Telecom Reform: Here Come the States

Published April 1, 2005

In February, Alabama became the latest state to place telecom reform on its legislative agenda.

Senate Bill 114 and its House counterpart, House Bill 112, call for deregulation of wireline dial-tone services. The law would still allow the Alabama Public Service Commission (PSC) to field complaints and adjudicate disputes between consumers and local phone companies, but the PSC would no longer set rates or dictate the way companies bundle their services. Similar reform bills are on the docket, or headed for it, in Illinois, Indiana, Texas, Wisconsin, and other states.

The Alabama bill recognizes the reality of intermodal competition from wireless and voice over Internet Protocol (VoIP) services. It affirms that telecommunications is becoming increasingly competitive as service platforms shift away from proprietary, closed narrowband networks to broadband connections based on open standards that support diverse, customizable multimedia services.

Telecom reform advocates recognize that telephone service offered on broadband platforms simply cannot be regulated as it was in the past. Reform is necessary. The only question is what form it should take. Many opponents of reform refuse to acknowledge that the current scheme, even as it keeps rates low for some, is unsustainable.

Consumers Reject Narrowband

The Alabama proposal has drawn fire from consumer advocacy groups, who say the measure will result in high prices and re-monopolization of the industry. They also say rural customers will be hurt the most, because in those areas, there are no alternatives and therefore regulations are needed to hold phone rates down.

The first claim assumes wireline service is still the “gold standard” of phone service–a questionable, if not outright erroneous belief, as the accompanying table shows.

Still the “Gold Standard?”
Narrowband Wireline Service Compared to Wireless and VoIP
  VoIP Wireless Narrowband Wireline
User-configurable Yes Limited No
Real-time Web Interface Yes No No
Geographically limited No No Yes
Multi-platform access Yes Yes No
Immediate service activation Yes Yes No
Web services integration Yes Yes No
Calling features (e.g., voice mail, call waiting, caller ID) included in baseline service Yes Yes* No
Local/Long-distance rate differentiation No No Yes
Special taxes and surcharges No Yes Yes
911 Compatibility No** Yes Yes
* Some wireless phone companies offer stripped-down packages that do not include extras.
** Not a necessary condition of VoIP. Customer demand is expected to lead to VoIP 911 compatibility as the service gains wider adoption.

When presented with phone service alternatives, consumers willingly opt for them. The Bell companies have lost 30 million wireline customers in the past five years. Last year, the number of wireless accounts in the U.S. surpassed wireline accounts. Time Warner, just to name one cable company attacking the phone market, adds more than 11,000 customers a week, mostly through its “digital phone” offering that uses VoIP. Comcast expects to offer VoIP to 40 million households by the end of next year.

True, there are fewer choices for consumers in rural areas than in metropolitan areas. The correct response, however, is not to subsidize conventional wireline service–which consumers reject when presented with other options–but to create an environment in rural and ex-urban areas where companies can provide options and thrive.

To start the process, states must revamp the way regulation props up narrowband service in rural areas. Guaranteed subsidies for conventional phone service prevent small telephone companies from risking capital to develop broadband alternatives. Price controls on dial tone prevent the entry of competitors who might use new technology to underprice the incumbent or provide better value if narrowband service were otherwise sold based on actual cost.

States can’t do it all, because critical elements of the subsidy scheme are governed at the federal level. But given the attention the FCC is paying to revamping the Universal Service Fund and intercarrier compensation rules–the two major vehicles the Telecom Act of 1996 set up for revenue distribution from urban to rural service–it behooves every state to consider Alabama’s example.

Contrary to what opponents say, the largest incumbents–the Bell companies–will not see a windfall at ratepayer expense if narrowband dial-up telephone is deregulated. They don’t even want to be in the business of narrowband anymore. At long last, they seem ready to enter the truly rough world of broadband service competition and genuine risk.

De Facto Deregulation

Independent of any legislative or PSC action, the Bell companies, which face intermodal competition in all of their major markets, are shifting to deregulated services. When the SBC-MCI and Verizon-AT&T deals are completed, these companies will have nationwide footprints. They will compete with each other, but their primary services will be in-home networking, on-demand video, and VoIP, all of which currently are–and show every sign of remaining–unregulated.

Today, in the large and medium-sized markets, consumers are deluged with choices. Phone, cable, satellite, and wireless companies are tripping over themselves to get a shot at the consumer broadband dollar. Telecom reform, far from hurting rural customers, will bring them into the overall market. Deregulation will eliminate a structure that discourages smaller phone companies from making the necessary transition from single-service utility to the market-driven telecommunications services provider rural customers need more than ever.

For the rural companies, the combination of cross-subsidies from Washington and price regulation from the states has been a velvet trap. The structure guarantees revenues and profits so long as the company uses its funding for conventional narrowband wireline service. So while broadband was being introduced in larger markets, spurred by competition, rural companies were given every incentive to pour money into an outmoded technology while keeping rates artificially low so cost-based competitive alternatives could not take root. As long as the subsidies roll in, it would be irresponsible for these companies to exchange the guaranteed profit on narrowband for the competitive risk inherent in broadband.

Legislators in Alabama have begun to realize that the only way to spur broadband growth statewide is to start dismantling the regulatory scheme that puts misplaced value on narrowband telephony. Their effort is courageous and controversial because it challenges the conventional notions that regulation and revenue redistribution are required to assure universal service.

We have seen more innovation and pricing flexibility, more diverse services, and faster deployment and consumer uptake from competitive, unregulated telecom sectors in the past five years than we have seen from regulated companies in the past 50. Legislators in Alabama understand the path to universal, affordable broadband service lies in less regulation, not more.

Steven Titch ([email protected]) is managing editor of IT&T News and The Heartland Institute’s senior fellow for information technology and telecom policy.