Envy and blame stalk universal service

June 1, 1997

Envy and blame stalk universal service

The fcc and the usta tell the U.S. Senate that the entire world envies America`s telephone system, while they blame each other for potentially ruining universal service

StePHen n. brown, mev inc.

How do Americans know they have the best telephone network in the world? Because the rest of the world "envies" their telephone system.

That is what Reed Hundt, chairman of the Federal Communications Commission (fcc), and Roy Neel, president of the United States Telephone Association (usta), testified before the Senate Commerce Committee last March. "Our country has a telephone network that today is the envy of the world," said Hundt. "It delivers real service to real people in real places in a way that is unsurpassed. But we can do more and can do better. That`s what the 1996 [Telecommunications] Act is all about."

"The quality service provided by U.S. telephone companies is the envy of the world," agreed Neel. "Our companies created this technology and have maintained this infrastructure notwithstanding that we are one of the most heavily regulated industries in our country."

These statements were made during the men`s testimonies regarding the development of the universal service rules issued by the fcc in May.

Hundt and Neel are protagonists in the effort to make the Telecommunications Act work. Each has a history of interpreting the law in terms diametrically opposed to the other`s viewpoint. The words they chose this time also reflect on the speakers. Their selection of "envy"--a word not usually used to assess an industry`s performance--rather than a more positive word such as "admire" signifies the emotionalism gripping national telecommunications policy.

The source of that emotionalism is the Telecom Act itself. Its susceptibility to opposite interpretations indicates how poorly the legislation was written. Instead of enabling leadership, the law is creating an old-fashioned political power struggle in which the controlling factors are negative rather than positive.

The American public and the regulatory agencies do not have independent confirmation that the nation`s telephone system is the world`s best because there are few public measures that permit comparisons of operational performance. State utility commissions and the fcc monitor the public switched network for outages, time-to-install, and subscriber-line-to-employee ratios. The public pays attention to telephone-service quality when it faces major outages or similar problems. But neither the agencies nor the public has alternative bases for judging the efficiency of the telecommunications networks.

Telephone companies do not have to reveal their records of switch loadings and routing alternatives in the same way that airlines reveal their on-time arrival performances. More important, no state or federal agency has ever had a full, on-the-record, adversarial investigation of how well the telephone companies are using SS7, the signaling network that routes calls and takes input from online data bases throughout the network. SS7 is the heart of the Advanced Intelligent Network (ain), a combination of computer software and hardware that manages telephone traffic and provides Caller ID and other telephone services.

The fcc monitors the ain through an advisory group known as the Network Reliability and Interoperability Council, which is composed of senior officials from industry. The council is the fcc`s source of advice and information about network problems and network-planning issues. The fcc itself cannot assess network performance. However, it is much better informed about the ain than are state commissions. Thus it is inappropriate that interconnection issues related to the ain and mandated by the Telecom Act have been handed over to state commissions.

The Code of Federal Regulations, Title 47, part 51.319(e)(3)(iv), says: "A state commission shall consider whether mechanisms mediating access to the Advanced Intelligent Network service management systems are necessary, and if so, whether they will be adequately safeguarded against intentional or unintentional misuse of an incumbent lec`s [local exchange carrier`s] Advanced Network facilities." This rule is poor because state commissions are inexperienced with the ain and each state could define "misuse" to serve any purpose--technical or political. State commissions` inexperience with the ain will force them to turn to the industry for advice, just like the fcc. The American public will continue to have no independent confirmation that the nation`s telephone system is the world`s best.

Thus, when Hundt and Neel described the American system as the "envy of the world," they were not proceeding from an informed comparison of telecommunications systems. They were wrapping themselves in the American flag and telling Congress not to worry. But no congressional committee wants to hear that other nations could ever have a system superior to ours and that the Telecom Act is making things worse instead of better. Instead of accepting its own responsibility, Congress would start the blame game, and heads would roll in industry and government agencies.

Placing the blame

The blame game over universal service started several weeks before the Commerce Committee`s hearing. The usta launched "a call to action," telling its member companies to "take our message on universal service to senators prior to" the hearings. The message was: "Senators must be asked to inform the fcc [that its]...current policy direction threatens economic development and investment opportunity...[and] will deny consumers access to modern infra structure." The usta`s lobbying efforts were reinforced by Neel`s testimony: "If...universal service...[does not] ensure...[that] companies...may recover their costs, the quality of our current system will be threatened....The consequences for the American people will be severe....Service will deteriorate, and basic rates will increase." The week after the hearings, the usta urged "company executives to ask their state public service commissioners to write to the fcc" and to "continue pressing their U.S. senators."

The usta worries about the fcc`s broad discretion to shape the universal service rules. The Act defines universal service as an "evolving level of telecommunications services that the Commission [fcc] shall establish periodically ...taking into account advances in telecommunications and information technologies and services." The law also says the fcc`s definition must conform to several conditions: "The Commission in establishing the defi nition...shall consider the extent to which such telecommunications services are: essential to education, public health, or public safety; have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers; are being deployed in public telecommunications networks by telecommunications carriers; and are consistent with the public interest, convenience, and necessity." These amorphous terms are being used to develop a so-called universal service fund--collecting money from telecommunications companies and disbursing the funds primarily to schools and libraries, but with other possible uses for low-income subscribers, rural health-care providers, and subsidizing high-cost services. The most contentious issue is about subsidizing high-cost services and, therefore, determining "high cost."

The fcc is determining cost through a "forward-looking" approach, known as telric, or Total Element Long Run Incremental Cost. telric assumes that the costs of the incumbent telephone company are based on the most recent technology available instead of on the cost of the technology in place. Because current technology is generally less expensive than that installed in the past, the telric cost is much less than the actual cost. Companies using substantial amounts of older technology cannot expect to recover the full amount of actual costs from the universal service funds.

The fcc used telric in the price-setting portions of the agency`s interconnection rules. The local telephone companies successfully challenged those rules in the U.S. Eighth Circuit Court of Appeals, which issued a permanent stay of the fcc`s price-setting directives (see Lightwave, Dec. 1996, page 30). The same thing may happen to the agency`s universal service rules. Neel implied this in his testimony, describing telric as a "sham" and asking: "If the fcc adopts telric as a pricing standard...how does the Commission intend to address the actual costs that our companies have incurred thus far? These are costs that were lawfully incurred...and with the approval of government regulatory bodies." Hundt took the opposite position, telling the committee: "If these rules were stayed, especially in an area as critical as how to collect universal service contributions, our country could be left with no universal service program. A lengthy litigation could truly threaten universal service."

To avoid stalemate, at&t, Bell Atlantic, and nynex have offered a compromise--one that "fulfills [the] goals of the Telecom Act," according to the companies.

However, Jot Carpenter, at&t`s director of federal government affairs, suggested that a court challenge may be "inevitable" and that the fcc should fashion rules to withstand a challenge rather than set rules to avoid a court contest. Apparently, the fcc has backed away from an immediate confrontation with the usta and its members. In an article by Telecommunications Reports, Hundt implied that the agency`s May 8 order would avoid the telric issue, leaving it for resolution at a later date. The usta`s lobbying efforts have paid off--for now. But these efforts are one more indication that the Telecom Act has turned American telecommunications policy into little more than a power struggle.

Perhaps other nations admire the American telephone system, but they are well-advised to think twice before emulating the Telecommunications Act of 1996. q

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