Key Public Policy Issues

I believe the most important policy concerns of interexchange carriers are

the possibility of inappropriate government actions relating to technology choices,
the potential for premature lifting of the Modification of Final Judgment (MFJ) restriction on the Bell Operating Company provision of interexchange, interLATA services,
the fragmented jurisdiction over telecommunications in the United States,
the recent successful challenge to the authority of the Federal Communications Commission (FCC) to deregulate, and
perhaps most important, the pricing and other terms and conditions associated with accessing the local exchange network.

A. Threat of Inappropriate Government Actions Relating to Technology Choices

For the past few years, more attention has been paid in policy circles to defining and developing policy for a national information infrastructure: the "information highway," if you will. The Clinton administration's interest in this topic has intensified the debate. If I were an interexchange carrier, I would have three concerns. First, I would be somewhat concerned about the government at the federal, state, or even local level getting so enamored with the notion of the broadband super highway that it constructs its own network at taxpayers' expense and unfairly competes with the private sector. Although budget realities may well preclude massive investments at the federal level, there have been some well-publicized proposals for government-owned facilities at the state and local levels.

Second, even if the government does not compete directly with the private sector by constructing facilities, it could unfairly favor one group of vendors over another--say, the local telephone companies over the interexchange carriers or the cable television companies--or one technology over another. The massive amounts of federal government money spent on satellite communications and ISDN standards-making activities are evidence of such possible favoritism.

Third, the federal or state governments could take steps to stimulate artificially the deployment of fiber in the subscriber access portion of local exchange networks. As long as the established local exchange carriers are dominant in their markets and, in particular, if they are rate-of-return regulated--or even if a strong component of rate-of-return regulation remains under alternative forms of regulation, as is now typically the case--there is a strong reason for them to garner political support and convince policymakers that they should be allowed to make massive investments in the local loop. I am not convinced that some sort of marketplace failure is taking place that is resulting in fiber being deployed too slowly. Hence, there is a danger that all users of the local exchange network--ordinary consumers as well as interexchange carriers purchasing access services will--end up holding the bag if the deployment of fiber-in-the-loop is artificially accelerated ahead of market demand.

I have little trouble with the government encouraging demonstration projects and educating consumers about the potential applications and benefits of broadband networks, but I have very real concerns about it artificially encouraging the deployment of fiber that may not be economically justified. Stated another way, government leadership on the demand side of the equation is one thing, but manipulating the supply side of the equation so that users rather than stockholders foot the bill is something entirely different.

B. Premature Lifting of the MFJ Restriction on BOC Provision of InterLATA Services

Under the terms of the Modification of Final Judgment that resulted in the breakup of AT&T, the BOCs were prohibited from

providing information services,
manufacturing telecommunications equipment, and
providing interLATA interexchange services.

Judge Greene reluctantly lifted the first of these line-of-business restrictions--the information services restriction--but the latter two remain. As long as the BOCs have a significant amount of monopoly power in the provision of exchange and exchange access facilities and services, there is a serious threat that they will use that power to cross-subsidize and discriminate in favor of their own competitive activities. As long as they have such market power, the interexchange carriers are, in my opinion, quite justified in having serious reservations about the wisdom of lifting the line-of-business restriction on interLATA services.

As a result of the entry of competitive access providers (CAPs) into larger markets and recent steps at the federal level facilitating such entry--namely, FCC actions in the expanded interconnection proceeding--competition is emerging in limited sectors of the local exchange market. By and large, however, ordinary switched local exchange and other intraLATA services remain off limits to competition. Although some states are moving in the direction of allowing at least limited forms of local exchange competition, significant legal barriers to competition at the state level still exist. Moreover, even if the legal barriers to entry are removed, other significant barriers may deter competition. These barriers include

the capital investment required to duplicate the subscriber access or local loop portion of the local exchange network on anything approaching a ubiquitous basis,
the nonfungible or sunk cost nature of that investment once made,
the difficulties and hence costs of gaining access to rights-of-way, ducts, pole lines, buildings, and radio sites, and
the lack of number portability.

Thus, although one can paint a technological scenario that points to competition with the local loop, whether such competition actually will develop on a wide basis is far from certain.

C. Fragmented Jurisdiction

The issue of local exchange competition naturally leads to the next concern: fragmented jurisdiction. Under the Communications Act of 1934, jurisdiction over telecommunications is split between the FCC at the federal level and public utility commissions in the 50 states and the District of Columbia. Because of this split, statutes and PUC rules and regulations at the state level can effectively thwart--or at least significantly delay--national policy initiatives on telecommunications. When I was directly involved in the policymaking process at the federal level in the mid-1970s, we were generally successful at preempting state regulations that conflicted with our policy initiatives. As a result of a later series of federal court decisions, however, the FCC's ability to preempt the states has been seriously restricted.

Thus, the fundamental issue is where should policy toward telecommunications be set, at the federal or the state level of government? Because of the tremendous importance of telecommunications to the future of the nation as a whole and the nationwide and global reach of telecommunications networks, I am personally convinced that the fundamental decisions--the fundamental policies, if you will--should be established at the federal rather than the state level. Telecommunications is simply too crucial to allow 52 different jurisdictions to go in 52 different and often conflicting directions. My feelings in this area are shaped by my belief in the wisdom of encouraging competition in local exchange facilities and services and by what I have perceived as open hostility toward competition on the part of some state regulators. Whether or not you believe in competition, we need a national policy on this issue. Fundamental decisions such as this should be made at the federal level.

D. Authority to Deregulate

The next major concern relates to deregulation. Because the Communications Act is so outdated, it does not really contemplate the possibility of competition in the provision of telecommunications services. That is, it basically assumes the 1934 monopoly structure in the telephone industry and, hence, the need to regulate. Arguably, that regulation was introduced to protect consumers from price-gouging by providers of essential services who had monopoly power.

With the successful entry of multiple competitors, however, the need for full, traditional, tariff- type regulation disappears, because the market can protect consumers against such price gouging. Unfortunately, the Commission's ability to deregulate carriers without market power--nondominant carriers--was successfully challenged by AT&T in federal court. This has forced the Commission to require carriers to file tariffs even where competition is sufficient to protect consumers. Although the FCC has tried to lighten the practical burden of this requirement, I am of the strong opinion that the Commission's ability to deregulate should be explicitly established by appropriate amendment of the Communications Act. As a nation, we certainly do not need unnecessary regulation holding back technology. Coupled with the changes necessary to permit the FCC to override state actions that are not in the overall national interest, this additional amendment, explicitly permitting deregulation, would--among other things--allow the Commission to ensure appropriate deregulation of interexchange communications and, as competition develops, of the local exchange market.

E. Access to the Local Exchange Network

The fifth major issue of concern is the pricing and other terms and conditions associated with accessing the local exchange network. This is an important issue not only to the existing interexchange carriers but also to CAPs, cellular carriers, and the new personal communication service providers. The latter group--potential competitors for the local loop--are also critically dependent upon the existing local exchange carriers for the termination of traffic generated on their networks. Thus, ensuring reasonable, cost-based access to and from the switched local exchange network--including, but not limited to, numbering plan access and number portability--is crucial to the development of competition.

Because of the very "iffy" prospects for widespread competition for the local loop, the interexchange carriers and many enhanced service providers are concerned about local exchange carriers' ability to leverage their monopoly power into the provision of switching, transport, intelligent network functions, and enhanced services. I share that concern, and consequently, my firm and I have been strong advocates of unbundling the local exchange network along true open network architecture principles. Such unbundling would diminish the ability of local exchange carriers to leverage off their monopoly power and would facilitate the development of competition in the other parts of the local exchange network--namely, switching, transport, and some level of service logic. I am encouraged by the reported actions that the FCC took in the expanded interconnection and intelligent network proceedings; by recent pro-competitive actions in some state jurisdictions; and by voluntary local exchange carrier proposals to unbundle, specifically, Ameritech's Customer First Plan.