Solveig Bernstein*

In October of 1996, the Telecommunications and Electronic Media Practice Group held its first conference. The one-day conference debated whether the new Telecommunications Act advances the industry toward deregulation, the impact of deregulation on the constitutional rights of incumbent carriers, the rationales for "universal service," and proposals to privatize the electromagnetic spectrum.

Among the presenters was Professor Richard Epstein of the University of Chicago, who discussed the constitutional implications of the TELRIC pricing regime the FCC imposed on incumbent local exchange carriers in the agency's interconnection order. The Supreme Court has generally ruled that just compensation is the fair market value of the taken property; in the utility arena, however, the Court and regulators have relied on historical cost. Professor Epstein noted that switching from one standard to the other in the course of a regulatory regime itself raised constitutional questions. He further suggested that the FCC's move to TELRIC constituted a switch from the historical standard to another standard--but that TELRIC could not be viewed as a "fair market" standard either. He described the TELRIC model as being "based not on the idea of what a competitor can do but basically on what a perfect competitor would have done in a hypothetical market that nowhere exists."

Addressing the same issue, Professor Tom Merrill of Northwestern University School of Law argued that historic cost is not the proper measure of the compensation that the local exchange carriers should receive for interconnection. "Let's say I bought a house in California in the halcyon days of the early '80s for a million dollars and now unfortunately it's only worth $750 thousand. The state comes along and decides to condemn it for a highway. What is my just compensation? Is it a million dollars? No. It's the fair market value, $750,000." He believed that this "forward-looking" price was analogous to TELRIC.

Greg Sidak of the American Enterprise Institute warned, however, that the Telecommunications Act threatened to turn the local networks into a kind of "commons." He invoked the "tragedy of the commons," noting that resources owned in common deteriorate over time. He concluded by cautioning that one should be concerned that if Congress has decided to "create a telecommons it will maintain incentives for the resource to be kept in good working order for the benefit of all consumers." During the question period, Professor Epstein seconded this point, describing the danger that mandatory resale lessens the incentive for new entrants to engage in facilities-based competition, and for incumbents to upgrade their networks.

Chairman Dan Miller of the Illinois Commerce Commission concluded this panel by describing the purpose behind LURIC (Long Run Incremental Cost), a method similar to TELRIC; LURIC focuses on the prices of services, while TELRIC focuses on the cost of elements of service. LURIC, he explained, "assumes the deployment of the most advanced technology available . . . and that new advanced technology inevitably is cheaper than the technology that preceded it. So LURIC pricing, almost by definition, is below the cost of the system already in place. In this way, the [commission] incented the telecommunications industry to . . . deploy new technology as rapidly as possible . . . had the [commission] allowed Ameritech [the local exchange carrier] to recover . . . stranded investments in outdated equipment, the Commission would have condemned Illinois consumers to a system that would likely never see a modern, more productive piece of technology deployed." He added his concern that the differences between LURIC and TELRIC were sufficient to raise concerns of confiscation.

The next panel concerned universal service. Lawrence Gasman of the Cato Institute began, contesting the commonly held view that the participation in the "information age" will require subsidizing information services to the poor. "Trust me, you really ought to know how to use a computer but, if you don't, you are not going to starve. And using your computer is going to get easier, anyway. I mean, I do know how to use a computer and I know how they work, but I can drive a car and don't have the faintest idea how they work. . . . So I think what we have done [in the universal service provisions of the 1996 Act] is create an entirely new entitlement and it is just not quite clear why." In his view, concerns about information have-nots are greatly exaggerated. While he agreed that it is important for schools to have access to technology, he saw no reason that federal subsidies should be provided, and more than there are for books. The success of markets in driving down prices in the computer industry shows that no subsidies are required.

Dr. Mark Cooper of the Consumer Federation of America argued in response that neglect of universal service would bring about a "society divided between those who have vast economic, social and political power, the power of information, and those who do not. . . . It is not only logical but absolutely critical that the concept of what is basic service evolve as the institutions and economic structure evolves." He pointed out that of households with income below $5000, 22 percent do not have phone service; by the time we reach an income of $30,00, 98 percent of the households have telephone service. Among households with incomes of $75,000 and a child, 86 percent have a computer, of those over $100,000 with a child, over 90 percent have a computer. But of households with incomes of $15,000 and a child, 28 percent have a computer. He concluded that he was looking forward to the next round of the debate, to "provide computer to all households so that citizens can fully participate in our information society."

The final speaker was Dennis Weller of GTE. He began by expressing his concern that if prices are held artificially low in the local exchange, we are unlikely to see new entrants attracted to that market. As an alternative, he described GTE's bidding proposal for universal service, which would work something like a school lunch program. Lawmakers would decide what goods (lunches) need to be provided, and at what price (say, $2.00 a lunch, when the market price would be $6.00). The board would then request bids from providers to find out who puts in the lowest bid that meets all the specifications. In his view, universal phone service could work the same way, starting with a policy determination of what product should be provided. A market created by competition among bidders to provide the service would give a good idea of how much the service could be provided for.

The concluding panelists debated whether the electromagnetic spectrum should be privatized. Tom Hazlett of the University of California at Davis began by pointing out how the FCC's administration of the broadcast spectrum under the "public interest" standard has been used to choke competition. New services must go to the Commission to prove that their service is in the public interest, providing an opportunity for incumbents to point out how new entry would upset existing regulatory programs and goals (universal service, localism, and so on). For this reason, he supported privatization.

Charles Jackson of Strategic Policy Research followed, noting that privatization might not be consistent with obligations the United States has incurred under international law. He was also concerned that the property rights approach could not adequately control the problem of interference at low cost, particularly for household items like garage door openers.

Peter Pitsch of Pitsch Communications argued that creating property rights in the broadcast spectrum would dramatically reduce scarcity and the underutilization of spectrum, and that most of the problems that Chuck Jackson had raised would become side issues. He pointed out a fundamental problem with the existing system: current licensees must either use their spectrum for the government-approved purpose, or give the spectrum back to the government. In that circumstance, the opportunity cost to the licensee of keeping the license in its approved use (no matter how costly to society) is zero. So he proposed "to give existing licensees the freedom with which to use their spectrum as long as they are not interfering with their neighbors," which brings the opportunity cost to the licensee of keeping the spectrum in its current use into line to the opportunity cost to society.

Andrew Schwartzman of the Media Access Project concluded. He stressed that the current system has worked pretty well, in spite of the fact that it had sometimes been used to benefit powerful incumbents. He criticized the current auction process, noting that the proceeds are being squandered on deficit reduction. He described auctions as a "tax on R&D," that depletes capital from innovative sectors of the economy. He was concerned that privatization could lock in current uses of the spectrum. He concluded "If we stick with democracy until technology lets us do it right, we are probably going to be better off than if we rush into something without seeing where its going. . . . [We should] not impose a new structure that is or is not what really should have been done in 1934 into what happens in 1996."

Some are concerned that the Telecommunications Act of 1996 has not produced the benefits that were predicted when the Act was passed. In raising serious questions about the Act's goals and the means taken towards those goals, this conference represented an important contribution towards understanding if and how the Act and its implementation have gone awry.

* Solveig Bernstein is Assistant Director of Telecommunications & Technology Studies at the Cato Institute.