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The fourth anniversary of the Telecommunications Act of 1996 most likely will be celebrated with more groans than cheers. The law set out to create "a pro-competitive, deregulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information services to all Americans by opening all telecommunications markets to competition,"[Fn.1] but that objective has not been fulfilled.
In some markets, competition appears to be vanishing rather than flourishing. Some now voice more concerns over the rollout of new, advanced technologies.
Even a cursory look at markets reveals one abject certainty - intelligent individuals in the telecommunications industry view regulatory change not only as a constraint, but as an opportunity. Firms both new and old have seized strategic advantages, often with outcomes far removed from the stated intentions of Congress. These unintended consequences warrant careful study by any policymaker now wrestling with the fallout from the 1996 Act.
The Cream Skimmers
A fundamental tenet of the Telecommunications Act lies in a simple quid pro quo. The regional Bell operating companies, or RBOCs, must first open their local calling markets; that condition lets them gain entry in the coveted long-distance service, or interLATA, market. (That term denotes traffic between more than one "local access transport area.") Only recently was one RBOC, Bell Atlantic, given permission to enter the in-region interLATA long-distance market, and only in New York state.
How are local markets opened? Section 271 of the Act defines the two paths through which the RBOCs may seek interLATA relief. "Track A" requires that local competition exist; namely, new market entrants must be providing local "exchange service ¼ to residential and business subscribers. ¼"[Fn.2] This language puts the control of RBOC entry under Track A largely into the hands of new market entrants and encourages "cream skimming." A new local competitor, especially one that already operates as an interexchange carrier, or IXC, may not want to see any RBOCs enter the long-distance market. This would-be entrant can stymie the competition that might satisfy the Track A provisions of Section 271 simply by avoiding the residential market. That IXC entrants can foreclose Track A has left the RBOCs dependent on "Track B," with its exacting 14-point checklist.
In effect, the Act rewards IXCs who enter the local market only to target the big-ticket business customers. The result is cream skimming. By including language that ostensibly encouraged competition in all market segments, Congress ended up shooting competition in the foot.
The Traffic-Sucking Blob
The Act also requires any competing local exchange carriers to compensate one another for the transport and termination of traffic. For example, the RBOCs and the other incumbent carriers (together known as ILECs) must pay any new competitors (CLECs) for each minute of duration for a terminating call. This arrangement, though seemingly innocuous, has led to unintended consequences.
Some CLECs recognized that this compensation requirement could work a windfall for them if they could attract a disproportionate amount of off-network traffic. Dial-up Internet service providers (ISPs) were ideal customers