The Public's Network?

Abstract

On April 8, 2004, the Heritage Foundation released a Backgrounder entitled Are U.S. Telecom Networks Public Property? by James Gattuso and Norbert Michel. There, the authors claim that the current telephone network was paid for by the shareholders of the incumbent Bell monopolists, and not by captive ratepayers who bore the downside risks of network construction over the past century, primarily as a result of the government's use of franchised monopoly and price regulation in local telecoms (i.e., guaranteed rates of return funded by consumers). To support this position, Gattuso and Michel utilize a financial model that relies primarily on an analysis of the amount of cash the Bell companies used to increase property, plant, and equipment (PP&E). However, the author finds that Gattuso and Michel's financial analysis is replete with analytical errors and data problems. After correcting these errors, Gattuso and Michel's conceptual framework implies that ratepayers bore the downside risk for the construction of 96% of the current Bell Company local exchange network. Thus, the author argues that ratepayers have a sizeable claim regarding the policy outcomes of efforts to promote competition to the incumbent Bell monopolists' wireline networks.