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 CPUC action was received as a new tax for a new service. The media coverage of the CPUC plan neglected the importance of maintaining universal service in a competitive environment. Instead, reporters produced headlines about a pending new customer surcharge.

Misplaced Focus

Not surprisingly, the battle over the size of the fund pitted existing local exchange carriers against the new competitive rivals for local service. The incumbent local carriers drew criticism for wanting too much reimbursement from the fund because they would benefit if no other providers invested in remote areas. And, predictably, the new competitors were criticized for not wanting to contribute enough, because it would add an extra cost to their new competitive strategies.

But these differences again focused attention only on the players (em not on the fact that universal service already exists and anything less than moving its financing toward its real cost will cripple the economic opportunities of real people in real communities.

Basic telephone service isn't all that's at stake in trying to assure adequate funding for universal service. Important opportunities from new information technologies will come eventually to schools, libraries, and health facilities in more remote areas, but only when the new telecommunications competitors seek investment in these seemingly less profitable areas. If it should fund universal service inadequately, the CPUC would provide few incentives for new telecommunications providers to compete and build in many parts of California. This lack of incentives would create redlined areas in which the economy could suffer for want of new services.

Economic indicators continue to demonstrate that small business growth in California will drive the state's overall economy. The greatest employment in the state can still be found among small businesses with fewer than 20 employees. But this growth can continue only if we create an Information Age that remains available to, and can be used by, all California (em not just those customers in profitable areas where new competitors see a quick return for little investment.

It's ironic that a commission should seek to implement a new competitive structure for local telecommunications by scrimping on a program that would enhance the competitiveness of the state's greatest economic base (em small business. Scrimping on universal service in the short term will block the long-term benefits for those areas that most need a state-of-the-art telecommunications infrastructure. And since greater competition is supposed to improve our choices and economies, this short-sighted view could set a bad precedent for future transfers of monopoly programs to more competitive markets.

In 1993, then-CPUC president Daniel Fessler wrote to Gov. Wilson about the importance of California's future infrastructure in telecommunications: "The benefits are clear, establishing advantage for California in an increasingly competitive global marketplace; generating new, higher-paying jobs for the state's citizens as California expands its role as the next century's center of technological innovation; and, of critical importance, delivering the promise of the Information Age to all Californians."

Three years later, these goals remain just as valid, and the future just as promising.

But if we are to truly move from a subsidized network to a competitive network, regulators must not be cowed by veiled threats aimed at revealing costs of subsidized services. Rather, they should take the initiative to educate the public and policymakers to the necessities of programs like universal service, which give so much back to the state's communities.

The commissioners will review and make changes to the proposal, and may have completed their work as you read this column. Hopefully, their review will have better reflected the true costs of guaranteeing access to new telecommunications services. If that day comes, Californians can take pride that their universal service program exemplifies a competitive system that doesn't just involve the economies of large customers and telecommunications giants, but also the real economies of our local communities. t

Stan Hulett is chair of Californians for Advanced and Affordable Communications (CAAT), which appeared in the CPUC's universal service docket on behalf of small businesses and rural communities. A former commissioner at the CPUC (1986-90; president 1987-88), Hulett is also vice president of New Energy Ventures, Inc., an aggregator and buyer's agent, which recently closed a deal to purchase 400 megawatts from the Bonneville Power Administration.

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