Universal service: Do not bury until dead

Mar 1st, 1995

STEPHEN N. BROWN

Universal service, the national public policy that brought telephones to 94% of American homes and the helping paternal hand that aided the telecommunications industry by guaranteeing it a market that will never die, has been pronounced dead at age 61. The death is not the handiwork of Dr. Jack Kevorkian, America`s expert in assisted suicide. The attending phy si cians are Wired magazine, The Wall Street Journal and Investor`s Business Daily. With varying degrees of urgency, they are eager to bury the body. John Browning of Wired says: "It is time to bury universal service--to bury it slowly, gently, and with great care to preserve both its spirit and its many achievements...but to bury it, nonetheless." The Wall Street Journal told Republican lawmakers to "divest themselves of such hoary notions as universal service." Investor`s Business Daily headlined its story with "Universal service...skew[s] markets, hurt[s] poor" and then backed it up with an acerbic quote from an unlikely supporter of the poor--the Heritage Foundation: "The telecommunications welfare state has been a disaster. The regulatory model of the past six decades has failed." These physicians not only want to bury their patient; they want to dance on its grave.

Proponents of universal service are fortunate. They have two heroes who believe in taking a pulse before pronouncing death--Vice President Al Gore and Senator Bob Dole. Speaking at a summit of federal, state and local officials, the vice president touted universal service, saying it "ensure[s] all consumers will be able to enjoy the lower prices and greater choices" provided by competitive telecommunications markets. In a public statement, Dole said, "No doubt about it; universal service has worked." Without it, he suggested that much of rural America would be "left behind." Thus, it is unlikely that any of us will soon attend a funeral for universal service.

Free-market ideologues incessantly criticize the policy because it truly is an elaborate system of subsidies created by the Communications Act of 1934. The act`s language says the law`s purpose is "to make available so far as possible, to all people in the United States, a rapid, efficient, nationwide and worldwide wire and radio communications service with adequate facilities at reasonable cost." This is the political basis for telephone pricing schemes based on regional and nationwide average cost rather than on costs specific to a given area or service. Free-marketers decry the practice and point to its defects: Urban customers subsidize rural areas, middle and high-income people subsidize those with lower income, businesses subsidize residential customers and long-distance service subsidizes local service. Put these arguments in a bag and shake them up to get an odd and provocative conclusion.

Universal service causes low-income telephone customers in urban areas to subsidize rural customers, no matter how rich or poor they may be. Such perverse results are compounded by the preference that poor people have for entertainment rather than communication. Supposedly, 91% of all households with income less than $5000 a year have color TV, but 73% have telephones, according to a story in Investor`s Business Daily. To critics of universal service, this is one more sign of ineffective policy; for instance, if poor people prefer color TV, why not subsidize the purchase of televisions instead of telephone service? The answer? Junk the policy. It is flawed and cannot work in competitive telecommunications markets where voice, video and data services are merging.

Industry security

None of these points acknowledges the policy`s positive impact on the industry`s economic security. The Communications Act of 1934 did many things, but the universal service provision was a golden opportunity. It underwrote the financial future of the telephone industry, mandating it to sell its products and services to every household and every person in the United States. Universal service did not bankrupt the telephone industry, nor did it deprive it of property, income and willing stockholders. Just the opposite happened between 1934 and 1984, the year of AT&T`s divestiture. That comfortable scenario may not be repeated if competition breaks out.

There is no example in American history in which competitive markets spare all companies inside an industry. Some of them go bankrupt. They disappear as do their services and physical plant--a normal consequence of competition. However, the prospect of failed and isolated networks scares government officials. Former Defense Secretary Casper Weinberger adamantly opposed AT&T`s divestiture. In 1981, he told the Senate that AT&T`s network "is the most important...network we have to serve our strategic system." The federal government clearly has a soft spot for telecommunications networks. They represent infrastructure and maybe a form of national security. Even if they are uneconomic, the government will not allow them to be destroyed by economic predators.

The way to protect networks is to interconnect them. Thus, government and the private sector agree that all networks must be interconnected. Every end user will have access to the services offered by every competitor on the network. Likewise, every competitor will have access to every end user. Interconnection is universal service in a post-divestiture world, giving a measure of economic security to the entire industry even as it moves to a competitive environment. This security stimulates the construction of new facilities. They retain value even if the original owner is bought out or goes bankrupt. A surviving company can take over the facilities, run them and keep the network integrated. Universal service and interconnection are flip sides of the same coin, a two-way incentive stimulating not only the consumption of telecommunications services, but their provision, as well. This is why Gore and others see no contradiction between competitive markets and universal service.

The two-way incentive has worked so well that it exhausted the numbering schemes for the so-called area codes and central office codes of the original North American Numbering Plan. The NANP has been quietly revised, and the changes are being implemented now. The reworking of the NANP weakens the claim that universal service makes long-distance operations subsidize local customers. The original NANP was a 10-digit number--(NYN)NNX-XXXX. The first three numbers are the area code, the next three are the central office code and the last four are the specific numbers at home or business. The central office is the first control point between a telephone user and the network. The office distinguishes whether the call is long distance or local. The 10-digit code made the distinction by limiting Y to either zero or 1 and by limiting N to any digit from 2 to 9. X could range from zero to 9. The plan was ingenious. If a customer dialed zero or 1 as the second digit, the call was long distance; otherwise it was local. The NANP worked for 30 years, but it had its limits: There could only be 128 area codes and 640 central office codes inside an area code.

Congestion difficulties

The growth in long-distance calling caused congestion and routing difficulties, and the easiest way to solve the problem was to expand the number of area codes through the adoption of a new 10-digit format, (NXX)NXX-XXXX. This simple change raises the amount of area codes to slightly less than 800. The amount of central office codes also increases to nearly 800, but the format means that area codes and central office codes can be identical. Thus, the second digit no longer distinguishes between local and long distance. For consumers, the new format means that any long-distance call must use "1+" 10 digits, even if they are dialing within their own area code. For telephone companies, the new format means reprogramming the entire population of central offices--approximately 9500 for the Bell companies and another 5000 for the remaining companies. This is a huge and costly task brought on by long-distance markets.

Last September, the National Telecommunications and Information Administration opened docket 940955-4255, an inquiry into universal service. The NTIA asked the public for comments, and interested parties were to respond by mid-December. The agency may publish a report later this spring. It may deal with the subsidy issue, but there are so many numbers swirling through the debate that there will probably be no clear answer. The United States Telephone Association sponsored a report contending that basic local phone service receives a $20 billion annual subsidy from local telephone companies. A study by Teleport Communications Group says the subsidy is only $400 million, while a report from MCI Communications estimates the amount at $3.7 billion.

More important than the subsidy issue is goal-setting. There is a saying that aptly describes the current condition of public policy: If you do not know where you are going, any map will get you there. Currently, there is no national policy that is comparable in scope and influence to the Communication Act of 1934. It secured AT&T`s financial future and spread two-way communication throughout the land. The act provided cohesion because it set a goal and was not overly concerned with process, unlike the nation`s current crop of business and political leaders. There has been an attempt to correct this imbalance. Last year, the Alliance for Public Technology told the Senate that the national goal "should be switched broadband to the home" and urged the Senate "to transcend the telephone emphasis" in its legislation. This is a laudable goal, but broadband to the home is stymied by the lack of a "killer application"--the inability to find a practical role for fiber optics to the home. In other words, there is a perceived lack of demand for fiber to the home. The same problem confronted the development of phone networks, and we know how that was solved.

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