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1. Universal service: A century of commitment

1. Universal service: A century of commitment

From Vail to the Telecommunications Act of 1996

Soon after the start of the twentieth century, Theodore Vail, president of AT&T, articulated his vision of the future of the nascent telephone industry:

The Bell system was founded on broad lines of "One System," "One Policy," "Universal Service," on the idea that no aggregation of isolated independent systems not under common control, however well built or equipped, could give the country the service. One system with a common policy, common purpose, and common action; comprehensive, universal, interdependent, intercommunicating like the highway system of the country, extending from every door to every other door, affording electrical communication of every kind from every one and every place to every one at every other place.1

Vail's vision may have been intended as much to further the corporate strategy of the powerful Bell company as to promote a social policy, but the concept of universal service„connecting each to all„has been at the center of telecommunications policy ever since.2

Vail's vision was certainly futuristic at the time, because only about 10 percent of the households in the country had telephone service.3 But this goal was effective and produced a rapid extension of service and concentration in the industry.4 A quarter of a century later, when Congress passed its first piece of comprehensive legislation dealing with the telecommunications industry (the Communications Act of 1934), the penetration of telephone service had risen to almost 40 percent. And AT&T's market share had risen from about 50 percent to more than 80 percent.5

In the Communications Act of 1934 Congress established a national policy of universal service that went beyond merely laying the wires and infrastructure to connect each to all. It included a commitment to making service economically accessible to all Americans. To continue the highway analogy introduced by Vail, it was not enough that the roads be in place; public policy declared that pricing be such that all Americans could avail themselves of telephone service. The Federal Communications Commission (FCC) was created at this time,

[f]or the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible to all the people of the United States, a rapid, efficient, Nation-wide, and world-wide wire and radio communications service with adequate facilities at reasonable charges.6

Today, as the twentieth century draws to a close, Congress has not only reaffirmed the central importance of universal service in telecommunications, but it has vastly expanded the concept.

Section 254 of the Telecommunications Act of 1996 significantly expands the concept of universal service (box 1.1):7

1. The FCC is charged with assuring that all rates for universal service are just, reasonable, and affordable, not just the rates for interstate services.

2. The word "affordable" had not been used before this legislation, but the 1996 Act introduces the concept of affordability directly and explicitly into national policy.

3. The 1996 Act expands the services to which the universal service concept applies and institutes a formal process for expanding the definition of universal service over time.

4. Although access to the network for high-cost areas and low-income consumers has been supported for years, the 1996 Act explicitly requires this policy and requires that it be implemented with specific and predictable mechanisms, in the form of contributions from all providers of telecommunications services, to support universal service.

5. A whole new range of institutions has been identified as having a role in universal service policy.

6. Section 255 also adds a commitment to consumers with disabilities.

Changing industry structure: From monopoly to competition

In the largest of a series of steps to reverse national policy (which relied on a monopoly to deliver telecommunications services), the Telecommunications Act of 1996 unleashes and relies on competitive market forces to lower rates for consumers and to accelerate the deployment of advanced services throughout the nation. Although telephone service is much more widespread today, subscribed to by about 94 percent of all U.S. households,8 the new commitments made in the 1996 Act expand the concept of universal service in several areas. The Act requires states to allow competition in local telephone service by removing the legal and regulatory barriers the local exchange companies have operated under since before the passage of the 1934 Communications Act. The Conference Report states that the overall purpose of the law is

to provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition.9

The task facing regulators is to implement a significantly more inclusive and aggressive concept of universal service in harmony with the pro-competitive and deregulatory goals of the 1996 Act.

As the telecommunications policy framework is recast, and competition and deregulation become the norm, national policy must recognize that no market mechanism is perfect and that there are serious social and economic costs to bear when some individuals--or groups of individuals--are isolated from the information society. The social and economic benefits of connecting all Americans are clear. These benefits include improved education, enhanced access to health care services, and better paying jobs.

In the coming months, federal, state, and local implementation will further define the telecommunications landscape. At the federal level the FCC will implement and, where necessary, clarify the language of the Telecommunications Act. At the state level utility commissions will facilitate interconnection and implement intrastate universal service policies, enhancing the national definition of universal service as they see fit. At the local level providers will negotiate with community leaders about where and how services will be deployed. At each level there will be opportunities for the public to comment and debate. The active, informed involvement of nonprofit organizations, public interest advocates, and community-based organizations at each level of implementation will help guarantee that public interest is served. The services that are offered, the communities that are targeted for connection, and the definition of reasonable and affordable rates will be decided by the people who participate in the development of these policies.

Also up for grabs is the role that public institutions„public schools and libraries„will play in the new telecommunications environment. The Telecommunications Act directs the FCC to devise a discount plan for basic services for these institutions as well as a plan to accelerate the deployment of high capacity services. These plans will determine the availability of communications and information services for students and lifelong learners from all walks of life and in every community.

Regional Bell operating companies (RBOCs), or "Baby Bells," and other local exchange carriers (LECs) currently provide more than 95 percent of local phone service in this country. The 1996 Act attempts to create competitive local telecommunications markets that would eliminate the last bottleneck in telecommunications services. The "local loop"„the connection from the home or business to the local switch„has been controlled by a local monopoly for nearly 100 years. The 1996 Act outlines the rules by which RBOCs will have to open up their networks so that competitors can interconnect and offer comparable services to local subscribers.

In April 1996 the FCC issued a Notice of Proposed Rulemaking to allow the public to comment on the establishment of regulations to implement interconnection requirements. Under the Act RBOCs must:

Negotiate interconnection agreements in good faith. Provide interconnection to their networks on just, reasonable, and nondiscriminatory terms and conditions. Provide access to each separate network element, such as subscriber numbers, databases, or signaling systems. Offer resale of their telecommunications services at wholesale rates. Provide reasonable public notice of changes to their networks. Provide physical colocation (facilities sharing) or virtual colocation if physical colocation is impractical.

The Act aims to minimize customer inconvenience by ensuring that customers can retain their phone numbers when they change telecommunications providers. Also, customers are to retain the ability to make calls without access codes, the extra numbers one would have to dial just to access the new telephone company. After the FCC sets the overarching rules to provide for interconnection and local competition, state commissions will oversee the implementation of these interconnections.

Proponents of these provisions argue that greater competition in the local loop will lead to lower prices and increased services for consumers. Such competition could come from wireless services as well as other wire-based providers such as small local service providers unaffiliated with the RBOCs and incumbent LECs, RBOCs operating outside their service areas, long-distance providers, and new entrants into telecommunications, such as cable TV and utility companies. AT&T, for example, has filed petitions in each of the 50 states to provide local telephone service. A small number of cable companies and utility companies have also announced plans to provide local service.

Some public interest advocates speculate that this competition may never be realized without proper safeguards. Advocates believe that in the interim customers may see higher rates instead of the promised lower rates. Potential scenarios for competition that should be monitored are discussed in the following sections.

Wireless service

In some nations where potential subscribers might have to wait years for new service, wireless telephone services are proliferating because of the ease and decreased expense of connecting new customers. A "wireless local loop" could arise in the United States as well if sufficient radio spectrum, the medium that wireless services transmit on, is allocated for personal telephony. The spectrum has many potential users, however: broadcast television and radio use large portions of the spectrum, and some television stations are asking for more. Terrestrial and orbital satellite systems are becoming popular for providing video services in private homes. National defense organizations have spectrum allotments. Public safety organizations, such as police, fire, and other emergency services, use dedicated frequencies to coordinate responses. Utility companies want spectrum so that meters can be checked without having to send someone to the home to do it; even taxicab services are coordinated in cities using portions of the spectrum. In short, there simply isn't enough spectrum available for all these services.

Local service providers unaffiliated with the RBOCs

Competing local phone companies exist, but currently provide service to a small percentage of subscribers. Many fear that these companies will target only the highest-volume customers, especially large businesses, and ignore low-volume customers, especially in low-income areas. If people are to believe„in the mantra of market forces„that competition means lower prices, they should also be wary that companies may pursue the customers who will offer them the greatest returns. Customers in high-cost or low-income areas may not see the benefits of competition for some time.

Competition from other RBOCs

At first this seemed like the most likely source of competition in the local market. A neighboring RBOC, with facilities already in place, would begin to compete across state lines that separate the RBOCs. As the RBOC gained more of an area's market share, presumably, it would expand its infrastructure into that area. In the past few months, however, four of the seven RBOCs have announced plans to merge. Their strategy may be to protect their core business, local telephone service, and expand into long-distance service as well. A customer could receive local and long-distance service from one provider (the norm in telecommunications when AT&T was the sole provider), but may not necessarily see any relief in his or her bill.

Long-distance carriers

As noted earlier, AT&T has petitioned each state to be allowed to provide local telephone service. With name recognition in some areas greater than that of the local provider, AT&T and others may have a good chance to lure some customers with the same one-stop shopping offers that local RBOCs will make. These companies will not necessarily be building their own facilities in local areas. They will buy local service wholesale from RBOCs and sell it retail to customers. If the prices charged are too high, or the terms unfair, this form of competition will not have a chance to get started.

Cable and utility companies

Perhaps the only players with an infrastructure that rivals that of the RBOCs are cable, power, gas, and other utility companies. They can use their current right-of-way access to connect with a large portion of American households. Most cable systems today allow for a great deal of information to flow toward the home, however, but allow little data to flow back the other way. These companies will have to make heavy investments in new facilities to provide telephony services. Many cable companies are already carrying large debts and may be unable to make this transition. Another problem may be customer confidence. Telephone service needs to be more reliable than cable TV. Many customers may ask, "What does the cable company (or the gas company or the electric company) know about telephone service?"

Ironically, in the wake of the 1996 Act, RBOCs are asking to raise local telephone rates by about $10 a month over a five-year period. These rate hikes, RBOCs say, will be offset by decreased long-distance bills (which represent more than 50 percent of consumers' telephone bills) and cheaper add-on services such as call-waiting and caller ID. Long-distance rates, however, may not decline sufficiently to offset local rate increases. Without lower long-distance rates, the basic, no-frills subscriber will see substantially increased phone bills if the requested rate hikes are enacted.

Purpose and outline of the paper

Although the outline for universal service and competition policy for the twenty-first century has been laid down by Congress, the content of those policies remains an open issue. Over the next year or so the FCC will issue rules and guidelines to fill in the details.10 The states will put their own stamp on universal service„simultaneously in some instances, subsequently in others„by adopting state-specific policies to meet their individual needs, while they continue to exercise full authority over setting retail rates.11

Thus, in a flurry of proceedings, 50 regulatory bodies will write the road map for the information superhighway, determining who has access to what services at what prices. And if the Internet and other advanced telecommunications services prove to be anywhere as powerful a social force in the twenty-first century as plain old telephone service proved to be in the twentieth century, a great deal is at stake for consumers.12

This paper is intended to encourage public interest groups to become actively involved in the process of defining the information age by illuminating the fundamental questions they will face in the universal service debate. It attempts to demystify the regulatory issues that individuals and public interest groups will face in the policymaking process at regulatory commissions, first by presenting a consumer-friendly position on policy issues, and then by describing rebuttals to the arguments they are likely to encounter from governmental and industry representatives.13

Industry representatives frequently suggest that technology will dictate the shape of the telecommunications future and that economic policy analysis is beyond the understanding of individuals and public interest groups. But the initial reaction to the FCC's first Notice of Proposed Rulemaking (NPRM),14 implementing the universal service section of the 1996 Act, makes it clear that policy decisions can dramatically influence where and how the information superhighway is built, who gets to use it, and how costs are allocated. More than 200 comments were filed at the FCC, many by public interest groups, all providing the Commission an enormous amount of information on what services should be universal. Because the federal proceeding on universal service has elicited much comment and will greatly influence the overall outcome of the Act's implementation, the issues and positions taken in that proceeding will be used as primary material in this paper.15

The paper begins with the broad commitment to universal service. Chapter 2 deals with the issue of ensuring just, reasonable, and affordable rates for the general body of ratepayers. The cornerstone of universal service policy has always been a commitment to ensuring access for average citizens. Chapter 3 reviews the definition of affordability, a concept which has been introduced explicitly into the law. Chapter 4 discusses which services have been proposed for inclusion in the definition of "basic service." Chapter 5 addresses the issue of underserved populations. It describes eligibility for groups of individuals as well as special arrangements necessary to support institutions, including public institutions and companies.

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