57p. · Telecommunications. A Report of the Annual Aspen Institute ... P.O. Box 222, Queenstown, MD 21658. Collected Works - Proceedings (021) Reports - Evaluative (142)

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Entman, Robert M.Competition, Innovation, and Investment inTelecommunications. A Report of the Annual Aspen InstituteConference on Telecommunications Policy (12th, August 10-14,1997, Aspen, Colorado).Aspen Inst., Queenstown, MD.ISBN-0-89843-235-91998-00-0057p.

Aspen Institute, Publications Office, 109 Houghton Lab Lane,P.O. Box 222, Queenstown, MD 21658.Collected Works - Proceedings (021) Reports - Evaluative(142)

MF01/PC03 Plus Postage.Competition; Conferences; Costs; Federal Regulation;Government Role; Information Industry; *Information Policy;Information Technology; Investment; State Regulation;*Telecommunications

The topic of the 1997 Conference, "Competition, Innovation,and Investment in Telecommunications," reflects one of the important areasfor concern in the telecommunications community. Representatives oftelecommunications carriers, cable industries, consumer, academic, andregulatory bodies at the federal, state, and local levels, wocked togetherover four days to define the difficult issues inherent in these issues andsuggest practical resolution of these dilemmas. In this report, therapporteur for the Conference records some suggestions that reflect groupconsensus as well as some issues in which no consensus was reached,reflecting the diverse positions held within the telecommunications industry.The following topics are highlighted in the report: barriers to investment;regulatory reform; regulatory treatment of new investment by incumbent localexchange carriers (ILECs); regulating wholesale pricing by ILECs; regulatingretail pricing by ILECs; taxes and rents on telecommunications imposed bylocal governments; and public investment in telecommunicationsinfrastructure. "An Essay on Competition, Innovation, and Investment inTelecommunications" (Dale N. Hatfield and David E. Gardner) and a list ofconference participants are appended. Author profiles, previous publications,and a description of the Aspen Institute Communications and Society Programare also included. (AEF)

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Competition, Innovation, andInvestment in TelecommunicationsThe Twelfth Annual Aspen InstituteConference on Telecommunications Policy

Robert M. Entman, Rapporteur

"PERMISSION TO REPRODUCE THIS I

MATERIAL HAS BEEN GRANTED BY

S. Ralston

TO THE EDUCATIONAL RESOURCESINFORMATION CENTER (ERIC)."

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U.S. DEPARTMENT OF EDUCATIONOffice of Educational Research and Improvement

EDUCATIONAL RESOURCES INFORMATIONCENTER (ERIC)

This document has been reproduced asreceived from the person or organizationoriginating it.

O Minor changes have been made toimprove reproduction quality. TheAspePPoints of view or opinions stated in thisdocument do not necessarily represent Instituteofficial OERI position or policy. 9

4,

Competition, Innovation,and Investment in

Telecommunications

A Report ofThe Twelfth Annual Aspen Institute Conference

on Telecommunications Policy

byDr. Robert M. Entman

Rapporteur

TheAspe0Institute

Communications and Society ProgramCharles M. Firestone

DirectorWashington, DC

1998

3

For additional copies of this report, please contact:

The Aspen InstitutePublications Office109 Houghton Lab LaneP.O. Box 222Queenstown, MD 21658Phone: (410) 820-5326Fax: (410) 827-9174E-mail: publications@aspeninstorg

For all other inquiries, please contact:

The Aspen InstituteCommunications and Society ProgramSuite 10701333 New Hampshire Avenue, NWWashington, DC 20036Phone: (202) 736-5818Fax: (202) 467-0790

Copyright © 1998 by The Aspen Institute

The Aspen InstituteSuite 1070

1333 New Hampshire Avenue, NWWashington, DC 20036

Published in the United States of America in 1998by The Aspen Institute

All rights reserved

Printed in the United States of America

ISBN: 0-89843-2359Bin No. 98-010

4

Contents

FOREWORD v

COMPETITION, INNOVATION, AND INVESTMENT INTELECOMMUNICATIONS

Barriers to Investment 2

Regulatory Reform 4

Regulatory Treatment of New Investment by ILECs 6

Regulating Wholesale Pricing by ILECs 9

Regulating Retail Pricing by ILECs 13

Taxes and Rents on Telecommunications Imposed byLocal Governments 14

Public Investment in Telecommunications Infrastructure 18

Conclusion 20

APPENDICES

An Essay On Competition, Innovation, and Investmentin Telecommunications 25Dale N. Hatfield and David E. GardnerConference Participants 43

ABOUT 'THE AUTHORS 47

PREVIOUS PUBLICATIONS 49

THE ASPEN INSTITUTE COMMUNICATIONS ANDSOCIETY PROGRAM 51

111

Foreword

The Twelfth Annual Aspen Institute Conference on Telecom-munications Policy was held August 10-14, 1997 in Aspen,Colorado, over a year after the passage of the Telecom-munications Act of 1996. The thrust of the Act was to promotetrue and effective competition in and among telecommunicationsservice providers. Congress envisioned a vigorous, expanding sys-tem of advanced communications goods and services, an end tomonopoly in telephone, cable, and other transmission and accessindustries, and a better civic society and economy as a result.

The sentiment of the nation as it evaluates implementation ofthe Act, however, is mixed. Significant progress in some areasthus far has been balanced by stalemate in others.

The topic of the 1997 Conference, "Competition, Innovation,and Investment in Telecommunications," reflects one of theimportant areas for concern in the telecommunications communi-ty a year after the Act. Representatives of telecommunications car-riers (local exchange, long distance, and wireless), cable indus-tries, consumer, academic, and regulatory bodies at the federal,state, and local levels, representing a broad cross-section of inter-ests, attitudes, philosophies, and viewpoints, worked togetherover four days to define the difficult issues inherent in that topicand suggest practical resolution of these dilemmas.

The Conference began with a presentation by Dale Hatfield,then chief executive officer of the telecommunications consultingfirm Hatfield Associates, who gave participants some backgroundon the risks that competitive local exchange companies may see asthey consider investment in the local exchange. (Hatfield's presen-tation was based on a paper co-authored with David Gardner andreprinted in the Appendix of this report.) Participants then turned

v

Vi COMPETITION, INNOVATION, AND INVESTMENT IN TELECOMMUNICATIONS

to a full agenda of questions concerning legitimate social goals andgovernment regulations at the federal, state, and local levels whichaffect incentives to invest and, ultimately, the amount of competi-tion that develops. Have government regulations created anyunintended consequences for expanding competition? Are therechanges to current regulations that would stimulate investment?

The answers to these questions have tremendous implicationsfor the emerging networked society and the economy as a whole.Answers were often difficult and contentious. But that hasbecome typical of these Aspen conferences, and in spite of theirconflicting viewpoints, participants were able to define their dif-ferences and in some cases make constructive suggestions forimprovement. Thus, in the following report, Professor RobertEntman, the rapporteur for the Conference, records some sugges-tions that reflect group consensus as well as some issues in whichno consensus was reached, reflecting the diverse positions heldwithin the telecommunications industry. While the report gener-ally reflects the sense of the group, the statements made hereshould not be taken in any way as the views of any particular par-ticipant or participant's employer unless noted otherwise.

Probably the area of greatest significance in the reportwherea partial consensus emergedis pricing. The group struggled atlength over what many saw as a disincentive for incumbent localexchange carriers to invest in new technology if they must sharethat technology with competitors at wholesale prices. While par-ticipants generally agreed with the concept of a sunset to currentwholesale pricing and unbundling requirements, they failedto reach consensus on a specific test for when that sunsetshould occur.

AcknowledgmentsThe Aspen Institute would like to commend conference partic-

ipants for their openness, constructive attitudes, and willingnessto grapple with the obtuse questions presented by the current reg-ulatory milieu. A list of conference participants follows in theAppendix. We would also like to thank Robert Entman, our rap-porteur for all twelve years of the Conference, for his excellentrepresentation of the deliberations as well as his help in develop-

7

Foreword vii

ing reading materials; our research associate, Susan Oberlander,for her help in developing the conference agenda and readingmaterials; and Elizabeth Golder, program coordinator, for herwork on conference arrangements and this report.

Finally, but very significantly, we want to thank our Conferencesponsors from competing organizations whose contributions madethe Aspen Institute Conference on Telecommunications Policy andthis report possible. They are: Ameritech, AT&T, Bell Atlantic,Cablevision Systems, California Cable Television Association, CoxEnterprises, Intel, MCI, Nortel, NYNEX, Sprint Spectrum, TCGTeleport Telecommunications Group, and U S WEST.

Charles M. FirestoneDirector, Communications and Society ProgramThe Aspen InstituteApril 1998

a

Competition, Innovation,and Investment

in TelecommunicationsRobert M. Entman

The Aspen Institute Conference on Telecommunications Policymet in August 1997, as an atmosphere of growing frustrationenveloped the industry.' More than a year after passage of thelandmark Telecommunications Act of 1996, many observersbelieved little of its promise had been realized. Most significant,many felt, was the failure of local exchange telephone competi-tion to take off. The central dilemma addressed by this year's con-ference was how public policy might work better to stimulate effi-cient investment and vigorous competition in local exchangetelecommunications.

Considering this core question in no way denigrates the impor-tance of achieving the other objectives in the Act, or of investmentand competition in other market sectors. But most conference par-ticipants appeared to agree that widespread penetration of facili-ties-based local exchange competition will be the sine qua non, anecessary if not sufficient indicator of success for the 1996 Act.

Beyond the general agreement on the key issue, however, laya wealth of disputed diagnoses and variegated solutions. As weshall see, disputes arose over the meaning or measurement ofsuch terms as facilities-based and competition. Nor was the agen-da entirely consensual. Some participants felt the conferenceshould have focused as much on competition in broadband ser-vices as competition in local exchange service. With the likely

1 Several particpants have changed employment since the Conference was held.References to participants affiliations within the report are to the position held at thetime of the Conference. See appendix for affiliations as of March 1998.

1

2 COMPETITION, INNOVATION, AND INVESTMENT IN TELECOMMUNICATIONS

convergence of telecommunications networks toward a multime-dia Internet, with cable television and telephone companies' plansto challenge each other in broadband, these attendees argued forexpanding the discussion.

This report documents the debates and the suggestions thatemerged from this year's energetic colloquy, with an emphasis onthe local exchange market. Even more than usual, the report rep-resents the rapporteur's distillation and interpretation of a seriesof conversations and working group proposals far too intricateand lengthy to publish verbatim or even to summarize usefully.Given the complexities of this first post-Act year, and the manycomplaints and remedies that reverberated through the workinggroup and plenary meetings, an interpretive essay will provide themost helpful information for those seeking the essence of ourdeliberations. Unless cited to a particular person, none of thecomments herein should be taken as embodying the views or car-rying the endorsement of any specific attendee at the conference.

Barriers to InvestmentThe agenda for the conference grew out of the perception that

imperfections in the 1996 Act and other telecommunications poli-cies, along with serious and even crippling problems with the reg-ulatory process, have stifled efficient investment in the industry.Participants agreed with Dale Hatfield, who, at the time of theconference, was CEO of the consulting firm Hatfield Associates,when he emphasized that simply increasing capital inflow orreaching some arbitrary absolute level of investment is not thegoal. The idea is to encourage economically efficient investment,based on rational expectations for the evolution of a competitivemarket. Increased investment motivated by incorrect prices, forexample, would hardly be desirable. On the other hand, if regu-lated prices or enduring artificial barriers to entry distort invest-ment decisions, that most certainly is a matter for concern.Participants generally agreed that policy at federal, state, and locallevels is having such effects. Some of the hindrances to efficientinvestment in some or all telecommunications market sectorsmentioned are listed below. This is a list of contentionsmost ofthe items would not be considered significant impediments by atleast some participants.

1 0

The Report 3

Carrier certification requirements that are costly, cumber-some, and time-consuming;

Uncertainty over whether state or federal regulators' jurisdic-tion applies;

Difficulty of obtaining access to rights-of-way, buildings, andantenna sites;

Uncertain regulatory status of the Internet;

For incumbent local exchange carriers (ILECs), requirementof total-element long-run incremental cost (TELRIC) pricing,unbundling of service elements, and uncertainty over abilityto recover embedded costs;

Inefficient, regulation-set prices for ILECs at the retail level;

Universal service obligations that could require ILECs todeploy any new service ubiquitously;

Regulatory processes that create uncertainty and delay anduse up resources in "gaming the process" that might other-wise be invested in telecommunications itself;

Use of telecommunications, especially by local governments,as a source of tax revenues, and specifically, the impositionof rents or taxes by local governments that are unrelated tocosts of using or maintaining rights-of-way;

Regulatory commissions' lack of a clearly defined mission ina changed and rapidly changing environment;

The frequent need to deal with multiple, sometimes conflict-ing, regulatory and judicial jurisdictions; and

Difficulties in enforcing policies that are meant to encourageequitable interconnection agreements between ILECs andcompetitive local exchange carriers (CLECs).

Admittedly, this enumeration reads something like a laundry listof company complaints about regulation in general. Perhaps theimplication is that most of the frustrations that industry represen-tatives cite can diminish firms' incentives to invest, enter, andcompete. The issues and potential solutions that generated themost interest and discussion were:

1 1


Regulatory process reform;

Regulatory treatment of ILECs' entry into new areas outsideof local exchange service;

Regulation of wholesale and retail prices charged by ILECs,specifically, enforcement and potential phaseout of TELRICpricing and unbundling requirements, and restructuring ofretail rates;

The nature, legitimacy, and proper level of taxes and rentson telecommunications that are imposed by local govern-ments; and

The potential for and desirability of public investment intelecommunications infrastructure.

The remainder of the report will concentrate on these areas.

Regulatory ReformIn two different working groups and the plenary sessions, a

clear consensus emerged that the current regulatory process at alllevels of government needs substantial, even radical, rethinkingand reform. The fast pace of change in information and commu-nication technology drives a constantly transforming series ofpotential new services, along with adaptations of existing ones.The contrast between the almost geometric rate of alteration inthe technology and possible applications, and a regulatoryprocess laden with opportunities for obstruction and delay, couldhardly be more marked. The costs to the economy and to socialwelfare are surely enormous. In the words of Eli Noam, directorof Columbia University's Columbia Institute for Tele-Information,"The bottleneck isn't the local loop anymore, it's the policyprocess."

A number of ;nteresting suggestions emerged for uncloggingthe blockage. One that engendered no dissent was to eliminatethe need for CLECs to obtain certification at the federal or statelevel. Instead, registration should be sufficient, which will avoidthe delay and associated problems of the certification process.Beyond this relatively straightforward item, however, were morecomplicated, less readily agreed upon options, all designed toreduce the cost and delay inherent in state regulation:

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The Report 5

Speedily resolving carrier-to-carrier complaints, perhapsusing special "quick look" methods for provisional resolutionof disputes, with due process to follow;

Similarly expedited resolution of consumer complaints;

Modifying the roles of Public Utility Commissions (PUCs) toact more as legislative, policy-making bodies, rather than ascase-by-case adjudicators. A corollary that received consider-able support is to use administrative law judges to make spe-cific rule-applying decisions, subject to PUC approval;

Conducting more proceedings at PUCs via paper filingsrather than oral hearings; and

Based on the FCC's unusually rapid production of rules toimplement the 1996 Telecommunications Act, establishingclear deadlines and sunset provisions for appropriate PUCregulations.

The ultimate dream for some at the conference was a completeend to regulation, so that all these process reforms would becomemoot. Yet merely having new market entrants does not immedi-ately eliminate the need for regulation. On the contrary, partici-pants agreed, the burden on regulators in many respects hasgrown to the point that it merits the label "overload." Eli Noamsuggested developing a ten-year process for total deregulation, oras close to total as feasible. "We should," he said, "be planningnow how to eliminate regulation where possible and how tomake regulation where needed as efficient as can be." Heobserved that even ten years from now, significant numbers ofconsumers will not enjoy competitive carriers. Those conditionswill necessitate some regulatory apparatus. Moreover, there willremain the big issue of whether a given service or carrier partici-pates in a market sufficiently competitive to merit deregulation.Participants could not agree whether having just two firms vyingin local exchange markets would constitute real competition. Onthe other hand, everyone concurred that having resale competi-tion only would not create a genuine competitive market. Manyassented to the possible need for asymmetric regulation in thefuture, with ILECs subject to more extensive oversight in some

13


respects than CLECs. Then the question will return again to mak-ing that regulation as efficient as possible.

To reduce the scope of regulatory intervention, Noam and oth-ers suggested focusing on noncompetitive markets (such as somerural areas) in advance. As Joan Smith, commissioner on theOregon Public Utilities Commission, observed, a critical goal forher state and others, as competition and advanced capabilitiespenetrate, will remain assuring that everyone, "all income groups,in rural areas and cities, 100 percent of the country," has access.If this and other goals require some regulation, we should estab-lish a forward-looking institutional process to determine, wellbefore the time is upon us, ways of enhancing its efficiency.

Regulatory Treatment of New Investment by ILECsThe conference devoted substantial time to the way regulation

affects investment by ILECs. Investment in innovative technolo-gies and services by these dominant local carriers can obviouslyprovide great benefits to society. But many participants voicedconcern about ILECs leveraging their market power in the tradi-tional local exchange market to the disadvantage of competitorsand consumers alike. The same worry motivated many of the pro-visions in the 1996 Act, including the requirement that incumbentsunbundle network elements and sell them at marginal cost tocompetitors. The next section of this report takes up the matter ofpricing the unbundled elements. In this section the focus is on thescope of the unbundling and on other aspects of regulating theILECs' new market activities.

Henry Geller, communications fellow at The Markle Founda-tion, after analyzing the federal regulatory scheme's impact oninvestment, proposed that a separation be enacted into policybetween existing and new network components installed by theILEC. He suggested that the unbundling requirements, which areembedded within Section 251(c) of the Act, should apply only tothe existing network. To further Section 706, these requirementswould not apply to future advanced telecommunications capabil-ities created by the ILEC.

How any demarcation of new from old network investmentwould work in practice generated substantial discussion. Geller

14

The Report 7

suggested defining the existing network as of a certain date.Additions to facilities after that would not be made available tocompetitors under the Section 251 regime. As an example he citedasynchronous digital subscriber lines (ADSL), which will enablethe ILEC to offer high-speed Internet access. In the current situa-tion, he asserted, the incumbent has little incentive to bear thenecessary cost to upgrade the network since it would immediate-ly have to make the ADSL capacity available to competitors at reg-ulated wholesale rates. For that very reason, CLECs may also havelittle incentive to invest in ADSL facilities, since they could pro-cure the capacity from the incumbent without risking much capi-tal. The Geller reform would augment the incentives of both sidesto install ADSL capacity themselves. In Geller's view, this reformwould put into place win-win incentives for both ILECs andCLECs. Geller further argued that governments could implementthis treatment of the ILEC without any new legislation.

Although nobody quarreled with the basic idea of improvingincentives for new investment by the incumbent and competitivecarriers, questions arose about possible drawbacks. Geller saidthe ILEC could separate its operation into two parts. One wouldprovide local loop, remaining subject to Section 251. The otherwould be a separate, subsidiary CLEC using its own switches orother facilities to provide advanced services, such as video distri-bution or enhanced Internet connections. Regulators could treatan ILEC subsidiary engaged in broadband services as they wouldany other CLEC.

Jonathan Sal let, chief policy counsel for MCI, suggested apply-ing to the ILECs' activities a standard of market power. Gellermaintained the ILEC has no market power in such areas as videodistribution and high-speed Internet connection, where it willface competition from several competitors, especially cable. DanReingold, first vice president for global telecommunicationsresearch at Merrill Lynch, responded that if the incumbent carrierinstalls ADSL, it would indeed have market power wherever cableis not offering broadband, and that discouraging such entry by theincumbents would rob consumers of access to innovative tech-nology and services. Robert Crandall, a senior fellow in econom-ic studies at the Brookings Institution, sharpened the focus by


suggesting an antitrust standard rather than market power, sincethe former means government will look for and prevent any useof the market power to impede competition. Endorsing this idea,Commissioner Steven Wallman of the Securities and ExchangeCommission said, "If the incumbent local exchange carrier hasclear market power we don't want to prevent it from investing,just from using that power to advantage its new services."

Larry Strickling, Ameritech's vice president for public policy,seemed comfortable with this concept. He said that he could read-ily agree to policies that ensured ILECs would not discriminate infavor of their own CLEC affiliates or in favor of any particulartechnology that helps its affiliates. However, David Turetsky, vicepresident of law and regulatory policy at Teligent, asserted thatthis guarantee would not prevent the ILECs from deliberatelyallowing their older facilities to deteriorate, especially whenwholesaling them to competitors. Even if there is no overt dis-crimination, the ILECs might put the bulk of their corporateenergies and the best people into the new subsidiary. Stricklingcountered that the new entity would be buying loops from theincumbent, so the incumbent's own CLEC would actually consti-tute an important source of demand for high-quality local loops.Unsatisfied, Turetsky pointed to the precedent of regional Belloperating companies discriminating against long-distance compa-nies after the divestiture of AT&T, even when the Bell companieshad no stake in the long-distance market themselves. Here theirincentive to discriminate would be far greater since they would beserving direct competitors. Compounding problems with the idea,Ron Binz, president of the Competition Policy Institute, predictedthat the old bugaboo of joint and common costs would rear itshead in any scheme to operate a truly separate subsidiary. CharlesFirestone, director of the Communications and Society Programat The Aspen Institute, suggested that regulators might alleviateconcerns about degradation in the ILECs' networks, and aboutdiscrimination against competitive carriers, by requiring ILECs'subsidiary CLECs to buy their local access from their parents.

There were suggestions at the conference, some veiled andsome quite direct, that it might be time to consider a "DivestitureII." Such a policy must navigate between the Scylla of discourag-

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The Report 9

ing new investment by ILECs, the largest firms in the industry, andthe Charybdis of allowing them to enter and perhaps either extin-guish competition or severely limit its scope. In the divestiture sce-nario, the ILECs might be split into two independent firms, withone providing (what is likely to remain for the foreseeable future)the bottleneck local loops, and the second competing with otherCLECs to offer advanced and traditional telecommunications ser-vices. Gail Garfield Schwartz, vice president for public policy andgovernment affairs of TCG Teleport Communications Group, sug-gested explicitly that the ILECs might follow the lead of the small-er incumbent local carrier, SNET, of voluntarily splitting wholesaleand retail operations. The goal would be for the ILECs' retail ser-vices to operate on an equivalent footing with the CLECs. She pre-dicted this would induce the ILECs not only to provide bottleneckfacilities such as local loops in a nondiscriminatory fashion, butalso to terminate all traffic without discrimination. She suggestedthat traffic termination might be the ultimate bottleneck functionsince eventually even local loops will be competitively supplied.Divestiture of the ILECs did not generate sufficiently careful atten-tion at the conference to merit further discussion here.

Regulating Wholesale Pricing by 1LECsIronically, given its stated goals, one of the 1996 Act's major

provisions was identified as creating a serious impediment toinvestment by the ILECs: requirements that they provide unbun-dled network elements (UNEs) and price them for resale at total-element long-run incremental cost (TELRIC pricing). Most partici-pants agreed that the so-called UNE/TELRIC mandate discouragesthe incumbent from making large investments in the network. Ifthey have to share the product of new investment with their com-petitors at prices that regulators may set at barely compensatorylevels, why would ILECs take the risk? At the same time, in someparticipants' view, knowing they can gain access at regulatedprices to any new ILEC facilities gives CLECs less incentive tobuild their own. The latter point was more controversial. But asCLECs do build their own systems, there will be a smaller collec-tion of bottleneck facilities and more reason to seek alternativesto the UNE/TELRIC regime. The two proposals that received the

17


most attention were (1) to end TELRIC pricing on a phased basisthat would vary from place to place depending upon certain cri-teria, and (2) to end it by a time-certain termination. Drawingheavily upon a proposal offered by Dan Reingold of MerrillLynch, this section discusses the two alternatives.

Reingold suggested that TELRIC pricing be phased out, in effectallowing UNE prices to reach, over time, the level where theywould help compensate the ILEC for historical costs. TELRIC pric-ing initially offers new entrants a kick-start, enabling them to offerlocal service to customers faster and at lower cost than by con-structing their own facilities. In this sense, new entrants can usethe TELRIC prices (which some believe average 50 percent belowcurrent aggregate retail rates) to offer price-competitive servicesand thereby build up local customer bases prior to and duringconstruction of their own facilities. Establishing a transition planwould provide new entrants the certain knowledge that such dis-counts would not last, and thus stronger incentives for investingsoon in new facilities. At the same time, knowing they would befreed of TELRIC requirements once certain conditions were met,ILECs would receive encouragement to invest more in upgradinglocal facilities to offer innovative new technologies and services.

Reingold proposed specifically that TELRIC pricing be phasedout over three years, beginning from the date that the ILEC in aparticular state received FCC approval to offer long-distance ser-vice to in-region customers, that is, the date they achievedapproval under Section 271 of the 1996 Act. The Act charges theFCC generally to grant Section 271 approval when the incumbentcarrier faces facilities-based competition in the local exchangemarket (defined by the Act as having a competitor that exclusive-ly or predominantly uses its own facilities to deliver business andresidential service). The trigger date of three years after Section271 approval was proposed in order to accommodate the differ-ing paces at which local competition would develop across dif-ferent geographical areas of the United States.

Several participants felt a more finely tuned geographic stan-dard should be used for deciding when and where to phase outthe TELRIC prices. Absent a distinction between, say, urban andrural markets within a state, some feared that the latter might be

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The Report 11

left without competitive facilities or improved incentives for ILECinvestment once the state's urban areas became competitive.Moreover, David Turetsky of Teligent argued that Congress doesnot believe Section 271 approval is equivalent to effective com-petition, since the Act provides that for at least three years aftersuch approval the ILEC must operate separate affiliates.

For this and other reasons, some participants felt that regulatorsshould make even finer judgments about the competitiveness ofspecific network elements and customer categories (large versussmall business versus residential) in particular places before elim-inating the TELRIC rules. Among others, Bill Kennard, at the timegeneral counsel of the FCC, Joel Lubin, regulatory vice presidentof AT&T, Gail Schwartz of TCG, and Larry Strickling of Ameritechseemed to find common ground in suggesting that the issue hereas elsewhere is market power. All indicated regulators could finda workable standard for judging and containing an ILEC's marketpower, lifting the TELRIC pricing rules only when competition suf-ficiently diminishes that power. Lubin suggested requiring thatILECs make new investments through a separate subsidiary thatwould have to act in a technology-neutral and competitor-neutral way. To minimize the incumbent's ability to leverage anymarket power from its essential facility, Strickling said it might beappropriate to assess whether competitors have an alternative tothe incumbent local exchange carrier. Thus TELRIC pricing forlocal switching might end before TELRIC pricing for local loops,since alternatives for the former likely will be available wellbefore alternatives for the latter. Indeed, some note that switch-es are widely available for purchase from competitive suppliersright now, allowing a nearer-term phaseout of TELRIC pricing forlocal switching.

The notion of a switch phase-out was not specifically addressedor opposed, but this may well have been the consequence of thediscussion moving to a more general plateau. Thus, several par-ticipants countered the above ideas, arguing that requiring regu-lators to make such fine judgments would likely deepen themorass of legal wrangling, political gamesmanship, and govern-ment gridlock, in effect postponing the incentives for years. Intheir view, state-wide termination of TELRIC pricing three years

13


following fulfillment of the 1996 Act's competitive checklist andfacilities-based provider conditions serves as a reasonable com-promise. In response, the other side maintained that analysis ofcompetitiveness by place and service would work, and even ifcausing some delays would mark a major improvement over thecurrent version of gridlock. Almost everyone seemed to agree thatit would be both desirable and feasible to retain some kind ofregulation to set wholesale prices at incremental costs for localloop transport and termination, the segment of the network leastlikely to see vigorous competition in the near future.

This last agreement extended to advocates of the other majorproposal, which was to set a definite date to end UNE and whole-sale pricing rules, with five years being the most commonlyaccepted time frame. Alternatively, Noam of Columbia Institute ofTele-Information suggested that rather than enforcing terminationof TELRIC pricing, the policy might apply a sunset, which wouldallow policy makers to renew the TELRIC regime if officials feltcompetitive conditions warranted.

This second alternative aroused significant opposition. Mostimportantly, argued Sal let of MCI, a time-certain termination cre-ates incentives for delay by the ILEC. The ILEC would know thatby staving off competition for five years it could win big, gainingfreedom from TELRIC rules while undermining competition in itslocal market. And the ILEC might still refrain from much newinvestment during those five years. Moreover, several participantssuggested, whatever the effect on the ILEC's incentives, TELRICprices do not delay facilities investment by important new com-petitive carriers like fixed wireless and cable television. Lubin ofAT&T asserted that these firms would not make investment deci-sions based on TELIUC rates but "on the basis of retail pricestoday." Even if TELRIC prices are set at 50 percent of current retailrevenue, such a discount does not provide the unfair bonanzato new entrants that some might believe, in Lubin's view. Com-petitors have to bear high costs for marketing, customer acquisi-tion, and customer care and service. And as Binz of theCompetition Policy Institute argued, "a competitive carrier wouldbe foolish to stake the future on permanent TELMC pricing," sinceit would assume the end of that regime at some point. Given their

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The Report 13

view that TELRIC rules do not appreciably reduce incentives forinvestment by CLECs, these participants felt the benefits of time-certain termination of TELRIC pricing would not be worth the riskof ILECs exploiting the situation.

Regulating Retail Pricing by ILECsEven if all the players could settle on a way to resolve the

UNE/TELRIC pricing issueand the conference gave little reasonfor optimism on that scoregovernment officials still must con-front the distortions from the implicit subsidies embedded withinretail prices for local service. Many participants felt competitiveentry for residential local service will occur slowly, if at all, in theabsence of change in the structure of retail telephone rates. It wasproposed and widely agreed that policy should strive to separateretail prices from subsidies, by making the latter explicit ratherthan burying them in pricing formulae.

Among the specific components of rate realignment suggestedat the conference:

Geographic deaveraging of rates within perhaps three broaddensity bands, encompassing urban, suburban, and rural.Given the finite amount available in the high-cost fund, thiswould enable targeting of subsidies to those in the highestcost areas.

Bringing residential and business rates into closer calibra-tion with each other and with the costs of service. Ratechanges would be phased in over a defined time period.

Making subsidies explicit and portable, so that consumers inhigh-cost areas could use them, after the introduction ofcompetition, for the telecommunications services and carriersthey wished.

Providing rate flexibility to ILECs. In order to prevent preda-tory pricing but encourage competition, a floor for ILEC ratesmight be set by a formula that allows rates to go down to theequivalent of TELRIC plus any explicit subsidy.

Finding methods to create more efficient price structures forhigh-usage lines, whether serving businesses or residences(e.g., for Internet access).

21

14 COMPETMON, INNOVATION, AND INVESTMENT IN TELECOMMUNICATIONS

Often enunciated at this and other policy conferences andenshrined within the 1996 Act, these goals have long eluded pol-icy makers sensitive to the political fallout. And certainly politicalrealities and other considerations dictate protection of residentialcustomers from rate shock. But this need not preclude all localrate increases. Conference dialogue suggested that proper politi-cal leadership and forthright explanation of the benefits fromcompetition could enhance the political feasibility of raising localservice rates. A persuasive case can be made that in numerousareas competition will soon yield lower prices and innovativeservices to compensate for many initial rate hikes. The publicdoes increasingly appreciate the attractions of an informationsuperhighway, of multichannel, multimedia services, and ofdiverse choices for local, wireless, and long distance. Precedingefforts to enact the rate reforms listed, officials from private andpublic sectors alike could organize a program of education forconsumers about the benefits of advanced telecommunicationsand the need for regulatory reform to encourage investment. Thisprogram would emphasize that investors will take greater risk andinvest more in competitive local facilities and alternative tech-nologies if regulators allow competition to drive prices (both retailand wholesale) from current levels over time. However, rate pay-ers should receive assurance that retail price levels will remainregulated as needed to protect consumers from market powerexerted through control of bottleneck facilities.

Taxes and Rents on Telecommunications Imposed byLocal Governments

The topic of charges assessed by local government upontelecommunications firms generated intense discussion, especial-ly within the working group originally charged with the task ofconsidering the impacts of local regulation on investment. Thegroup contributed a detailed report of its deliberations. Many ofits specific points were never discussed in plenary session, nor didthe working group reach internal consensus. However, this sec-tion draws heavily upon elements of the working group's draft.The working group did come close to consensus about whetherlocally imposed charges do in fact create barriers to investment,

2 2

The Report 15

with almost all agreeing they do. The working group also agreedthat local charges can be imposed in ways that distort investmentin telecommunications. Some did argue that taxes and rents donot constitute a demonstrable burden on investmentwitness thesubstantial continuing new facilities expenditures by cable firmsand CLECs in many markets. All assented to the proposition thatlocal charges should be competitively neutral and should not, forexample, favor cable operators over incumbent telecommunica-tions providers or favor incumbents over competitors where thedifferent entities engage in the same activities.

The working group provided some much needed definitionalclarification. It suggested that the term fees refers to chargesimposed to recover government costs of providing a service orregulating an activity. To be considered a fee, revenues generat-ed thereby can be used only to recover government costs. On theother hand, the term rents refers to charges imposed in exchangefor the right to occupy public property. These charges reflect thevalue to industry users of property owned by local governmentson behalf of local taxpayers. The term taxes then covers chargesimposed without any necessary relationship to any service pro-vided or privilege granted by the local government.

There seemed wide agreement within the working group andat the larger conference that state and local governments can andshould be able to recover the actual costs imposed upon them bythe operation of telecommunications facilities. Cost recoverycomes by definition through imposition of local fees, where thesecharges are designed only to recoup incremental costs created bythe installation of telecommunications facilities. Fees cover bothshort and long term costs related to maintenance of the publicrights-of-way. As to taxes, the group agreed that telecommunica-tions businesses should be taxed in a comparable manner and atcomparable rates to other businesses. This means there should beno special taxes levied upon telecommunications entities that arenot assessed upon other business firms.

Rents provoked the most contention. Consensus broke downalong predictable lines. Representatives of the government per-spective usually defended the right of municipalities to chargerents. Firestone of The Aspen Institute pointed out that cities actu-

23


ally have conflicting interests. On the one hand, they are oftenstrapped financially and must maintain or expand revenue levels.Especially attractive are those sources like telecommunicationsrents that are typically far less politically visible and volatile thanlocal sales, income, or property taxes. On the other hand, citiesvery much desire investment in their area's telecommunicationsinfrastructure and the concomitant benefits to their localeconomies and constituents. Proponents of the cities' rights tocharge rents argued that local taxpayers are entitled to receive areturn on their investment when firms use the public streets togenerate private profit. Moreover, they maintained, governmentsare not the only providers of rights-of-way. Using public rights-of-way reduces the transaction costs that would be involved innegotiating to obtain rights-of-way from multiple private propertyowners. And as Firestone suggested, local officials have a built-inreason to avoid excessive rental charges: angry constituents' com-plaints if services available to other communities cannot be pro-vided within their jurisdiction.

Most taking the firms' vantage disputed the right or desirabilityof governments charging rents. They observed that rents discour-age precisely the deployment of new telecommunications facilitiesand services that should be everyone's goal. They also assertedthat, as monopoly providers of access to streets, local governmentscan extract excess levels of payment.

Notwithstanding the wide gulf between these positions, most ofthe working group agreed that if rents are charged for the right tooccupy public rights-of-way, comparable occupancies should becharged at comparable rates for all telecommunication providers,including cable television operators. The devilish details of imple-menting comparability received only brief attention. For example,"occupancy" can be ambiguous, say if a company changes fromits initial menu of services or technologies to a new mix over time.Neither this element nor others were resolved. Working groupmembers agreed that rents could be capped, though again unsur-prisingly the level of the ceiling aroused debate. Some argued thatCongress agreed in the Cable Act of 1984 on the fairness of citiescharging 5 percent of gross revenues, a level legislators knewexceeded actual city costs. Others argued that rents should be

2 4

The Report 17

capped at a much lower level, such as 1 or 2 percent of grossrevenues.

Two additional important matters came up regarding inequali-ty in rents which may discourage efficient investment. One iswhether non-facilities-based carriers such as resellers and wirelessshould, in the interest of equity, be required to pay any rents thata government imposes. The other is how to deal with situationsin which ILECs don't pay rent while potential and actual CLECsdo. On the first, there seemed general agreement that wirelessproviders should pay rents only to the extent they do use rights-of-way (for instance, in operating antennas). Resellers wouldmore or less automatically pay rents embedded in the paymentsthey make to the facilities-based carriers on whom they rely.

As for how to resolve apparent inequities between rentscharged the ILECs and those charged other facility operators, theworking group identified two alternatives for moving towardcompetitively neutral rental charges:

Requiring local governments to provide access to rights-of-way free or at low cost to all providers; or,

Requiring providers who benefit from low- or no-cost right-of-way access to increase compensation to levels commen-surate with other providers.

The working group recognized that local governments andbeneficiaries of low-cost access are likely to litigate disputes aris-ing from either alternative for years. State law issues and consti-tutional claims may put these disputes beyond the reach of theFCC. As a result, the group suggested that a political compromisemay be a more expeditious way to eliminate the inequities inrental charges which distort investment decisions.

Most of the group concurred that preempting local authoritymay not be the best way to resolve the problem of inequitablerents. Frank Fisher, a professor of public policy at the Universityof Texas at Austin, argued with particular force that municipalities'control over this matter should not be breached, absent a show-ing that they have abused their authority. In his view, determin-ing rents or taxes on local carriers should remain the province oflocal governments. On the other hand, some argued that cities


have sometimes imposed unjustifiable charges. For example,Turetsky of Teligent said that some localities seek rents from hisfirm, even though its facilities are wireless and do not impactrights-of-way. The clash over local governments' taxing authorityspawned the idea of having industry representatives and localgovernment groups meet to develop a mutually acceptable solu-tion. Michael Guido, mayor of Dearborn, Michigan, and telecom-munications committee chair for the U.S. Conference of Mayors,said that the discussions at the conference left him optimisticabout achieving such an entente.

Public Investment in Telecommunications InfrastructureA working group considered the idea of encouraging more

direct government involvement in telecommunications invest-ment, and this section relies upon their contribution. Little if anysupport was voiced for cities providing telecommunications facil-ities or services directly to citizens, but considerable backing arosefor having cities more actively facilitate the development ofadvanced networks within their jurisdictions. The specific mecha-nism debated was making city-controlled or city-overseen ductsavailable to firms seeking to lay communications fiber or cable.The working group identified three alternatives, all to beemployed at the time of major road construction or other projectsthat require digging up streets. One option would have citiesinstall municipally-owned telecommunications ducts. Anotherwould feature city-owned ducts and fiber. A third option wouldhave cities contract with a private firm to install and operatetelecommunications ducts.

The idea of encouraging any city involvement in duct owner-ship came under immediate attack. Sheila Mahony, senior vicepresident for communications and public affairs of CablevisionSystems, voiced her worry about cities forcing firms like hers touse the city-owned facilities, preventing companies from doingwhat they would prefer. Bruce Posey, vice president for federalrelations of U S WEST, pointed out that telephony requires not justinstalling fiber or cable but also transformers and generators, acomplication that might lead to regulatory delay. James Gattuso,vice president for policy development of Citizens for a Sound

26

The Report 19

Economy, acknowledged that a single duct installation may bemore efficient than expensively, disruptively, and repeatedlydigging up streets. But he argued that such efficiencies could beharnessed with a duct operated entirely by a private companyusing private capital. Demand might even justify competing ducts.That option would be important in Eli Noam's view. He saw thespecter of monopoly in this proposal: a city controlling a singlebig duct would have incentives to overcharge for access, and itmight develop a financial interest in prohibiting or obstructingwireless antennas that otherwise would reduce the value of theducts. Several participants offered reassurance that city investmentin ducts could work. Dale Hatfield recognized the potential draw-backs but observed, "What we have now is a mess anyway, somaybe this would at least represent an improvement." MayorGuido reminded all of how little it costs to put in conduits whena street is opened for sewer or water lines or road widening. Inhis view, consumers and communities waste valuable resourceswhen they fail to seize the opportunities often presented by rou-tine city construction projects. Making an inexpensive duct systemavailable to new firms could so lower the cost of market entry asto provide a very powerful stimulant to facilities investment.James Ron Cross, vice president for regulatory policy at Nortel,revealed that his firm has been discussing these sorts of plans withseveral cities, and some municipalities are about to announcetheir own telecommunications network projects. These are inno-vative, creative proposals to stimulate competition and lower bar-riers to investment, he argued. The proposal for municipalities toget involved in owning or operating telecommunications infra-structure clearly perturbed many participants. Yet the basic con-cept of exploiting what is essentially a positive externality arisingfrom city operation of roads and sewer and water lines just asclearly attracted many other attendees. Firestone noted that citieswould not necessarily have to go it alone in such ventures. Forexample, municipalities could join with neighborhood or non-profit groups in consortia to operate the duct systems. In thenotion of joint ventures between local governments and privateentities, whether for-profit firms or nonprofit groups, may lie acompromise that might reassure opponents while stimulatinginnovation and competition.

27


ConclusionPerhaps inevitably, given its broad purview, the conference

stimulated an unusually wide range of ideas and controversy. Thisreport covers only selected dimensions. One clear if unsurprisingconclusion is that the Telecommunications Act of 1996 did notend or even appreciably reduce policy conflicts among key indus-try players. The stakes in the specifics of policy decisions remainhigh. Combine this with the political constraints imposed byclashing industry lobbyists and by fear of public opinion, add theunabated availability of the court system, and we have a recipefor persisting regulatory confusion and delay. The conferencenonetheless pointed to a common theme: active leadership fromgovernment officials could provide some breakthroughs. Beloware some key areas that could benefit from such leadership.

Almost everyone agreed on the need for regulatory processreform at the state level. Some suggested a special task force con-vened by the FCC in consultation with key associations of regu-lators and companies could produce ideas that would garnerenough support to attain implementation.

Even though the issue of local taxes and rents on telecommu-nications firms generated heated disagreements, the cities' inter-ests in telecommunications developmentnot just in revenuemaximizationopens a path toward compromise. Here too,based on discussions at the conference, it appears that an initia-tive by government actively to seek a mutually acceptable solu-tion could pay off.

On the other hand, the stark conflict over enforcement andpotential phaseout of TELRIC pricing and unbundling require-ments seems, on the surface, less amenable to negotiated com-promise. It appears that many participants fear what ILECs woulddo without the UNE/TELRIC mandate. By contrast, the ILECs areadamant that they will not aggressively invest in new facilitiesunder that regime. This may be a place for courageous leadershipfrom regulators who are willing to risk antagonizing essentiallyevery major player by coming up with a compromise that willhave the virtue of moving things off dead center. Most participantsappeared to agree that such a compromise is possible withoutnew legislation by Congress. States and the FCC may have the

The Report 21

authority to implement creative interpretations of the 1996 Act toallow a rational phaseout of TELRIC pricing that maximizes ILECs'investment incentives while giving a reasonable window of pro-tection for CLECs.

The conference made no real progress on the perennial prob-lem of retail rate rebalancing. Virtually every policy analyst arguesthat subsidies should be generated and accounted for separately,outside of the retail price structure; that the subsidies should goonly to those who need them to stay on the network; and that thespread between business and residential rates should shrink whilethat between urban and rural rates should grow. But most regu-lators and industry members believe the political opposition tothis course is insurmountable. An academic observer mightobserve that the fear of constituent wrath in the wake of residen-tial rate increases appears wildly exaggerated by all sides. Publicreaction depends heavily on the framing of government actions.To take an example, localities and states regularly implement taxincreases in the form of bond issuestax hikes that the publicvoluntarily imposes on itself. People vote yes in bond referendaand thus for tax increasesbecause of the context in which theyare presented: we need schools, we need roads, we must preparefor the future. Yet the tax hikes required by bond issues typicallydwarf any increase in phone rates likely to arise from rationaliz-ing the retail price structure. If officials would frame the rateincreases as a way of meeting future needs, they could minimizepolitical opposition to rate increases. Recall the federal impositionof subscriber line charges in the mid-1980s. Reaction was intensebut extremely short-lived, and it defies common sense to believeany members of Congress lost office because of it. There is almostcertainly a lot more political space for change than most repre-sentatives of government and industry appear to think.

Without these sorts of initiatives, the dialogue at the conferencesupports a gloomy prediction of continued bickering, high invest-ment in political and legal maneuvers, and delays in delivery onthe promise of new telecommunications technologies and ser-vices. In the competitive global economy, that scenario trulyserves nobody's long-term interests.

9 3

Appendices

3 0

An Essay on Competition,Innovation, and Investment in

Telecommunicationsby Dale N. HatfieldDavid E. Gardner

Hatfield Associates, Inc.

Background and PurposeFor the past eleven years, The Aspen Institute Communications

and Society Program has convened The Aspen InstituteConference on Telecommunications Policy in Aspen, Colorado.This paper was prepared in advance of the twelfth program, enti-tled "Competition, Innovation, and Investment in Telecommuni-cations." The conference was designed to identify factors thataffect investment in competitive telecommunications markets andto examine which policies at the federal, state, and local levels ofgovernment promote or create barriers to such investment. Thepurpose of this paper is to frame the issues and provide back-ground for the participants in the conference on some of themajor factors that encourage or discourage investment in thetelecommunications field.

IntroductionBy way of introduction to the balance of the paper, we would

like to make three points. The first point is that we will focusalmost all of our attention on factors influencing future invest-ments in local rather than long-haul telecommunications servicesand facilities. This reflects our belief that the most critical issuesin telecommunications policy and regulation in the United Statesare associated with establishing workable, economically efficient

2531


competition at the local level. This is not to say that investment isnot important in the long-haul portion of the network. It clearly isimportant. Rather, our focus on local facilities and services simplyreflects the fact that (1) establishing facilities-based competitionand overcoming the technical constraints associated with the"last mile" of the telecommunications infrastructure will requireenormous investments, and (2) other than the important issuessurrounding Bell operating company entry into the in-region,inter-LATA (local area telephone access) long-distance market, thepolicies and regulations surrounding local competition are cur-rently the most unsettled and controversial, and are critical to thebusiness plans of emerging competitors.

Our second point amounts to a cautionary note. As profes-sionals working in the telecommunications field in either thepublic or private sectors, it is easy to fall into the trap that saysthat any increases in telecommunications investments are goodalmost as ends in themselves. That is not necessarily true, ofcourse. For example, if more efficient equipment or systemsbecome available, then, from a broad societal view, disinvest-mentrather than increased investmentshould occur in thatarea. Similarly, if increased investment is a result of economicdistortions that artificially favor the deployment of capital ratherthan labor, then society is not being well served. In short, settingaside social goals (equity considerations) for a moment, the pub-lic policy objective should be efficient investment, not investmentfor investment's sake.

The third (and related) point concerns governmental actions toencourage investments to achieve social goals. In a market-ori-ented economy, decisions on the deployment of capital and otherresources are made on a decentralized basis in response to prices,set by supply and demand in the marketplace. While such decen-tralized decision making encourages the efficient use of theseresources, it can result in certain low-income groups or groups liv-ing in high-cost, rural, or insular areas not having access totelecommunications facilities and services that are deemed to bein the public interest. This typically leads, as it has in the telecom-munications field, to various forms of government intervention toassure that such groups have access to some basic level of ser-

3 2

Appendix 27

vice. This intervention can be in the form of explicit subsidies orthrough implicit subsidies inherent in requirements, for example,that a provider offer service in both low-cost and high-cost areasat averaged rates. The focus of this paper is not on the merits ofsuch intervention, but, rather, more simply on the incentives orbarriers that they create for telecommunications investment.

Overview of the Investment DecisionThe decision whether or not to participate in a particular invest-

ment is relatively straightforward to model at the conceptual level.A potential investor will invest in a project when the return oninvested capital (ROIC) is sufficient to compensate the investor forthe time value of money and the risk associated with the invest-ment relative to other opportunities. The time value of moneyreflects the fact that a dollar received today is worth more than adollar received a year from now. Risk, of course, refers to theinvestor's exposure to loss of assets or income. Increased riskinessinfers a greater likelihood that a particular outcome (e.g., a par-ticular ROIC) will not be achieved.

One common method of evaluating investments that takes intoaccount the time value of money and the risk is known as thediscounted cash flow (DCF) approach. In the DCF approach, thecurrent value of the investment is assumed to be the futureexpected cash flow discounted at a rate that reflects the riskinessof the cash flow. If the current value of the investment computedusing the DCF approach is equal to or greater than the amount tobe invested, then the investor will have incentive to make theinvestment. If it does not, the investor will be deterred from mak-ing the investment. In today's economy, an investor might expectan ROIC for a long-term, essentially risk-free investment (e.g., agovernment guaranteed bond) of, say, 6 percent and an ROIC of30-40 percent or even more for a highly risky equity investmentin a start-up firm. Thus, the attractiveness of a particular invest-ment is increased by (1) increasing the cash flow or by accelerat-ing when the cash flow is received, and/or (2) reducing the risk.

33


Investments across Regions, Countries, States,and Localities'Background

From the description in the previous section it is apparent that,absent any controls on the flow of capital, investors will seek outthose regions, countries, states, and localities where the expectedROIC is greatest compared to the associated risk. Investments mayflow to particular regions or countries of the world becauseof large pent-up demand for telecommunications services, rapideconomic growth, growing per-capita income, favorable develop-ments within a particular regional trade group, and a host ofsimilar reasons. Individual countries may further encourage directinvestment through, for example, favorable tax treatment, tariff-free zones, and educational support.'

Balanced against these favorable indications for investment ina particular country may be a host of other broadly defined andsometimes overlapping risks. For example, the author of a book'concentrating on assessing political risk sets forth the followingcategories:

Business risk: Negative variation in operating income result-ing from market and nonmarket risks;

Financial risk: Negative variations in income available forprofit remittances and debt-service payments outside thecountry, that is, transfer risks such as foreign exchange con-trols and other repatriation restrictions; and

Catastrophic ri.sk: Termination of business by direct govern-ment actions such as expropriation, nationalization, confis-cation, or forced divestment.

Facilities-based telecommunications investments are especiallyvulnerable to political risk. This is because a large amount offixed, nonfungible assets are typically involvedinvestments(e.g., investments in labor to install an outside plant) that cannotbe easily removed in the event of political instability.

Other authors distinguish between "macro-" and "micro-" polit-ical risks.' In this categorization, macro-risks refer to generalpolitical events and government actions that tend to be broadand pervasive and, as such, affect all foreign investments or busi-

3 4

Appendix 29

ness operations. Macro-risks include, for example, a revolution orarmed civil strife. Micro-risks, on the other hand, are thoseactions or events that selectively affect certain fields of investmentor business activities, e.g., telecommunications.

In relation to indirect investment, a recent special section in afinancial publication was devoted to risks in global investing. Inone article entitled "Rating the Risk," the stock markets of variouscountries were ranked in terms of "market risk (including thingslike volatility and currency fluctuations); investment opportunity(the range of investment vehicles each country offers and the easewith which foreign investors can buy them); the quantity andquality of information on the country's markets; investor protec-tion, such as the quality of securities regulation and the treatmentof minority stockholders; and the 'headache factor,' includingadministrative details such as custody, settlement, and taxes."'

Certainly the United States ranks well in terms of low macro-risks of the types described above and in terms of the risks asso-ciated with indirect inward investment. Thus, the focus of thebalance of this paper will be on political risks that fall into themicro-risk category. That is, we will focus primarily on telecom-munications industry-specific policies and regulations as theyimpact suppliers of local telecommunications facilities and ser-vices. The paper looks very briefly at micro-risks induced byuncertainties in the policy and regulatory processes themselves atfederal, state, and local levels of government, addresses the risksfaced by competitive local exchange carriers (CLECs) and incum-bent local exchange carriers (ILECs), respectively. Because of theimportance of establishing workable, economically efficient com-petition at the local level, our major emphasis will be on the risksfaced by CLECs.

Generic Forms of Micro-RiskIn the material immediately above, we defined micro-risk as

those governmental actions or events that selectively affect certainfields of investment or business activities, e.g., telecommunica-tions. A major component of micro-risk in telecommunications inthe United States is the policy and regulatory risk created by fed-eral, state, and local regulatory action or inaction. Regulatory riskis decreased when actions taken by the regulatory agencies are

35


open and transparent, consistent, and predictable. At the mostbasic level, openness and transparency refers to the ability ofstakeholders to participate in and challenge decisions and actionstaken by the government. Consistency and predictability are asso-ciated with policies and regulations that are neither arbitrary norcapricious, and reflect fairness, balance, and objectivity. Theseattributes of openness and transparency, consistency, and pre-dictability are important for the stability of the industry and, mostimportantly, they allow a sound basis for long-term planning andinvestment. Another desirable attribute of government regulationis that the regulations not be unnecessarily intrusive (e.g., in eco-nomic terms, the minimum necessary to correct for marketplacefailures).

Balanced against these desirable attributes are the costs anddelays associated with the regulatory process itself. Unfortunately,but inevitably, there are usually trade-offs between openness andtransparency, consistency, and predictability on the one hand andspeed of decision making on the other. As is often said, no deci-sion is actually a decision, in that delay has its own set of conse-quences. One of those consequences is that it may discourageinvestment by reducing the predicted ROIC because of the timevalue of money. For this reason, participants in the conferencemay want to consider these generic forms of micro-risk in theirdeliberations.

Risks Faced by Competitive Local Exchange CarriersAlthough we were generally familiar with the risks that CLECs

face in entering the local telecommunications market, we decidedto analyze the risks in a somewhat more formalized, methodicalway by examining documents filed by the emerging competitorsbefore the Securities and Exchange Comniission (SEC).6 We start-ed out our examination by first identifying CLECs that are requiredto file, and in fact have filed, documents (e.g., S-4s or 10-Ks) withthe SEC.7 The list of companies that we identified is shown inTable 1. We then downloaded the pertinent sections of the vari-ous documents filed by each of the identified companies from theSEC's World Wide Web site. Next, we briefly reviewed the down-loaded sections dealing with risk and we found a significantdegree of consistency among them. Building upon this consisten-

3 G

Appendix 31

cy, we broke the risks down into six broad categories: legal andregulatory risk, financing risk, strategic and operational risk, tech-nological risk, market condition competitive risk, and criticaldependence risk. We then examined each document in depth inorder to prepare the analysis that follows.

TABLE 1

SEC Filings ExaminedBrooks Fiber Properties Incorporated (S-4)GST Telecommunications Inc. (S-3/A and 10K)ICG Holdings Inc. (S-4/A)Intermedia Communications of Florida Inc. (5-4/A)McLeodUSA Inc. (5-4/A)Teleport Communications Group (10-K405)Win Star Communications Inc. (S-4/A)Associated Group Inc. (10-K405)American Communications Services Inc. (10-KSB)

Legal and Regulatory Risk: More than most industries, the legaland regulatory environment has significant impact on the fate ofcompetitors in the provision of local telecommunications services.In general, legislation, regulatory proceedings and actions, andcourt decisions at the federal, state, and local levels of govern-ment make up the legal and regulatory environment. In addition,negotiation and, when necessary, arbitration between entities addto the legal environment. Less important in this instance, perhaps,is the risk associated with applying for and defending patents,trademarks, and copyright protection associated with a CLEC'ssystems and services.

Understandably, the CLECs represented in the SEC filingsdiscuss the Telecommunications Act of 1996 (the Act) in a veryfavorable way in terms of its striking down the legal barriers toentering the local telecommunication market. In other words, theynote that it eliminates the risk of an outright denial of the regula-tory permissions (e.g., a certificate of public convenience andnecessity) traditionally required to enter the local telecommunica-

3 7


tions market. On the other hand, they point to possible adverseeffects that may stem from the greater pricing flexibility, relaxedregulatory oversight, and other regulatory relief that may be grant-ed to the ILECs as a result of the increased potential for competi-tion under the Act. For example, they express apprehension aboutsubstantial volume and/or term discount pricing by the ILECs.They also express concern about possible delays in state certifi-cation proceedings and, in particular, in the tariffing requirementsof state regulators and the possibility of costly challenges to thosetariffs by customers and competitors.

Likewise, the CLECs point with favor at the Act requirementsthat the ILECs provide access to unbundled network elements thatcomprise the ILECs' local telecommunications infrastructure. Theyalso praise the Federal Communications Commission's (FCC's)efforts to implement the local competition portions of the Act interms of requiring the ILECs to provide local loops, switches, col-location, intercompany trunks, and interfaces to operations sup-port systems (OSS). However, they express concerns about theILECs' compliance with those requirements and their adherence tothe letter of their interconnection agreements. Hence, theydescribe the possible risks they face in obtaining services compa-rable to those provided by the ILEC in terms of installation times,repair response time, billing, and other administrative functions.

Most of the SEC materials that we examined were filed prior tothe decision by the U.S. Court of Appeals for the Eighth Circuitconcerning the FCC's interconnection order of August 1996. TheEighth Circuit decision invalidated portions of the FCC order that(1) set forth guidelines for the amounts the ILECs can chargeCLECs for access to their networks, and (2) dealt with the agency's"pick and choose" rules. Moreover, because certain CLECs wereable to negotiate interconnection agreements without going toarbitration, their reactions to the decision will vary. Thus, becauseof the timing of the decision and differing impacts, it was not pos-sible to assess how the CLECs view this recent decision basedupon these materials. However, based upon their commentsregarding the earlier stay issued by the Court, some CLECsexpressed strong concerns about (1) the resulting uncertaintyabout the rules governing pricing, and other terms and conditions

3 3

Appendix 33

associated with interconnection and (2) with the possibility ofmore difficult and protracted negotiations. They expressed con-cern about possible "sharp" changes in business conditions as aresult of interconnection pricing and they also noted the possibil-ity of having to contribute to a universal service fund at the stateor federal level. They also expressed some apprehension about apossible slowing of competitive initiatives in general.

Similarly, while the CLECs point with favor to the Act's require-ments that (1) local governmental entities treat telecommunica-tions carriers in a competitively neutral, nondiscriminatory man-ner and (2) utilities (including the ILECs) afford CLECs access totheir poles, conduits, and rights-of-way at reasonable rates onnondiscriminatory terms and conditions, they express concernabout their own ability to maintain their existing franchises, per-mits, and access rights and to obtain new ones as required toimplement their business plans. While some of these concernsmay amount to little more than "boilerplate," the reported diffi-culties that certain personal communication service (PCS) andother wireless service providers have had with state and localmoratoriums on base station antenna siting and zoning applica-tions for wireless telecom facilities indicate at least some problemsin this area. Some CLECs also mentioned uncertainties associatedwith municipally imposed license or franchise fees.

To summarize, it is clear from the CLEC filings that the Act hassignificantly reduced the uncertainty associated with entering thelocal telecommunications market. It did so by striking down legaland regulatory restrictions on entry. On the other hand, the per-ceptionif not the realityis that there still remains a substantialamount of legal and regulatory risk associated with the successfulimplementation of the legislation.

Financing Risk: Competing in the facilities-based localtelecommunications market places tremendous strain on the cap-ital resources of even the most financially sound entities. Beforeoffering services and generating significant cash flow, CLECsmust typically devote large amounts of capital toward buildingup an infrastructure. The large, initial negative cash flow exacer-bates the difficulties in achieving an adequate rate of returnbecause of the time value of money in the DCF analysis

33


described earlier. Moreover, if fiberoptic or coaxial cable facilitiesare involved, the investment cannot be easily redeployed ifdemand does not develop as expected. That is, the costs are"sunk" both figuratively and literally.

In addition, not only are there large start-up capital require-ments, but geographic expansion typically leads to a continuingneed for large capital infusions. This means that, even if the ini-tial start-up capital is raised, the company may fail because of theinability to raise subsequent rounds of investment. This inabilitymay stem from a general tightening of the capital markets, diffi-culties encountered by other companies with similar businessplans, or by failures to achieve initial forecasts in terms of cus-tomer acceptance and cash flow. The difficulties that some of thePCS providers have had in raising additional funding are exam-ples of this phenomenon. That is, initial investments are jeopar-dized by the potential difficulties in arranging succeeding roundsof investment. In short, the large initial and recurring investmentsassociated with constructing and expanding a basic infrastructureincrease the risk associated with becoming a facilities-based localtelecommunications provider.

Although not mentioned in any detail in any of the materialswe reviewed, there are existing statutory restrictions on foreignownership of communications service providers utilizing radiofrequencies. The FCC also has the authority to impose restrictionson foreign ownership of communications service providers notutilizing radio frequencies. These restrictions or potential restric-tions may increase the financing risk by denying competitorsaccess to capital resources outside the United States.

Strategic and Operational Risk: This category includes the risksassociated with choosing which customer groups to target (e.g.,residential or business and, within the business group, large orsmall companies), which geographic markets to target, and whichcombinations of facilities and services to offer to those customersin the selected geographic areas. Another important strategic riskis associated with choosing the right technology. Because of theimportance of technological risk, it is treated in a separate cate-gory of its own below.

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Appendix 35

This category also includes the operational risks associated withactually implementing the chosen strategy. According to the mate-rials reviewed, these operational risks stem from such things as (1)the competitor's limited history of operations, (2) inexperiencedmanagement teams, (3) uncertainty over the performance of jointventures and other forms of alliances with other companies, (4)the possible difficulties associated with securing distribution chan-nels, (5) the ability to recognize and negotiate favorable agree-ments (e.g., for interconnection with the ILEC or for access torights-of-way), (6) the ability to make favorable acquisitions tosupport a "growth by acquisition" strategy, (7) the ability to dealsuccessfully with rapid expansion, and (8) the ability to resisthostile takeovers.

Wired and wireless providers also point to specific operationalrisks associated with their particular choice of technology. Forexample, one of the microwave radio-based providers points tothe risks associated with successfully negotiating agreements toallow it to install antennas on the roofs of buildings where its cus-tomers or potential customers are located. It also points out thatphysical obstructions (natural or man-made) can make it difficultor raise the cost of serving certain customers. On the other hand,new entrants relying upon wired technology (e.g., fiberopticcables) point to the risks associated with successfully negotiatingagreements for rights-of-way or easements and in gaining physi-cal access to certain premises.

These strategic and operational risks vary from business plan tobusiness plan. To the extent that they are present in a given busi-ness plan, they reduce the attractiveness of that new entrant toinvestors.

Technological Risk: There are various ways of entering the localtelecommunications market. A company can enter (1) as a resellerof an ILEC's services, (2) by constructing its own stand-alone net-work, (3) by utilizing unbundled network elements (UNEs) of theILEC's network, or (4) by some combination of the above. In con-structing its own facilities-based network, the new entrant canchoose to use wired or wireless technology. Within these twobroad categories, there are further choices as well. For example,within the wireless category, there is a choice between licensed

41

36 COMPEDTION, INNOVATION, AND INVESTMENT IN TELECOMMUNICADONS

and unlicensed services/equipment, among various networkarchitectures (e.g., microcellular or macrocellular), and amongvarious access technologies such as Frequency Division MultipleAccess, Time Division Multiple Access, or Code Division MultipleAccess.

These choices create several levels of technological risk. First,the new entrant can simply choose the wrong technology. Thisrisk of choosing the wrong technology is enhanced by the factthat, for a variety of reasons, the best technology does not alwayssucceed in the marketplace in the long term. Stated another way,the right choice on technological grounds can turn out to be thewrong choice for other reasons that are largely beyond the con-trol of the new entrant. This means, for example, that a newentrant's chosen technology can become an "orphan" so that, inthe extreme, the supplier stops providing it. Or it can mean thesupplier no longer supports the technology or only supports itminimally.8 Even if the technology achieves limited success in themarketplace (i.e., it is adopted by other entrants), the new entrantcan still be disadvantaged by the equipment suppliers' inability toachieve significant economies of scale. Second, even when thenew entrant and potential investors are confident that a correctchoice of technology has been made on fundamental engineeringgrounds, there are often delays in successfully implementing thetechnology on a widespread basis in the field. Some of the diffi-culties that commercial mobile radio service providers have hadwith digital systems are illustrative of these types of delays.

Technological risk is also exacerbated by the rapid technologi-cal changes that are characteristic of the telecommunications field.In other words, a correct choice of technology today may proveto be wrong tomorrow. Thus investors will expect a higher rateof return because of these technological risks.

Market Condition Competitive Risk: This category of riskincludes both the risks associated with the performance of thedomestic economy as a whole and the specific conditionsencountered in the local telecommunications market. All compa-nies face the risks associated with the formere.g., the risk of arecessionso they will not be dealt with further here. In terms ofthe specific conditions associated with the local telecommunica-

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Appendix 37

tions market, the companies, in their SEC filings, emphasize thevolatility of the market in terms of the demand for their productsor services. They also point to the risks associated with their ownmarketing and branding strategies in such an environment. Theytypically stress the risk posed by the presence of entrenched com-petitors and, in particular, the ILECs. They often note that the ILECshave significant advantages in terms of having (1) established,ubiquitous, or nearly ubiquitous infrastructures, (2) long-standingrelationships with customers, (3) financial, technical, and market-ing resources substantially greater than their own, (4) the ability tosubsidize competitive services with revenues from a variety ofother business activities, and (5) familiarity with the regulatoryprocess as well as established, long-standing relationships with theregulators. They also note the presence of other CLECs pursuingsimilar strategies in the markets they have chosen to enter.

Critical Dependence Risk: In their SEC filings, most of the com-panies mentioned risks associated with certain key relationships.Included under this category are dependence on key personnel,often executives and members of their technical staff; dependenceon a few large customers for a significant portion of product/ser-vice demand; reliance on a few key suppliers for the execution oftheir business plan, including reliance upon equipment vendorsas described under the category of technological risk; and depen-dence on various billing, customer service, and other essentialsystems.

Risks Faced by Incumbent Local Exchange CarriersAs noted earlier, we have focused most of our attention on the

risk faced by the CLECs because of the importance of establishingworkable, economically efficient competition at the local level.However, the ILECs also face risks that may deter them from mak-ing economically efficient investments in the local telecommuni-cations infrastructure. These include some of the same ones facedby the CLECs (e.g., risks created by rapid technological change).Under traditional rate of return regulation, as a long as an ILEC'srate of return was greater than the firm's cost of capital, there wasan incentive to overinvest. In terms of a highly risky service, atleast, this incentive to overinvest was tempered by the possibility

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that the regulator would disallow an investment on the basis thatit was imprudent. The shift to price cap regulation at the federallevel and in many states diminishes the incentive to overinvest.This stems from the fact that in price cap regulation, prices aredecoupled from short-term profits, giving the regulated firmadded incentives to employ capital efficiently.9 In addition, somestates have linked their shift to earnings sharing or price cap reg-ulation to commitments by the ILECs to increase their networkinvestments and hasten the deployment of modern technology.The impact of these regulatory reforms on local infrastructureinvestment is an area of controversy that conference participantsmay want to address.

While no attempt will be made here to develop a comprehen-sive list, several specific legal and regulatory risks faced by theILECs standout. First, while the CLECs are understandably con-cerned about the risks associated with the ILECs prematurelygaining greater pricing flexibility, relaxed regulatory oversight,and other regulatory relief, the ILECs have the opposite concern.Namely, they are concerned that they will not be able to respondpromptly and fairly to increasing competition due to regulatoryrestrictions. Second, the Bell operating companies face uncer-tainty as to when they will be able to enter the in-region, inter-LATA long-distance market. Third, they have recently argued thatthey face legal and regulatory risks because of the uncertaintyover the FCC's rules governing the separation of regulated andnonregulated service costs for integrated networks, and the uncer-tainty in the provision of video services due to court appeals ofthe FCC's open video system rules. Fourth, and more generally,they have expressed concern about the increased risk associatedwith greater competition and the unbundling requirements thatallow selected portions of their networks to be accessed and usedby competitors. They have argued that these requirements maymake them reluctant to invest in innovative technology.

Summary and Closing ObservationsIn this paper, we have reviewed some of the major factors that

influence investment in telecommunications across regions, coun-tries, states, and localities. We reviewed the fundamentals of the

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Appendix 39

investment decision and then focused on the risks associated withinvesting in a particular country. We distinguished between"macro-" and "micro-" political risks and then focused our atten-tion on micro-risks associated with uncertainties in the policy andregulatory processes themselves at the federal, state, and local lev-els of government. In terms of the micro-risk, we emphasized theimportance of openness and transparency, consistency, and pre-dictability in creating a stable investment climate. We also notedthe inevitable trade-off of those attributes with the speed of deci-sion making and the effects that delays have on the attractivenessof an investment opportunity.

We then focused attention on the risks faced by CLECs in enter-ing the local telecommunications market. We focused our attentionthere because of the importance of CLEC investment in creatingworkable, economically efficient competition at the local level asenvisioned in the Telecommunications Act of 1996. Using variousCLEC filings before the SEC as a starting point in our analysis, weidentified six broad categories of risk: legal and regulatory risk,financing risk, strategic and operational risk, technological risk,market condition risk, and critical dependence risk. Based uponour review of those risks and the risks faced by the ILECs, wewould offer two observations in advance of the conference.

First, given the impact of the legal and regulatory environmenton the fate of competition in the local telecommunications mar-ket, the importance of openness and transparency, consistency,and predictability in the legal and regulatory processes and theassociated values of fairness, balance, and objectivity in reducingrisk and encouraging investment cannot be denied. Given thisimportance, participants in the conference may want to addresswhat additional steps, if any, can be taken to achieve these goalsand objectives for the legal and regulatory processes while bal-ancing the necessity of a swift decision making process.

Second, some of the remaining (nonlegal and nonregulatory)risks pose difficult issues of public policy. Many of these issuesare associated with potential government actions that fall outsidethe legal and regulatory category. For example, the governmentcan reduce technological risk by conducting research onadvanced innovative telecommunications systems and by sup-

4 5


porting demonstration or pilot projects. But this raises questionsof budgetary constraints and of the government's ability to choosewisely from among competing projects absent the discipline ofthe marketplace. The government can also reduce the technolog-ical and operational risks by setting standards, but what standardshould the government choose? What risks are raised by the gov-ernment making such a choice? The government can also reducetechnological and financing risk by specifying technologicallyadvanced requirements to meet its own internal telecommunica-tions needs and then entering into long-term contracts withproviders to meet those requirements. But, in doing so, how canthe government avoid favoring one technology over another orone competitor oVer another? Some direct intervention and invest-ment of the types suggested here may be justified by the classicpublic goods argument for government support of the nation'sinfrastructure. However, the conference participants may want toconsider how much support is realistic given overall budgetaryconstraints and how the public can be assured that more goodthan harm will result, given the practical difficulties mentionedherein.

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Appendix 41

Notes

1. Parts of this section rely upon the work of one of the author's graduate students atthe University of Colorado at Boulder. See Jeffery A. Johnson, "A Methodology forAssessing Regulatory Risk in the Telecommunications Sector," unpublished thesis,1996.

2. Direct foreign investments are defined as active investments made directly in compa-nies as opposed to commercial loans, indirect purchase of shares purely for financialinvestment, etc. See Implementing Reforms in the Telecommunications Sector. Lessonsfrom Experience, Bjorn Wellenius, Peter A. Stern, eds.: The World Bank, 1994, p. 694.

3. Ting, Win lee, Multinational Risk Assessment and Management, New York: QuorumBooks, 1988, p. 8.

4. In defining micro-risks and macro-risks, we are relying upon the work of StefanRobock and Jeffery Simon as described in Win lee Ting, op. cit.

5. The Wall Street Journal, special section on Global Investing, June 26, 1997.

6. We recognize that attorneys advising clients on the securities laws may urge them tobe very conservative in terms of not omitting even small risks. Nevertheless, webelieve that the uncertainties identified in the filings can serve as a reasonable start-ing point for an analysis of the risks facing the CLECs.

7. We started our list of CLECs with an analysis prepared by Communications CapitalPartners of San Francisco.

8. The resulting reliance on a single supplier is also addressed under the category ofCritical Dependence Risk.

9. In actual practice, of course, price cap regulation typically retains elements of rate ofreturn regulation. Thus, as actually implemented, price cap regulation may not com-pletely deter overinvestment.

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Conference Participants

Ron Binz President and Policy DirectorCompetition Policy Institute

Jonathan Chambers

Robert Crandall

James Ron Cross

Robert Entman

Charles M. Firestone

Vice President, External Affairs andAssociate General CounselSprint Spectrum, L.P.

Senior Fellow in Economic StudiesThe Brookings Institution

Vice President, Regulatory PolicyNortel

Professor of CommunicationNorth Carolina State University

Director, Communications andSociety ProgramThe Aspen Institute

Francis Dummer Fisher Professor of Public PolicyThe University of Texas at Austin

Julia Friedlander Deputy City AttorneyCity of San Francisco

James Gattuso Vice President, Policy DevelopmentCitizens for a Sound Economy

4348


Henry Geller Communications FellowThe John and Mary R. MarkleFoundation

Ellen Berland Gibbs PresidentCRI Media Partners, L.P.

Michael A. Guido MayorCity of Dearborn, Michigan

Frank Gumper

Dale N. Hatfield

Vice President, Long Range PublicPolicyBell Atlanticand formerly, Vice President,Federal Regulatory PlanningNYNEX

Chief Technologist, Office of Plansand PolicyFederal Communications Commissionand formerly, Chief Executive OfficerHatfield Associates, Inc.

Julia Johnson ChairmanFlorida Public Service Commission

Spencer Kaitz PresidentCalifornia Cable Television Association

Laurel Kamen Vice President, Government AffairsAmerican Express Company

William Kennard ChairmanFederal Communications Commissionand formerly, General CounselFederal Communications Commission

Joel Lubin Regulatory Vice PresidentAT&T

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Appendix 45

John B. Lynn

Sheila Mahony

Telecommunications CounselEDS Corporation

Senior Vice President, Communicationsand Public AffairsCablevision Systems Corporation

Susan Ness CommissionerFederal Communications Commission

Alex Netchvolodoff Vice President, Public PolicyCox Enterprises

Eli Noam Professor of Finance and EconomicsColumbia Institute for Tele-InformationColumbia University

Robert Pepper Chief Office of Plans and PolicyFederal Communications Commission

Bruce Posey Vice President, Federal RelationsU S WEST, Inc.

Thomas Reifenheiser Managing Director, Group ExecutiveThe Chase Manhattan Bank

Daniel Reingold First Vice President, GlobalTelecommunications ResearchMerrill Lynch & Co., Inc.

Jonathan Sallet Chief Policy CounselMCI Communications Corporation

Gail Garfield Schwartz Vice President, Public Policy andGovernment AffairsTCG Teleport Communications Group

Joan Smith CommissionerOregon Public Utility Commission


Lawrence Strickling

David Turetsky

Assistant General Counsel, ChiefCompetition DivisionFederal CommunicationsCommissionand formerly, Vice President, PublicPolicyAmeritech

Vice President, Law andRegulatory PolicyTeligent

Les Vadasz Senior Vice PresidentIntel Corporation

Kathleen M. H. Wallman Chief Executive OfficerWallman Strategic Consultingand formerly, Deputy Assistant tothe President for Economic Policyand Counsellor and Chief of StaffNational Economic Council

Steven M. H. Wallman Senior FellowThe Brookings Institutionand formerly, CommissionerUnited States Securities andExchange Commission

StaffElizabeth Golder Program Coordinator,

Communications and SocietyProgramThe Aspen Institute

Susan Oberlander

51

Doctoral CandidateUniversity of California at Berkeleyand formerly, Research Associate,Communications and SocietyProgramThe Aspen Institute

About the Authors

Robert M. Entman is professor of communication at NorthCarolina State University. During the fall 1997 semester he was theLombard Visiting Professor at the Kennedy School of Govern-ment, Harvard University. Formerly on the faculties of Duke Un-iversity and Northwestern University, he holds a Ph.D. in politicalscience from Yale University and an M.P.P. in policy analysis fromthe University of California, Berkeley. Dr. Entman is the author orco-author of numerous books and articles, including DemocracyWithout Citizens: Media and the Decay of American Politics(Oxford University Press, 1989), Media Power Politics (Free Press,1981) and the forthcoming Living Black and White: Media andRace in America (University of Chicago Press). Dr. Entman hasserver as rapporteur of The Aspen Institute Conference onTelecommunications Policy for the past 12 years.

David E. Gardner is a business consultant for MetaSolvSoftware, Inc., a Texas-based company that provides ordering,provisioning, and network management solutions to telecommu-nications companies. As a graduate student in the InterdisciplinaryTelecommunications Program at the University of Colorado atBoulder, he interned with Dale Hatfield, then CEO of HatfieldAssociates, Inc. Mr. Gardner served on the legislative staff of U.S.Representative Al Swift and was subsequently a liason to the pri-vate and public sectors for the National Telecommunications andInformation Administration.

475 2


Dale N. Hatfield is the chief technologist in the Office ofPlans and Policy at the Federal Communications Commission.Previously, he was the founder and CEO of Hatfield Associates,Inc., a consulting firm specializing in engineering, economic, andpolicy studies in the telecommunications industry. The firm hasconducted studies relating to the current status and futureprospects for local telecommunications competition. Mr. Hatfieldholds a B.S.E.E. from Case Institute of Technology and an M.S. inindustrial management from Purdue University.

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Previous Publications of The Aspen InstituteConference on Telecommunications Policy

all are authored by Robert M. Entman

Implementing Universal Semice After the 1996 Telecommuni-cations Act. The report of the eleventh annual Aspen InstituteConference on Telecommunications Policy, August 10-14, 1996.

The Communications Devolution. The report of the tenth annualAspen Institute Conference on Telecommunications Policy,August 6-10, 1995.

Strategic Alliances and Telecommunications Policy. The report ofthe ninth annual Aspen Institute Conference on Telecommunica-tions Policy, August 7-11, 1994.

Local Competition: Options for Action. The report of the eighthannual Aspen Institute Conference on TelecommunicationsPolicy, August 12-16, 1993.

Competition at the Local Loop: Policies and Implications. Thereport of the seventh annual Aspen Institute Conference onTelecommunications Policy, August 16-20, 1992.

Toward Consensus on American Telecommunications Policy. Thereport of the sixth annual Aspen Institute Conference onTelecommunications Policy, August 4-8, 1991.

Shaping the Future Telecommunications Infrastructure: IdealVisions and Practical Policies. The report of the fifth annualAspen Institute Conference on Telecommunications Policy,August 12-16, 1990.

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5 4

The Aspen InstituteCommunications and Society Program

The overall goal of the Communications and Society Programis to promote integrated, thoughtful, values-based decision mak-ing in the fields of communications, media, and information pol-icy. In particular, the Program focuses on the implications ofcommunications and information technologies on democraticinstitutions, individual behavior, instruments of commerce, andcommunity life.

The Communications and Society Program accomplishes thisgoal through two main types of activities. First, it brings togetherleaders of industry, government, the nonprofit sector, media orga-nizations, the academic world, and others for roundtable meetingsto assess the impact of modern communications and informationsystems on the ideas and practices of a democratic society.Second, the Program promotes research and distributes confer-ence reports to decision makers in the communications and infor-mation fields, both within the United States and internationally,and to the public at large.

Topics addressed by the Program vary as issues and the policyenvironment evolve, but each project seeks to achieve a betterunderstanding of the societal impact of the communications andinformation infrastructures, to foster a more informed and partic-ipatory environment for communications policymaking, or topromote the use of communications for global understanding.In recent years, the Communications and Society Program haschosen to focus with special interest on the issues of electronicdemocracy, lifelong learning and technology, electronic com-merce, the future of advertising, and the role of the media indemocratic society.

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The Program also coordinates all of the activities of the Institutefor Information Studies, a joint program with Nortel, and engagesin other domestic and international Aspen Institute initiatives relat-ed to communications and information technology and policy.

Charles Firestone is director of the Aspen Institute'sCommunications and Society Program. He is also serving as theInstitute's interim executive vice president for policy programs.Prior to joining the Institute, Mr. Fitestone was a private commu-nications and entertainment attorney in Los Angeles and anadjunct professor at the UCLA School of Law, where he directedthe Communications Law Program. Firestone worked previouslyas an attorney at the Federal Communications Commission and asdirector of litigation for the Citizens Communication Center inWashington, D.C.

56

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