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IS UNIVERSAL SERVICE out of ORDER? by Barry D

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IS UNIVERSAL SERVICE out of ORDER? by Barry D 0MO FEATURE ARTICLE .1 TELECOMMUNICATIONS COMPETITION ARRIVES: IS UNIVERSAL SERVICE OUT OF ORDER? By Barry D. Fraser* I. Introduction to a federal mandate for universal service the advanced services of the information is found in Section 151 of the Commu- superhighway available to the poor, those he dream is a telecommunications nications Act of 1934.10 The Act author- in remote areas, minorities, and the phys- future of fiber optic cables, com- ized the Federal Communications Com- ically challenged. 15 Put advanced services puter keyboards, video cameras, mission to regulate communications "so and technology in the hands of the in- tiny wireless personal communication as to make available, so far as possible, formation-poor and they will be poor no systems, and interactive access to the to all the people of the United States a more! world's information, art, culture, news and rapid, efficient, Nation-wide, and world- The reality is that the concept of "uni- 1 entertainment. This cornucopia of ad- wide wire and radio communication ser- versal service" was invented by AT&T vanced telecommunications technology vice with adequate facilities at reason- as a marketing tool to woo regulatory and services is being touted as the solution able charges.. .for the purpose of promot- protection as a monopoly and to sell to many of today's most pressing social ing safety of life and property11 through more telephone service at an increased problems.2 And astonishingly, the magic the use of...communication." cost. 16 Today's version of universal ser- word "competition" will transform the Historically, "universal service has vice is based upon a series of inefficient price of this electronic utopia to one3 which meant widespread access to voice-grade cross-subsidies which create deceptive all consumers can easily afford. telephone service, commonly referred 'to2 pricing incentives and will be im ractic- But behind this dream is the regulatory as 'plain old telephone service' (POTS).' able in a true competitive marketR There 4 5 reality: Reports, investigations, and leg- The goal has been "to give all Americans is strong evidence that today's version of 6 islation on all fronts promise much, but an opportunity to pick up the telephone universal service is based on false assump- are sadly lacking on the substance of get- and, at a reasonable cost, have a voice tions, and has been ineffective for certain ting from today's regulated monopolies in conversation with anyone else in the coun- groups. 18 Finally, universal service reg- telephone and cable television service to try or, increasingly, the world." 13 Gener- ulation, which is subject to manipulation tomorrow's competitive, affordable utopia. ally, defining a measure of universal ser- by the Regional Bell Operating Compa- This activity has raised many important vice in the POTS era was relatively sim- nies (RBOCs), 19 allows these companies questions about the development and reg- ple. Everyone should be allowed to re- to place the burden of the cost of devel- ulation of the "information superhighway," ceive basic telephone service at an afford- oping advanced services on the consum- but the answers to most have proven elu- able rate, regardless of their geographic ers of residential service, without provid- sive. And one of the most intriguing un- location. And anyone who could not af- ing substantial20 benefits to these consum- answered return. questions is:' 7"What do we do ford telephone service at the standard rate ers in with universal service? should be allowed the opportunity to ob- This article will argue against the un- To most people, the term "universal tain service at reduced rates. Tradition- necessary expansion of universal service, service" means the provision of basic ally, the cost of providing below-cost ser- and against additional or increased cross- telephone service at reduced price to vice to these groups has been recovered subsidization practices. Part II explores low-income households which cannot af- through various cross-subsidies created by the historical background of universal ford to pay full price. In California, this above-cost pricinq 4of long distance and service, and develops the evolution of mechanism is known as the Universal business services. the term as a marketing tool of AT&T. Lifeline Telephone Service (ULTS or Now that telecommunications ser- Part III describes the economic underpin- "Lifeline"). 8 However, such low-income vices are about to move beyond the basic nings of the universal service subsidy subsidies are merely some of the more service benchmark, arguments are being system, and questions the viability of recent and visible features of universal advanced for the expansion of universal such a system in a competitive market. service. service, and its underlying subsidies, to Part IV explores the past track record of The term "universal service" was include various additional enhanced ser- traditional universal service, while Part popularized by American Telephone and vices. Once again, there is the dream and V sketches the acknowledged benefits of Telegraph (AT&T) President Theodore the reality. Universal service must be ex- universal service. 9 Vail as early as 1907. The closest thing panded, according to the dream, to make Lastly, Part VI presents a set of pro- posals to guide regulatory agencies in shaping the future of the universal ser- *The author is a May 1995 graduate of the University of San Diego vice concept in competitive telecommu- School of Law and a former intern at the Centerfor Public Interest Law. nications markets. These guidelines cen- He is currently coordinating the development of ConsumerNet, an elec- ter around a shift in focus from universal service to universal access to all commu- tronic databaseof consumer information, under a grantfrom the California nications services. The best way to pro- Consumer Protection Foundation. mote universal access goals is to set base- line standards of connectivity, interoper- California Regulatory Law Reporter * Vol. 15, No. 4 (Fall 1995) 1 WOT % FEATURE ARTICLE IZOD ability, and openness to which all service similar invention.28 A settlement be- 13 million telephones in the United States, providers must adhere in order to partic- tween the two companies in 1879 gave representin an overall penetration rate 12.69. ipate in the market. All market partici- Bell's company a virtual monopoly over29 of However, 55% of these tele- pants must bear the cost of providing es- telephone technology for 17 years. phones were residential, and the penetra- sential services to special groups (e.g., During this period, telephone service tion in farm households had risen to low-income, geographically remote, phys- rates could be set at levels considerably 38.7%. In certain states, rural telephone ically challenged). Furthermore, all market above marginal cost, without regard for penetration had increased dramatically- participants should be held to baseline se- the entry incentives created. In fact, it is for instance, Iowa had a rural penetration curity, privacy, and service quality stan- possible that the structure of the system rate of over 86%. dards, and must disclose accurate pricing caused the retail price to be higher than The competition which arose around information and provide other relevant ed- the profit-maximizing price because tele- the turn of the century has been described ucation to enable consumers to fairly phones were rented to subscribers at mo- as "access competition." 36 Primarily be- cause AT&T 37 refused to authorize its choose from competing services. nopoly prices, and connection charges30 Finally, as regulation diminishes to al- were also computed at monopoly rates. subsidiaries to interconnect with compet- low competition, service providers should This structure during the patent mo- ing firms, the concept of "dual service" be subject to heightened antitrust scru- nopoly period was responsible for an ini- became prevalent. In this arrangement, tiny, to ensure that anticompetitive prac- tial rapid increase in telephone service, companies competed to be the first to sign tices (such as predatory pricing, price- followed by a slow increase once equi- up subscribers for service. The telephone fixing, cartel conduct, and anticompeti- librium was reached.31 These reduced system with the most subscribers became tive mergers) are avoided. demand levels during the latter years of the most attractive system, because more the patent period were probably caused people could be reached. While most ob- II. A Brief History of by Bell's anticompetitive pricing of tele- servers have condemned dual service com- phone rates. Furthermore, development petition as destructive competition,38 this Universal Service concentrated in the cities, with little ef- arrangement created three powerful in- Although Theodore Vail was the first fort given to rural lines or small towns. centives to universality: "(1) it rewards to popularize the expression, 2 1 Alexan- Monopoly pricing, combined with the the first to establish telephone exchanges der Graham Bell should be credited with Bell company's lack of interest in attract- in unserved areas; (2) it creates pressure first articulating the dream of universal ing residential and rural customers, cre- to make the price of service as low as telephone service. 22 While promoting his ated a reservoir of unsatisfied demand possible, so as to attract new subscribers new invention in 1877, he correctly pre- and a strong inducement for entry of new and draw away subscribers from the other firms after the patent protection ex- system; [and] (3) it rewards those who in- dicted that "a telephone in every house 3 2 would be considered indispensable." 23 In pired. terconnect local exchanges with toll lines 1878, Bell further described his vision: The Bell company achieved one major as quickly and as extensively as possi- 39 [I]t is conceivable that cables of benefit from the patent monopoly period ble." telephone wires would be laid which gave it a distinct advantage over These incentives may help to explain under ground, or suspended over- potential competitors once the patent ex- the rapid penetration of telephones in head, communicating by branch pired.
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