Looking not far into the future

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  • needs of these markets through a common in- frastructure maximizes the commonality of inter- ests of all consumers and yields enormous economies of scale and scope to ttie benefit of the United States economy.

    The cost of a modern telecommunications in- frastructure will vary across regions depending largely on current states of technology, size of serv- ing areas, and market density. We are confident that both private and social benefits will justify these expenditures. We are also confident that regulatory reform will produce the optimal deployment sce- nario. These changes are vital if we are to keep pace with the developments occurring outside the United States and to meet the needs of the 1990s customer. []

    READINGS SUGGESTED BY THE AUTHOR: Arnheim, Louise. Telecommunications Infrastructure

    and Economic Development in the Northeast- Midwest Region. Washington, D.C.: Shooshan and Jackson, Inc., 1988.

    REGULATING COMMUNICATION / 21

    Coopers and Lybrand. State Policy and the Telecommunications Economy in New York. New York: Coopers and Lybrand, 1987.

    Davidson, William H. Trends in Telecommunications Networks: Regulatory Issues and the Outlook for the U.S. Information Economy. Los Angeles: University of Southern California, 1988.

    Intelligent Network Task Force. The Pacific Bell Intelligent Network Task Force Report. San Francisco: Pacific Telephone, 1987.

    Johnson, Leland L. Price Caps in Telecommunications Regulatory Reform. Washington, D.C.: Rand Corporation, 1989.

    Bailey M. Geeslin is vice president of marketing and technology for the NYNEX Service Company, a subsidiary of New York Telephone Company and New England Tele- phone and Telegraph Company. His responsibilities in- clude product development, regulatory planning, and network implementation planning. Previously, he was di- rector of regulatory matters at the NYNEX Service Com- pany and held several positions at New England Telephone and AT& T.

    Looking Not Far into the Future

    Henry Geller

    i n focusing on United States domestic telecom- munications policy, I am not going to try to look far into the future. It is too difficult to do that. We are lucky to be able to look ahead five to seven years because the technology is so dynamic. Telecom- munications has to be consistent with the tech- nology and the market. Both of these factors count far more than policy measures. The policy that was in place from 1900 through World War I I--the end- to-end AT&T monopoly--was consistent with the use of the paired or twisted copper wire. It was con- sistent with the marketing environment, and it served the United States well.

    It came to an end not because the Federal Com- munications Commission (FCC) decided deliber- ately to abandon it. The commiss ion - -and I include myself--was not farsighted when the oppor-

    tunity came to introduce competition. We thought that we could introduce just a little bit of competi- tion in private lines, which represented less than 2 percent of the revenues of the AT&T. We could therefore keep the system essentially intact, includ- ing the subsidies. We were wrong; market segmenta- tion simply does not work.

    What really took the old system apart was the changing technology and the changing demands of the market. There has been a technological revolu- tion; we now have the microwave, coaxial cable, the satellite, and, above all, the revolution in photonics. The computer, the integrated circuit, drastically changed system switching and enabled packet trans- mission for data. There has been a convergence of the communication and computer fieldsm the one regulated and the other unregulated--that forced

  • 22 / SOCIETY ,, JULY / AUGUST 1989

    policymakers to lean in the direction of deregula- tion as much as possible.

    There also has been a change in the marketplace. New vendors and value added networks wanted to enter. Most importantly, the large users wanted tele- communications that were tailored to their needs. They wanted to be able to deal with customers or offices in a manner customized to the unique needs or requirements of their business. That again shook this entire structure.

    Today there is a global competition. Our indus- tries--whether financial or manufacturing--are en- gaged in global competition and therefore have to be as competit ive as possible. While telecom- munications is not a panacea, it can make a signifi- cant contribution to improved productivity. In some industries, such as in the financial sector, it is critical, as in the case of Citicorp. Here again the global market demands call for a different policy environment.

    There is also a need to have telecommunications make a contribution to the quality of life, for exam- ple through the intelligent network. People have to develop the specialized information services that go over this intelligent network. We want that network to be in place, not only for business, but also for the residence, as a way of making a contribution to edu- cation, environmental and energy control, to the provision of information, to any number of objec- tives that people want met. When all these factors are considered together, their combined force clearly calls for a telecommunications policy that permits the industry to respond quickly to a dy- namic technology and marketplace. That in turn calls for the greatest possible use of competition, rather than the old, slow administrative minuet wherein the industry has to get permission to intro- duce some new product or service.

    Full, all-out competition was introduced in the equipment area, and it has worked very well. There have been enormous gains to the nation in that area, since this competition has spurred innovation and lower prices. The same thing is true when we turn to the toll area, other than intra-LATA toll. (A LATA is a local access and transport area, often but not always equivalent to a standard metropolitan statistical area.) The inier-LATA toll area is now wide open to competition. There are three full facil- ities competitors, a host of regional ones, and rail- roads and pipeline companies using their rights of way for fiber optic transmission facilities. There are thousands of miles of fiber optic as a result.

    This has greatly benefited the nation. It is true that the large user has benefited the most, but that phenomenon should not be denigrated. Our large user cannot compete well if it does not have effi- cient telecommunications and will lose out in the current global competition. Thai means the nation

    loses jobs and suffers. Thus, we are not simply dis- cussing "trickle down," but something that is an essential factor in how this nation meets its compe- tition in the global and emerging information society.

    I shall briefly suggest the principles that govern this policy area and give some examples of their application. The first principle is to use competition wherever it is feasible, wherever it can flourish. This needs no defense. If there is a choice in the United States between monopoly--with government reg- ulation to substitute for the market--and competi- tion as a regulatory policy, competition will be selected. It is, after all, the norm in this country. It does the best job of spurring efficiencies and inno- vation, of driving prices to marginal costs.

    The second principle is equally undisputed: when we opt for competition and get effective competi- tion, deregulation should follow. Regulated compe- tition makes no sense in such circumstances; however, government often has a tendency to do just that, to handicap some and protect others in- stead of allowing effective competition to take its course. This is because competitors like to come to government to ask for help. Senator Magnuson put it well when he said that "all each industry seeks is a fair advantage over its rivals."

    An example of this tendency is our failure to de- regulate AT&T. There are two full facilities rivals, several regional ones, and thousands of miles of fi- ber optic cable. It is true that AT&T still has about 70 percent of the inter-LATA toll maket. It is also true that in a few areas, such as Vermont where no competitor wants to enter because of the sparse traf- fic, AT&T still has a monopoly. Those situations can be handled by simply relating tariff prices there to the competitive areas. There is no need to hold on to this rate-of-return regulatory system as to this one competitor. That is particularly true of the bid- ding war now going on for the large user. If AT&T wins that war with its tariff number 12, or whatever, it then has to file with the FCC--and it is the only one that can be challenged. If MCI, U.S. Sprint, or some other competitor oppose the filing at the FCC, since it delays AT&T's service, it may discourage the large user from taking the AT&T option.

    Were it not for short-term political considera- tions, the FCC probably would have deregulated AT&T. To spur competition in this field, we broke up AT&T and required equal access for its com- petitors to the divested Bell Operating Companies, the BOCs. We now have roughly 75 percent of the end offices cut over to equal access; that is, the com- petitors of AT&T have the same high-grade access to the BOC's local facilities as AT&T receives. It is time to stop handicapping the competitive race, to de- regulate and see how the market really functions.

    My third principle deals with the fact that we do

  • REGULATING COMMUNICATION ] 23

    end up with monopoly on the local level. That is what we have now. The third principle is that this monopoly should be earned in the marketplace. At the local level, there should be open entry, resale of local services, and fair interconnection with the lo- cal exchange carrier. That last is very important in view of the burgeoning number of networks. There is thus a need for the regulatory process to ensure that there is fair interconnection for these new networks.

    We have not followed or implemented this third principle. Take the example of intra-LATA toll. In many states, we have very large LATAs. Within those LATAs, the BOCs have a monopoly on tolls. That monopoly represents about 24 percent of the toll revenues in the country--bil l ions of dollars. The monopoly may be a de jure one since in many areas the state legislature or public utility commis- sion (PUC) will not allow competition. Even where there is no legal bar, competition is ruled out, for example, in New York because there is no equal access. In Texas, Southwestern Bell charged AT&T more for access to its local lines than a customer would pay for an end-to-end intra-LATA toll call over Southwestern Bell.

    This situation has to change; it is the wrong pol- icy, and it is bound over time to embarrass the BOCs. The BOCs say that they do not want to be fenced in, to be prevented from competing in infor- mation and inter-LATA services. If they are at the same time fencing out competition, that is a poor hand to play in this game. It may be that even with open entry and fair interconnection, the BOCs will win the competitive struggle and we will still end up with monopoly. But the principle here should be open entry and fair competitive conditions, with the monopoly earned fairly in the marketplace.

    I have been discussing intra-LATA toll, but the same principle holds for all intra-LATA services, in- cluding the "last mile" into the business or home. There should be open entry and resale of local serv- ices. It will be difficult to get full, effective competi- tion in this area, and I am not sure if there will be such competition in the next decade. For the de- velopments- Integrated Service Digital Network (ISDN), greater use of fiber and digital equipment, Open Network Architecture--will all enrich the network and thus strengthen its local monopoly.

    There are competitive niches. The large user cer- tainly can bypass the local monopoly and get access to the toll networks. For such large users, the local exchange company has become its own bypasser, giving special access at lower rates so as to retain some of the revenue. There can also be niches for data transmission. But they are relatively small. When we look at the overall picture, the local ex- change carrier remains the powerful ubiquitous lo- cal network. I see nothing in the next seven years or

    so that will undermine that monopoly. We will see effective competition--perhaps in digital radio or cellular--in the next century, but it is not likely to occur now.

    It is unlikely to occur for another reason: the sub- sidy in the present scheme keeps local rates ar- tificially low. We put what is, in effect, a tax or surcharge on the access charges for toll users of the local facilities, and use the substantial sums so ob- tained to reduce the local residence charges. It is hard for any competitor to enter in such circum- stances. Maybe no one could compete anyway, but we are certainly not going to find out when the local system receives substantial subsidies.

    That brings me to the fourth principle: to phase out the substantial and untargeted subsidies. The present system makes no sense: we subsidize every- body, whether they need it or not. It should be grad- ually phased out; ending the subsidies abruptly would be politically disastrous. We must slice the salami every year and shift the present "tax" on the toll user to the end subscriber. If we fail to act over time, the system will continue to give this false eco- nomic signal. We will be skewing local competition, and we will not get the full contribution to im- proved competitiveness that we want in this era of global competition. We will be overcharging our large business users and therefore handicapping them.

    In the present system, we subsidize everybody whether they need it or not.

    The present scheme encourages uneconomic by- passing of the local carrier's access charges for com- pleting the toll call. There is nothing wrong with bypassing when it occurs because it is more efficient for a Citicorp to go that way. Economic bypassing is just another name for competition. But bypassing that occurs in order to avoid this governmental pol- icy of a subsidy tax on tolls represents poor policy. When we impose a toll tax on a large user like Proc- ter & Gamble or General Electric or General Some- body, they do not absorb it; it is just another expense to pass on to the consumer. The consumer, including the poor, end up paying anyway. Indeed, it may be regressive taxation, as compared to monies coming from the general treasury.

    I am not against targeting subsidies to those who really need them. That is my fifth principle: to tar- get and avoid skewing the competitive system by

  • 24 / SOCIETY 9 JULY / AUGUST 1989

    using the general treasury, as, for example, Mary- land does. That is what we do in areas such as elec- tricity, gas, or food. Why should we not do the same here? If we wanted to subsidize the poor with food, we would not knock on the door of every...