire, whoever controls those “last hundred feet” still retains monopolistic power.
The day soon may come when even the last hundred feet of traditional telephone wire will no longer be technically necessary for the great majority of phone users.
When that happens, telecom providers still may be tempted to form “contracts, combinations and conspiracies” to restrain trade.
However, they will not have any more or less power to do so than paving contractors or oil companies. Until then, state utility regulators need to be alert.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.