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Fortnightly Magazine - October 15 1996

In August, the Federal Communications Commission (FCC) issued rules to show how new competitors can enter the local markets for telecommunications (em forever relegating local telephone monopolies to that switchboard in the sky. But, as the FCC translates the Telecommunications Act of 1996 into agency regulations, the handwriting is already on the wall: Converting the old monopoly to a competitive system won't be easy.

FCC chairman Reed Hundt has said that his agency will take few other actions in which mistakes could prove so costly, as with the new rules for local telephone competition.

Moving toward competition continues to be the right course. Yet major decisions often deal only with the economic theory of competition (em not the realities of local economies. Telecommunications services can exert an enormous impact on small businesses and rural areas. When regulators make decisions that will affect an MCI, a Bell Atlantic, or a TCI, they should also consider the economic impacts on a Fresno, a Peoria, or a Lonesome Gulch.

The California Public Utilities Commission (CPUC), for example, recently proposed a program to transfer the once-subsidized "universal service" program to a newly competitive market in a way that will inappropriately focus on the race to compete (em rather than assuring adequate conditions for competitive entry. That program (CPUC Decision 95-07-050, July 19, 1995) was reviewed in August 1996 by an administrative law judge. The judge issued an initial decision that was slated to come before the CPUC once more for final review, perhaps sometime this month. (See, Rulemaking on Universal Service, R.95-01-020, Investigation into Universal Service, I.95-01-021, Aug. 5, 1996.)

Glaring Misjudgments

For decades, universal service has guaranteed basic telephone service for all customers. In a newly competitive environment, this guarantee should serve as a floor for new competitors (em the obligation from which competition begins. The price tag for this subsidized guarantee of telecommunications service has not come cheap. (In California, the tab has reached $1 billion.) But this "cost" has reaped economic benefits. By diminishing the size of the universal service fund in a competitive environment, the CPUC's proposal shifted the focus to the new competitors and their economic needs, giving short shrift to economic impacts in affected communities.

In this case, the CPUC's original proposal made two glaring misjudgments.

First, the proposal did not move the financing of universal service toward the historic cost of service. By proposing a dramatically lower funding level than what existing providers say it now costs, the CPUC threatened smaller, less urban communities that had benefited from access to telecommunications services. If we are to believe Pacific Bell (em the largest local monopoly provider in California subsidizing universal service through other services (em the CPUC's original plan would have only shifted less than 20 percent of the subsidies needed to support the program.

Second, by proposing that a surcharge for universal service should be listed explicitly on customer bills for the first time (rather than through competitor transactions), the CPUC created a political issue. Even with its low proposed

surcharge of 1.24 percent on local toll service, the