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 baseline 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 because 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. This period enabled the company rural areas during this period. One ex- wires with private dwellings, to establish a strong telephone network ample was the development of "farmer counting houses, shops, manufac- which, unlike the telephone itself, was a lines," systems of "informally organized tories, etc., uniting them through strong barrier to new entry: telephone lines to connect the farmers of the main cable with a central of- The telephone instrument itself an area." 40 These consisted of "a single fice.. .Not only so but I believe in has few natural barriers to entry. line in which all conversations reached the future wires will unite the head There are no significant economies all subscribers or multiple lines with a offices of telephone companies in of scale in telephone set manufac- simple switchboard operated by one of different cities, and a man in one turing and many companies had the farm families."4' These systems were part of the country may conmmuni- the technological ability to produce relatively inexpensive to construct, and cate by word of mouth24 with another the sets ....The temporary patent were a quick and efficient method of fill- in a distant place. monopoly on telephone sets al- ing the demand for rural telephone ser- Bell's small company grew quickly lowed Bell to establish a monopoly vice. Once developed, these systems be- and, after reorganization in 1878, Theo- of telephone exchange service in came attractive buy-out targets for AT&T dore Vail was named general manager and which much greater 33natural bar- and the independents because their ac- driving force. 25 existed. became the company's riers to entry quisition would quickly and cheaply 42ex- Vail's vision of universal telephone ser- However, when the initial patents ex- pand the company's subscriber base. vice evolved to "one system, one policy, pired in 1894, Bell experienced a period Initially, AT&T's strategy to combat universal service." To Vail, this concept of intense competition from many inde- the intense competition which followed meant the interconnection of local ex- pendent companies. In 1895, there were the initial patent period expiration con- changes by long distance service. 26 Vail there were 252,000 telephones subscrib- sisted of four elements: (1)developing clearly contemplated a service in which ers in the Unites States, representing an and patenting new technology to fore- "universal" 34 imlied everywhere, rather overall penetration rate of less than .5%. close competition; (2) cutting prices for than everyone. Only 10% of these telephones were used service; (3) developing long distance ser- The early development of the tele- by residential subscribers, and less than vice to interconnect its local systems, phone industry supports this view. After 3% of all telephone subscribers were in while denying competitors access to its Bell began selling his invention in 1877, located in rural areas. By 1920, after 25 network; and (4) attempting to purchase 43 a patent dispute quickly arose with West- years of competition, these figures had or merge with competing services. The ern Union, which had already patented a changed dramatically. There were over ensuing rash of attempted mergers, com-

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bined with concerted refusals to allow by a single firm; and (3) monopoly and vice" argument against allowing compe- 64 long distance connections with compet- not interexchange of traffic among com- tition for long distance service. AT&T ing firms, drew the attention of both state peting systems was the best way to argued that the introduction of competi- and federal regulators. 44 Some states had achieve universal service. 53 For Vail and tion in the long distance market would begun regulating telephone rates as early AT&T, universal service became not a destroy the separations and settlements as 1879.45 By 1910, all but a handful of socially desirable goal, but a means to subsidy system, and cause local service states had enacted statutes regulating tele- effectively end all competition: prices to rise to a level that would be phone service, and state antitrust action Vail's vision infused the Bell unaffordable for many residential users. had succeeded in preventing some merg- System with a new coherence. Thus, AT&T contended that a competi- ers and establishing limitations on AT&T's 'Universal service' became a com- tive long distance market would be con- conduct toward the independent compa- petitive strategy, a political slogan trary to the universal service "mandate" 46 nies. and a catchy advertising term all imposed by the Communications Act of In 1910, Congress enacted the first in one .... Instead of fighting to 1934. Milton Mueller observes that federal telecommunications statute, giv- eliminate all independents, it [just as Vail had used the term ing the Interstate Commerce Commis- would absorb them into the to fend off access competition from sion jurisdiction over the industry. 47 Ad- 'universal' system by making them 1907 to 1920, AT&T attempted to ditionally, AT&T entered into an agree- noncompetitive feeders through use the same term, albeit with a dif- ment with the U.S Department of Justice sublicensing.... Above all, univer- ferent meaning and in a very differ- in 1913 to refrain from acquiring directly sal service was the spearhead of ent context, to renew the nation's competing companies without prior De- Vail's drive to achieve political commitment to the regulated mo- partment approval. 48 This arrangement support for the elimination of com- nopoly structure Vail had helped to establish. The modem reconstruction was known as the Kingsbury Commitment, petition and the establishment54 of because it was set forth in a letter from regulated monopoly. of universal service, however, was not an accurate description of a his- AT&T Vice President N.C. Kingsbury to Vail's strategy was effective. In 1921,55 J.C. McReynolds, U.S. Attorney General. Congress passed the Willis-Graham Act, torical policy, but a retroactive ratio- nalization for the institution of reg- However, mergers4 9continued after 1913 which effectively ended access competi- 65 at a reduced rate. tion by terminating the Kingsbury Com- ulated monopoly. Under increasing antitrust scrutiny mitment and exempting telephone com- In the end, competition for long dis- and the threat of more oppressive regu- panies from antitrust review.5 Vail's goal tance service won out over AT&T's ar- lation, Vail changed his strategy and of regulated monopoly status was fully re- gument. But today, as competition for began to "embrace regulation rather than alized in 1934 with the federal Communi- local service is poised to descend on the 66 fight it"50: cations Act.57 This legislation created the RBOCs' monopolies, the universal ser- By accepting regulation volun- Federal Communications Commission vice rallying call has suddenly resurfaced. tarily, Bell reduced the risk that un- (FCC) and consolidated all communica- However, this time, the term is neither a favorable regulation would be im- tions regulation under one entity.58 At this call for a centralized telephone system posed. The system of competing time, to AT&T, "universal service" meant nor a defense of the regulated monopoly federal and state regulation, to- a unified, interconnected monopoly, not a system, but a mandate for subsidizing a gether with the complex Bell struc- system of cross-subsidies designed to pro- host of new services and technologies in a new competitive environment. To fully ture, prevented real regulatory con- mote universal household59 penetration of trol while providing the protection telephone service. understand this new treatment of the term and legitimacy of a regulated util- Once it gained monopoly status, AT&T "universal service," it is necessary to un- ity. Vail was...happy to accept reg- developed a pricing policy that did pro- derstand the mechanics of subsidized ulation so long as it did not en- vide the opportunity for every United pricing of local service under the current croach on what were considered States household to acquire telephone regulated monopoly structure. management prerogatives... It gave service at a reasonable cost.6° Known as the Bell system a powerful weapon "nationwide average pricing," this policy 11. The Mechanics of to exclude competitors and justifi- based the price of all calls on distance Universal Service cation for seeking a monopoly, as between parties, not on cost of the ser- well as reducing the chances of vice. In addition, local and long distance The goal of a telephone company pricing and revenue recovery methods manager is to earn enough revenue from outright nationalization5 1 or serious antitrust action. were "separated," and long distance rev- services offered to cover costs and return Early on, Vail and AT&T adopted the enues were pooled and repaid to local a profit to the company's owners (i.e., 67 "universal service" rallying cry as the so- exchange carriers in proportion to their the investors). In a competitive market, cial justification for regulated monopoly costs as "settlement" payments. These the threat of price competition restricts68 status. The "one system, one policy, uni- and other methods of subsidizing local the amount of profit that can be earned. versal service" theme is found repeatedly service became known as "separations Additionally, antitrust law protects new in AT&T annual reports between 1907- and settlements." 61 However, these prac- entrants and competitors with smaller 1914.52 But this concept differs substan- tices are economically inefficient, and market shares from anticompetitive practices by those competitors with larger tially from the "phone in every home" could only 6have2 developed in a monop- idea that exists today. Vail's doctrine of oly market. market shares. In a regulated monopoly universal service had three main compo- Beginning in the late 1960s, AT&T market, there is no competition; how- limited by nents: (1) the value of telephone service came under increasing pressure to accept ever, the amount of profit is 69 grew as the number of subscribers grew; new competition for long distance ser- both state and federal regulation. (2) universal service requires centralized vice. 63 Its cross-subsidy practices quickly Rates of services provided by a mo- control, i.e., service should be provided became the basis of its "universal ser- nopoly utility are generally set by a state

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public utilities commission, in an effort 70 benefit from their telephones,7 8while res- of providing the service higher than its to simulate a competitive environment. idential subscribers do not." own. Antitrust law attempts to preclude Rather than establishing rates based solely A third type of subsidy involves the such practices through the requirements89 on recovery of sunk investment and mar- payment by long distance carriers of set- of the "essential facilities doctrine." ginal cost, regulators set rates with other tlement fees to local exchange carriers This doctrine provides that where a firm socially desirable goals in mind. 71 Be- (LECs). 79 Generally, the LEC receives a controls a resource that cannot practica- cause there is no competition, certain ser- portion of all long distance revenues as bly be duplicated by competitors, and vices may be priced higher than their cost; reimbursement for access to the local without which competition is infeasible, these "monopoly" profits may then be "bottleneck" to connect long distance the firm must make that resource avail- used to subsidize other services so that calls. These payments have traditionally80 able to competitors on reasonable terms they may be priced lower than cost. Such subsidized the cost of local service. and conditions. 90 Therefore, when com- cross-subsidies would not be possible in Each of these methods of subsidizing peting service providers must utilize the a competitive market, because competi- services is subject to erosion in a com- local network to reach the consumer, tors would undercut the price of the petitive market. The competitor simply LECs must allow this interconnection at above-cost service and steal customers prices the above-cost service at its mar- the same price that it costs the LEC to from the utility. This would in turn make ginal cost, and attracts those customers deliver the same service. it impossible to provide the subsidized away from the telephone company. The In sum, a universal service system service at below cost, because the reve- telephone company is forced to lower its which relies upon artificial cross-subsi- nues required to support the lower prices prices, which causes the subsidy funding dies cannot exist in a fully competitive would disappear. to disappear. Then it must raise rates for market. Competition does not allow as- Universal service goals have tradi- the subsidized service in order to recover sured profit from one population which tionally been funded through a variety 72of its costs for that service. may simply be transferred to support an- such price discrimination practices. Another problem that exists with other. In order to retain universal service, Generally, certain groups of customers cross-subsidy activity is predatory pric- a regulatory regime must be interposed are provided basic service at a price that ing.8 1 A producer, by setting the price of in a newly-competitive market-but is is less than the cost of the service, to competitive services below cost, may be universal service worth the price? To an- encourage the universal availability of able to force competitors out of the mar- swer this question, we must look at the 73 basic service to these groups. Of course, ket.82 Commentators have long debated track record of universal service to de- this means that other services are priced whether predatory pricing is ever econom-83 termine whether its benefits outweigh above their respective costs. ically feasible in an unregulated market, the costs of regulation. These subsidies came to flow in and courts are generally skeptical of familiar directions: from long-dis- predatory pricing claims. The U.S. Su- IV. Has Universal Service tance service to.local service, from preme Court has declared that "such business services to Been Effective? residential ser- claims are rarely 8tried4 and even more vices, and from urban ratepayers to rarely successful. "Universal service" has become an rural ratepayers. Once in place, the However, in a market where one firm umbrella term for a variety of subsidy system of subsidies was an addi- offers both regulated monopoly services mechanisms designed to get telephones tional reason not to permit compe- and related competitive services, this into the hands of the most people. With tition, since low-cost competition practice could conceivably be used to the impending telecommunications "rev- could destroy the telephone com- drive competitors out of business. 85 The olution" of advanced services and the in- panies' higher-priced services and firm merely allocates the deficit incurred troduction of competition at all levels of the politically popular subsidies74 from selling the competitive product at service, this model of ensuring access to they provided to basic services. below cost to the expense side of the led- all is being questioned. In addition to the One of the prevalent price discrimi- ger for the regulated service, then peti- points already raised in Parts I (that uni- nation strategies is geographic averag- tions the regulatory entity for a price in- 75 versal service is primarily a marketing tool ing. Consider two customers-one lives crease based on the spurious expense of the RBOCs) and II (that the subsidy 86 next door to the phone company, while data. The regulator grants the price in- framework is economically inefficient in the other lives on a distant farm one mile crease, but the regulated service is now a competitive market), three other rea- from the nearest telephone line. Under priced above-cost, and the additional sons justify a reexamination of universal geographic averaging price structures, both revenues in effect 8subsidize7 the preda- service. will pay the same price for local service. tory-priced product. First, there is evidence that the pres- "Under this policy, the farmer will not Finally, one more practice which may ent system of promoting universal access pay the full cost of his mile-long access affect both competition and universal to basic telephone service has not been line; instead, he will pay the same rate service subsidies deserves mention. Be- as effective as advertised. It is common as the customer who lives across the street cause it may not be feasible to construct to treat the goal of universal service as from the central office. The farmer's ac- multiple telecommunications networks fully realized, but in fact many house-91 cess line is subsidized by the urban rate- to serve the same customers, the LECs holds still lack basic telephone service. payer. "76 may be required to sell access to their "bot- Approximately six million households in Another example of price subsidy in tleneck" local networks to competing the United States do not have a tele- telephone service is value-of-service 88 92 77 service providers. The LEC may be phone. This is about 6.7% of all United pricing. Above-cost rates are imposed tempted to price such interconnection States households. 93 However, these per- on business customers and the surplus is fees higher than the cost it incurs to de- centages increase substantially for low- used to subsidize basic, residential ser- liver the same service. This would be income and minority households and vice. "The rationale is that the business anticompetitive, because it would allow households headed by those under 25 customers...derive substantial economic the LEC to keep the competition's costs years of age.94 Two-thirds of households

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1 7 headed by African-Americans between pricing. 0 Another abuse results when ogy has become an "indispensable life- age 16 and 24 with annual incomes95 under the LEC diverts revenues from basic, savin tool[] during the twentieth cen- $5,000 do not have a telephone. residential service to subsidize the re- tury. " 4 It gives individuals the ability These statistics have caused many ob- search and development of advanced to quickly connect with emergency as- servers to conclude that universal service plant and services.10 8 This practice ef- sistance, medical care, essential business has not enjoyed the success that the tele- fectively cheats the basic service rate- and professional services, and cultural and 96 phone companies claim. These low payer, who probably will receive no cor- societal contacts. Moreover, it is vital to penetration rates appear to result from a responding benefit from the newly de- advancing the democratic process and the variety of factors. Undoubtedly, for the veloped services. fundamental115 rights of free speech and as- lowest-income groups, even subsidized In an unregulated, competitive mar- sociation. telephone service is simply too expen- ket, a firm cannot simply raise prices to There well may be certain advanced 97 sive. There is also evidence that lan- fund new development. It must either services 116 that will, at some point in the guage barriers and the need for increased use capital on hand or raise additional future, achieve the degree of importance public education, at least among certain capital through the debt and equity mar- to society that basic service currently has groups, contribute to reduced levels of kets.10 9 The investors in the company achieved.t1 7 If and when this occurs, penetration.98 Additionally, in certain low- share the risk that the new development there will be a justifiable need to provide penetration states, regulators appear not will fail, and will share any profits if it such advanced services to socioeconomic to have pressed telephone franchisees to is successful. If, however, a monopoly groups who normally would not be able extend service to the most9 9remote areas utility funds new development through to afford them. and to pockets of poverty. increases in basic service rates, the rate- Second, basic service will likely con- A second problem with universal payers take on the risk of the investment. tinue to be unavailable to certain groups, service relates to arguments in favor of If the investment is successful, the com- absent some form of support mechanism. expanding universal service to include pany may be tempted to pass the in- The lowest income groups will not be advanced telecommunications services. creased earnings directly to its investors, able to afford any cost-based service, These arguments are founded on the "in- thus denying the ratepayers a return on even if driven to the lowest possible price formation-rich/information poor" rift in the investment. by competition. 1 18 Also, certain individ- our society 00 This theory is based on Recently, the California Public Utili- uals in remote or poverty-stricken areas the assumption that new information tech- ties Commission determined that Pacific may be denied service because it is not nologies will have a greater effect upon Telesis did just that, when it attempted commercially viable to provide service those individuals who are already better- to "spin off' its cellular and paging di- to those individuals. To the extent such "electronic redlining" occurs, it must informed, better-educated, and of higher vision without returning some of the 1be19 socioeconomic status.101 In order to narrow profit from the sale to ratepayers. 1 0 The resolved through a support mechanism. the gap between the information "haves" Commission determined that Telesis had Finally, specialized equipment required and "have-nots," many argue that it is funded its research and development of by physically disadvantaged individuals essential to provide affordable, easy ac- cellular service with ratepayer revenues, may require a subsidy to enable such cess to advanced communications and in- and that some of these revenues should equipment to be universally available to formation services. 102 be returned to the ratepayers."' It would them. However, there is increasing evidence be easy to envision an LEC being equally Third, the need for some framework that the mere availability of advanced tempted to finance the development of an for consumer protections will arise out services does little to narrow the gap be- advanced, broadband network through of the transition from a regulated tele- tween the information-rich and the infor- increases in basic service rates, then pric- communications market to competitive mation-poor. A recent study by Mueller ing the service so that it may be unafford- telecommunications market. In the past, and others found that minority and low- able for the ratepayers who have funded consumers have relied upon regulatory income urban areas consume a dispro- it. entities to protect their interests in fair portionate amount of advanced telecom- pricing and marketing practices, service munications services such as cable tele- V. Balancing the Costs and quality, network security, and privacy. services. 10 3 vision and pay television Benefits of Universal Service But as competition increases and regula- Mueller suggests that the biggest risk is tion shrinks, the importance of protecting not the denial of access to advanced ser- So, one might ask, if universal ser- the consumer in these interactions will vices, but the inducement to the poor to vice is simply a self-serving marketing arguably fall under the universal service buy services they cannot afford.104 Muel- tool of the telephone companies, incom- umbrella. 120 In the future, consumer safe- ler also found that many inner-city house- patible with competitive markets, and in guards should be implemented, particu- holds without telephone service have ac- many cases simply does not work, then larly in the transition from regulated cess to cable television service.105 These why not do away with it? In fact, some market to competitive market.'2 These findings suggest that other methods of have argued that universal service should safeguards should be universally avail- narrowing the information gap may be be abandoned in favor of other more able. more effective Finally, as the "information super- than1 6 simply providing sub- modernistic approaches to service ac- sidized services. 0 cess.' l2 However, traditional universal highway" unfolds, there will be a need The third problem with the traditional service has served an important role in for adequate education to show all indi- universal service regime is that it can be- telecommunications development, and its viduals the importance of advanced ser- come merely a disguise for anticompeti- continued presence is supported by sev- vices and the procedures for appropri- tive and anti-consumer practices by util- eral meritorious arguments. ately and efficiently using them. The im- ities. Already discussed are situations First, there is an undoubted need for portance of closing the information gap where the LECs attempt to use cross- universal access to basic telephone ser- has already been mentioned. 122 It will 1 13 subsidy revenues to engage in predatory vice. Telephone and related technol- also be essential for consumers to have

California Regulatory Law Reporter • Vol. 15, No. 4 (Fall 1995) 0FEATURE ARTICLE

access to educational assistance to better service providers and content providers ate incentives to encourage interconnec- avoid potential abuses which might arise would be required to support public ed- tion of competing services; however, due to the competitive nature of the tele- ucation and training mandates, and to uniform national or international techni- communications market. Consumers will disclose accurate price and service infor-128 cal standards should be developed and require some method of obtaining information for comparison by consumers. this require- implemented137 to facilitate mation-not only concerning pricing and The universal access model stresses ment. service quality of competing services, equal access to all services. The driving Related to the idea of interoperability but also to enable them to avoid potential force of the universal access model is com- is the concept of openness. Openness is abuses such as excessive charges or un- petition, not government regulation of a essential to universal access for two rea- knowing risks to the security and privacy monopoly provider. In order to promote sons. First, the system should be capable of the information they transmit through equality of access, however, certain base- of both sending and receiving all types these new services. line standards must be established. The Al- of information.-138 Second, the technol- Conceding that some guarantee of liance for Public Technology (APT) 129 has ogy relied upon by these service provid- baseline universal service standards is developed a set of specific actions and ers must create an open network, to allow required, and assuming that the current approaches which serve as the basis for the full implementation of interoperabil- universal service regime will be unac- the following guidelines.' 30 The APT's ity and connectivity goals. 139 Therefore, ceptable in a competitive telecommuni- approach would require any telecommu- both services and networks must be open cations market, several commentators nications service provider to meet the fol- and available to all. have developed an alternative to the tra-123 lowing guidelines in order to enter the Another element of APT's universal ditional model of universal service. market: (1) specified connectivity, inter- access model is the incorporation of the The final part of this article discusses a operability, and openness standards; (2) consumer safeguards of security, service proposed "universal access" model for specified service quality, security, and pri- quality, and privacy. 140 Specific baseline establishing baseline access guarantees vacy safeguards at no additional cost to standards should be mandated by the and consumer protections, while ensur- consumers; and (3) mandatory contribu- federal government, available to all users ing unfettered competition. tions to a "universal service" fund, which on an equal basis. Consumers should not would be administered by an entity which be forced to pay more for these funda- VI. The Universal itself is not a provider. 131 mental standards. Consumers should also To ensure universal access, advanced Access Model be made aware of what they should14 1 ex- telecommunications services must be pect from services in this regard. An alternative approach to the tradi- fully accessible to everyone. This con- The competitive market should be al- tional universal service model is the concept has been expressed as connectivity. lowed to function as freely as possible, cept of universal access. 124 Instead of The network should connect every home, without interference from the govern- mandating that.specific services be made school, library, business and health care ment. Existing internalized cross-subsidy available at certain prices, universal ac- provider. 132 To the extent that the com- practices should be dismantled in favor cess regulation would simply require that petitive market fails to provide such con- of cost-based, competitive pricing. Only whatever services are available be made nectivity, targeted incentive programs or where there is a specific market failure available to all on a nondiscriminatory regulation may be necessary to promote should service be subsidized, and then basis. Then, if certain groups, such as optimum connectivity. There is evidence, the subsidy should be an external cost low-income families, remain unable to however, from the historical development absorbed proportionately by all market afford some or all of the services offered, of the existing telephone system that participants. targeted assistance programs would be in competition will not fail in the goal of One area where targeted subsidies will place to encourage these at-risk groups universal connectivity. Widespread avail- be required is to ensure that low-income to subscribe to those services that are es- ability of telephones to rural areas oc- individuals have adequate access to any sential to participation in society. To curred only after AT&T lost its patent service which at least 51% of all resi- avoid difficult choices regarding the "es- monopoly. At that time, competing ser- dential customers have adopted. The APT sential" nature of services, any service vices developed low-cost "farmer lines" suggests that all telecommunications pro- to which at least 51% of all residential and other methods of serving rural resi- viders contribute to a universal service customers subscribe should be considered dents. 133 There is evidence that this may fund, which would be used to provide low- "essential" 125 to participation in society. already be occurring today with rural ac- er-cost service to low-income individu- Next, the universal access model would cess to electronic mail and the Inter- als. 142 These contributions should be al- require that providers of the actual tele- net. 134 located according to the market share of communications connection, or the Another requirement of the universal the individual provider. The fund should "wire" into the home, would be sepa- access model is that all services be inter- be administered by an entity which is not rated or "unbundled" from providers of operable. If competition is to be success- itself a service provider. 143 These subsi- the content that is being offered through ful, it is essential that users of different dies might take the form of credits or the "wire." Service providers (those who or competing networks be able to inter- vouchers which could be used to pay for provide the "wire") would be regulated connect. It was in part the refusal of the services. Additionally, a portion of this 126 as common carriers, and would be AT&T to allow competing companies to fund should be earmarked for public ed- subject to a set of service standards and connect to its system which led to the calls ucation for low-income, minority, and consumer safeguards, including privacy for regulated monopoly treatment. 135 The physically impaired groups. Education and security standards. Content provid- Clinton administration's National Infor- should be provided at no cost, and should ers would then be substantially deregu- mation Infrastructure report has recognized36 focus on the value of basic144 information lated and free to compete aggressively, the importance of full interoperability. 1 services to these groups. subject to strict antitrust scrutiny to min- Again, in the interests of reaching the The universal access model is based 127 imize anticompetitive practices. Both most customers, competition should cre- on a competitive market. Competition re-

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quires reduced and uniform regulatory consumers, it will be much more difficult Public Utilities Commission, Order Insti- oversight. However, it is important to en- to place limitations on them. tuting Rulemaking on the Commission's sure that none of the competing service The ability to communicate freely is Own Motion into UniversalService, R. 95- providers be allowed to obtain an unfair a fundamental right in the United States, 01-020 (Jan. 24, 1995) (hereinafter "CPUC competitive advantage. Therefore, two and a cornerstone of our democratic so- OIR"), which has resulted in the PUC's mechanisms should be implemented to ciety. The telecommunications revolu- proposed rules described infra at note 7. ensure fair competition and minimize tion has the potential to create fascinat- 6. See, e.g., Telecommunications Act consumer abuses. ing new ways to advance the interests of of 1996, S.652, 104th Cong., 2d Sess. First, service providers must be reg- democracy. But unless advanced tele- (1996) (providing for, inter alia, a Fed- ulated as common carriers. 145 This will communications technology is handled eral-State Joint Board on Universal Ser- ensure that all users are able to originate, properly, with appropriate standards for vice and a Federal Communications Com- as well as receive, communications. It universal access and consumer safeguards, mission study to recommend actions for will also require that the carrier itself be this potential could reduce or even evap- the preservation of universal service); Cal. separated or "unbundled" from the actual orate our present ability to communicate Assembly Bill 3643 (Polanco) (Ch. 278, content of the information provided. freely. It would be sad indeed to waste Stats. 1994) (requiring the California Pub- Telephone service is currently provided such a rare opportunity. lic Utilities Commission to initiate an in- on a common carriage basis, although vestigation and open a proceeding to ex- the RBOCs are lobbying to be allowed amine current and future definitions of to provide content as well, especially universal service). with regard to video programming.146 7. See generally Information Studies, ENDNOTES Cable television is not currently based on supra note 1; Susan G. Hadden, Extend- a common carriage system; cable franchis- 1. See, e.g., U.S. Department of Com- ing Universal Service Through the Na- ees may pick and choose their program- merce, Information Infrastructure Task tional Information Infrastructure, COMM- ming content. Some commentators have Force, The National Information Infra- LAW CONSPECTUS 17 (Spec. Iss. 1994) suggested that cable television operators structure: Agenda for Action 5-6 (1993) (hereinafter "Hadden"); Senator Larry be treated as common carriers as well.147 (hereinafter "Nil: Agenda for Action"); Pressler & Kevin V. Schieffer, A Pro- Second, the entire telecommunica- Robert M. Entman, Introduction in UNI- posal for Universal Telecommunications tions industry should be subject to height- VERSAL TELEPHONE SERVICE: READY FOR Service, 40 FED. COMM. L.J. 351 (1988) ened antitrust scrutiny in return for reduced THE 21ST CENTURY? ix, x (Institute for (hereinafter "Pressler & Scheiffer"); regulation. Service providers should be Information Studies 1991) (hereinafter John Browning, Universal Service (An monitored closely for anticompetitive prac- "Information Studies"). Idea Whose Time Is Past), WIRED, Sept. tices, because the high costs of network 2. See Nil: Agenda for Action, supra 1994, at 102 (hereinafter "Browning"). infrastructure will make new entry diffi- note 1, at 5. This report predicts that the As this article was being written, the cult and will likely reduce the total num- information superhighway will improve California Public Utilities Commission ber of competitors to a few. Thus the like- public schools and health care, reduce traf- (PUC) issued a set of proposed universal lihood of price-fixing, predatory pricing, fic congestion, improve access to govern- service rules aimed at protecting univer- and denial of access to essential facilities ment information and services, improve sal service goals in competitive markets. will increase. 148 Also, the possibility of business efficiency, make the vast resources The proposed rules establish a defined anticompetitive mergers and acquisitions of art, literature, and science available ev- set of "basic" services (subject to a pe- must be recognized. Service providers erywhere, increase access to home enter- riodic, three-year review), revise existing who also provide content must be scru- tainment, and reduce paperwork. universal service subsidies for low-income and rural customers, create a pro- tinized to prevent unfair49 tying agreements 3. See Alexander C. Larson, An Eco- or predatory pricing.1 nomic Guide to Competitive Standards cedure to designate a "carrier of last re- For content providers, new entry will in Telecommunications Regulation, 1 sort" to ensure that basic service is pro- be easier, so there will likely be more COMMLAW CONSPECTUS 31, 33 (1993) vided to all customers, and mandate dis- competitors and healthier competition. ("[i]ndeed, with the possible exception closure of certain pricing information to However, the opportunity for mergers of the phrase 'level playing field,' 'com- customers. California Public Utilities and consolidations to create an oligopoly petition' is probably the most pervasive, Commission, Rulemaking on the Commis- market exists. Again, antitrust scrutiny yet debated term used of late to advance sions Own Motion into Universal Service must be vigorous to ensure that content telecommunications public policy"). and to Comply with the Mandates of As- providers maintain a competitive market. 4. See, e.g., Nil: Agenda for Action, sembly Bill 3643, D.95-07-050 (July 19, supra note 1; see also California Public 1995) (hereinafter "PUC Proposed Uni- VII. Conclusion Utilities Commission, Enhancing Califor- versal Service Rules"). The Commission nia 'S Competitive Strength: A Strategy for has circulated these proposed rules for The telecommunications market is Telecommunications Infrastructure (Nov. public comment, but has not formally very complex and difficult to compre- 1993). Even municipalities are getting into adopted them at this writing. hend. Apart from those set forth here, the act. See Report of the Mayor's Ad- 8. Lifeline service subsidies were es- other safeguards may be necessary to en- visory Committee on the City of the Fu- tablished by the Moore Universal Tele- sure universal access to the full panoply ture, San Diego: City of the Future-The phone Service Act, CAL. PUB. UTIL. CODE of new age communications services that Role of Telecommunications (Mar. 1994). § 871 et seq. (formerly § 739.2, enacted the information superhighway promises 5. See, e.g., U.S. Department of Com- in 1983). to deliver. However, it is essential that merce, Notice of Inquiry on Universal 9. See Milton Mueller, Universal Ser- adequate safeguards be developed now, Service and Universal Access Issues, 59 vice in Telephone History, 17 TELECOM- before the new infrastructure is in place. Fed. Reg. 48,112 (1994) (hereinafter MUNICATIONS POL'Y 352, 356-58 (1993) Once these new services are accepted by "Notice of Inquiry"). See also California (hereinafter "Mueller").

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10. 47 U.S.C. § 151. pany Exchange Statistics, and AT&T- Final Judgment (MFJ), is beyond the 11. Id. Bell Labs Archives. scope of this article. Briefly, in 1974, the 12. Notice of Inquiry, supra note 5, 35. Id. at 357-58. U.S. Department of Justice brought suit 1. 36. Id. at 358. against AT&T under section 2 of the 13. Id. 37. American Telephone and Tele- Sherman Act, alleging conspiracy to mo- 14. See CHARLES H. KENNEDY, AN graph became the parent company of nopolize three telecommunications mar- INTRODUCTION TO U.S. TELECOMMUNI- American Bell Telephone Company in kets: intercity telecommunications ser- CATIONS LAW 12-14 (1994) (hereinafter 1900. Brock, supra note 16, at 118. vices, customer-provided equipment, and "Kennedy"). 38. Mueller, supra note 9, at 358; see telecommunications equipment. United 15. Notice of Inquiry, supra note 5, also Pressler & Schieffer, supra note 7, States v. American Tel. & Tel. Co., No. 26 ("[w]itnesses at [Department of Com- at 356 n.13 ("[diuring this period, some 74-1698 (D.D.C. filed Nov. 20, 1974). A merce] field hearings suggested that uni- cities had as many as three telephone ex- settlement was reached in 1982 whereby versal service encompass a host of dif- changes, all with independent networks AT&T agreed to divest its RBOCs and ferent services, including: access to a and facilities. In order to communicate their local service networks, in exchange basic set of information and telecommu- with all the other telephone customers in for the court's modification of a 1956 nications services; multiple languages, such a city, three telephones were re- court decision known as the Final Judg- including Spanish and Native American quired-each with independent lines run- ment (United States v. Western Elec. Co., languages that require special, non-ASCH ning from the telephone to each of the 1956 Trade Cas. (CCH) 68.246 (Jan. characters; set-aside resources, facilities, independent exchanges"). 24, 1956)). This modification allowed and capacity for public, education, and 39. Mueller, supra note 9, at 359. AT&T to enter into unregulated activities government training and use; new tech- 40. Brock, supra note 16, at 111. such as computer equipment manufactur- nologies such as video link and cellular 41. Id. ing and data processing. See generally telephone service; and services defined 42. Mueller, supra note 9, at 361 (ob- Pressler & Schieffer, supra note 7, at as characteristics or features, rather than serving that these farm lines became a 364. technologies") (footnote omitted). highly sought-after prize, as they were The MFJ also placed several limita- 16. GERALD W. BROCK, THE TELE- wooed by both AT&T and independent tions on the RBOCs, including a require- COMMUNICATIONS INDUSTRY 151 (1981) companies for interconnection agree- ment that they provide equal access to their (hereinafter "Brock"); see infra discus- ments). facilities to all providers of long distance sion in Part II. 43. Brock, supra note 16, at 114. service, and prohibiting them from partic- 17. See infra discussion in Part III. 44. See Pressler & Schieffer, supra ipating in certain lines of business. Id. at 18. See infra discussion in Part IV. note 7, at 357-58; Brock, supra note 16, 365, citing United States v. Western Elec. 19. The RBOCs are the seven regional at 151-58. Co., 569 F. Supp. 990, 994 (D.D.C. 1983). Bell companies which were divested from 45. Pressler & Schieffer, supra note Many of these line-of-business restrictions AT&T under the 1984 consent decree, 7, at 357. Evidently, Connecticut became have since been eliminated. See Kennedy, discussed infra at note 63. the first state to enact a statute regulating supra note 14, at 50. 20. See infra text accompanying notes telephone service. Id., citing 1879 Conn. 64. This argument was set forth in a 109-11. Spec. Acts 36. report submitted to Congress by Eugene 21. Brock, supra note 16, at 102. 46. Brock, supra note 16, at 154. V. Rostow on behalf of AT&T in 1975. 22. Herbert S. Dordick, Toward a 47. Mann-Elkins Act, ch. 309, 36 Stat. The Rostow report argued that a monop- Universal Definition of Universal Ser- 539 (1910) (repealed 1934). See Pressler oly system devoted to universal service vice, in Information Studies, supra note & Schieffer, supra note 7, at 358. was part of the mandate of the 1934 1, at 109 (hereinafter "Dordick"). 48. Brock, supra note 16, at 155. Communications Act. However, Mueller 23. Id., citing ROBERT W. GARNET, 49. Id. at 156. correctly notes that this claim is "spe- THE TELEPHONE ENTERPRISE: THE Evo- 50. Id. at 158. cious." Mueller, supra note 9, at 367. LUTION OF THE BELL SYSTEM'S HORIZON- 51. Id. at 161. The Communications Act contains no di- TAL STRUCTURE 12 (1985). 52. Mueller, supra note 9, at 363. rect reference to universal service. 24. Id., citing ITHIEL DE SOLA POOL, 53. Id. at 363-64. 65. Id. (footnote omitted). THE SOCIAL IMPACT OF THE TELEPHONE 54. Id. (footnotes omitted). 66. In California, the PUC has 156-57 (1977). 55. Willis-Graham Act, ch. 20, 42 opened the door for facilities-based local 25. Brock, supra note 16, at 94. Stat. 27 (1921) (repealed 1934). competition starting January 1, 1996, 26. Dordick, supra note 22, at 112. 56. See Mueller, supra note 9, at 365; and for bundled resale local competition 27. Id. Pressler & Schieffer, supra note 7, at as of March 1, 1996. California Public 28. Brock, supra note 16, at 89-90. 358. Utilities Commission, Order Instituting 29. Id. at 95. 57. 47 U.S.C. § 151 et seq. Rulemaking on the Commission's Own 30. Id. at 107. Brock notes that the 58. See Pressler & Schieffer, supra Motion into Competition for Local Ex- average annual return on investment for note 7, at 358-59. change Service, R.95-04-043 (July 24, Bell stockholders during this period was 59. Mueller, supra note 9, at 366. 1995). To date, however, few companies 46%. Id. 60. Dordick, supra note 22, at 115. have expressed interest in competing for 31. Id. 61. Mueller, supra note 9, at 354. local service for residential customers. 32. Id. 62. See infra Part I for full discus- 67. A comprehensive explanation of 33. Id. at 123-24. sion of the economic aspects of cross- the economic analysis of monopoly ver- 34. Mueller, supra note 9, at 356. subsidy pricing. sus competitive markets is beyond the Mueller compiled the figures in the text 63. A comprehensive discussion of scope of this article. For an excellent from the national censuses of 1890, 1900, the events which led to the AT&T con- treatment of this topic, see Kennedy, and 1920, American Bell Telephone Com- sent decree, also known as the Modified supra note 14, at 119-54. The following

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discussion draws heavily upon the con- atory price cutting is most unlikely to duplicate Bell's local distribution facili- cepts discussed therein. exist and that attempts to outlaw it are ties (involving millions of miles of cable 68. For example, if one producer sets likely to harm consumers more than and line to individual homes and busi- the price of his product higher than its would abandoning the effort"). The most nesses), and regulatory authorization could cost to produce, one of two things will serious flaw with predatory pricing ac- not be obtained for such an uneconomi- happen. If competitors already offer a tivity in unregulated markets is that the cal duplication"). Whether this holds true substitutable product, they will price it predator must somehow recoup its losses in a future market where LECs and cable less than the producer's price, thus in- from below-cost pricing tactics, by charg- television franchisees compete for cus- creasing their sales and decreasing the ing monopoly prices after the victim has tomers remains to be seen. producer's market share. If no substitut- been forced out of business. This requires 91. Notice of Inquiry, supra note 5, able product is available, incentives are that predators maintain "supracompetitive 20. created for potential competitors to enter prices for an extended time," which is vir- 92. Id., citing H.R. Rep. No. 560, the market, to take advantage of the ex- tually impossible absent strong barriers to 103d Cong., 2d Sess. 6 (1994), and U.S. cessive profits earned by the producer. entry. Matsushita Elec. Indus. Co. v. Ze- Census Bureau, Population Survey (1990). In either case, the producer will be forced nith Radio Corp., 475 U.S. 574, 591-92 93. Dordick, supra note 22, at 119. to lower prices to avoid losing market n.15 (1986) (hereinafter "Matsushita"). 94. Notice of Inquiry, supra note 5, at share. In a perfectly competitive market, Others note that if legal or economic 20. Approximately one-third of all Afri- therefore, all producers will price their barriers to entry exist, or if the victim can-American and Latino households with product at or very near its cost to pro- faces much higher capital costs than the annual incomes of less than $5,000 lack duce. Id. Of course, this analysis assumes predator, predatory pricing may be ratio- telephone service, and 53% of Native that no market flaws exist, such as high nal. See, e.g., RICHARD POSNER, ANTI- American households on reservations do barriers to entry, imperfect pricing or cost TRUST LAW: AN ECONOMIC PERSPECTIVE not have phones. Nearly 15% of all house- information, external costs, or cartel be- 184-96 (1976). holds headed by a person under 25 years havior. 84. Matsushita, supra note 83, 475 of age are without phones. Id. 69. Id. at 5. U.S. at 589. Elderly households (headed by indi- 70. The two most popular forms of 85. See MCI Comm. Corp. v. AT&T, viduals over age 65) have surprisingly rate regulation are rate of return rate reg- 708 F.2d 1081 (7th. Cir. 1983), cert. de- high telephone penetration rates. Even ulation and price cap or incentive regu- nied, 464 U.S. 891 (1983) (hereinafter among the lowest income categories, less lation (currently called "performance- "MCI v. AT&T'). than 5% were without phones. Dordick, based ratesetting" in California). A dis- 86. Kennedy, supra note 14, at 27. supra note 22, at 121. cussion of these regulatory regimes is 87. Both the FCC and the California 95. Id. at 119. beyond the scope of this article. See id. Public Utilities Commission have insti- 96. Notice of Inquiry, supra note 5, at 6-7, 14-17. tuted expense reporting requirements at 21. 71. Id. at 12-13. which subject cost accounting figures 97. Id. 72. Notice of Inquiry, supra note 5, submitted by the LECs to close scrutiny, 98. Id., citing testimony of Bong 34. in an effort to detect such practices. See, Hwan Kim, Executive Director, Korean 73. Id. e.g., Federal Communications Commis- Youth and Community Center, Los An- 74. Kennedy, supra note 14, at xvii. sion, Separation of Costs of Regulated geles, California (Feb. 16, 1994). 75. Id. at 12-13. Telephone Service from Costs of Non- 99. Dordick, supra note 22, at 121. 76. Id. regulated Activities, 2 F.C.C.R. 1298, Dordick notes that competitors have en- 77. Id. at 13. 1312 (Report and Order 1987); Califor- tered some of these unserved markets, us- 78. Id. nia Public Utilities Commission, Re Al- ing low-cost wireless technology (known 79. Mueller, supra note 9, at 354. A ternative Regulatory Frameworks for Local as BETRS) to reach these communities. local exchange carrier (LEC) is simply Exchange Carriers, D.89-10-031, 33 However, such efforts have often been the telephone company who provides C.P.U.C.2d 43 (Oct. 12, 1989). delayed or prevented by challenges from local service, usually a RBOC. Another controversial question is what the franchised carriers, even though the 80. There is some dispute over the constitutes below-cost pricing. A complete carriers do not currently serve the cus- extent to which local service is subsi- discussion of this issue is beyond the scope tomers. Id. dized by these settlement payments. Es- of this article. The Seventh Circuit has held 100. See generally EVERETT M. ROG- timates range from $400 million to $20 that so long as the price of a service covers ERS, COMMUNICATION TECHNOLOGY: THE billion. Notice of Inquiry, supra note 5, its long-run incremental costs, that price is NEW MEDIA IN SOCIETY 169-72 (1986) T 35. However, the Consumer Federation not predatory. MCI v. AT&T, supra note (hereinafter "Rogers"). The information- of America estimates that, far from re- 88, 708 E2d at 1120. The Ninth Circuit rich/information-poor theory was first quiring support from long distance sub- has expressed a broader standard. William discussed in an article by Philip Tichenor sidies, local service actually produces net Inglis & Sons Baking Co. v. ITT Conti- and others in 1970, which analyzed the income for the LECs. Id. nental Baking Co., 668 E2d 1014 (9th Cir. differences with respect to mass media 81. See Kennedy, supra note 14, at 1981). audiences. Philip J. Tichenor, et al., Mass 27. 88. Kennedy, supra note 14, at 31. Media Flow and Differential Growth of 82. Id. 89. Id. at 31-32. Knowledge, 34 PUB. OPINION Q. 159 83. Some scholars argue that preda- 90. See, e.g., Otter Tail Power Co. v. (1970). tory pricing is rarely rational. See, e.g., U.S., 410 U.S. 366 (1973). Courts have 101. Rogers, supra note 100, at 169. ROBERT H. BORK, THE ANTITRUST PAR- held the local exchange network to be This effect is compounded by the fact ADOX: A POLICY AT WAR WITH ITSELF, an essential facility. MCI v. AT&T, supra that newer communication technologies 148-56 (1978) ("[tlhe theoretical argu- note 85, 708 F.2d at 1133 ("[iut would create new information gaps before old ment presented here suggests that pred- not be economically feasible for MCI to information gaps close. Thus, each new

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information technology which arnives on 112. See, e.g., Browning, supra note pressed concerns about these types of the scene will tend to widen the gap even 7, at 102 ("[w]hile the spirit of universal consumer protections, and have included farther. Id., citing Natan Katzman, The service-the idea that everybody should a consideration of them in universal ser- Impact of Communications Technology: be able to speak as freely in the ether as vice investigations. CPUC OIR, supra note Some Theoretical Premises and Their they do in the air-is noble, its substance 5; Cal. Assembly Bill 3643 (Polanco) Implications, 225 EKISTICS 125, 125-30 is woefully dated"). (Ch. 278, Stats. 1994), supra note 6. (1974). 113. "Basic service" has been defined 121. See generally Hadden, supra 102. NIl Agenda for Action, supra by the PUC to include most of the ele- note 7, at 20-21 (explaining the author's note 1, at 8. ments of today's standard telephone ser- vision of universal access and govern- 103. Milton Mueller & Jorge Sche- vice: access to single-party local ex- mental actions needed to achieve that vi- ment, Universal Service from the Bottom change and interexchange carriers, abil- sion). Up: A Profile of Telecommunications Ac- ity to place and receive calls, touch-tone 122. See supra text accompanying cess in Camden, New Jersey, Rutgers dialing, free access to emergency (e.g., notes 100-106. University Project on Information Policy 911) services, access to directory assis- 123. See, e.g., Hadden, supra note 7; (Feb. 23, 1995) (summary on file with tance, Lifeline rates and TTD relay ser- Browning, supra note 7; Notice of In- author). vices for eligible customers, access to inquiry, supra note 5, at T 55; Alliance for 104. id. formation (e.g., 800 and 900) services, Public Technology, Connecting Each to 105. Id. The study found that these one-time free blocking for information All: A Telecommunications Platform for households preferred cable to telephone services, access to customer service, and the Information Age, Washington, D.C. service because telephones expose them operator services. PUC Proposed Uni- (1993) (hereinafter "Connecting Each to to uncontrollable charges, whereas cable versal Service Rules, supra note 7, Ap- All"). is a flat monthly fee; and telephones are pendix A. 124. "Historically, access has focused often an undesirable channel for making 114. Pressler & Schieffer, supra note on issues such as physical access to a drug transactions and receiving calls from 7, at 370. seamless and transparent web of monop- government agencies and bill collectors. 115. Dordick, supra note 22, at 125- oly local exchanges, equal access to long Cable television provides inexpensive en- 28. distance carriers, and availability to and tertainment, helps keep children off crime- 116. "Advanced services" are all tele- ease of use by consumers, among oth- ridden streets, and "offers a visible sign communications service not included in ers." Id. at note 5, T 56 (footnote omit- of well-being in households with few ma- the current definition of "basic service." ted). The universal access model simply terial comforts." Id. Examples of advanced services include takes these qualities and mandates that 106. Importantly, the findings suggest Caller ID, Call Forwarding and related they be made universally available. that public education concerning the services, voice mail, paging services, cel- 125. The PUC recently set forth a pe- value and proper use of various commu- lular and wireless telephone services, In- riodic, three-year review process for de- nications and information services may tegrated Services Digital Network (ISDN) termining which services should be con- be at least as important as access to the access, and fax services. Additionally, sidered "basic services." The review cri- services. advanced services may embrace com- teria include whether the service is es- 107. See supra text accompanying puter-based communication services such sential for participation in society; the notes 81-87. as E-Mail, file transfers, real-time elec- costs and benefits of adding the service; 108. This problem has been identified tronic conferencing, World Wide Web ser- service availability or subscriber levels by public interest organizations such as To- vices and video conferencing, as well as will not otherwise increase; and at least ward Utility Rate Normalization (TURN). "video dialtone" services such as cable 65% of residential customers subscribe Much of the foregoing discussion has television, video-on-demand, and inter- to the service. PUC Proposed Universal been derived from TURN's testimony at active multimedia services. Service Rules, supra note 7, Appendix the National Telecommunications and 117. The scope of universal service A. In addition to requiring an exces- Information Administration's Hearing on has changed over the years to include ad- sively high penetration rate, this method Universal Service and the National In- vancements such as direct dialing, sin- of identifying subsidized services will formation Infrastructure (Los Angeles, gle-party lines, and even touch-tone ca- force the PUC to make difficult judg- California, Feb. 16, 1994). pability; see supra note 113. This trend ments as to the necessity and quality of 109. Id. should continue, as some services become individual services, which may well cause 110. Re Pacific Telesis Group, D.93- so commonplace and necessary as to be the Commission to attempt to avoid mak- 11-011, 51 C.P.U.C.2d 728 (Nov. 2, included as part of "basic service." See ing such decisions at all. 1993). See also PUC Approves Pacific Notice of Inquiry, supra note 5, 25. 126. "Common carriage" is the pro- Telesis Spin-Off, 14:1 CAL. REG. L. REP. 118. See supra text accompanying vision of services to the public in a non- 167 (Winter 1994). notes 93-95. discriminatory basis. 1ll. Unfortunately, the Commission 119. "Electronic redlining" is a prac- 127. The primary federal antitrust only required Telesis to return $41.3 mil- tice in which low-income and minority laws include the Sherman Act, 15 U.S.C. lion, a drop in the bucket compared to neighborhoods are "systematically un- §§ 1-7, and the Clayton Act, 15 U.S.C. the actual return on investment that this derrepresented" in the deployment of ad- §§ 12-19, 26. profitable division was worth. Id. The vanced telecommunications services. This 128. The PUC's proposed universal PUC's ultimate decision concerning how practice has already been alleged with re- service rules fail to provide for public to distribute this refund was recently an- spect to various local telephone companies' education or training, and only require nulled by the California Supreme Court. video dialtone network plans. Notice of minimal disclosure of pricing informa- Assembly of the State of California v. Inquiry, supra note 5, 15. tion to customers. PUC Proposed Uni- California Public Utilities Commission, 120. In California, for instance, the versal Service Rules, supra note 7, Ap- 12 Cal. 4th 87 (1995). state legislature and the PUC have ex- pendix A.

10 California Regulatory Law Reporter • Vol. 15, No. 4 (Fall 1995) FEATURE ARTICLE

129. "The Alliance for Public Tech- 141. Although these standards should nology is a nonprofit coalition of public be implemented uniformly at the federal interest groups and individuals whose level, their enforcement may be left to goal is to foster universal access to af- state public utilities commissions. fordable, useable information and com- 142. Hadden, supra note 7, at 20. munications services and technology." 143. Id. Hadden, supra note 7, at 17 n.2. 144. Note that various consumer 130. Connecting Each to All, supra groups, including the Utility Consumers' note 123. Action Network and the Universal Ser- 131. Hadden, supra note 7, at 18-20. vice Alliance, have proposed that carriers 132. Notice of Inquiry, supra note 5, be assessed a "universal applications in- 57; Hadden, supra note 7, at 18. centive fee." This fee would be distrib- 133. See supra text accompanying uted in the form of grants to statelocal/ notes 40-42. business partnerships, which would in 134. For example, development of turn develop applications designed to computer bulletin board services (BBS) meet the needs of a broad range of cus- in rural areas has demonstrated that ad- tomers. These applications would be vanced services can be provided to such made available to diverse segments of users. These services provide a local num- the population, thus reducing the amount ber which rural residents may dial to ac- of the subsidies required to maintain uni- cess the Internet, thus avoiding the long versal service. PUC Proposed Universal distance charges that would accrue if Service Rules, supra note 7, at 23. Un- such calls were made to Internet access fortunately, the Commission refused to providers in more urban areas. Also, adopt such incentives in its proposed rules. many commercial online services pro- Id. at 25-26. vide toll-free numbers which allow dis- 145. Hadden, supra note 7, at 20. tant users to access the service without 146. In this regard, see Chesapeake being charged long distance rates. & Potomac Tel. Co. v. United States, et 135. See supra text accompanying al., 42 F.3d 181 (4th Cir. 1994), and US notes 43-44. West, Inc. v. United States, 48 F.3d 1092, 136. NIl: Agendafor Action, supra note 1106 (9th Cir. 1995), both holding that 1, at 9; Notice of Inquiry, supra note 5, a 1984 Cable Act provision prohibiting 62. telephone common carrier delivery of 137. Hadden, supra note 7, at 19. video programming fails the narrow tail- 138. Id. at 18. For example, today's oring requirement of the intermediate telephone system is "open" with respect to scrutiny test, and therefore is invalid voice transmissions. A caller may send or under the first amendment. receive any voice message at any time. By 147. See Donald L. Bell, Unbundling: contrast, a cable television system is a An Alternative to the Current System of closed system, offering only a limited op- Cable Television Franchising, 21 CUMB. tion of viewing choices and no capability L. REv. 42 (1990). for users to interact. 148. See supra text accompanying The FCC has coined the term "video notes 81-90. dialtone" to describe a more open system 149. For instance, if the provider of in which users may both send and re- the telecommunications service also pro- ceive video programming. Kennedy, supra vides a popular online information ser- note 14, at 76. A more appropriate term vice, the provider might attempt to tie might be "information dialtone." the two services by requiring purchase 139. The FCC has also recognized the of the telephone service in order to ob- importance of openness in developing its tain the information service. Or, the pro- Open Network Architecture (ONA) rules, vider might cross-subsidize the informa- aimed at allowing the RBOCs to compete tion service with excess profits from the with other service providers in delivering telecommunications service and price the advanced information services. The ONA information service below its costs, thus rules allowed competing providers to ac- driving competing information service cess RBOC infrastructure and required the providers out of business. RBOCs to buy access to their own services under the same tariffs as their competition, thereby preventing unfair disadvantage to the competitors. See id. at 65-66. 140. The need for privacy and security safeguards is also discussed in the Clinton administration's National Infor- mation Infrastructure plans. Nil: Agenda I for Action, supra note 1, at 9-10.

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