A Response to Drs. Hazlett, Havenner and Bazelon

Abstract

In July 2003, the Phoenix Center released POLICY BULLETIN NO. 5, Competition and Bell Company Investment in Telecommunications Plant: The Effects of UNE-P (July 2003) that evaluated, using a simple economic and econometric model, the short-run relationship between UNE-P and Bell Company investment in telecommunications plant at the state level. For the analysis, data from the Automated Reporting and Management Information System (ARMIS) and other publicly-available data were used. From the results of this econometric analysis, we concluded that UNE-P had a positive and sizeable effect on BOC investment in telecommunications plant, with each UNE-P line increasing on average BOC net investment by about $759.00. Subsequently, two formal responses to the analysis set forth in POLICY BULLETIN NO. 5 were released. On one hand, in a document filed in Verizon's Forbearance Petition (WC Docket No. 03-157), Verizon employed Drs. Thomas Hazlett (the Manhattan Institute), Arthur Havenner (Univ. California - Davis), and Coleman Bazelon (Analysis Group) to comment on the empirical analysis contained in the BULLETIN. Verizon's advocates proposed several modifications to our model, and presented a few alternate specifications. On the other hand, Z-Tel Communications, Inc. asked Dr. Carter Hill (Louisiana State University) to review the declaration of Hazlett, Havenner, and Bazelon as well as provide comments on the econometric model in POLICY BULLETIN NO. 5. Although the Phoenix Center, as a non-profit research institution under Section 501(c)(3) of the U.S. Internal Revenue Code, does not seek to influence the political process by participating as a party in any regulatory proceeding or engaging in lobbying of legislatures, we nonetheless believed it appropriate to respond to the comments of Hazlett, Havenner and Bazelon (HHB I) and to Carter Hill (Hill) in the interest of academic debate. This response was issued as POLICY BULLETIN No. 6, UNE-P Drives Bell Investment: A Synthesis Model (September 2003), where we summarized an extensive effort to evaluate the robustness of the empirical results reported in POLICY BULLETIN NO. 5. While these new specifications represented a synthesis of the modeling preferences of the Phoenix Center and the aforementioned economists, they nonetheless remained true to the neoclassical model of investment and valid econometric practice, to the extent allowed by the data. Despite wide variations in model specification, all our new empirical models confirmed that UNE-P competition a positive relationship between Bell Company investment in local telecommunications plant. As such, our new models affirmed both the results and specification of the empirical models in POLICY BULLETIN NO. 5. Notwithstanding, Verizon again hired Drs. Hazlett, Havenner and Bazelon to file a formal critique of POLICY BULLETIN No. 6 as part of Verizon's comments to the FCC's pending TELRIC proceeding. Again, although the Phoenix Center as a non-profit research institution under Section 501(c)(3) of the U.S. Internal Revenue Code does not seek to influence the political process by participating as a party in any regulatory proceeding or engaging in lobbying of legislatures, we nonetheless believe it appropriate to consider formally the comments of Hazlett, Havenner and Bazelon (now HHB II) as there is always the possibility that critical review, even when adversarial rather than academic in nature, may prove useful in improving our analyses or, in some cases, reveal trivial or substantial flaws that we may have inadvertently committed or overlooked. Moreover, such comments are also useful in providing direction for future research. After review, we believe the additional efforts by Verizon advocates Drs. Thomas Hazlett, Art Havenner, and Coleman Bazelon to discredit the statistical analysis summarized in POLICY BULLETIN NOS. 5 and 6 to be uncompelling. The nature of HHB's criticisms frequently relate to what cannot be estimated (given limited data), rather than what we have or can estimate. Much of their criticism is also directed at a statistical problem for which our models did not suffer (i.e., heteroscedasticity). This line of attack is unpersuasive and, in many cases, irrelevant. As such, we find no reason to alter or change our analysis or interpretation of it as summarized in the POLICY BULLETINS. We leave it to the discerning public, armed with the POLICY BULLETINS and all relevant documents (all made freely available at the Phoenix Center website), to make an educated decision on the validity of the analysis and the criticisms of it. As always, we appreciate the attention (adversarial or not), which signifies the relevance of our work.