Thursday, August 26, 2004

Reading :: Competition and Deregulation in Telecommunications

Originally posted: Thu, 26 Aug 2004 19:17:45

Competition and Deregulation in Telecommunications: The Case for a New Paradigm

by Thomas Duesterberg, Kenneth Gordon

This 95-page monograph was coauthored by two members of the Hudson Institute, a not-for-profit research organization that makes recommendations on public policy. Duesterberg served as Assistant Secretary for International Economic Policy at the US Department of Commerce during the first Bush administration and, before that, as Administrative Assistant to Sen. Dan Quayle. Gordon served as Chairman of the Massachusetts Department of Public Utilities and of the Maine Public Utilities Commission. With that kind of pedigree, it's not surprising that the book is both knowledgeable about the subject and enthusiastic about telecommunications deregulation. In fact, its central thesis appears to be that the Telecommunications Act of 1996 (TCA96), though it contains some deregulatory impulses and language, is not deregulatory enough and preserves managed competition rather than moving toward a free market. With this point in mind, the book provides a valuable critique of TCA96 paired with a really interesting historical perspective.

That historical perspective isn't of TCA96's repercussions -- the book was written only a year later -- but of the negotiations that led to it. Duesterberg and Gordon discuss a couple of things in detail. One is access charges, which "stem directly from policies designed to keep local-exchange rates low enough to meet political needs" and "to keep local rates low -- that is, to cross-subsidize them" (p.29). This arrangement worked fairly well as long as AT&T was a monopoly: access charges were leveled on long-distance charges (a relatively small fraction of wealthy users) and transferred to the local side of the business, keeping local access cheap, and since all that money stayed in the company regardless, it was a zero-sum game. (I oversimplify here -- an economist would point out that price fluctuations have tremendous effects on demand in what are actually separate markets. See p.33.) This arrangement, of course, works only as long as both services are controlled by the same monopoly (p.31); when other long-distance companies began competing, they could provide more competitive prices, partially because they initially didn't have to pay a local subsidy (p.51). More on this in a minute.

Access charges weren't the only form of cross-subsidy. Another was "the practices of capitalizing nonrecurrent expenses and using depreciation rates that fail to recognize the real rate of decline in the economic value of assets" (p.31). This practice of underdepreciation, the authors charge, resulted in "tomorrow's ratepayers underwriting the consumption of today's ratepayers" as well as underinvestment in facilities. "If competition is introduced ... the very recovery of the as yet underdepreciated amounts may be at risk": competition upsets this logic and destabilizes this second form of cross-subsidy (p.31).

Thus, the authors conclude, "an enormous subsidy burden was building" throughout AT&T's monopoly from the 1930s-1970s, a burden that "would haunt later regulators and enormously complicate their attempts to introduce competition as it became apparent that little or even none of the industry any longer exhibited natural monopoly characteristics" (p.32).

This discussion leads to the notion of universal service, which in some ways got us into this mess. "As currently applied under governmental policy, universal service refers to a system of direct and indirect subsidies that essentially maintains basic residential service at rates deemed affordable by regulatory authorities," the authors state (p.48). But -- despite the arguments of universal service's supporters -- the concept does not date back to the early days of telecommunication. "Instead, the term universal service was coined by the visionary head of AT&T, Theodore Vail, for the altogether mundane purpose of eliminating competition in telephone service and creating a monopoly for his company" (p.48). The term was coined in 1907 (p.49) and meant the need to unify telephone services under regulated local exchange monopolies -- a very different meaning than the contemporary one (p.49). The term doesn't even appear in the Communications Act of 1934 (p.50).

The notion of universal service led to the access charge cross-subsidies of which I spoke earlier. This arrangement worked well until others moved into the long-distance market and the Department of Justice filed an antitrust suit against AT&T in 1974. At this point, Eugene Rostrow, an AT&T consultant, testified to Congress in 1975 that universal service was tied to the practices of regulated monopoly (p.51). This notion wasn't spelled out in the Communications Act of 1934:

Unable to locate either the term or the concept of universal service in the text of the 1934 act, Rostrow instead appealed to the vague language in the act's statement of purpose, much in the spirit of the 1970s that discovered large concepts in the "penumbra" of founding texts.

Though the authors don't say so explicitly, this sounds like a reference to Roe v. Wade.

The point that leaps out to me here is that we have to be very careful when talking about cultural-historical development. In this case, certainly a concept called "universal service" developed historically; but the contemporary meaning becomes read back into the history, making it seem as if the kernel of the meaning has been there all along. But that contemporary meaning could not have existed in the original -- indeed, we see an interesting example of what I've been calling splicing here, in which contemporary legal trends are read back into the documents that predate them. As the authors say with some regret, "Historical accuracy matters less, unfortunately, than the political reality of universal service as currently understood, for the concept was explicitly enshrined in the Telecommunications Act of 1996" (p.52); the notion of universal service had been stabilized, nailed down, and now it undergirds TCA96.

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