Thursday, August 26, 2004

Reading :: Competition and Deregulation in Telecommunications

Originally posted: Thu, 26 Aug 2004 19:17:45

Competition and Deregulation in Telecommunications: The Case for a New Paradigm

by Thomas Duesterberg, Kenneth Gordon

This 95-page monograph was coauthored by two members of the Hudson Institute, a not-for-profit research organization that makes recommendations on public policy. Duesterberg served as Assistant Secretary for International Economic Policy at the US Department of Commerce during the first Bush administration and, before that, as Administrative Assistant to Sen. Dan Quayle. Gordon served as Chairman of the Massachusetts Department of Public Utilities and of the Maine Public Utilities Commission. With that kind of pedigree, it's not surprising that the book is both knowledgeable about the subject and enthusiastic about telecommunications deregulation. In fact, its central thesis appears to be that the Telecommunications Act of 1996 (TCA96), though it contains some deregulatory impulses and language, is not deregulatory enough and preserves managed competition rather than moving toward a free market. With this point in mind, the book provides a valuable critique of TCA96 paired with a really interesting historical perspective.

That historical perspective isn't of TCA96's repercussions -- the book was written only a year later -- but of the negotiations that led to it. Duesterberg and Gordon discuss a couple of things in detail. One is access charges, which "stem directly from policies designed to keep local-exchange rates low enough to meet political needs" and "to keep local rates low -- that is, to cross-subsidize them" (p.29). This arrangement worked fairly well as long as AT&T was a monopoly: access charges were leveled on long-distance charges (a relatively small fraction of wealthy users) and transferred to the local side of the business, keeping local access cheap, and since all that money stayed in the company regardless, it was a zero-sum game. (I oversimplify here -- an economist would point out that price fluctuations have tremendous effects on demand in what are actually separate markets. See p.33.) This arrangement, of course, works only as long as both services are controlled by the same monopoly (p.31); when other long-distance companies began competing, they could provide more competitive prices, partially because they initially didn't have to pay a local subsidy (p.51). More on this in a minute.

Access charges weren't the only form of cross-subsidy. Another was "the practices of capitalizing nonrecurrent expenses and using depreciation rates that fail to recognize the real rate of decline in the economic value of assets" (p.31). This practice of underdepreciation, the authors charge, resulted in "tomorrow's ratepayers underwriting the consumption of today's ratepayers" as well as underinvestment in facilities. "If competition is introduced ... the very recovery of the as yet underdepreciated amounts may be at risk": competition upsets this logic and destabilizes this second form of cross-subsidy (p.31).

Thus, the authors conclude, "an enormous subsidy burden was building" throughout AT&T's monopoly from the 1930s-1970s, a burden that "would haunt later regulators and enormously complicate their attempts to introduce competition as it became apparent that little or even none of the industry any longer exhibited natural monopoly characteristics" (p.32).

This discussion leads to the notion of universal service, which in some ways got us into this mess. "As currently applied under governmental policy, universal service refers to a system of direct and indirect subsidies that essentially maintains basic residential service at rates deemed affordable by regulatory authorities," the authors state (p.48). But -- despite the arguments of universal service's supporters -- the concept does not date back to the early days of telecommunication. "Instead, the term universal service was coined by the visionary head of AT&T, Theodore Vail, for the altogether mundane purpose of eliminating competition in telephone service and creating a monopoly for his company" (p.48). The term was coined in 1907 (p.49) and meant the need to unify telephone services under regulated local exchange monopolies -- a very different meaning than the contemporary one (p.49). The term doesn't even appear in the Communications Act of 1934 (p.50).

The notion of universal service led to the access charge cross-subsidies of which I spoke earlier. This arrangement worked well until others moved into the long-distance market and the Department of Justice filed an antitrust suit against AT&T in 1974. At this point, Eugene Rostrow, an AT&T consultant, testified to Congress in 1975 that universal service was tied to the practices of regulated monopoly (p.51). This notion wasn't spelled out in the Communications Act of 1934:

Unable to locate either the term or the concept of universal service in the text of the 1934 act, Rostrow instead appealed to the vague language in the act's statement of purpose, much in the spirit of the 1970s that discovered large concepts in the "penumbra" of founding texts.

Though the authors don't say so explicitly, this sounds like a reference to Roe v. Wade.

The point that leaps out to me here is that we have to be very careful when talking about cultural-historical development. In this case, certainly a concept called "universal service" developed historically; but the contemporary meaning becomes read back into the history, making it seem as if the kernel of the meaning has been there all along. But that contemporary meaning could not have existed in the original -- indeed, we see an interesting example of what I've been calling splicing here, in which contemporary legal trends are read back into the documents that predate them. As the authors say with some regret, "Historical accuracy matters less, unfortunately, than the political reality of universal service as currently understood, for the concept was explicitly enshrined in the Telecommunications Act of 1996" (p.52); the notion of universal service had been stabilized, nailed down, and now it undergirds TCA96.

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Wednesday, August 25, 2004

Reading :: Communications Policy and the Public Interest

Originally posted: Wed, 25 Aug 2004 19:53:26

Communications Policy and the Public Interest: The Telecommunications Act of 1996

by Patricia Aufderheide

If you were to write a short sociotechnical history of the US telecommunications industry -- and alas, I plan to do just that fairly soon -- there are a few large events you would have to address. One is the establishment of the Bell monopoly, more or less enshrined in the Communications Act of 1934. Another is the 1982 Modification of Final Judgment that broke Bell into AT&T (long distance, competitive) and the Regional Bell Operating Companies (RBOCs: local area, regional monopolies). And the third is the Telecommunications Act of 1996, which (among other things) opened up local telephone service to competition and mandated that RBOCs share their network infrastructure with competitors until those competitors could build their own facilities.

Facilities are what this fight is all about, of course. Bell established its monopoly in part by building the infrastructure when building infrastructure was relatively cheap. Imagine having to build your own facilities to compete in the local phone market: arranging for right of way, erecting telephone poles, laying cables, setting up a local loop, wiring jacks into people's houses, hiring workers to troubleshoot the physical network (which constantly decays and must be repaired). Ideally competing companies can do all of these -- and indeed they're beginning to do so -- but they couldn't be expected to do all that at once, and even if they did, consumers might have a hard time trusting them. But for a long time the question was moot, because Bell would let nothing -- nothing -- attach to its network. In fact, in the 1950s Bell sued a company that manufactured the "Hush-a-Phone" -- a small plastic cup that you attached to the phone mouthpiece so that you could speak softly (pp.21-22). Bell claimed that even this plastic attachment threatened the integrity of its network; the repercussions of this foolish claim led eventually to our present state, in which RBOCs must let companies attach to their networks. In a way, Bell was right: Hush-a-Phone contaminated and changed the nature of the entire network.

Bigger changes were in the offing, though:

Digital processing has changed the very characteristics of communications networks. Rapidly evolving computing that is based on distributed processing has made it possible to decentralize networks. Many of the decisions once made in large centralized switches are now made at intermediate stops or even within the consumer's telephone. Along with increased flexibility and the potential to reconfigure the very shape of networks and subnetworks, decentralized data processing has dramatically increased the amount of intelligence -- or the ability to respond to input and take action -- in communications networks. This innovation provides a fundamental challenge to the notion of common carriage, or the restriction of network providers to transmission alone, because the clear lines between content and conduit have become muddied. Networks themselves have information, or content, built into them. (pp.10-11)

That's the present state. And it's what allows the snarl of telecommunications infrastructures -- their name is Legion -- to work together coherently and appear to provide unified, uninterrupted service. Not by themselves, of course, but through the negotiated and legislated agreement known as the Telecommunications Act of 1996. The Act is examined and dissected in this book in terms of its history, development, negotiations, and repercussions. Aufderheide is not a sociotechnical theorist, at least not in the terms of the sociology of knowledge, but she does a good job of examining the workings of the Act and providing us with enough information to begin such an analysis.

For instance, she dissects the notion of universal service, a chimeric term that has been reinterpreted throughout the history of US telecommunications. The 1934 Act, for instance, stated its overarching purpose as "to make available, so far as possible to all the people of the United States, a rapid, efficient, nation-wide, and world-wide wire and radio communications service with adequate facilities and reasonable charges" (qtd. on p.18). AT&T raised long-distance prices to pay for investment in universal service -- "an important claim of social benefit, which could discourage adoption of a competitive model of service provision" (p.18). Of course, once a competitive model was introduced, AT&T's strength became its weakness. "In 1969, MCI won the right to attach to the AT&T network in order to offer what then were merely private network services for corporations" (p.22), and that attachment was free of universal service requirements. "The decision fundamentally challenged the old logic of cross-subsidy. AT&T charged the upstarts with 'cream skimming' -- taking the high-dollar clients and leaving AT&T with the large, expensive network to service" (p.22). Eventually, after the MFJ, universal service became a contribution from long distance service to local service (p.57).

This conflict in part drove the move toward deregulation, an attempt to move from the monopoly model to a competitive one. But how to maintain the commitment to universal service? One deregulative idea was for the government itself to offer "phone stamps," modeled on food stamps, directly to disadvantaged consumers. Imagine. Another, more decentralized version was described in Peter Huber's 1987 study The Geodesic Network: In a decentralized network, "each supplier can independently provide end-to-end service, and yet suppliers as a group can offer universal access. by providing horizontal links among their networks" (qtd. on p.29). Eventually, universal service was operationalized in the Telecommunications Act of 1996 as subsidies provided by providers to K-12 schools, libraries, and similar nonprofit parties at discounts of 20% to 90%. The discounts were set based on "poverty level, as measured by school lunch eligibility" (p.100) -- a wonderful illustration of how different sociotechnical networks can be spliced together.

Another interesting case is that of local service. In the MFJ, the RBOCs had been granted limited monopolies in local service. But with the Telecommunications Act of 1996, competitive local exchange carriers (CLECs) were allowed to compete. Ideally, as I mentioned earlier, these companies would build their own infrastructure; realistically, the price of entry was far too steep. So the Telecommunications Act mandated that in the short run, RBOCs must provide their services at a discount to the CLECs, which could then repackage that service and resell it to consumers at competitive prices. Eventually, the Act envisioned the CLECs bootstrapping themselves: building their own physical facilities, providing hardware-to-hardware or facilities-based competition (p.44). The Act "leaves to the FCC and to states (in an unclear formulation) the determination of what price is fair for resale"; mandates number portability; disallows mandated access numbers; and sets up payment arrangements for calls that traverse multiple competitors' networks (pp.63-64). Of course, once again the competitors cream-skimmed: By 1998, CLECs controlled 1% of local lines, but those lines represented 3% of local phone revenues, because the CLECs aggressively pursued business rather than residential lines (p.84).

I enjoy reading histories because they give interesting insights into how our world became the way it is, and this one was in general engagingly written. Aufderheide injects occasional flashes of humor that keeps the book lively. More importantly, the book keeps track of stakeholders, their influences, and their negotiations as the book moves inexorably to the passing of the Act and its repercussions.


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