Reform on Hold

Want Telecom Reform? Hang Up and Dial Again

People outside of Texas wonder how our state government functions with a Legislature that only convenes for four months every two years. (Jealous they might be, but curious nonetheless.) We would be in trouble if we actually had new Legislatures with new issues. Instead, we economize by repeating the same session, with the same intractable issues, again and again for a decade or so. By which time the Lege's poses are so well-practiced, and the public's senses so addled, that no one cares any longer how Problem X gets solved, as long as something appears on the Governor's desk that smells like a solution.

So it has become with telecommunications, poised to pain the ass of its third successive Legislature. For all the mind-numbing detail and rump-numbing debate that went into 1995's high-profile revamping of Texas telecom law -- known to all by its bill number, House Bill 2128 -- we still have a few teeny questions to resolve. Like whether local telephone service in Texas will ever be competitive. Or whether Southwestern Bell will ever enter other telecom markets, like long-distance service. Or whether the Internet will ever offer a solution to the problems created by 50 years of telecom monopolies. Or whether Texas' schools, universities, libraries, and hospitals will ever cruise tomorrow's Infobahn.

Minor details. With the camp followers of the Capitol galleries moving on to new cockfights -- such as property tax relief and electric utility deregulation -- the real and as-yet-unaddressed challenges of telecom reform will likely get ironed out in backstairs hearing rooms and the back pages of the papers. This has stopped neither Southwestern Bell nor its potential competitors from mounting the first Session Ads of the season, slick confections that no doubt left many Texas TV viewers in a puzzlement. Didn't we already do this? Don't we already have a level playing field for the information gladiators? And didn't the Feds do it all over again last year? What do these people want now?

As regards Topic A on the telecom agenda -- local-exchange competition -- the Federal Telecommunications Act of 1996 ("FTA96" for short) sorta mucked things up. The Federal Communications Commission -- charged with making the rules required by FTA96 -- envisions a local-exchange market that's a little too free for SBC Communications, its subsidiary Southwestern Bell Telephone (SWBT), and their many, many friends in the Texas Legislature and at the Texas Public Utility Commission. To wit: across America, the incumbent local-exchange carriers -- for most, one of the Baby Bells such as SBC -- own the actual wires, switches, and other physical plant that makes up the telephone network. Under the FCC's rules, the incumbents were required to sell access to their networks to potential competitors at a 25-35% discount off the retail rates we pay. This would speed up true local-exchange competition faster than if the non-Bells had to build their own networks, which might happen before Judgment Day, but not much before.

These FCC rules were intended to supersede state regulations that were uniformly kinder to the incumbents and especially to the Bells -- requiring them to offer smaller discounts to a much smaller set of potential competitors. In one state, the Baby Bell is only required to provide a 5% discount, and state rules make it nearly impossible for potential competitors to qualify even for that token break -- most new entrants have to build new physical plant serving at least 60% of their calling area. Guess which state that would be. Now guess how many lobbyists Southwestern Bell sends this-a-way every two years, in order to keep that deal in place. (To be fair, this isn't the sweetest deal delivered to an incumbent. Connecticut regulators are allowing their local monopoly telco to charge resellers 60% more than its retail rates.)

The Defense of Southwestern Bell Act, aka HB2128, would be irrelevant at this point were the FCC rules not stuck in legal limbo, somewhere between Not Happening and Ain't Gonna Happen. You can thank the Eighth Circuit Court of Appeals in Kansas City, acting on the behest of Denver-based US West, one of SBC's sister Bells. US West's complaint was that, given the vast distances and low profit margins of its territory in the Intermountain West, a 25% discount was tantamount to giving its wares away. Some incumbents extend this reasoning to claim that FTA96-mandated discounts are a "taking," a la property rights. To date, the U.S. Supreme Court has shown little interest in taking this issue on, though the FCC is pressing the legal challenge, (including a rehearing in a different appellate court next month), and the Commission is back at the rulemaking drawing board.

So, for now and perhaps forever, HB2128's gently whispered incentives for competition will reign over the Texas plains. Even if the FCC comes up with new rules that pass judicial muster, Texas has filed several pre-emptive petitions before the Commission to allow HB2128 rules to remain in place -- specifically the restrictions on who can enter the local market as a pure reseller of phone service, rather than a provider via its own network.

However, since the FCC's pry-bar strategy has its fans -- notably folks like AT&T and Sprint, along with some heretics among the Bells -- the Lege is not free of pressure to bring HB2128 a little more in line with the Feds' perceived mandate. Hence the slick anti-SWBT ads. Despite the big names involved, their effort is a cheap carnival ride compared to Bell's lobbying juggernaut. But "competition" is a holy word in mainstream econo-politics, and Texas is nothing if not mainstream.

In fact, even Southwestern Bell wants to see the Lege act in favor of competition -- that is, in Southwestern Bell's favor. Just as the Baby Bells, as a whole, bought off the states to protect the local exchange market, AT&T and its fellow long-distance carriers dispensed their blandishments in Congress to make their core market tighter than wet blue jeans. Now, Southwestern Bell, like all the Bells, wants to horn in on the long-distance market, specifically what's known as "interLATA" service -- that is, long-distance within Texas, where SWBT already has a network. (A LATA -- Local Access and Transport Area -- is the region within which your calls are handled by local carriers, even when you're calling outside your local exchange. Intra-LATA long-distance, such as from here to Georgetown, is notoriously overpriced in Texas, but don't bet on that changing real soon.)

Under FTA96, the Bells can, by 1999, enter the interLATA and interstate markets if their local markets are sufficiently competitive, according to a 14-point checklist in the Federal law. (This was actually seen as a victory for the Baby Bells, courtesy of the GOP -- the original, Democratic telecom bill required the Bells to wait until their competitors had their own physical networks.) Which brings us back to the Lege and the Public Utility Commission, who have de jure power over some of the 14 criteria, and de facto power, in the absence of FCC rules, over the others. The challenge facing SWBT is to convince lawmakers and regulators to help them enter long distance without goring their local-exchange cash cow. The opposite challenge faces AT&T et al. (In Congress, the Bells threw their lot behind the Republicans to the tune of about $2.3 million in campaign contributions, while the long-distance carriers backed Democrats with like sums. In Texas, SBC went dancing with Reps and Dems alike.)

In another muddled irony of telecom reform, Southwestern Bell's cause may be furthered by another provision of FTA96. To secure the votes of reps from states like North Dakota and Alaska, the act exempts telephone companies serving fewer than 2% of the national market from the local-access provisions (whatever form they eventually take) that the Bells are fighting in court. The idea is that mom-and-pop telcos and rural telephone cooperatives, of which there are several dozen in Texas, could thus keep the Baby Bells from crashing their party lines. However, the 2% standard is liberal enough to remove some fairly large chunks of the country, like the entire state of Connecticut and most of Pennsylvania outside its two major cities, from the competitive table.

The 2% rule also exempts the 7% of the Texas local-exchange market that isn't served by either Southwestern Bell or GTE. This includes both remote West Texas counties with telephone co-ops, and major metro areas served by companies like Alltel, whose rapacity makes Fort Bend County residents crave competition from any source, even Bell. And, with chutzpah to spare, GTE -- which, with its nationwide reach, serves more customers than any Baby Bell -- is arguing before the FCC that, since it doesn't control more than 2% of the market in each LATA, it too deserves exemption. So, the thinking goes, if everyone but Bell is free to monopolize the local market, pressure for Bell to loosen up its monopolies will naturally decline.

These conflicts between the Bells (and their friends in the state capitals) and the long-distance carriers (and their friends in D.C.) are kindergarten spats compared to the emerging brouhaha over universal service, specifically how it's going to be paid for in a free telecom market. Right now, the guarantee that anyone, anywhere, can have access to the telephone network -- supported by not only FTA96 and HB2128 but also by local franchise agreements -- is underwritten by an elaborate network of subsidies and artificial pricing structures, such as the markup on business phone lines and the unnaturally high cost of intra-LATA long distance.

Mostly, though, universal service is supported by "access charges" paid by long-distance carriers to local exchange operators for use of their networks -- about $30 billion annually nationwide. Naturally, AT&T and its brothers would like these fees abolished, while Southwestern Bell and its sisters would like them to remain intact, especially when they enter the long-distance market themselves and can thus undercut AT&T on price. The access-charge system is probably headed to the boneyard, but what will replace it is still a mystery, not addressed in detail in either HB2128 or FTA96. Given the lack of a compelling Federal mandate, the Lege and PUC are likely to fight to keep this issue to themselves (10 states already have challenged FCC authority in this realm), and given that Texas has plenty of remote places and poor people to drive up the cost of universal service, Southwestern Bell will likely be able to play them like violins.

When the access-charge system was spawned with the AT&T breakup in 1983, the FCC exempted "enhanced service providers" -- usually traffickers in digital data, such as today's Internet service providers (ISPs) -- from having to pony up to subsidize universal service, so that high fees wouldn't kill off high tech. Now, everyone and their lobbyist is cruising cyberspace, via their local phone networks, without paying what the local-exchange carriers claim is their fair share, not just into the universal-service kitty but for the actual traffic they create. (The typical voice call, or at least the baseline upon which most phone networks are engineered, lasts three minutes. The typical dial-up Internet connection lasts 20 minutes, and surely you know folks who go online for much longer. This ties up phone lines and makes Bell engineers very unhappy.)

The ISPs counter that lifting the enhanced-service exemption would put them in the same boat as the long-distance carriers, paying inflated access charges to the likes of Southwestern Bell -- which, you likely know, is rolling out its own Internet package. Furthering their ire is the philosophical contention, common among Internet partisans, that the Net, far from being another option for Bell to plug in the front of the phone book, actually provides an alternative model for how the telecom environment should be organized -- decentralized, based on open systems and eliminating the need for direct hard-wired connections between Hither and Yon -- and that if anything, Bell et al. should be paying for, instead of getting a kickback from, the development of Internet services. This is another issue that got glossed over in both HB2128 and FTA96, and Texas lawmakers and regulators are already weighing options for special higher-than-now Internet rates.

Actually, the ISPs would be in a world of hurt right now if one of the original public-good proposals for Texas telecom reform -- the inclusion of Internet access as part of the universal service guarantee -- had made it into HB2128, thus giving Southwestern Bell all the excuse it needed to jack up rates on providers other than itself. Instead, lawmakers, with admirable intent, adopted a raft of provisions to guarantee that public institutions (schools, libraries, colleges and universities, hospitals, etc.) could be the gateway to universal Net access for the citizenry. (Admirable, that is, compared to Congress, which parroted the Clinton/Gore goals for such access without providing any mechanism for making it happen.)

The biggest bit of Legislative largesse was the creation of the Texas Telecommunications Infrastructure Fund (TIF), a 10-year, $1.5 billion money bucket filled through assessments (i.e., taxes) on both local phone companies and mobile-communications providers (cell phones, pagers, and the like). The TIF is supposed to pay, through grants, for schools, colleges and universities, libraries and hospitals to get connected -- or get better-connected, since the Lege has provided elsewhere for their basic Internet service -- and, more importantly, provide the services (like distance learning and telemedicine) touted by the Ghost of Information Future.

The TIF dove into trouble almost immediately and has remained parked there throughout the interim between legislative sessions. For reasons that now seem obscure, the Lege set up two separate funds, one specifically for schools and funded by the local telcos, one for everyone else funded by the mobile-comm providers, both set up to receive $75 million a year from their sugar daddies. Since the mobile-comm market is much smaller than the local phone market, this translated to a higher tax on them; they were in court before the ink dried and left court happy. So the Lege now has to fix this snag.

A more serious problem, in the estimation of many TIF stakeholders, lies with the agency created to administer the fund. While the nine board members (three each appointed by Messrs. Bush, Bullock, and Laney) have not pissed any more people off than any other state board, their executive director, Arnie Viramontes, has turned the TIF into a joke -- or worse -- in the eyes of the institutions it's supposed to protect and serve. A former middle manager at Ysleta ISD in El Paso, Viramontes was widely expected to find himself in way over his head, and he has not failed to disappoint.

Part of Arnie's trouble stems from different conceptions of how the TIF is supposed to work -- does it support the current (and badly underfunded) efforts of institutions in the field, or does it dictate what local institutions should do via its own plans? Viramontes has, in a manner described by one observer as "both maniacal and stupid," chosen the latter course, much to his peril -- especially since his top-down plans make a lot of current projects, involving collaboration between schools, libraries, et al. ineligible for TIF funding. Among Arnie's new enemies is former lieutenant governor and political demigod Bill Hobby, currently serving as the University of Houston's dollar-a-year chancellor, who fired off a cutting letter to not only the TIF board but also to various powers-that-is in the Legislature. So Arnie is now being watched, and while the board may end up merely cutting its losses and canning Viramontes, the philosophical and structural confusions of the TIF will likely not escape Legislative attention.

Such a bustle of activity here in Capitol Candy Land on an issue everyone thought was solved! Indeed, count on telecommunications to end up on the short list (next to school funding) of chronic Legislative bellyaches, to be tweaked and teased from now until the end of time, at precise two-year intervals. Eventually, we will either get the telecom reform we needed, and were promised, over the last two years, or we will no longer give a damn, and nothing will change. Those who would rather follow the first course are urged to tell their reps that, where telecom is concerned, they need to hang up and dial again.

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