|The FCC Reshapes
the Telecom Industry
by Jim Surowiecki
NEW YORK, N.Y. (May 7, 1997) -- Deregulation, it seems, needs active
regulation. At least that's one conclusion that can be drawn from the Federal
Communication Commission's unveiling Wednesday of its new plan for the telephone
industry. There are a host of competing interests, from long-distance companies
anxious to move into new markets to rural residential consumers anxious to
keep receiving phone service. The FCC produced a plan that should cut
long-distance costs for most customers while raising rates for some small
businesses and for individuals who have more than one phone line.
Most intriguingly, the commission followed through on its promise to facilitate
access to the Internet. The new plan contains provisions that will allow
every classroom and library in America to become wired in the near future
at discounts of up to 90%. Up to $2.25 billion a year will be available from
a fund created specifically for this purpose. And the money for the fund
will be raised from surcharges on additional phone lines and from new fees
on wireless and cellular carriers.
While the FCC has obviously been working on the plan ever since the passage
of the 1996 Telecommunications Reform Act, it seems possible that the biggest
breakthrough in formulating the new rules came last weekend. In the face
of the expected FCC vote on a cut in access charges paid by long-distance
companies, AT&T (NYSE: T) offered a dramatic cut in long-distance
bills in exchange for a reduction in the access charges, which now cost as
much as $25 billion each year.
AT&T, in negotiations with consumer groups, agreed to cut daytime and
evening charges by 5% and night and weekend charges by 15%. While the changes
seem relatively small -- particularly since they apply to the company's basic
calling customers, and not those who use a discount plan like Reach Out America
-- they would be Ma Bell's first rate cut in five years. While neither
MCI (Nasdaq: MCIC) or SPRINT (NYSE: FON) came out with similar
offers, both companies tie their rates closely to those of AT&T. In addition,
AT&T promised that it would reduce rates again in 1998 if the FCC cut
access charges one more time.
The paradox of the telecommunications industry, particularly in the wake
of the 1996 legislation, is that competition takes place within a highly
regulated environment. This stems not only from the genesis of the industry
in the early 1980s court-ordered breakup of AT&T, but also from the
foundation of all phone business in this country: the need to continue to
provide cheap local service to every customer. The so-called "residential
dial tone" requirement underlies the entire debate about the telecom industry,
and sets the boundaries within which prices can be established. The current
vogue for market forces is constrained, then, by Americans' demand that even
rural customers have access to local service.
Reed Hundt, commissioner of the FCC, was unwavering in his insistence that
whatever changes the plan created, the "subscriber line charge" paid by all
customers would not rise in price. Reconciling that demand with the cut in
access charges that both the commission and consumer groups wanted meant
the shifting of costs to those people and businesses with additional phone
lines and to the newer players in the industry like the wireless carriers.
AT&T's last-minute offer to slash rates, then, came as a boon to Hundt,
since it meant that any cut in access charges would not be pocketed by the
long-distance companies, as, at least according to the Baby Bells, has happened
in the past. In an interview with The New York Times, which broke the story
on Sunday, Hundt used unusually vivid language to describe the commission's
battles with the nation's largest long-distance carrier. "We have been in
a firefight with AT&T behind closed doors, and now the smoke has cleared,"
Hundt said. Today the FCC suggested that rates for 85% of residential customers
would drop significantly over the next five years.
What was especially important about AT&T's offer was that for the first
time it split consumer advocates and business groups, both of whom had been
the most part skeptical about Hundt's plans. While business groups, particularly
those representing small businesses, complained today that the new plan places
an unfair burden on them, consumer advocates seem more enthusiastic about
the plan than about anything the commission has done in years. Gene Kimmelman
of Consumers Union called it "the first real long-distance cut in years"
for the average consumer. He also expressed the hope that it might be the
first step in a series of rate cuts.
Still, there has been bipartisan opposition to the new plan in Congress.
Sen. John McCain, a Republican from Arizona, and Reps. Billy Tauzin (R-La.)
and John Dingell (D-Mich.) wrote Hundt a letter after AT&T's announcement
voicing their concern about the impact of access-charge cuts on local rates.
"Any local telephone rate increases resulting from the [FCC's] actions to
modify access charges would be sharply contrary to congressional intent in
passing [the 1996 law]," they suggested.
The Baby Bells, meanwhile, have been even more vigorous in their criticism
of Hundt's plan. BELL ATLANTIC (NYSE: BEL) termed AT&T's offer
"a last-minute ploy" and an attempt to wangle a "sweetheart deal." Edward
D. Young III, vice president of external affairs, said, "Federal rules already
require significant access rate reductions in addition to the $9 billion
in cuts over the last five years, much of which AT&T has pocketed. Rather
than pass these previous cost savings on to its customers now, AT&T is
going for a new and completely unlawful retroactive rate cut." More troubling,
perhaps, Young added that the new plan would mean that long-distance customers
would receive a small cut in price that "our customers" would end up paying
What remains unclear, then, is to what degree the Baby Bells will pass along
the cuts in long-distance charges to their residential customers. Hundt's
plan is intended to avert that possibility, and certainly the FCC retains
enough regulatory authority to enforce the rules on the residential dial
tone. But the curious nature of the phone industry makes it easier to pass
along costs, particularly to residential customers, than in other businesses.
Since there's no real competition -- at least not yet -- for the actual provision
of the dial tone, the companies that control that dial tone have monopoly
power (which is why regulation makes so much sense). Until real competition
for the dial tone is a serious possibility, backing away from regulation
in the name of fostering better service and better price would be a recipe
From the perspective of AT&T, though, its willingness -- however forced
by circumstance -- to make an offer of this magnitude might be seen as a
welcome sign of life from a company that has, over the last year, appeared
to have lost its way. Considering that last year AT&T fired 60,000 workers
in an attempt to demonstrate its new competitive drive, the results have
been painfully paltry. The performance of LUCENT (NYSE: LU) to take
only one example, has made many investors wonder if AT&T's best elements
have been lost in its many spinoffs. The offer might be seen, then, as an
attempt to get back in the game, and to appear more active than reactive.
Still, it was clearly Hundt's pressure for change that provoked the long-distance
rate cuts. The FCC has turned in an inconsistent performance over the last
five years, and has missed crucial opportunities -- like the auction of digital
wavelengths -- to reinvigorate the idea of public regulation. At the same
time, both the FCC and the FTC have been more aggressive than many might
have expected in 1992. In doing so, they have illuminated the delicate balance
of market and government forces that continues to shape the national economy.