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 true market value, rather than simply given away.
Sold to the Highest Bidder
The business strategies of CLECs vary. It is by no means the intention of each registered CLEC to offer service in every locality in the states in which it operates. However, plain arithmetic illustrates that to do so could require scores of additional area codes. This calculation is based on some plain realities: the number of exchanges available in an area code (about 800); the number of local calling areas in a state; and the number of registered CLECs. If, hypothetically, 40 CLECs were to seek to provide statewide service in a state that is divided into 100 local calling areas, it would require 4,000 exchanges -- the capacity of five area codes -- just to serve the needs of new CLECs. In fact, many states have well more than 40 registered CLECs. Some states have many more than 100 local calling areas. Historically, these calling areas were tied to neighborhoods served by mechanical switches. Often, these exchanges have not been consolidated, even as switching technology has been updated.
Under a market approach, state regulators need not become directly involved in setting the value of exchange codes. Instead, they would only set the schedule by which new exchange codes are to be released, keeping in mind the likely period of time within which new solutions -- e.g., number portability and number pooling, which are expected to alleviate much of the pressure on this situation -- will become available. The Number Administrator for the state would assign newly released exchange codes on the basis of an auction that would be strictly impartial and non-discriminatory, in compliance with the key requirements set forth in Section 251.e.2 of the federal Telecommunications Act of 1996.
Central to this approach is the notion that the winning bidder would gain, not only the use of the exchange code, but a transferrable property right to it. Because customers will gain rights to their 10-digit numbers under the number portability provisions of the Telecom Act, these exchange code rights necessarily would expire upon implementation. Moreover, holders of existing, previously assigned exchange codes also must be vested with similar, transferrable, and eventually expiring, rights to them.
By determining and clearly signaling only the time frame by which new codes will be released, state utility commissions could stimulate an orderly market among all LECs in a given area for both new and existing exchange codes, and ensure that the lives of the existing area codes are extended for a considerable period -- if not, in theory, indefinitely.
This auction approach would work by encouraging efficient market exits, providing attractive compensation for less viable competitors who make a well-timed decision to yield up their exchange codes. Whenever an exchange code "jeopardy" situation looms, bids will rise. Competitors with few customers will exit or combine with others and sell rights to exchange codes to those who have a greater need for them. This system would re-establish equilibrium, relax the "jeopardy" situation, extend the life of existing area codes, and reduce the market value of existing and newly assigned exchange codes to prevent windfalls. It also would compound the incentive to implement number portability and perfect a number pooling system, allowing the release of 10-digit numbers in blocks of 1,000 rather than 10,000 and, most likely, indefinitely postponing the need for new area codes.
Too Many CLECs?
Critics are certain to charge that this proposal favors incumbent LECs. Clearly, regulators must at least observe the results of bidding and take steps to guard against abuse, such as any effort to "corner the market" on exchange codes. Such behavior plainly would violate antitrust law. It would more likely occur in states or regions that have not created new area codes recently, particularly since enactment of the Act. Where new codes have been implemented and the provisions of the Act observed, the share of the "market" for local exchange codes held by incumbents already has been diluted significantly.
More broadly, such criticisms do not hold up. Efficient competition should not require the public to subsidize unlimited market entry. Considering all the constraining factors that operate today, -- limited exchange and area codes, plus the incalculable expense of retooling the basic 10-digit dialing system -- there can be no such thing as too many CLECs. The optimum level of competition in local exchange service -- at least given today's technology -- may require more limited entry than is the case in industries that do not suffer from similar constraints.
This simple description of a possible approach to the problem of area code conservation does not address all of the complex issues that are likely to arise in its implementation. Consider just four issues. First, some customers' numbers may need to be withdrawn so that underutilized exchanges can be reassigned; the scope of these customers' rights must be re-established. Second, steps must be taken to prevent excessive concentration of exchange code ownership. Third, an appropriate plan must be devised for the use of auction proceeds. Fourth, suitable incentives must be developed for ILECs to consolidate local calling areas so that the sheer number of areas does not limit the availability of new services or give rise to an insurmountable barrier to entry or market participation by CLECs.
It is well worth the effort to identify and address these and other concerns and to weigh the difficulty of resolving them against the difficulties associated with more conventional methods to augment the stock of exchange codes.
John Howe, a vice president with American Superconductor Corp., was chairman of the Massachusetts Department of Public Utilities from 1995 to 1997.
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