3 In particular, we note the support of Ambassador Bradley P. Holmes
and the Hon. Warren Clark.
4 In particular, we note the support of the Hon. Janice Obuchowski,
who was the Assistant Secretary of Commerce in charge of NTIA during this
period, and her colleague Jack Gleason.
5 In particular, we note the support of Commissioner Andrew Barrett,
Walda Roseman, Robert Pepper, and Kathleen Collins.
6 Appendix A to this report lists the many enthusiastic and able
U.S., Polish, Hungarian, and Bulgarian contributors to the process. Many
knowledgeable and hard working people from TeleConsult also were instrumental
in helping to shape and manage the overall process, including particularly Mark
Burke, Richardson Franklin, and Paul Boettinger.
7 We express special thanks to Louise Benjamin, Associate Professor
of Telecommunications, Indiana University at Bloomington; Fritz Messere,
Associate Professor and Chairman, Communications Studies Department, State
University of New York at Oswego; and Matthew Mickelson, Medill School of
Journalism, Northwestern University, who served as rapporteurs for the 1991 and
1992 sessions. Charon Harris, a young and talented lawyer who is headed for a
bright future in the field of communications law, played an invaluable role in
helping to edit, structure, and generally improve this report during the long
process of its gestation.
8 Because of the diversity of legal and
regulatory approaches taken by the various states, it would be difficult to
present a reasonable and informative discussion of a "state" approach to
overseeing telecommunications. Accordingly, this section focuses primarily on
federal considerations. Throughout this report, as appropriate, references
will be made to various matters in the context of a state's approach to a
problem or issue.
9 The clause specifically delegates to Congress the authority to
"regulate Commerce with foreign Nations, and among the several states, . . .".
For a detailed discussion of Commerce Clause jurisprudence, see L. Tribe,
American Constitutional Law ch. 5 (2d ed. 1988).
10 Section 410 of the Communications Act authorizes the FCC to refer
matters to a "joint board" consisting of members of each of the states affected
by the matter, as well as members of the FCC. This provision also contemplates
less formal consultation between the FCC and state regulatory bodies on
appropriate matters. Finally, it also requires the Commission to refer certain
matters that involve both federal and state concerns over common carrier
communications to a Federal-State Joint Board, consisting of three of the FCC's
Commissioners and four state commissioners selected by the National Association
of Regulatory Utility Commissioners (an organization of all state utility
regulators).
11 The Executive Branch is one of three branches of the federal
government. The President is the chief executive, and the various departments
and agencies within the Executive Branch are responsible for enforcing federal
law. The Legislative Branch, consisting primarily of Congress, is responsible
for writing federal law. The Judicial Branch, consisting primarily of the
various federal courts, is responsible for judging the application,
administration, and constitutionality of the federal laws (both as written and
as applied). This division of powers is required by the U.S. Constitution and
is commonly referred to as the "separation of powers." By separating the
various government functions, the resulting system is intended to provide
checks and balances. Although each branch of the federal government is
technically "independent" of the others, the system by which the government
operates requires "interdependence." In other words, government action often
requires action by two of the three branches (or at least exposes action to the
scrutiny of two branches.) Thus, for example, the courts are able to use their
powers of judicial review to guard against unconstitutional actions by the
Legislative Branch or the Executive Branch. The President, by exercising his
right to veto laws adopted by Congress and his power to direct the government's
law enforcement activity, exerts a significant influence on the content and
administration of the federal laws.
As a so-called "independent" regulatory agency, the FCC is the creation of
Congress and is subject to the scrutiny and influence of all three branches of
the federal government (and the resulting system of checks and balances),
although it is not controlled by any of the three branches. The U.S.
Constitution explicitly prohibits any state from "entering[ing] into any
Agreement or Compact with . . . a foreign Power, . . . ." U.S. Constitution,
art. I, [[section]] 10. Accordingly, matters of international communications
are handled solely by the federal government. Although the FCC participates
actively in various international communications policy decisions, the
President, the Department of State, the Department of Commerce, and the U.S.
Trade Representative are involved most extensively in addressing and resolving
international matters.
12 See note 54 and the accompanying text below. See also 28 U.S.C.
[[section]][[section]] 2341-51, covering the exclusive right of the federal
courts of appeal to enjoin, set aside, suspend, or review the validity of
certain FCC decisions (including essentially all decisions involving license
and similar applications, as specified in Section 402(a) of the Communications
Act). Other FCC decisions are subject to court review under Section 402(b) of
the Communications Act and the provisions of the APA, 5 U.S.C.
[[section]][[section]] 701-06.
13 The APA is the federal law that prescribes this process, as well
as the process for judicial review of agency decisions, as discussed above.
The APA requires the FCC (and other federal agencies) to give the public notice
of matters to be acted upon and an opportunity to comment on such matters. The
APA also requires agencies to make reasoned decisions, explained in writing,
based upon the evidence submitted to them. The APA also sets out the standards
under which agency decisions may be reviewed by the courts. The FCC's decision
making procedures are discussed more fully in Section VII.
Agency action is further affected by the Freedom of Information Act, which
requires agencies to release virtually all documents to anyone submitting an
appropriate request for documents. (The law provides for some exemptions from
disclosure, including national security and protection of private commercial
interests.) The Sunshine in Government Act also requires federal agencies to
hold their meetings in public, after reasonable notice to the public of the
times, places, and agendas of such meetings.
The FCC, like other agencies, adopts additional rules of practice and
procedure to supplement these federal laws. The FCC's rules are published as
Title 47 of the Code of Federal Regulations.
14 The MFJ is considered in and appended to the court's decision in
United States v. Western Electric Co., Inc., 552 F. Supp. 131 (1982), aff'd sub
nom. Maryland v. United States, 460 U.S. 1001 (1983). The MFJ modified in
part, and replaced, an earlier consent decree that had been entered in
settlement of a 1954 antitrust suit against AT&T. AT&T's local
telephone businesses were organized into 22 local BOCs. In addition, seven
Regional Holding Companies (the RHCs) were created, each of which became the
owner of certain BOCs. The RHCs (also commonly referred to as the RBOCs) are
NYNEX, Bell Atlantic, Bell South, Ameritech, Southwestern Bell, Pacific
Telesis, and US West. One good discussion of the process that resulted in the
divestiture is S. Coll, Deal of the Century (1988).
15 The line-of-business restrictions were developed because of a
concern that the RHCs, through the BOCs, could use their monopoly control of
local switching and transmission networks to compete unfairly in businesses
other than voice telephony. Accordingly, the MFJ prohibits the RHCs from
providing "any product or service that is not a natural monopoly service
actually regulated by tariff." This restriction is waived if the RHC can
demonstrate that its control over the local telephone network will not permit
it to compete unfairly in offering a new product or service. As a result, the
RHCs have, over time, been permitted to enter many unregulated businesses,
including essentially any noncommunications business. The MFJ also
specifically prevents the RHCs from (1) providing interexchange
telecommunications services, (2) providing information services, or (3) being
involved in the design or manufacture of telecommunications equipment. In
1991, amid significant controversy and heated debate, and upon remand from the
Court of Appeals, Judge Greene removed the information services restriction.
United States v. Western Electric Co., Inc. 767 F. Supp. 308 (D.D.C. 1991). The
MFJ's restriction on nontelecommunications businesses also was removed. In
concluding that the information services restriction should be removed, Judge
Greene acted in response to what he believed was, in effect, a mandate from the
Court of Appeals to reverse his initial 1987 decision to retain the information
services restriction in a slightly relaxed form. See United States v. Western
Electric Co., Inc., 673 F. Supp. 525 (D.D.C. 1987), rev'd in part, 900 F.2d 283
(D.C. Cir.), cert. denied sub nom. MCI Communications Corp. v. United States,
____ U.S. ____, 111 S. Ct. 283 (1990). Judge Greene concluded that the RBOCs
still possessed sufficient market power to act in an anticompetitive manner if
permitted to enter the information services market, and, therefore, should
remain subject to the information services restriction. He went on to decide,
however, that the decision of the Court of Appeals, which focused on a narrow
legal issue involving the standard under which the MFJ's line-of-business
restrictions were to be evaluated, required him to remove the information
services restriction -- despite his own disagreement with such a result.
15A See note 15 above. The series of FCC decisions that addressed
the regulatory status of "enhanced" services, which include information
services, is discussed below in note 19. Although the FCC, in these decisions,
concluded that "enhanced" services would be unregulated, it decided to use its
regulatory authority over common carriers to impose conditions on their
involvement in the enhanced services market. In response to the perceived
market power of AT&T and the RBOCs, the FCC decided to permit AT&T and
the RBOCs to offer enhanced services only through subsidiaries that were
separate from these companies' telephone business operations and that dealt
with the telephone operations on an arms-length basis. More recently, these
so-called structural safeguards have given way to nonstructural safeguards,
including Open Network Architecture, as discussed in Section VII.
16 The MFJ, its administration over time, and its relationship to
various FCC policies, are complex and controversial subjects.
17 The relationship between the FCC and the states is discussed in
more detail in Section VII.
18 The concept of a "natural monopoly" is discussed in Section
III.
19 The Illinois statute defines a "competitive telecommunications
service" to mean:
. . . [A] telecommunications service, its functional equivalent or a
substitute service, which, for some identifiable class or group of customers in
an exchange, group of exchanges, or some other clearly defined geographical
area, is reasonably available from more than one provider, whether or not such
provider is a telecommunications carrier subject to regulation under this Act.
A telecommunications service may be com petitive for the entire state, some
geographical area therein, including an exchange or set of exchanges, or for a
specific customer or class or group of customers, but only to the extent
consistent with this definition. Ill. Rev. Stat. ch. 111-2/3, [[section]]
13-209.
This definition focuses on the economic attributes of a service to determine
its regulatory treatment. Neither the New York statute nor the federal
Communications Act defines services that are exempt from regulation based upon
their economic characteristics. The New York Public Service Commission and the
FCC, however, each have used their regulatory powers to reduce the regulation
of various "competitive" services and exempt other "competitive" services from
regulation entirely.
Both the Illinois and federal statutes include similar definitions of a
"telecommunications service" that is subject to regulation, although the
federal law is slightly broader (to include broadcast services regulated solely
by the FCC) and distinguishes between wire communication and radio
communication. Compare Ill. Rev. Stat. ch. 111-2/3, [[section]] 13-203, with
47 U.S.C. [[section]] 153(a) & (b). In both cases, the transmission of
information, using a range of media, and incidental services (including
switching, for example) are covered. The Illinois statute itself excludes
customer premises equipment (CPE), telephone answering and paging services, and
cable television service (but only if such service is a one-way service, from
the system headend to the subscriber) from the definition of a
telecommunications service. Ill. Rev. Stat. ch. 111-2/3,
[[section]] 13-203(a)-(c). These services either are generally considered
competitive (particularly CPE), or are subject to other regulatory oversight
(such as cable television, which is managed by local regulatory authorities and
the FCC).
The federal Communications Act does not have similar broad exclusions, but the
FCC has used its authority to exclude many services from regulation. For
example, the FCC spent a considerable amount of time and energy to adopt
policies that distinguish between regulated "basic" telecommunications
services, on the one hand, and a range of "enhanced" services (which, in many
parts of the world, are referred to roughly as "value-added" services), on the
other hand, which the FCC chose to leave unregulated. This decision was based
primarily upon the FCC's judgment that "enhanced" services would be offered on
a competitive basis and, therefore, did not need to be regulated. More than a
decade after beginning its effort to define the class of services that would be
unregulated, the FCC concluded that it would not regulate a service that:
. . . [C]ombines basic service with computer processing applications that
act on the format, content, code, protocol or similar aspects of the
subscriber's transmitted information, or provide the subscriber additional,
different, or restructured information, or involve subscriber interaction with
stored information [with all such services being referred to as "enhanced"].
Amendment of Section 64.702 of the Commission's Rules and Regulations, 72
F.C.C.2d 358 (Tentative Decision); 77 F.C.C.2d 384, 387 (1978) (Final
Decision). See also 47 C.F.R. [[section]] 64.702. Commonly known as the
Second Computer Inquiry, or Computer II (it modified an earlier decision
in the First Computer Inquiry, or Computer I, 28 F.C.C.2d 267 (1971)),
this proceeding defined a basic service as the offering of a "pure transmission
capability over a communications path that is virtually transparent in terms of
its interaction with customer supplied information." 77 F.C.C.2d at 420. The
FCC then went on to state that an "enhanced service" is anything other than a
basic service and is considered to be "dependent upon, but different in kind
from the pipeline [basic] service." 84 F.C.C.2d 50, 53 (1980)(Order on
Reconsideration). In Computer II, the FCC also deregulated the CPE
market.
19A A relatively recent discussion of the changing role of state
regulation of telecommunications is set out in Telecommunications Policy and
Economic Development: The New State Role (1989)(J. Schmandt, F. Williams &
R.H. Wilson, eds.)(concluding, in general, that telecommunications (1) has
assumed much greater prominence as a policy matter at the state level, (2) is
generally recognized as a key infrastructure element for economic development
purposes, (3) is no longer centered on efforts to ensure universal service, and
(4) presents great opportunities for state governments to realize savings,
efficiencies, and benefits through their consumption of telecommunications
services).
20 Where market demand will support substantial multiple entry, this
cycle will not occur. Duplication of facilities will not be wasteful, because
the market will be able to absorb and use the duplicate facilities and
services.
21 A "natural monopoly" is a business in which, inevitably, there
will be room for only one seller. In economic terms, such a business has a
declining marginal cost curve so that a single provider able to achieve
economies of scale is able to produce goods or services at the lowest unit
cost. A number of states are now dismantling what has long been considered a
"natural monopoly" -- local exchange access service -- by authorizing
competitive entry, or by prescribing rules to encourage competitive entry, into
this business. New York's Public Service Commission, for example, has been
very aggressive in seeking to open the local market to competition. In a
landmark 1990 decision, the State Commission required local exchange carriers
to separate their charges for local transport and for central office switching,
thereby establishing a fundamental condition for permitting the development of
a more competitive local market. The Commission followed that decision with
other, more recent, actions requiring local telephone companies to provide
competitors with broad, nondiscriminatory access to local network features
needed to establish competitive businesses.
The FCC took similar action in September 1992, when it adopted new rules giving
competitive access providers (CAPs), interexchange carriers, and end users more
extensive rights to interconnect, on reasonable terms, with local exchange
carriers' central office switches. (CAPs offer end users an alternative to the
local monopoly telephone company for accessing the interexchange transmission
and switching network. CAPs often rely on microwave or fiber optic
connections, rather than traditional wire facilities, to link users to the
interexchange network.) The new interconnection arrangements are intended to
accelerate the process of ending the local exchange companies' monopoly control
over bottleneck local distribution plant. Because entities other than the
local telephone company will now be able to use the existing local loop, on a
reasonable basis, to reach customer premises, cost-inefficient duplication of
the expensive "last mile" connection should become unnecessary. (In other
words, only large-volume users that can enjoy savings from constructing
dedicated last mile connections will opt to build such connections. The new
interconnection arrangements, it is believed, will permit CAPs and other
entities to offer alternative service arrangements to a wider group of end
users, including those that could not justify the cost of constructing
end-to-end dedicated access facilities.) In addition to altering the rules for
interconnection, the FCC revised its rules governing the tariffing of these
interconnection arrangements to promote unbundling of rate elements and
cost-based pricing. In this initial step, the FCC only addressed so-called
"special access" arrangements, which are used to offer private line services.
However, the FCC has proposed adopting similar rule changes for switched
access, which is used to offer traditional switched voice and data
communications.
21A For one comprehensive examination of this perplexing policy
debate, see H. Geller, Fiber Optics: An Opportunity for a New Policy? (1991)
(available from The Annenberg Washington Program).
22 To date, New Zealand stands in stark contrast to the rest of the
world on this point. New Zealand opened its telecommunications market to
relatively unfettered competition without creating any significant government
regulatory or oversight structure. The government chose to rely almost
entirely on the use of competition laws to guard against anticompetitive and
unfair actions. A 1992 inquiry by the Commerce Commission concluded that
competition was not developing as quickly or extensively as had been expected
under this regulatory regime. However, only time will tell whether -- and why
-- New Zealand's approach does or does not work. For a discussion of the
possible role of regulation in a competitive market, see Section
VII.
23 Where specific sections of the Communications Act can be cited as
authority for the concepts discussed, appropriate references are included.
24 The goal of "universal service" is central to many state
statutes. E.g., Ill. Rev. Stat. ch. 111-2/3, [[section]][[section]] 13-102
("[T]he General Assembly finds that: (a) universally available and widely
affordable telecommunications services are essential to the health, welfare and
prosperity of all Illinois citizens;"), 13-301 ("[T]he [Illinois Commerce]
Commission shall: . . . (c) order all telecommunications carriers offering or
providing local exchange telecommunications service to propose low-cost or
budget service tariffs and any other rate design or pricing mechanisms designed
to facilitate customer access to such telecommunications service, . . .; (d)
investigate the necessity and feasibility of establishing a fund from which
telecommunications carriers offering or providing local exchange
telecommunications service, whose costs of providing such service exceed the
average cost of providing such service in Illinois, could recover revenues
intended to mitigate the price impact on customers . . . ;").
25 See the discussion of the Commerce Clause of the U.S.
Constitution in Section II above.
26 Some provisions of the Communications Act, particularly those
contained in more recent amendments, provide more focused guidance and more
specific standards and limits. For example, Section 226 of the Communications
Act, which was added in 1990, sets forth elaborate and detailed requirements
for providing "operator assisted" calling services. This provision was adopted
by Congress, in large part, because of its perception that, as a result of
substantial deregulation by the FCC, providers of these services were
extracting unfair charges from consumers. See Section VII for a discussion of
the condition that led to adoption of Section 226.
27 Section II discusses the complex relationship that exists in the
United States.
28 The difficulty of such a task is especially daunting when the
state operator is expected to finance other state activities (such as postal
services), assist in reducing general budget constraints by transferring all or
a substantial portion of its profits to the state (whether by an explicit
transfer mechanism or through special taxes), subsidize state-owned equipment
manufacturers to serve industrial policy considerations, or increase overall
employment levels by serving as an "employer of last resort" for an enormous
civil service pool.
29 The explosive growth of the interstate long distance market in
the United States, following the 1984 AT&T divestiture and the substantial
deregulation of long distance services, is well known. Similar growth has
occurred at the state level, in many of the 50 United States, as well. For
example, in Florida, intrastate long distance service was offered by 13
companies before the AT&T divestiture. Following the breakup of AT&T,
and accompanied by substantial deregulation at the state level, the market grew
to include approximately 150 long distance service companies.
30 Interconnection is discussed in Section VIII .
31 "Value pricing" is discussed in Section VIII .
32 "Cooperative ownership" means that subscribers to the network
also own the network. In Idaho, for example, 6 of the state's 22 local
telephone companies are cooperative companies. The state does not regulate the
cooperatives.
33 To be meaningful, interconnection of the networks should be
technologically and economically invisible to users. See Section
VIII.
34 The network owner may take comfort if it receives some type of
legal assurance that fair compensation will be paid if the assets it has
developed or acquired are taken away by the government.
35 Enhanced SMRS is a cell-type radio system that is less expensive,
but also less powerful and sophisticated, than cellular service.
36 These options also highlight the dangers of having the government
prescribe a level of service that must be provided to all customers. As noted
above in Section III, the imposition by the government of unrealistic or
uneconomic conditions as a condition to entry may be an impediment to
competition and development. As a political and humanitarian matter,
governments will want to ensure that there is broad access to a minimal level
of service at an affordable price. The oft-noted "universal service" goal of
many national telecommunications laws is a prime example of this concern. The
question, however, is whether the government should expect market entrants to
self-finance such minimal service, at stated price levels, or whether the
government should be prepared to provide explicit subsidies for low-income
residents who cannot afford the true cost of the minimal service. The
government may even want to consider permitting residents to select a less
costly level of service, such as a multiparty connection, as an interim measure
or, in exchange for some type of separate benefit, as a longer-term measure.
Some residents simply may not want or need a particular level of service, and
the government should not necessarily force them -- or pay them -- to accept
it. See note 88, below for a discussion of how the United States addressed
these concerns in developing rural telephony. See also E. Parker & H.
Hudson, Electronic Byways: State Policies for Rural Development Through
Telecommunications (1992).
37 Of course, innovative variations to a national approach may
produce interesting results. In the 1970s, for example, France restructured
its national carrier (now known as France Telecom) to create multiple, separate
profit centers (called "filliales"). These pieces of the company were allowed
to develop their own priorities and strategies. They also competed with each
other, at least in certain instances. The result, overall, was a more
vigorous, decentralized market arrangement, although this was all carried out
through a single, national company. In early 1992, Hungarian Telecommunications Co. entered into a joint
venture with another Hungarian company and one of Finland's telephone companies
to develop the network in the Pest section of Budapest. There has been some
speculation that there might be substantial interest in Hungary in the
possibility of replicating the unusual model of telecoms development found in
Finland. In that country, a group of nearly 60 privately owned and cooperative
telephone companies has long provided local service to most subscribers in the
country. The government-owned telephone company provides virtually all
intercity service, as well as local service in certain areas of the country.
38 If conditions warrant, the regional approach can be decentralized
further to encourage truly local network development in relatively small
geographic areas. A mixture of regional and local approaches, depending upon
the size, geography, and demographic composition of the market, may make sense
as a policy matter or simply may develop over time.
39 For a provocative critique of historic regulatory practices in
the United States, see Fowler, Halprin & Schlichting, "`Back to the
Future': A Model for Telecommunications," 38 Fed. Comm. L.J. 145
(1986).
40 See, e.g., U.K. Department of Trade and Industry, The
Infrastructure for Tomorrow iv, vii (1988) (Report of the Communications
Steering Group)("[M]arket-pull rather than technology-push should be the
driving force of policy. . . . [U]ser demand is particularly difficult to
predict in [the case of potential infrastructure improvements] . . . . It is
for the market, rather than the Government, to resolve this indecision [about
the technology users want in the medium to long term]. A technology-driven
solution should not be imposed. It is entrepreneurial activity -- the drive to
offer new services possibly using new technology -- that needs to be
fostered."). See also notes 43-45 and the accompanying text, below.
41 See Section IV for a discussion of the problem of having to rely
on frequent legislative action.
42 For a recent survey and critique of regulatory efforts to promote
or safeguard competition, see Information Technology Association of America,
"Competition Safeguards in Telecommunications" (September 1991). The
discussion that follows is based in part upon the overview of competitive
safeguards contained in Section III of this paper.
43 E.g., Coase, "The Federal Communications Commission," 2 J.Law
& Econ. 1 (1959).
44 For social and political reasons, many would argue that existing
wealth distributions create inequities that undermine this entire approach.
One question is whether the FCC decision making process should be used to
redress such inequities, or whether broader tax or other wealth redistribution
mechanisms are more appropriate mechanisms. Another question is whether
financial institutions can help correct existing disparities in wealth. In
theory, a bank would be willing to lend money to a person with an idea that
reasonably can be expected to make money. The bank's willingness to lend will
depend upon the relationship between costs and anticipated revenues.
Accordingly, if the value placed on spectrum is economically efficient, a
person lacking personal finances should be able to gain access to sufficient
borrowed funds. Values that are not commercially sensible would not represent
efficient allocations of spectrum. Only those with substantial discretionary
funds could afford to "overpay" for spectrum, and their inefficient investment
decisions would not, in the long run, be sustained because the market would not
allow them to recoup their investment or earn a profit.
45 The area within which the transmission could be received would
depend upon the frequency being used and the power of the transmitter, as well
as various geographic and atmospheric variables.
46 See, e.g., P. Areeda, Antitrust Analysis [[section]] 2C (3d ed.
1981) ("Oligopoly or `Shared Monopoly'"). See also note 47 below.
47 See, e.g., United States v. Socony-Vacuum Oil Co., 310 U.S. 150,
223 (1940) ("[M]arket manipulation in its various manifestations is implicitly
an artificial stimulus applied to (or at times a brake on) market prices, a
force which distorts those prices, a factor which prevents the determination of
those prices by free competition alone."); Interstate Circuit v. United States,
306 U.S. 208, 227 (1939) ("Acceptance by competitors, without previous
agreement, of an invitation to participate in a plan, the necessary consequence
of which, if carried out, is restraint of interstate commerce, is sufficient to
establish an unlawful conspiracy . . . ."). But see, e.g.,
Maple Flooring Manufacturers' Assn v. United States, 268 U.S. 563, 586 (1925
("[T]rade associations or combinations of persons or corporations which openly
and fairly gather and disseminate information as to the cost of their product,
the volume of production, the actual price which the product has brought in
past transactions . . ., as did these defendants, and who, as they did, meet
and discuss such information and statistics without however reaching or
attempting to reach any agreement or any concerted action with respect to
prices or production or restraining competition, do not thereby engage in
unlawful restraint of commerce . . . .").
48 Interconnection in the telecommunications business is a key to
successful market entry by new firms. Accordingly, without clear and fair
interconnection arrangements, existing companies can readily defend themselves
against the competitive pressures that can be exerted by a new market entrant.
Interconnection is discussed in more detail in Section VIII .
49 In the United States, users typically may choose among competing
long-distance companies when making nonlocal calls. As a result of the "equal
access" plan that was imposed by the MFJ and included within the FCC's rules,
each telephone subscriber is permitted to select one long-distance company to
serve as a "first choice" carrier. (This selection is made on a
location-by-location basis and is tied to the subscriber's local phone line.
Thus, a user with a home and an office telephone may select one carrier at home
and another at the office. The selection does not, however, "travel" with the
subscriber. Thus, when placing a call from a friend's telephone, a subscriber
will be subject to that friend's carrier selection.) Any long-distance call
made from a telephone simply by dialing "1" and the telephone number will be
handled by the preselected carrier. Under equal access, however, a subscriber
can route the call to another long-distance carrier by dialing a five-digit
"access code" before dialing the telephone number. Each long-distance company
has an access code that permits subscribers to route calls to it, even if that
carrier is not the "first choice" carrier for the phone from which the call is
being placed.
50 Section 226 requires, among other things, that each AOS provider
(1) identify itself to the customer before any call charge is imposed; (2)
permit the customer to terminate the call without charge before the call is
connected; (3) upon request by the customer, disclose rates and charges,
methods of collection, and methods for resolving complaints; (4) not bill for
unanswered calls; (5) permit "800" numbers to be reached without charge; and
(6) provide customers to gain access to carriers other than the presubscribed
carrier through the use of the appropriate equal access codes.
51 See, e.g., Operator Service Providers (Monitoring and Reporting
Requirements), 68 Rad. Reg. 2d (P&F) 1605 (1991).
52 When the FCC is deciding a dispute, acting more like a judge or
court, these types of "ex parte" contacts or presentations are strictly
prohibited.
53 All meetings involving a quorum of the Commissioners must be held
in public, under the requirements of the APA. See note 13 above.
54 The courts usually defer to the agency's expertise on matters of
judgment, so long as the administrative record provides the agency with a
reasonable basis on which to reach its conclusion. For example, if the FCC
were to make a decision contrary to the overwhelming weight of public comment
by ignoring the public comment, a court might conclude on appeal that the FCC
had not acted in a reasoned fashion. The court would be likely to remand the
matter to the FCC and instruct it to reconsider its conclusion in light of the
public's comments. The FCC might reach the same result at the end of the new
proceeding, and if it did so in a reasoned manner, the decision, even if
appealed to a court once again, might well be upheld the second time around.
This review process forces the agency to take account of the public comment
that it receives and to articulate the reasons for its decisions. As a result,
rule and policy decisions are made in the context of a written discussion that
explains the reasons for agency action. Rule and policy decisions are not
simply issued as a set of agency conclusions.
55 See note 37.
57 The author is a lawyer and offers the following discussion with
apologies to engineers and economists. The discussion is not intended to
provide a detailed technical or economic examination of either issue.
58 The central role of switching as a determinant of the market
power of monopoly telephone companies in the United States was at the heart of
the argument presented by Peter Huber, consultant to the U.S. Department of
Justice, when he recommended in 1987 that the MFJ's restrictions on the RBOCs
be relaxed substantially. See Section II for a discussion of the MFJ.
According to Huber, the increased availability and affordability of switching
and processing capability was altering the shape and nature of the U.S.
telecommunications market. What was once a pyramidal arrangement, in which the
large companies with the concentrated switching capacity exercised almost total
control over traffic, was, in Huber's view, becoming a "geodesic network," in
which access point and interconnections were becoming more widely dispersed.
See generally P. Huber, The Geodesic Network (1987).
59 Although a detailed discussion of the
technical considerations relevant to interconnection is beyond the scope of
this report, the complexity and importance of such technical issues cannot be
understated. Consider the following excerpt from the 1990 Consultative
Document released by the U.K. Department of Trade and Industry as it was
considering a relaxation of its duopoly policy:
12.16 Interconnection between public networks is essential in
order for competition to develop. . . . The technical interface
between competing networks has been left to commercial negotiation, with a
generally successful outcome. . . .
12.17 The Government wishes to see more effective competition in
telecommunications. This gives rise to the question of whether, in such an
environment, greater efforts will be needed to ensure that technical barriers
do not arise. The choice of technical standard is becoming so wide as to
create considerable uncertainties for decision makers in all parts of the
market. There are numerous examples of new technology being introduced in two
networks but using incompatible standards. The usual solution is for a gateway
to be provided for converting signals between the two standards. Large profits
on international circuits have generally ensured that such gateways are
provided. However, some recent examples, where profit margins are low, have
shown that gateways are not being so readily provided. At the extreme, this
can result in one set of users being cut off from another set.
12.18 One response would be for the Government simply to continue to
contribute to European and other international standards making and to ensure
implementation of the resultant standards in this country, but otherwise to
leave it to the market to resolve interconnection and related issues through
commercial negotiation. However, this runs the risk that, over time,
. . ., incompatible standard may start to arise. To try to meet this
concern the Government could take a more active role in formalizing the
interconnection interfaces between all public networks. . . . [Whether such a
role should involve mandatory prescriptions is unclear.] . . . [The Government
could seek] to arbitrate between competing interests and to ensure all
functions were provided on some equitable basis for the successful operation of
concatenated networks. . . .
12.19 The establishment of such new interfaces may have drawbacks. The
interfaces would be complex and would require considerable effort to draw up
and maintain. The existence of the interfaces, while creating stability, would
by the same token create rigidity. . . .
U.K. Department of Trade and Industry, Competition and Choice:
Telecommunications Policy for the 1990s 73-74 (1990)(Consultative Document).
60 Ianna, "Open Networking in a Competitive Environment,"
Telecommunications, Jan. 1987, at 57, 58.
61 Filing and Review of Open Network Architecture Plans, 65 Rad.
Reg. 2d (P&F) 1193, 1214 (1988). ONA was adopted in the Computer
III proceeding, as a successor to the structural safeguards that were
imposed under the Computer II regime, as discussed above in notes 15A
and 19 and the accompanying text. E.g., Amendment of Section 64.702 of the
Commission's Rules and Regulations, 60 Rad. Reg. 2d (P&F) 603 (1986)(Report
and Order in Phase I of the Third Computer Inquiry ("Computer III").
62 This concern also has been at the heart of various state efforts
to alter the structure of local telephone markets. One example, in New York
State, is discussed above in note 21.
63 See, e.g., Valee, "Open Networks: Present and Future Prospects
18 (March 1988)(English translation of "Les Reseaux Ouverts: Concept - Enjeux
- Perspectives," 1 Les Dossiers du SPES 1 (Mars 1988)) ("[T]echnological
development lends credence to a breakup and/or transparency of
telecommunications structures during the next few years. . . . [There have
been numerous efforts] concentrated on finding a general common network
which would allow for flexible interconnection and guaranteed
interoperability with all the other telecommunication and data processing
networks and equipment.") [emphasis in the original].
64 Though lacking the same focus on architecture as ONA, the
European Community's Open Network Provision (ONP) directive has many objectives
in common with ONA. As expressed by the European Commission, ONP seeks to
promote "harmonized open access to the basic public network infrastructure and
basic public services." Such a goal involves three main components: (1)
definition of harmonized technical interfaces and service features, (2)
definition of harmonized usage conditions, and (3) definition of harmonized
tariff principles. See, e.g., Commission of the European Communities, Proposal
for a Council Directive on the establishment of the internal market for
telecommunications services through the implementation of Open Network
Provision, COM(88) final - SYN 187 (Jan. 9, 1989).
65 The "investor" might be a single individual, a bank or other
financial institution or lender, the public capital market (including
stockholders and bondholders of a public company), the private capital market
(including equity owners and creditors), a national government, or a
multinational governmental body. In the United States, for example, rate
payers have absorbed the $3-4 billion cost of allowing competitive
long-distance networks to obtain equal access to local switches. Equal access
is just another part of the attempt to ensure broad interconnection of
facilities in the United States.
66 For example, in the United Kingdom, Oftel ultimately stepped in
to prescribe the terms of interconnection between British Telecom and Mercury
after negotiations between the companies failed to produce a workable
arrangement. See also note 57 above.
66A The following discussion does not consider the complicated
subject of rate rebalancing. Rebalancing is likely to be faced in any sectoral
restructuring process that seeks to encourage cost-based pricing. For a
variety of reasons, including policies favoring universal service at averaged
prices and national fiscal policies that seek to have telephone companies
contribute to the national treasury, rates for long-distance (including
international) services historically have been substantially above cost, and
rates for local services have been below cost. This has been true throughout
the world. As various countries (including the United States) have moved to
competitive, or more competitive, market arrangements, a central element of the
restructuring process has been to correct this rate imbalance. Subject to
concerns about the social effects of drastic, rapid price increases on local
services, national efforts to promote repricing generally have resulted in
higher local service prices and lower long-distance prices. In general terms,
users of local services have been required over time (and through repricing) to
pay a larger share of the costs of operating the local loop. In the United
States, these infrastructure costs historically were recovered largely from
users of long-distance service through usage-sensitive charges -- even though
the vast majority of such costs are not usage sensitive. Over time, most of
these so-called nontraffic sensitive costs have been shifted to local users
through the imposition of a flat monthly access charge (which does not vary
based on service usage) that is included in each subscriber's telephone bill.
As access charges were added to local bills and removed from the long-distance
rate base, long-distance rates declined. This repricing process in the United
States, however, has been complicated and surrounded by substantial legal,
economic, and political controversy. The FCC proceeding that was begun in the
late 1970s to restructure rates is still ongoing as the agency seeks to refine
and continue to rebalance rates without completely undermining historical
policies favoring universal access to affordable local service at averaged
prices. Repricing also has been accompanied by the development of aid programs
to assist users who have low incomes, or who live in areas that are costly to
serve, with the financial burden of paying for basic telephone service. For a
detailed discussion of pricing issues, see Telecommunications Pricing Primer
(1991) (J. Alleman, ed.)(prepared for the European
Telecommunications Seminars and available from the U.S. Department of State).
For a discussion of comparative approaches to sectoral restructuring, which
includes a discussion of various approaches to rate rebalancing, see generally
R. Bruce, J. Cunard & M. Director, From Telecommunications to Electronic
Services (1986).
67 Prices set initially at high levels will permit service providers
to earn high returns on their initial investments. At the same time, the high
prices will lower demand, because many users will be unable to afford the price
of the service. As a result, resources will be allocated to those who value
the scarce service most. At the same time, the high returns can be reinvested,
at least in part, to expand service over time. In theory, as service expands,
marginal costs should decline, which will permit prices to be reduced. As
prices decline, demand should increase. Demand will increase, however, at a
time when supply also can be increased, because funds will be available to
acquire the resources necessary to expand supply. This approach to pricing,
commonly referred to as "value pricing," may avoid some of the problems that
currently plague developing countries where prices are set at a level that
attracts a demand far in excess of available supply. The result is enormous
dissatisfaction among users because of the long wait imposed on anyone seeking
to obtain new service.
68 Price caps are outlined in general terms below.
69 E.g., Policy and Rules Concerning Rates for Dominant Carriers, 66
Rad. Reg. 2d (P&F) 372 (1989) (Report and Order establishing price caps for
AT&T).
70 What follows is an extremely simplified version of the U.S. price
cap scheme. The actual regulatory model that was adopted is far more complex,
particularly as applied to the local exchange companies. Because of the many
complicated revenue sharing arrangements in the United States that were
established to advance national average pricing and universal service
objectives, the implementation of price caps has required a comprehensive
reexamination of the entire system of allocating costs, charging for services,
and allocating revenues among companies to advance social objectives. There
also has been substantial debate in the United States about the appropriate
productivity factor and the need for flexibility in the caps, which has made
the price cap formula reasonably complicated.
71 Many of the states within the United States also have moved from
rate-of-return to price cap regulation. See, e.g., S.M. Schmitz & M.D.
Drainer, 2 Report on Telecommunications Alternative Regulation Plans by State
(Jan. 1990) (available from the Missouri Office of the Public Counsel).
72 The price cap plan for the RBOCs similarly includes carefully
formulated baskets and definite limits on price increases for service
categories within the baskets.
73 In this case, price regulation would be applied to the "dominant"
firm or firms, as is the case in the United States, where AT&T and the
RBOCs remain subject to price regulation in many of their markets.
74 Under basic economic theory, a company that faces no competition
will be able to set prices well above marginal costs, enabling it to receive an
excess level of profit. This is commonly referred to as "monopoly profit." By
limiting such profit, rate-of-return regulation seeks to prevent the regulated
company from transferring money from the rate payers to itself and its
stockholders.
75 Lack of competition also robs the system of the pressures that
typically would lead a firm to cut costs, so that prices could be reduced
without reducing profits.
76 Critics contend that the network would have been built faster,
with more modern equipment, under a more competitive and less regulated market
structure.
77 Immediately before the conversion to price cap regulation, the
overall rate of return that the RBOCs were permitted to earn on interstate
access services was 11.25%. See 70 Rad. Reg. 2d (P&F) 26 (1991).
78 Former government-owned monopolies, particularly in countries
that embraced centrally planned economies, may find it particularly difficult,
if not prohibitively expensive, to develop the type of cost and accounting
system that would be needed for rate-of-return regulation.
79 Of course, to the extent that the market demands improved service
quality or advanced features and is willing to pay the costs associated with
such development, investment should result.
80 The inefficiencies and inherent inaccuracies involved in
regulatory decisions about market functions are discussed in Section VI
above.
81 See, e.g., Schwartz, "Price Caps With a Consumer Benefit
Mechanism: A Workable Approach for AT&T," 5 Telematics 1 (1988) ("In New
York, such sharing has been established for New York Telephone Co., Rochester
Telephone Co., Continental Telephone Co., and AT&T Communications.
Opponents of this [sharing] mechanism might argue that it would inhibit
cost-cutting behavior [by the telephone company because it would have to give
away a portion of any resulting profits]. However, the argument has not been
found compelling . . . .").
82 In the United Kingdom in the late 1980s, increasing consumer
complaints prompted Oftel to pay somewhat closer attention to the activities of
British Telecom. The FCC requires companies subject to price cap regulation to
provide periodic reports on the condition of the network and the services
offered, including repairs, maintenance, and similar matters.
83 See, e.g., Lavey, "Innovative Telecommunications Services and the
Benefit of Doubt," 27 Calif. Western L. Rev. 51-73-74 (1990)(traditional
regulation can impede the introduction of new innovative services "because of
concerns regarding impacts on universal service programs and established
carriers; . . . [by] requiring that the initial prices for . . . [such]
services substantially exceed their marginal costs to help support universal
service programs . . .; . . . [to allow for] full tariff review . . .;
. . . [by] requiring the disclosure of competitively sensitive
information, . . . ; . . . imposing unequal regulatory burdens on competitors'
innovative services; and . . . failing to reevaluate prices of innovative
services as they grow to determine whether they are too high . . . or too low
. . . . Many of these regulatory obstacles flow from the regulators' failure
to distinguish innovative from repriced services, as well as initial regulatory
treatment of each innovative service as though it is already a major
market force accounting for a large portion of the carrier's operations.")
84 E.g., U.S. Department of Commerce, The NTIA Infrastructure
Report: Telecommunications in the Age of Information ch. 3 (1991).
85 See Contribution of the Delegation of the United States of
America to the Americas Regional Telecommunications Development Conference
23-24 (March 1992)(setting forth certain desirable principles for redefining
this relationship).
86 For an expanded discussion of these factors (referring to these
factors as the "golden triangle"), see Hon. Bradley P. Holmes, "Global Lessons
in Regional Applications: Liberalization, Privatization and Competition -- The
Building Blocks of Marketplace Telecommunications Reform" 5-6 (March 17, 1992)
(text of speech delivered in Yalta, Ukraine).
87 The list that follows reflects principally the findings set forth
in Advisory Committee on International Communications and Information Policy,
U.S. Department of State, Eastern Europe: Please Stand By (March 1990).
88 The United States has actively pursued funding of rural
telecommunications development through specific assistance programs, following
the approach taken in an earlier investment program developed to expand the
availability of electric power in rural areas. As a result of the focus on
supporting telecommunications investment, 96% of U.S. farms have telephone
service, up from 25% in 1940. This growth resulted from a 1949 change in
federal law, which authorized the Rural Electrification Administration (the
REA) to make loans for telephone network construction and operation. In 1971,
the United States established the Rural Telephone Bank (the RTB) as a
supplemental funding source. This lending significantly increased the
development of rural telephony, which had depended heavily on cooperative
development by groups of farmers during the first part of the 20th century.
The REA and the RTB have loaned approximately $8.5 billion to rural telephone
businesses, portions of which have been sold to private commercial banks in
recent years. In addition to making low interest loans available through the
REA and the RTB, the U.S. rural telephony program has encouraged (1) pricing
policies based upon a standard rate, rather than a per mile charge; (2)
definition of a minimum service standard that does not require single party
service for every resident; (3) dissemination of technical information to
promote standardization and interconnection of the many small rural networks;
(4) organizational assistance for customers interested in forming cooperatives;
and (5) cooperation between borrowers and manufacturers to improve equipment
performance.
