The Telecom Act, Five Years Later: Deregulation or Remonopolization?

On Feb. 8, 1996, President Clinton signed a sweeping revision of the laws governing telecommunications services—the first major overhaul since the early days of Franklin Roosevelt's administration. Now, five years later, it's time to assess it.

The most revolutionary change in the Telecommunications Act of 1996 came in Title I, which presented a way to provide broad competition by breaking down the barriers between local and long-distance telephone service—which, of course, also means Internet service.

After the consent decree of 1982 that broke up American Telephone & Telegraph Co., a monopoly that had been nurtured and protected by regulation for a century, seven Regional Bell Operating Companies (RBOCs) were created for local service in 1984 while AT&T was designated for long-distance. Soon, long-distance became fiercely competitive as MCI, Sprint and other companies drove down prices. The price of a call dropped from more than a dollar a minute to just a few pennies.

The focus of the Telecom Act of 1996 was to bring deregulation to the local level by holding out a deal to the RBOCs: If they sufficiently opened their exchanges to competitors, they would receive certification that would let them into long distance. The law specifically required the RBOCs to interconnect their facilities with competitors at "any technically feasible point and on just, reasonable, and non-discriminatory terms," to unbundled their services and make them available to competitors on similar terms, and, likewise, to provide for the resale of their services to competitors.

It was an excellent idea—a worthy compromise to produce true deregulation in telecommunications. But why not simply let the RBOCs into long distance immediately? Wouldn't that be a better way to deregulate?

Not at all, Congress and the president decided—and I agree. The problem was that the RBOCs owned the "last mile"—the wires that run from broader telecom networks into virtually every home and office in America. And the RBOCs came to own that last mile through government intervention and protection. The last mile, in effect, was a moat, keeping competitors out.

Yes, the moat could possibly be breached with new technologies like wireless or satellite, and coaxial cables, which carry TV signals, could be upgraded for telephone. But those technologies would take a long time to implement broadly. The only way to breach the moat was to drain it—to take the barrier away. That's what the Telecom Act tried to do, by offering the RBOCs a clear incentive—the ability to get into long-distance—in return for draining the moat.

But five years after the act became law, the moats are still there. In some ways, they are broader than ever.

First, in only two states—New York and Texas—have the RBOCs been certified for long distance. In the other 48, they have failed to open up sufficiently to competitors—not a great record.

Second, the RBOCs have grown more powerful. At the start there were seven of them, plus GTE, a regional company that, thanks to grandfathering, could offer both local and long-distance service. Today, through mergers, there are just four companies that handle 95 percent of the local monopoly telecom business: Verizon, SBC, Bell South and Qwest. It is highly unlikely that this "remonopolization" was what the framers of the Telecom Act of 1996 had in mind.

Third, the new companies that sprang up with the passage of the Telecom Act—companies called CLECs, or Competitive Local Exchange Carriers—are, in the words of an article in Fortune last November, "flaming out." Why? Most CLECs "blame the Bells for failing to open their networks to competitors."

In just three years, 144 CLECs went public, raising more than $25 billion. Tens of billions of dollars more were pumped into their networks. But now, the CLECs are dying. Major bankruptcies include NorthPoint, Digital Broadband Communications, ICG, Picus and GST. Other firms have been forced into mergers. Adelphia, Covad, Teligent, FairPoint and many others have cut back their expansion plans or services. Teligent cut personnel by 25 percent in November. Covad has announced two separate job cuts. Jato laid off 350 workers; ICG, 500. The devastation is broad and intense.

The result is that local telecom pricing remains high, and the promised rollout of broadband technology that would speed the Internet to homes and businesses hasn't materialized. Companies that were started to take advantage of a speedy Internet are going out of business.

Now, on the heels of these clear failures, the local telephone companies are proposing to remove the incentive to drain their moats—to promote the competition that is, as always, the only hope for lower prices and better quality. A bill in Congress with strong backing from the new chairman of the telecom subcommittee, Rep. Billy Tauzin, R-La., would allow the locals to get into the fast-growing data part of the long-distance business immediately—without meeting the certification requirements of the original act. So, the only incentive for opening the local switch would be a desire to get into the vicious free-for-all competition over voice long distance. Not much incentive.

The RBOCs and their political supporters say that all they want is "deregulation." But deregulation comes in many varieties. The Telecommunications Act of 1996 offered the most sensible idea, one that was endorsed by all the parties. Sloppy deregulation—of the sort embodied in the Tauzin-Dingell bill, H.R. 2420—is worse than no deregulation, as the citizens of California have learned in the electricity debacle they are now undergoing.

The Telecom Act is not producing the desired results, but that doesn't mean it should be changed. Instead, it should be reaffirmed. If the Bells think the law will be changed, they have no incentive at all to open their exchanges. Why make that sacrifice if you will be allowed in a few months to retain the advantages of local monopoly plus entry into long-distance data? Also, Congress should hold hearings to examine the demise and suffering of so many CLECs. If it is true that the Bells are killing them off by not allowing them access—as required by the act—then clearly the act needs toughening.

There is a paradox here: The best route to complete deregulation is through tough but fair enforcement—for a period of transition. The worst route is to gut the Telecom Act. If that happens, then five years from now we will still see the Bells (now, maybe down to just one or two companies instead of four) holding onto their local monopolies while dominating data as well. In a world like that—virtually without competition—Americans will be suffering from high prices and low quality. Don't let it happen.