A Retrospective Overview of The United States Telecommunications
Act of 1996
December 04, 2001
Introduction
The Telecommunications Act of 1996 is clearly an important
development in the cost and transmission of information in the Unites
States. It provides a substantial influence on the sociology and business
marketplace of this country. The content of that influence, and its endurance
are the subject of much debate.
This debate is often centered on what many identify as the act’s
primary failure, an inability to spur competition. In no area is that
failure more prevalent than in the last mile, the point from which consumers
connect with their local service providers. Although the act proposed
to bring prices down for communities typically lacking in adequate telecommunications
services through increased competition, most critics claim it simply failed
to do so.
Little Change in Real World Markets
Many experts believe that one of the primary expected
benefits of the act was to encourage a competitive environment. The anticipation
was that a competitive environment would encourage a higher level of service
and decrease the cost of telecommunications services for retail home consumers.
Specialists sight the fact that for the 6 percent of households that do
not have telephone service in their home, the barrier to entrance is price.
Research by the Benton Foundation and the Consumer Federation of America
found that for “households with incomes below $30,000 . . . telephone
subscribership can represent too much of the family’s earnings to
bear” (Benton). The foundation also claims that over 53% of the
households in American earn less than $30,000. This means that many consumers
are very near failing to be able to afford phone service.
The annual yearly cost for telecommunications related services affected
by the act is, for the typical American family, about $1000. That amount
affords for basic local, long distance, and cable service. The majority
of these costs are allocated to “local and long distance phone service“
(Consumer Union). Proponents of the act suggest that market forces in
a competitive environment should drive the cost to consumers down. According
to economic theory, competition should drive market inefficiencies, such
as inflated service costs, down.
The act’s primary means of encouraging a competitive market is by
removing a source of market inefficiency, monopoly. The act purposed to
offer new opportunities for customers’ choice of telecommunications
providers. By deregulating certain aspects of the market, while providing
more stringent limitations on incumbent providers, the act aimed to create
a more efficient marketplace. However, as one author suggests “national
policy must recognize that no market mechanism is perfect and that there
are serious social and economic costs to bear when some individuals .
. . are isolated from the information society” (Benton).
There are clear problems with the economic approach that the act has encouraged
during the last 5 years. Since few real world market mechanisms are faithful
to their models, analysts are finding that the market remains highly inefficient.
Prices have not fallen; providers of service have multiplied, but in terms
of majority share, have not diversified.
Likewise, there is a substantial cost in providing services to groups
for which there had not previously been an economic impetus for servicing.
Even though, for example, the act explicitly recommends “rural market
entry” (USTA) guidelines, many recent reports suggest there is simply
no economic reason for companies to provide substantial attention to these
small markets. Other remote areas and some technologically underdeveloped
urban areas were also expected to benefit from the changes created by
the act.
Such problems point toward several issues that prove much more qualitative
than the economic theory entwined in the act. Some critics analogize the
lack of improved service in remote areas to the issue transportation service
providers have faced for years. An Arthur Andersen consultant is quoted
as saying that “’. . . it just may not happen . . . just as
we may not have competition for bus routes to rural areas, because there
just aren’t enough economic opportunities’” (Goodman).
It simply does not make fiscal sense to develop a strong service in an
area where that service will be used infrequently and perhaps cost more
to maintain than the profit the service generates.
The government expected that the movement into rural markets could be
facilitated by shaving profits from lucrative long distance and business
markets. As Robert Crandall stated in the Wall Street Journal, “regulators
allowed these companies to overcharge business and long distance customers
and use the excess charges to subsidize residential . . . rural service.”
Despite this force, areas with sparse populations have experienced little
growth in the availability of telecommunications services during the years
following the signing of the act. The increased charges, however, have
continued.
In larger volume markets, there has also been little change. A report
by Ken McGee, a Gartner Analyst, reiterates Gartner’s previous expectations.
In 1997 Gartner had speculated that “by 2002, the overwhelming majority
of large enterprises . . .will not replace their current IXC [Interexchange
Carrier] service with the services provided by the RBOC [Regional Bell
Operating Companies]”(McGee). In 2001, the group has found that
“not one major enterprise has changed Interexchange carriers as
the primary or sole provider” (McGee). In that report he claims,
“the major beneficiaries of the act have been attorneys and investment
bankers” (McGee), not business or residential customers.
Telecommunications Business Response
The act was a dramatic, enormous, and unprecedented
edict. The 600-page document not only endeavored to inspire competition
to improve market efficiency, it recommended an aggressive economic policy.
It employed a more rigorous effort to inspire the competition than those
laws that govern airlines, freight trucking, and railroads. The act outlined
the rules for using incumbent owned technologies specifically, describing
explicitly the requirements down to switches and wires.
The act also required many charges to be based on simple cost, instead
of the assorted rates that commonly used by businesses to expense their
investments in technology. In a summary provided by the USTA it is written
that “facility interconnection charges shall be based on cost (to
be determined without . . . rate based proceeding) and may include a reasonable
profit” (USTA). Pricing facilities in this way is described as “revolutionary”
(Crandall).
It is no wonder that in the hours following the announcement of the act,
“former Bell companies and GTE, fell 4% to 10%” (Crandall)
in public equity value. In the three years following “144 CLECs
held IPOs, raising more then US$25 billion” (Glassman). This is
a tremendous action for what a Washington Post staff writer describes
as little change in choice. He claims that “only a bare faction
of the nation’s residential customers today [February 1, 2001] has
a choice for . . .service” (Goodman).
Some analysts state that this limited change is due to insufficient pressure
by the FCC, while others indicate corporate mergers and weak incentives.
James Glassman suggest that the telecommunications industry has simply
gone through a “’remonopilization’” that is held
by the four businesses. The merging of Bell Atlantic with NYNEX, SBC with
Pacific Telesis, and Time Warner with Turner Broadcasting after 1996 concentrated
the market, offering power to an even smaller group. Glassman suggests
that “Verizon, SBC, Bell South, and Qwest “ handle “95
percent of the local [service] monopoly “ (Glassman). Goodman also
sites a supporting FCC statistic that states “’93 percent
of the nations local telephone wires’” are owned by “Bell
companies and smaller rural systems.”
In opposition to what some consider a shortsighted evaluation there are
some that suggest positive aspects to the investments made to inspire
this competitive environment. Proponents suggest, “the investment
and new enterprises unleashed by deregulation have permanently altered
the competitive landscape” (Goodman). Others argue that even if
the competitive local exchange carriers fail “their assets will
endure for others to fashion into sustainable businesses” (Goodman).
The Last Mile
In recent years there has continued to be a struggle
over, what industry specialist call the last mile. This is the service
line that runs into homes and offices. The last mile constitutes much
of the “93 percent of the nations local telephone wires” (Goodman)
owned by Bell companies and rural systems. Since it is an end point of
the link between customer and provider, it is an extremely important element.
Peter Goodman suggests that the “Bell companies enduring domination
of the ‘the last mile’ . . . denies millions of people the
benefits of increased competition.” He reminds us that the “local
rates have roughly kept up with inflation,”(Goodman) not declined
sharply as expected. Mark Cooper, a research director for the Consumer
Federation of America, supports Goodman’s assertions by stating
that “’we clearly have a failure to produce competition .
. . the industry organization that Congress hoped would come into being
just has not materialized’” (Goodman).
What has materialized is a clear realization that little has changed between
1996 and now. In 1998 The Consumer’s Union, the non-profit organization
that publishes Consumer Reports, released a document outlining the status
of the industry after the act’s enactment. This press release describes
the “failure of the Telecommunications Act of 1996 to promote effective
competition” (“Two Years After the Telecommunications Act:
A Snapshot of Consumer Impact”). They claimed then that the “failure
to deliver the benefits promised to consumers” is proved by the
“act’s failure to increase competition for local phone and
cable services” (“Two Years After the Telecommunications Act:
A Snaphshot of Consumer Impact”). In later years, they followed
with additional proof, linking the lack of competition in the last mile
to the act’s lack of positive impact.
Ironically, the last mile is the area in which consumers will feel substantial
effect. Consumer Union claimed that in 1998 “local phone rates [were]
up 1-2%” (“Two Years After the Telecommunications Act: A Snapshot
of Consumer Impact”), suggesting that the current monopoly of the
last mile prevented decreases.
Suggestions for the Future
Few critics of the Act have said that it needs
to be removed. Instead, they suggest varied enhancements. Many of these
enhancements center around simply policing the industry incumbents more
attentively and more severely. Others suggest entirely new measures and
approaches.
The Consumer’s Union outlined a series of suggestions that they
hoped would help the consumer. These primarily focused on the same goal
as the act, to increase competition. Consumer’s unions suggested
the following:
“Policy makers a the state
and federal levels must:
· Impose substantial economic penalty for noncompliance with the
Act;
· Withhold approval of mergers or acquisitions until enforceable
commitments to open local markets are made;
· Fight the Bell Companies’ courtroom assault on the public
policy of opening local markets to competition . . .
· Vigorously implement the consumer protection sections of the
Act”
-“Two Years after the Telecommunications Act: A Snapshot of Consumer
Impact)
While none of these are exceptionally inventive solutions
many analysts believe that the government has failed to make such efforts.
Robert Crandall provides simple but slightly more creative advice. He
asks “why not simply limit this . . . process [identifying network
parts that must be shared] to just those facilities that would be prohibitive
to duplicate.” He offers the copper wire that connects the last
mile as a prime candidate. He also suggests that wireless telephony companies
use their facilities to provide a wireless last mile instead.
Philosophical and Theoretical Problems
Before effective next steps can be taken, some
would say it would be beneficial to assess the validity of the assumptions
and approaches inherent in the act. For one, the act is looking to inspire
competitiveness. Yet, it fails to recognize the natural tendencies of
competitive markets. Competitive markets are not regulated markets. They
are markets in which participants perpetually vie for market share. The
idea of regulated competitive market is counter intuitive. That is why
creating competition, in a formerly non-competitive market is so clearly
difficult.
Justice Stephen Breyer questions the FCC’s
interpretation of the 1996 act. He asks, “why it is necessary for
local companies to lease out all facilities, particularly those than be
leased out easily” (Crandall). He questions whether the act is an
effort to deregulate and increase competition, or an epic effort to create
competition through comprehensive regulation. He is quoted as saying “’rules
that force firms to share every resource or element of a business would
create, not competition, but pervasive regulation, for the regulators,
not the marketplace would set the relevant terms” (Crandall).
The question is then posed if the matter
is of too much regulation, too little regulation, or regulation of the
wrong kind. Proponents of the Consumer Unions perspective suggest that
there are too few regulations. This can be construed as illogical. Glassman
described the strange paradox, “the best route to complete deregulation
is through tough but fair law enforcement.” If something does not
work properly, do you keep pushing harder until it does?
A small minority suggests that there needs
to be less regulation. These professionals suggest that a competitive
marketplace can only exist when regulatory factors are removed. They suggest
instead a bold set of anti trust lawsuits to dismantle the incumbents,
and an insurgence of a capital to build new companies from the resulting
fragments. Less severe perspectives include Democrat Herb Kohl of Wisconsin’s
belief that “’Congress can’t mandate competition’”
(Ross). He suggests, “if competition doesn’t make business
sense, laws like the Telecommunications Act won’t really work”
(Ross). Critics of this theory suggest that that defers an inevitable
re-establishment of current monopolies.
Others suggest that the focus of the act should have been realigned. They
suggest that more emphasis should have been focused on the last mile or
other aspects that would apply market pressure to the incumbents to alleviate
what to some, is a stronghold on the market. Another plan requires more
freedom toward wireless companies, to allow them to become more closely
competitive with the traditional telephony services provided by the incumbent
telecommunications providers.
The success or failure of the Telecommunications act
of 1996 may simple be undiscovered. With only 5 years of time to change
more than 50 years of history, it may be too early to assess. It is clear
that it has had an effect on the industry. The scope and depth of that
effect has yet to be completely described. Speculation of future acts
by the government, performance of the industry, or other related changes
will of course remain speculation until proven.
This summary endeavored to describe some criticism of the act. It ends,
as many preceding sophomoric works have, with the too used idiom, only
time will tell.
References:
The references page for this document has been lost. Information was gathered from the following resources online:
http://www3.gartner.com/Init (Gartner Group)
http://www.washingtonpost.com/ (The Washington Post)
http://www.fcc.gov/ (The Federal Communications Commision)
http://www.benton.org/ (The Benton Foundation)
As well as other resources not listed here.
Please contact the author if you would like more information about the
references in this document.
Lindsay Grace (Lgrace@ameritech.net)