[BETA] Fortnightly

IN RECENT YEARS, THE high demand for local exchange codes from incumbent local exchange carriers and new competitors has mandated scores of new area codes across the United States, created through processes that generate a high degree of local controversy. Yet even after the new area codes are created, the demand for exchange codes for local calling areas continues unabated, leading in some cases to the exhaustion of exchange codes within brand new area codes in as little as two to three years -- a period much shorter than their expected life. Federal rules, which bar so-called "service-specific overlays" and mandate 10-digit dialing in conjunction with overlays, leave states to confront a dwindling supply of exchange codes, with choices that appear limited and unpalatable.

This situation has laid bare the flaws of the existing on-demand method of allocating exchange codes. It points to the possibility of an even more dire problem: the eventual exhaustion of usable area codes in North America. The time has come to consider a market-based method to allocate exchange codes. Such an approach could postpone, or in many cases obviate, the need to create still more area codes -- protecting customers from what is, at best, a frustrating nuisance and averting what could be, at worst, a serious crisis for North American telecommunications.

Until recently, the true costs of the on-demand method of allocating local exchange codes were not apparent, even as national policy encouraged competition in telecommunications. Now, dozens of CLECs -- competitive local exchange carriers -- are registered to do business in many states.

Nevertheless, government policy cannot repeal a law as old as the dismal science. There is no free lunch; if something of value is taken for nothing, then someone, somewhere will eventually bear real costs. Under the existing on-demand method of allocation used around the country, these costs have remained hidden, as exchange codes have been parceled out by the hundreds without any mechanism for requiring LECs to ascertain any underlying need. Today, these costs have surfaced in the form of forced, region-wide changes to telephone numbers and dialing patterns. The number of area codes, relatively stable from the mid-1950s until the early 1990s, has escalated dramatically in the past four years. No one can possibly want to see this difficult process repeated unnecessarily.

Sound regulatory policy balances many goals. Customer choice is certainly important, but the needs of competitors cannot be allowed to trump those of the public. Also important, however, is a fair apportionment of costs and the avoidance of unnecessary confusion. Before more customers suffer from disruptive changes in numbers and dialing patterns, it is fair and reasonable to place more of the burden on industry participants to extend the usefulness of existing codes, especially in those regions that have already added new codes to help competitors enter the market.

A public policy aimed at fostering competition to drive down costs and encourage technology innovation has made new area codes necessary. To conserve area codes, policymakers should consider a market solution: Exchange codes should be offered for sale at their