From: frankp@galena.bellcore.com (Frank Perez)
Subject: Free Market Telecommunications Industry
Organization: Bellcore, Livingston, NJ
Date:  7 Jan 93 19:43:57 GMT
Summary: Free Market Telecommunications Industry
Keywords: Free Market Telecommunications Telephony



Dear Objectivists:

Below is an article I have written "The Case for a Completely Deregulated Free
Market Telecommunications Industry." I have included quotes from Ayn Rand. It
is NOT a complete philosophical paper, but I thought I'd offer it to 
Objectivists to see what there comments are.

Sincerely yours,

Franklin Perez

-------------------------------------------------------------------------------





          Date:     March 5, 1992                     From:  Franklin Perez

          Subject:  The Case for a Completely
                    Deregulated Free Market
                    Telecommunications Industry



          1.  Introduction

          "There is no general theory of public utility regulation. What
          often passes for theory is a reconstruction of historical events
          woven into a pattern of generalization to meet contemporary
          issues. Thus, while the thesis that `Regulation is the law's
          substitute for competition' is the legend on the wall of the
          Michigan Public Service Commission's hearing room,1 there is
          scant evidence that those who invoke the slogan have examined the
          differential impact of market competition and regulated monopoly
          on price, market development, and innovation. While market
          competition provides consumers no perfect guarantee of price
          benefits or rapid technical and operating innovation, it creates
          a readier climate for such developments than does regulated
          [government-enforced] monopoly. The available historical evidence
          indicates that, at least in the communications industry,
          regulation has served to stabilize price and earnings of the
          carriers, has inhibited innovation in rate structures, and has
          protected the carriers from the competitive inroads of private
          manufactures and suppliers."2

          Many individuals supporting the public utility paradigm for
          telecommunications do so on the basis that if telecommunications
          were left to be at the whims of the free market system, the
          natural monopoly nature of telecommunications would manifest
          itself, leaving one private monopoly firm to occupy the field.  I
          will demonstrate in this paper that (a) telecommunications is not


          __________

           1. Richard Gabel, "The Early Competitive Era in Telephone
              Communication, 1893-1920," Law and Contemporary Problems 34
              (Spring 1969): 340. "AT&T, Profit, Performance and Progress,
              A study of Regulated and Nonregulated Industry for Bell
              System Use 64 (1952)."

           2. Ibid.: 340.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 2 -



          a natural monopoly and (b) the best environment for
          telecommunications is the free enterprise system as follows:

            1.  The section, "Survey of the Competitive Era: 1893 - 1920,"
                gives a brief history of the competitive era in telephony
                from 1893 - 1920. This section sheds light on the charge
                that "competition in communications led to inefficiency,
                poorer quality, and higher cost in telephony...."3 It
                indicates basically that the net effects of telephone
                competition were favorable.

            2.  The section, "Debunking the Natural Monopoly Theory," will
                demonstrate that, at least in the United States, the
                eventual formation of mainly one firm providing all the
                telecommunications was not the result of the natural
                monopoly nature of telecommunications in a free market, but
                more than likely was due to governmental interferences such
                as the issuance of exclusive franchises in many key high-
                volume major cities.

            3.  The section, "Effects of the Public Utility Paradigm in
                Telecommunications," basically states that public
                regulation of privately-owned government-enforced telephone
                franchises is bad.

            4.  The section, "Free Market Telecommunications Environment,"
                describes the benefits of a free market telecommunications
                environment. It goes into the effects that it has had on
                those parts of the telecommunications industry that have
                undergone deregulation, the effects of having a competitive
                environment in the local loop, and the net effects of
                having a completely deregulated telecommunications
                industry.


          2.  Survey of the Competitive Era : 1893 - 1920

          "The independent telephone industry began in 1893 with the
          expiration of the Bell System patents on the telephone handset.
          From its inception until about 1913 there was limited
          interconnection between the independent and the Bell exchanges.
          Refusal to interconnect was, of course, a tool employed in the
          competitive battle for domination of the industry.


          __________

           3. Ibid.: 341.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 3 -



          Interconnection refusal was not limited to the strictly
          duplicating situations, but was also extended to service areas
          where Bell had never chosen to provide telephone service.  When
          competition took the form of overlapping exchanges of rival
          companies,4 the impact on plant requirements was apparent. A
          subscriber desiring telephone service with access to all users
          was required to obtain two separate telephone instruments; a
          separate subscriber loop had to be furnished from each telephone
          instrument to a central office, necessitating separate central
          office lines both served by switchboard operators.5 There clearly
          must have been some duplication of facilities and investment
          under this arrangement. However, the degree of `inefficiency' and
          `higher cost' has never been demonstrated, and perhaps it is not
          determinable."6

          It is interesting to note which would be cheaper - (a)
          subscribing to two telephone companies in a competitive telephone
          environment or (b) being forced to subscribe to a government-
          enforced monopolistic franchised telephone company if one wants
          telephone service. It turns out that it is actually possible to
          have telephone service cheaper in case (a). In fact, according to
          a 1909 AT&T annual report, in 1894 at the beginning of telephonic
          competition, the Bell System was charging an annual average of
          $65.00 to residential customers connected to AT&T exchanges that
          were facing competition,7 while in 1909, when telephonic
          competition was really under way, the Bell System was charging an
          annual average of $22.80 to residential customers connected to
          those same exchanges,8 and the independents were charging an
          annual average of $23.25 to those same residential customers.9


          __________

           4. Ibid.: 341. "In 1907, overlapping territory was estimated at
              20%, but this was only about one-third of all exchanges. G.
              Johnston, Some Comments on the 1907 Annual Report of AT&T
              (Int'l Independent Tel. Ass'n, Sept. 1908)."

           5. Ibid.: 341. "The duplication of subscriber directory services
              must have been a source of annoyance to business customers."

           6. Ibid.: 341-342.

           7. Ibid.: 346.

           8. Ibid.

           9. Ibid.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 4 -



          Notice then that in 1907, a residential customer could subscribe
          to the Bell and independent telephone companies for a total
          annual charge of $46.05, a lot cheaper than the annual charge of
          $65.00 in 1894, when telephonic competition was just beginning
          and the Bell System had almost all the telephone market.

          "Early Bell System telephone development [during its patent
          monopoly] took place at the business core of large urban
          communities.10 Since territorial extension by the competing
          independents was for the most part to contiguous rather then
          overlapping geographic areas,11 the provision of distribution
          plant must have been more often complementary than duplicative.
          For the small central offices in use at the time there were no
          significant differences in cost per line for separate as against
          combined switching facilities, and, in the absence of
          interconnection, this could not have materially affected total
          investment.12 Dual services, in the absence of interconnection of
          the rival companies at the central offices, necessarily required
          dual telephone instruments, but the instrument and its associated
          wiring probably made up less than ten per cent of the average
          investment per station.13 Any rigorous examination of the effect
          of competition on communication costs would require knowledge of
          the capacity and rate of utilization of facilities prior to and
          subsequent to the inroads made by the independents."14




          __________

          10. Ibid.: 342. "1910 AT&T Ann. Rep. 23-24."

          11. Ibid.: 341. "In 1907, overlapping territory was estimated at
              20%, but this was only about one-third of all exchanges. G.
              Johnston, Some Comments on the 1907 Annual Report of AT&T
              (Int'l Independent Tel. Ass'n, Sept. 1908)."

          12. Ibid.: 342. "In 1902 the average switchboard served 225
              lines.  Bureau of the Census, Special Reports - Telephones
              and Telegraphs, table 37, at 33 (1902)."

          13. Ibid.: 342. "Investment per station at the turn of the
              century was about $200. 1911 AT&T Ann. Rep. 17. This source
              shows the average plant cost per exchange station from 1895
              to 1911. The concurrent investment in station equipment is
              estimated at about $20 per station."

          14. Ibid.: 342.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 5 -



          "A characteristic of telephone service is that it must be planned
          for and constructed in anticipation of future demand. A common
          lament of the Bell System at the time (reflected in reports to
          shareholders) was that its own facilities were continually
          inadequate to meet market demand or were not physically located
          where demand had developed.15 It can be conjectured that where
          independents did make inroads into Bell territory and literal
          duplication of service areas occurred, it was largely due to
          either the unavailability of Bell plant or the promotional
          efforts and attractive pricing offered by independent operating
          companies."16

          "In evaluating the [common] charge that telephone competition
          engendered inefficiency, poorer quality, and higher costs,
          several considerations must be borne in mind. All competition
          involves some redundancy of plant facilities and work effort. The
          question is whether the pressure of competing market forces
          produces a better or cheaper product than a single supply
          service. The evidence is clear that under a regime of monopoly
          supply, during the period 1879-93, the system was stagnant. The
          competitive period following expiration of the Bell patents in
          1893-94 resulted in the most rapid rate of growth of service in
          the history of the industry as well as in a substantial reduction
          in rates for business and residential telephone service. This
          comparison alone does not satisfactorily or completely answer the
          question whether competition was inefficient and costly.  Yet
          with respect to the duplication argument for inefficiency we see
          evidence of plant redundancy within the Bell System itself -
          duplication and triplication of exchange cable facilities,
          establishment of second and third wire centers within a few years
          of opening an initial office. Of course, this evidence may merely
          attest to the lack of omniscience of a highly centralized,
          carefully planned telephone organization. But just as Bell
          spokesman would argue that a second cable on the pole line does
          not represent inefficiency or high cost, the independents could
          insist, during the competitive era, that in a period of extremely
          rapid growth (created by their existence) all facilities were
          efficient, necessary, and provided at reasonable cost."17



          __________

          15. Ibid.: 342. "1900-07 AT&T Ann. Reps."

          16. Ibid.: 342.

          17. Ibid.: 342-343.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 6 -



          "The infusion of competition did force a substantial disruption
          of the operations of the Bell System. Profitability, rate levels
          and structure, and the whole innovative process were markedly
          affected by the coming of competition. The Bell System did not
          take this assault lightly. It changed tactics and practices and
          ultimately appealed for state intervention - the regulatory
          process - to stabilize and normalize competitive forces."18


          3.  Debunking the Natural Monopoly Theory

          3.1  Customers Will Eventually Subscribe to the Larger Telephone
               Network

          It has often been asserted that telephone service is a natural
          monopoly, and thus that it should be regulated since telephonic
          competition eventually leads to one telephone company controlling
          the market. One argument goes as follows: "In the early years of
          telephony, many cities had more than one telephone company....
          Wherever that happened, it created a bothersome and unstable
          situation. Frequently, the person one sought to phone was served
          by the other company. Business offices and heavy phone users had
          to have two telephones.  Generally, the greatest value from
          having a phone was obtained by subscribing to the larger of the
          two systems, for in that way one could reach more people.  As a
          result, whenever one company became much larger than another, the
          swing to the bigger system would accelerate, and soon the smaller
          company would have to throw in the sponge. The only way for some
          companies to keep going for a while was to cut rates, but in the
          end this meant that they did not have the capital for expansion.
          At least within single communities the phone system was a natural
          monopoly."19

          The assertion that individuals will automatically swing to the
          larger system is disputed by Kenneth Lipartito (with respect to
          the long-distance toll network (Bell System) being the larger
          network): "Though not totally false, this interpretation misses
          many crucial aspects of the story. Competition had demonstrated
          that telephone service was not a natural monopoly. It had neither
          the declining long-run average costs nor the fixed capital


          __________

          18. Ibid.: 343.

          19. Ithiel de Sola Pool, Technologies of Freedom (London: The
              Belknap Press of Harvard University Press, 1983), p. 102.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 7 -



          investment that restricted entry.... A small-scale telephone
          independent with a relatively modest initial outlay could offer
          rudimentary but profitable service in even poor regions like the
          South.20 Though Bell, with its more extensive system, could
          provide a level and quality of service that small-scale
          competitors could not match, that service was also more costly
          than independent alternatives. In places like the South, where
          demand for high-quality long-distance service was moderate,
          Bell's superior quality service was not a decisive factor in
          competition. Finding numerous customers who preferred their
          cheaper alternatives, independents flourished even while Bell
          built its integrated local and long-distance system. In the
          Midwest, competitors even began to make inroads in the long-
          distance market, suggesting that AT&T might not remain dominant
          even here.21 "22

          The assertion that at "least within single communities the phone
          system was a natural monopoly" can also be disputed. According to
          the natural monopoly theory, two different telephone companies
          serving the same geographical area eventually leads to one
          company overtaking the other. What this theory ignores is that
          each telephone company can serve a market niche based on class of
          individuals that the other does not provide. In fact a "curious
          and intriguing feature of the era of telephone competition is
          that in the older cities where it occurred, there was a tendency
          for the sides to be drawn along class lines. The two competing


          __________

          20. Kenneth Lipartito, The Bell System and Regional Business: The
              Telephone in the South, 1877-1920 (Baltimore: Johns Hopkins
              University, 1989), p. 250. "For information on the economics
              of the telephone industry, see Robert Bornholz and David
              Evans, `The Early History of Competition in the Telephone
              Industry,' in David Evans, ed., Breaking Up Bell: Essays on
              Industrial Organization and Regulation (New York, 1983),
              7-40."

          21. Ibid., p. 250. "Bornholz and Evans, `The Early History,'
              12-15. McMeal, The Story of Independent Telephony, 81-84. As
              shown in chap. 5, the Interstate Telephone Company in North
              Carolina successfully fended off Bell incursions in this way.
              In the Midwest, associations of independent firms, as well as
              several larger companies, built similarly successful regional
              networks."

          22. Ibid., p. 115.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 8 -



          systems not being interconnected, it was possible to talk only to
          those on the same system; naturally, one wanted to be able to
          talk to one's friends, and perhaps those one would like to be
          able to claim as friends. In Minneapolis, for example - according
          to the recollection of a survivor of the competitive era there -
          the Bell exchange, being the longer-established, was the exchange
          of the socially elite [i.e., the wealthy], while the competing
          Tri-State Telephone Company was for just about everybody else
          [i.e., the not so wealthy]."23 Therefore, assuming that
          individuals within the same socioeconomic class will tend to want
          to interact with each other as opposed to interacting with
          individuals of a different socioeconomic class, there is the
          strong possibility that one telephone company will develop a
          market niche for offering high-quality, expensive local telephone
          service attracting individuals of the higher socioeconomic
          classes while the other telephone company will develop a market
          niche for offering lower-quality, less expensive local telephone
          service attracting individuals of the lower socioeconomic
          classes.  There is evidence to indicate that this is what
          actually happened: In the South and Midwest, "new... firms grew
          by offering cheaper, lower-quality service, carving out an
          important niche for themselves in the telephone market.24 "25

          3.2  Natural Monopoly Theory Assumes Essentially Free Market

          "It is imperative that one be clear and specific in one's
          definition of `monopoly.' When people speak, in an economic or
          political context, of the dangers and evils of monopoly, what
          they mean is a coercive monopoly - i.e., exclusive control of a
          given field of production which is closed to and exempt from
          competition, so that those controlling the field are able to set
          arbitrary production policies and charge arbitrary prices,
          independent of the market, immune from the law of supply and
          demand. Such a monopoly, it is important to note, entails more


          __________

          23. John Brooks, Telephone: The First Hundred Years (New York:
              Harper and Row, 1976), p. 110.

          24. Kenneth Lipartito, The Bell System and Regional Business: The
              Telephone in the South, 1877-1920 (Baltimore: Johns Hopkins
              University Press, 1989), p. 248. "AT&T Archives, box 1033,
              Central Union Organization and Development, 1883-1912, Allen-
              Fish, 11 February 1903."

          25. Ibid., p. 104.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 9 -



          than the absence of competition; it entails the impossibility of
          competition. That is a coercive monopoly's characteristic
          attribute, which is essential to any condemnation of such a
          monopoly."26

          "In the entire history of capitalism, no one has been able to
          establish a coercive monopoly by means of competition on a free
          market. There is only one way to forbid entry into a given field
          of production: by law.  Every coercive monopoly that exists or
          has ever existed - in the United States, in Europe, or anywhere
          else in the world - was created and made possible only by and acts
          of government: by special [exclusive] franchises, licenses,
          subsidies, by legislative actions which granted special
          privileges (not obtainable on a free market) to a man or a group
          of men, and forbade all others to enter that particular field."27

          Many individuals espousing the natural monopoly theory of
          telecommunications base their conclusions on the assumption that
          an essentially free enterprise system occurred for
          telecommunications during the 1893-1920 time frame in the United
          States. This was not true of many situations.  From the onset of
          telephonic competition, there were severe governmental intrusions
          that either impeded or barred a competitor from offering
          telephone service within a geographic region.

          There were numerous cases of independent telephone companies
          wanting to establish telephone service in several major high-
          demand cities where the Bell System was entrenched and were
          either (a) denied a franchise or (b) granted franchises only
          after meeting onerous requirements that the entrenched firm was
          not required to meet.28 Examples of such practices are listed
          below:

            1.  "In Buffalo, for example, a franchise was granted to the
                Frontier Telephone Company on condition that it pay the
                city fifty thousand dollars in cash and a 3 percent gross
                receipts tax, and give the city the free use of one hundred


          __________

          26. Ayn Rand, Capitalism: The Unknown Ideal, (New York: The New
              American Library, 1966), p. 72.

          27. Ibid., pp. 72 - 73.

          28. John Brooks, Telephone: The First Hundred Years (New York:
              Harper and Row, 1976), p. 112.



          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 10 -



                telephones, while none of these impositions were put upon
                the local Bell licensee. Frontier soon went broke."29

            2.  In "San Francisco, representatives of the Bell licensee
                were accused of outright bribery to bring about the defeat
                of a competing franchise - in response, it is true, to an
                attempt by the city's political boss to extort an improper
                payment from the franchise seeker."30

            3.  In 1899, when the Telephone, Telegraph and Cable Company
                tried to set up telephone service in the "richly profitable
                New York City territory"31 in competition with the Bell
                System, they were denied permission to set up business.32
                John Brooks elaborates: "[B]y 1899 the Bell interests were
                fighting it out in the streets of New York - or rather, in
                the conduits under the streets. The New York Telephone
                Company[, the Bell system company,] had its underground
                wires in the conduits of the Empire City Subway Company,
                and when the promoters of would-be telephone competition
                asked permission to install wires of their own there, the
                Empire City Subway Company refused - logically enough,
                since New York Telephone controlled Empire City Subway
                through stock ownership. The courts [even] refused the
                independents permission to build their own underground
                conduits, and that was the end of the threat of telephone
                competition in New York City."33 (Note: The evil here is
                not that the Empire City Subway Company refused to let the
                would-be competitor install wires in its conduits - the
                Company was merely exercising its private property rights -
                but that the government, in this case, the courts, refused
                to let the would-be competitor build its own conduits,
                thereby creating a government enforced monopoly situation.)


          __________

          29. Ibid.

          30. Ibid.

          31. Ibid., p. 106.

          32. Ibid., pp. 106, 108. From what is stated on page 108, I
              conclude that the company that was denied a franchise was the
              Telephone, Telegraph and Cable Company because this company
              was organized in 1899.

          33. Ibid., p. 106.



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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 11 -



            4.  "In Connecticut, for example, competition developed for the
                first time in 1899 in the form of an independent company
                that planned to establish service in New London using the
                Strowger automatic system. After extended court hearings -
                at which the president and superintendent of the local Bell
                licensee, the Southern New England Telephone Company,
                testified at length - the petition for a charter was
                denied, and so the competitive project died."34

            5.  In Chicago, the Interstate Independent Association, an
                association of independents providing long-distance service
                in the Midwest, was denied access to the underground
                conduits controlled by the city. Yet, the Bell System was
                allowed access to these same conduits.35

          The licensing procedure was also used to keep out prospective
          telephone competitors, thus helping the entrenched telephone
          company.  "Before the license could be issued, the utility had to
          satisfy the licensing authority that its service would be `in the
          public convenience.' For example, the state of Ohio required a
          telephone company to secure a certificate of convenience from the
          Public Utilities Commission before exercising a franchise in any
          town where there was already a telephone company furnishing
          adequate service.36 In the village of Mendon, where one company
          was already providing phone service, another company obtained a
          franchise to do the same but was refused a certificate of
          necessity by the state on the grounds that it was not in the
          public convenience to have two telephone companies. The Supreme
          Court of Ohio in 1921 sustained the denial."37

          There is strong evidence to indicate that a lot of the success of
          the Bell System, the entrenched firm in most of the major
          profitable cities, in driving out the smaller independent


          __________

          34. Ibid.

          35. Kenneth Lipartito, The Bell System and Regional Business: The
              Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins
              University Press, 1989), pp. 105 - 106.

          36. Ithiel de Sola Pool, Technologies of Freedom (London: The
              Belknap Press of Harvard University Press, 1983), p. 274.
              "Sec.  614-52, Ohio General Code."

          37. Ibid., p. 102.



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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 12 -



          telephone companies was not due to the workings of the natural
          monopoly inherent in telecommunications, but was due primarily to
          government-enforced monopoly privileges given to the Bell System
          in these major cities. Political muscle, not the so-called
          inherently monopolistic nature of telecommunications, played a
          key role in the Bell System appearing to possess monopoly power.
          "Although some competitors arose to challenge Bell at its strong
          points - the nation's large cities - few succeeded unless they
          could exploit a weakness in Bell structure or gain political
          support from city and state governments anxious to discipline the
          Bell [government-enforced] monopoly.38 "39

          There did arise during this period, in the smaller and mid-sized
          cities where telephonic competition was allowed to flourish, a
          regional long-distance company in the Midwest, thereby
          challenging AT&T's dominance in the long-distance business.
          "Connections to electrical manufactures and early efforts in
          urban telephony served... [the midwestern independents] well in
          the long run, enabling them to construct their own regional
          systems in places between large cities and rural areas where
          Bell's long-distance network was not yet extensive.40 By
          connecting with each other, midwestern companies extended service
          from `the eastern slope of the Rocky Mountains to the Atlantic
          Coast....'41 As a result, midwestern firms were... able to stand


          __________

          38. Kenneth Lipartito, The Bell System and Regional Business: The
              Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins
              University Press, 1989), p. 245. "Philadelphia was the one
              major eastern city where competitors made a significant
              challenge."

          39. Ibid., p. 94.

          40. Ibid., p. 248. "AT&T Archives, Toll Maps. The maps show that
              AT&T's system grew by connecting major cities along heavy use
              routes first, then by filling in the gaps. It was in these
              gaps that the independents could build their own long-
              distance network. See also Ronald Abler, `The Telephone and
              the Evolution of the American Metropolitan System,' in Ithiel
              de Sola Pool, ed., The Social Impact of the Telephone
              (Cambridge, Mass., 1977). Also, McNeal, Independent
              _T_e_l_e_p_h_o_n_y_, 81-84."

          41. Ibid., p. 248. "James B.  Hoge, `National Inter-State
              Telephone Association,' The Telephone Magazine (July 1905):
              34."


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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 13 -



          up to Bell's competitive use of long-distance lines.... To combat
          Bell's head start in long-distance telephony and its advantages
          in system engineering, midwestern promoters also formed an
          association. With strong support from non-Bell manufacturing
          concerns, the Interstate Independent Association helped to
          overcome the limitations small size imposed on many competing
          firms. The organization started a clearing house to handle toll
          receipts and pooled resources to build main trunk lines to big
          cities."42

          Why, may one ask, did the Interstate Independent Association not
          survive to become a national long-distance network in competition
          with AT&T ? Was it the doing of the so-called natural monopoly
          nature of telecommunications ? Or could it have been the fact
          that the Bell System had established exclusive franchises to
          operate in all the major high-volume cities "such as New York,
          Chicago, and St. Louis, and used profits from [government-
          enforced] monopolized intercity markets to subsidize price wars
          in competitive local ones...."43 ? In fact, the Interstate
          Independent Association "tried to bring political pressure to
          bear to overcome Bell's dominance of the Illinois Tunnel Company,
          the body that controlled access to Chicago's underground
          conduits.44 Bell [via city hall] had been successful in keeping
          the city's conduits closed to competing firms, shutting them out
          of the key juncture point for long-distance service in the
          Midwest. Ultimately, the association failed to crack Bell's
          [government-enforced] monopoly in the city."45

          It would be erroneous from the evidence presented that the
          formation of one "monopoly" telephone network in the United
          States was the product of the natural monopoly nature of
          telecommunications when you consider the fact that the Bell
          System had been given exclusive franchises in many key high-
          volume cities such as New York, Chicago, and Saint Louis and had
          used the profits from these areas and the intercity trunk routes


          __________

          42. Ibid., p. 105.

          43. Ibid., p. 123.

          44. Ibid., p. 248. "AT&T Archives, box 1337, Interstate
              Independent Telephone Association, 1902, to Meany, 11
              December 1902."

          45. Ibid., p. 106.



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          without permission in writing from the author.








                                        - 14 -



          connecting these areas "to subsidize price wars in competitive"
          local markets.

          It seems clear now how in the United States, one telephone firm
          was able to establish a "monopoly" situation, thus causing only
          one major telephone network to occupy the field.  The formation
          of one "monopolistic" telephone network came about not because of
          the free market or the so-called natural monopoly nature of
          telecommunications, but because of the opposite principle -
          governmental intrusions into the free market.

          It is very possible, then, that a telephone firm that has
          business entities operating under conditions where no competitors
          are allowed to enter (and can thus charge exorbitant prices) can
          go ahead and use the profits from the coercive monopoly
          enterprises to subsidize price wars in other areas with other
          telephone firms that do not have coercive monopoly enterprises.
          In time, the firms that do not have coercive monopoly enterprises
          will fade away either by going out of business or selling to the
          larger firm.

          In this country, the process of having only one major
          "monopolistic" telephone network was accelerated even more when
          the Bell System, under President Vail, announced in 1909 - 1910
          that it would welcome public regulation of the telephone
          industry. "Regulation [, though,] is a two-sided coin: on one
          side [, the first series of objectives,] lies the aspect of
          public protection - profit limitations, the obligation to provide
          service at nondiscriminatory rates, and so forth. The other side
          of the coin [, the second series of objectives,] bears the aspect
          of utility protection - including bars to competitive entry,
          exclusive franchise, and the right of eminent domain. With an
          insight that was to serve Bell corporate interests well, Vail
          anticipated the limited inroads that public regulation would make
          in obtaining the first series of objectives and the extensive
          benefits conferred by the second. Real power would always rest
          with those responsible for management of telephone operations,
          and Vail was always insistent on the distinction between
          `regulation' and `management' Although the program of acquiring
          independent properties was being pursued unabated, the combined
          objective of `Universal Service - One System, One Policy' could
          not be achieved without political intervention. Bell's response
          to this limitation was the promotion of regulatory authority in
          utility commissions."46







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          this document may be reproduced, in any form or by any means,
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                                        - 15 -



          "Other paths were possible [for telephony development in the
          United States if no exclusive franchises had been given within
          any geographical regions and the laws of the free market were
          allowed to prevail].  Local companies in the South and Midwest
          could have kept large blocks of...  [customers] beyond Bell
          System reach, cooperating to form an alternative to AT&T's [long-
          distance service]. As late as 1907 independents carried 20
          percent of all toll calls, mainly in the midsized city market.47
          In addition, several large financiers from the East almost
          extended capital to the independents to help them wrest control
          of major cities from Bell as well."48

          3.3  Technical Nature of Telecommunications Leads To Monopoly
               Firm

          One argument in favor of the natural monopoly view of
          telecommunications states that "simple economies of scale in the
          provision of a standardized service dictate that one firm...
          [will eventually wind up] provid[ing] that service"49 if the laws
          of free market economics were allowed to proceed "because it is
          [more] technically efficient to have a single producer or
          enterprise."50 Even if this were true for telecommunications,
          which in my opinion seems doubtful considering what has been
          written in the section "Natural Monopoly Theory Assumes
          Essentially Free Market," Milton Friedman, winner of the Nobel
          Prize in Economics, notes that a private monopoly may be the best
          alternative.  Milton Friedman states the following:



          __________


          46. Richard Gabel, "The Early Competitive Era in Telephone
              Communication, 1893-1920," Law and Contemporary Problems 34
              (Spring 1969): 356 - 357.

          47. Kenneth Lipartito, The Bell System and Regional Business: The
              Telephone in the South, 1877 - 1920 (Baltimore: Johns Hopkins
              University Press, 1989), p. 256. "Bureau of the Census,
              Telephones and Telegraphs, 1912, table 28, p. 38."

          48. Ibid., p. 146.

          49. Ibid., p. 151.

          50. Milton Friedman, Capitalism and Freedom (Chicago: The
              University of Chicago Press, 1982), p. 28.



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                                        - 16 -



            1.  "When technical conditions make a monopoly the natural
                outcome of competitive forces, there are only three
                alternatives that seem available: private [unregulated]
                monopoly, public [government-owned] monopoly, or public
                regulation [of a privately-owned government-enforced
                monopoly].... [Which is the best among all these three
                alternatives ?] Henry Simons, observing public regulation
                of monopoly in the United States, found the results so
                distasteful that he concluded public monopoly would be...
                [the best option].  Walter Eucken, a noted German liberal,
                observing public monopoly in German railroads, found the
                results so distasteful that he concluded public regulation
                would be... [the best option]. Having learned from both,
                I... conclude that, if tolerable, private monopoly may be
                the... [best option]."51

            2.  "If society were static so that the conditions which give
                rise to a technical monopoly were sure to remain, I would
                have little confidence in this solution.  In a rapidly
                changing society, however, the conditions making for
                technical monopoly frequently change and I suspect that
                both public regulation and public monopoly are likely to be
                less responsive to such changes in conditions, to be less
                readily capable of elimination, than private monopoly."52

            3.  "Railroads in the United States are an excellent example. A
                large degree of monopoly in railroads was perhaps
                inevitable on technical grounds in the nineteenth
                century.53 This was the justification for the Interstate
                Commerce Commission. But conditions have changed. The
                emergence of road and air transport has reduced the
                monopoly element in railroads to negligible proportions.


          __________

          51. Ibid., p. 28.

          52. Ibid.

          53. I tend to disagree with this statement. I think that a major
              reason for the monopolistic behavior of some railroads was
              due to the issuing of exclusive franchises to railroads, most
              notably the Central Pacific in California. See Ayn Rand,
              Capitalism: The Unknown Ideal (New York: The New American
              Library, 1964), pp. 102 - 109. See also Burton W. Folsom,
              Jr., The Myth of the Robber Barons (Herndon, Virginia: Young
              America's Foundation, 1991), pp. 17 - 39.



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                                        - 17 -



                Yet we have not eliminated the ICC. On the contrary, the
                ICC, which started out as an agency to protect the public
                from exploitation by the railroads, has become an agency to
                protect the railroads from competition by trucks and other
                means of transport, and more recently even to protect
                existing truck companies from competition by new
                entrants.... If railroads had never been subjected to
                regulation in the United States, it is nearly certain that
                by now transportation, including railroads, would be a
                highly competitive industry with little or no remaining
                monopoly elements."54

          I believe that if such a private non-coercive monopoly does
          develop, it should be "tolerated."

          "[I]f one considers the only kind of monopoly that can exist
          under capitalism, a non-coercive monopoly, one will see that its
          prices and production policies are not independent of the wider
          market in which it operates, but are fully bound by the law of
          supply and demand; that there is no particular reason for or
          value in retaining the designation of `monopoly' when one uses it
          in a non-coercive sense; and that there are no rational grounds
          on which to condemn such `monopolies.'"55

          Remember, a "`coercive monopoly' is a business concern that can
          set its prices and production policies independent of the market,
          with immunity from competition, from the law of supply and
          demand. An economy dominated by such monopolies would be rigid
          and stagnant."56

          "The necessary precondition of a coercive monopoly is closed
          entry - the barring of all competing producers from a given
          field. This can be accomplished only by an act of government
          intervention, in the form of special regulation [favoring the
          entrenched firms], subsidies, or [exclusive] franchises. Without
          government assistance, it is impossible for a would-be monopolist
          to set and maintain his prices and production policies


          __________

          54. Milton Friedman, Capitalism and Freedom (Chicago: The
              University of Chicago Press, 1982), p. 29.

          55. Ayn Rand, Capitalism: The Unknown Ideal (New York: The New
              American Library, 1966), pp. 74 - 75.

          56. Ibid., p. 68.



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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 18 -



          independent of the rest of the economy. For if he attempted to
          set his prices and production at a level that would yield profits
          to new entrants significantly above those available in other
          fields, competitors would be sure to invade his industry."57

          "It takes extraordinary skill to hold more than fifty percent of
          a large industry's market in a free economy. It requires unusual
          productive ability, unfailing business judgement, unrelenting
          effort at the continuous improvement of ones's product and
          technique. The rare company which is able to retain its share of
          the market year after year and decade after decade does so by
          means of productive efficiency - and deserves praise, not
          condemnation."58

          "Now if a company were able to gain and hold a non-coercive
          monopoly, if it were able to win all the customers in a given
          field, not by special government-granted privileges, but by sheer
          productive efficiency - by its ability to keep its costs low
          and/or to offer a better product than any competitor could -
          there would be no grounds on which to condemn such a monopoly. On
          the contrary, the company that achieved it would deserve the
          highest praise and esteem."59


          4.  Effects of the Public Utility Paradigm in Telecommunications

          "For much of this century, fairness and efficiency in American
          telecommunications have been sought through the public utility
          paradigm of governmental regulation.60 The paradigm is expressly
          premised on the assumption that the industry constitutes a
          `natural monopoly' in which a single entity can provide better
          service at lower costs than a number of competing suppliers.61


          __________

          57. Ibid.

          58. Ibid., p. 66.

          59. Ibid., p. 75.

          60. Mark S. Fowler, Albert Halprin, and James D. Schlichting,
              "`Back to the Future:': A Model for Telecommunications,"
              Federal Communications Law Journal Vol. 38, No. 2 (August
              1986): 150. " See generally G. Brock, The Telecommunications
              Industry 158-61, 177-99 (1981)."

          61. Ibid.: 150. "2 A. Kahn, The Economics of Regulation 2, 146


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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 19 -



          Under the public utility paradigm, it is thought to be both more
          efficient and more fair for government to grant an exclusive
          franchise to one company than to let market forces reign. The
          governmentally bestowed monopoly, however, creates strong
          incentives for overpricing and reduced output of the monopoly
          services.62 In addition,... governmentally granted market power
          can be used to leverage other markets through anticompetitive
          conduct, such as the discriminatory provision of regulated
          services to competitors and their customers in these other
          markets or the cross-subsidization of competitive offerings
          through improper cost allocation between regulated and
          unregulated services."63

          "The public utility paradigm employs intrusive governmental
          regulation to combat these possible harms. To prevent the reduced
          output of monopoly services, the public utility paradigm strictly
          controls entry and exit, closely regulates both the prices and
          the conditions of service, and imposes an obligation to serve all
          applicants under reasonable conditions.64 The use of
          governmentally granted market power to leverage other markets is
          prevented by setting prices for regulated services and by
          severely restricting the utility's participation in competitive
          markets."65

          "The public utility paradigm has incorporated a number of
          specific regulatory practices to implement entry/exit regulation
          and rate-of-return ratemaking in telecommunications. First, costs
          that are joint or common to more than one service66 and local
          plant costs have been recovered from telephone services according
          to social and political objectives, with little regard for the


          _________________________________________________________________

              (1971)."

          62. Ibid.: 150. "See, e.g., Averch and Johnson, Behavior of the
              Firm under Regulatory Constraint, 52 Am. Econ. Rev. 1053
              (1962)."

          63. Ibid.: 150.

          64. Ibid.: 151.

          65. Ibid.: 151.

          66. Ibid.: 151. "For an explanation of joint and common costs,
              see page 168 and note 61 below."



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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 20 -



          social welfare benefits of economic efficiency. Second,
          uneconomically slow depreciation of investment has artificially
          depressed current rates while maintaining a high level of
          investment on which companies have earned a return. Third,
          widespread averaging of costs and rates has allowed a nationwide
          sharing of the costs of wiring the entire country for universal
          service,67 but has greatly limited telephone companies'
          incentives to run their operations efficiently. Finally, possible
          anticompetitive use of governmentally granted market power was
          not merely restrained, but affirmatively prohibited under the
          1956 Consent decree, barring AT&T, which through its Bell System
          affiliates had also become the preeminent local exchange carrier,
          from engaging in any business other than the provision of common
          carrier communications services.68 "69

          "An important, although not immediately apparent, effect of a
          national telecommunications monopoly subject to government
          regulation has been the imposition of significant direct and
          indirect (or opportunity) costs on society. The public utility
          paradigm has exacted significant efficiency costs in resource
          allocation: distorting investment decisions, limiting private
          incentive to innovate with new technology, and worse,
          affirmatively discouraging innovation that would render obsolete
          vast amounts of embedded equipment that is included in the rate
          base. Moreover, regulation has tended to discourage price
          competition and provided only limited incentives to cut costs or
          increase management efficiencies. Regulation has tended as well
          to limit the choices available to consumers: regulatory price


          __________

          67. Ibid.: 152. "Universal service was also achieved through the
              Rural Electrification Act of 1936, which provided additional
              funds to provide service to rural areas of the country. 
              7 U.S.C. ... 901 et seq. (1982)."

          68. Ibid.: 152. "Similarly, Western Electric, AT&T's wholly owned
              equipment manufacturing subsidiary, was precluded from
              manufacturing equipment other than the type of equipment used
              by the Bell System for furnishing common carrier
              communications services. AT&T and Western Electric also were
              required to license their patents to all applicants upon
              payment of appropriate royalties.  _S_e_e United States v.
              Western Electric Co., 1956 Trade Cas. (CCH) 1 68,246 (D.N.J.
              Jan. 24, 1956)."

          69. Ibid.: 152.



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          this document may be reproduced, in any form or by any means,
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                                        - 21 -



          ceilings prevent the supply of higher-quality, higher-priced
          offerings; regulatory price floors discourage the supply of low-
          quality inexpensive options that many consumers would find
          attractive. Furthermore, it has limited the ability of market
          participants to respond quickly to changes in demand and supply.
          Regulation also tends to react much more slowly than the
          marketplace to the changing reality of technology.70 In addition,
          substantial private and public resources have been spent simply
          administering the entire regulatory system. Finally, regulatory
          ratemaking not only has led to significant direct administrative
          costs, but also has been subject to serious practical
          difficulties, making terribly elusive the goal of keeping prices
          close to costs.71 "72

          "Perhaps the most costly aspect of traditional public utility
          regulation, however, has been its self-perpetuating character. It
          is impossible to test [completely] its central premise - that
          telecommunications is a natural monopoly - for regulation itself
          erects barriers to entry and provides existing firms with the
          opportunity to block or delay the plans of a firm wishing to
          offer a new product or service or to enter a new market.73 The
          costs and delays inherent in obtaining regulatory approval for
          such entry undoubtedly have led many firms to avoid entering the
          market when they were otherwise ready, willing, and able to
          provide a service or product that consumers would buy at market
          price."74



          __________

          70. Ibid.: 152. "A primary effect of regulation is, in fact, to
              slow down change. It has been argued that the pace of
              progress under regulation will be determined by existing
              firms, with the ability of new firms to make changes reduced
              or eliminated. See G. Brock, supra note 7, at 14-15. See
              also V. Goldberg, Regulation and Administered Contracts, 7
              Bell J. Econ. 426 (1976)."

          71. Ibid.: 153. " See G. Brock, supra note 7, at 15-16."

          72. Ibid.: p. 153.

          73. Ibid.: 153. " Id.  Existing firms can also create barriers to
              entry by such methods as building excess capacity.  Id.  at
              25-34."

          74. Ibid.: 153.



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                                        - 22 -



          It is clear that public regulation of the telephone industry has
          been harmful.  As an aside, it is worth mentioning that public
          regulation of any industry is harmful. The most notable examples
          are the airline, airmail transport, taxicab, railroad,
          automobile, trucking, electric utility, natural gas, banking,
          securities, broadcasting, food and beverage, building and
          housing, pharmaceutical, and insurance industries.75


          5.  Free Market Telecommunications Environment

          "[R]ecent changes in telecommunications regulation suggest that
          the time has come to replace the traditional public utility
          paradigm of government regulation with a competitive industry
          paradigm. The effects of the recent injection of competition into
          significant segments of interstate telecommunications, the
          benefits flowing from deregulation in other industries formerly
          regulated as public utilities, and the promise of new
          technologies on the brink of realization all demonstrate the
          necessity for changing our model for telecommunications....
          [T]elecommunications should become a ...  competitive marketplace
          in which competition drives prices to costs and lowers costs to
          the minimum, in which products and services are provided whenever
          end users are willing to pay the necessary costs of
          production.... Realization of these efficiency benefits of
          competition will provide greater value in the future for every
          telecommunications dollar."76

          "The benefits of competition in the markets for CPE and
          interexchange communications are clearly evident today. It is
          indisputable that the market for telecommunications equipment is
          vigorously competitive, with numerous well-financed ventures
          holding significant market shares.77 AT&T's predominant market


          __________

          75. Bernard H. Siegan, Economic Liberties and the Constitution
              (Chicago: University of Chicago Press, 1980), pp. 288-300.

          76. Mark S. Fowler, Albert Halprin, and James D. Schlichting,
              "`Back to the Future:': A Model for Telecommunications,"
              Federal Communications Law Journal Vol. 38, No. 2 (August
              1986): 158.

          77. Ibid.: 158. "See Customer Premises Equipment, 100 F.C.C.2d
              1298, 1313-16 (1985); Furnishing of Customer Premises
              Equipment and Enhanced Service, Order, 102 F.C.C.2d 655
              (1985) [hereinafter cited as AT&T Structural Relief Order],


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                                        - 23 -



          share of the new private branch exchange (PBX) and key system
          markets has declined drastically in the last few years so that it
          no longer can be said to dominate any segment of the equipment
          marketplace.78 The benefits of such competition are palpable. It
          is estimated that sales revenues in the CPE market increased by
          nearly 50% between 1983 and 1985.79 More than 2000 vendors are
          supplying end users with $14 billion worth of terminal
          equipment.80 The introduction of competition has also provided
          consumers with a wider variety of CPE options and with less
          expensive alternatives than existed in the earlier monopoly
          market. Consumers can obtain such new CPE features as automatic
          redial, hold, and other call-handling options. A wide variety of
          new terminal equipment has also appeared, including wireless
          telephony, customized dialing, and other speciality phones, as
          well as varieties of decorator phones. It is estimated, for
          instance, that there are currently 3 million cordless telephones
          in use. The benefits for business users have also been
          substantial; PBX and key system prices have been dropping.81
          Nevertheless, the capabilities of business CPE have increased,
          with such features as high-speed facsimile and integrated data
          and voice capabilities now being commonplace."82


          _________________________________________________________________

              aff'd in principal part on recon.  Memorandum Opinion and
              Order on Reconsideration, FCC 86-34] (released Aug. 7, 1986)
              [hereinafter cited as AT&T Structural Relief
              Reconsideration]."

          78. Ibid.: 159. "See AT&T Structural Relief Order,... 102
              F.CcC.2d at 676-77."

          79. Ibid., 159. "Telecommunications: A Market Profile, Wall St.
              J., Feb. 24, 1986 @ 4 (Telecommunications Special Report), at
              5D."

          80. Ibid.: 159. "See Furnishing of Customer Premises Equipment
              by the Bell Operating Telephone Companies, Notice of Proposed
              Rulemaking, FCC 86-113, para. 32 (released Mar. 28, 1986)
              [hereinafter cited as BOC Structural Relief NPRM]."

          81. Ibid.: 159. "Zorpette, The Telecommunications Bazaar, IEEE
              Spectrum, November 1985, at 59 & 61. For instance, the
              average wholesale price of a key system has dropped from $300
              per unit in 1983 to $225 in 1985.  Id.  at 59."

          82. Ibid.: 159.



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                                        - 24 -



          "It is also apparent that the interexchange market is well on the
          way to complete competition. The majority of Americans now have a
          choice of long-distance carriers. A number of competitors with
          substantial resources have obtained significant market shares in
          a few short years. Because of the advent of these competitors and
          movement toward more rational economic pricing of regulated
          services,83 usage rates for interstate MTS and WATS services have
          decreased more than 20% in two and one-half years, stimulating
          significant additional usage of the public switched network.84
          With the achievement of `equal access' for long-distance
          competitors,... the shape of the interexchange market should be
          determined primarily by competitive forces.85 "86


          __________

          83. Ibid.: 159. " See infra pages 167-83."

          84. Ibid.: 159. "Press Release, `Interstate Long Distance Rate
              Reductions Worth More Than $2 Billion Become Effective,"
              Mimeo No. 4871 (released May 30, 1986)."

          85. Ibid.: 160. "The Commission recently determined that current
              policies governing competition in the interexchange
              marketplace and the transition to equal access are
              fundamentally sound.  See OCC Joint Petition for Expedited
              Rulemaking. Notice of Proposed Rulemaking, 50 Fed. Reg.
              50,316 (1985) [hereinafter cited as OCC NPRM]. The Commission
              is committed, however, to taking all actions needed to ensure
              a level playing field for competition in this market. See
              Separate Statement of Chairman Mark S. Fowler, id.  at
              50,328-29. For example, the Commission has addressed a number
              of transitional problems resulting from the presubscription
              process under which customers select their primary
              interexchange carrier before conversion of their telephone
              company central office to equal access. In particular, the
              Commission found that the routing to AT&T of all traffic from
              customers who fail to presubscribe was unreasonable and
              discriminatory. It mandated instead a uniform pro rata
              allocation plan that became effective May 31, 1985. Moreover,
              the Commission resolved a number of questions related to
              presubscription, including, inter alia, the controlling
              indication of customer choice, the retroactive allocation of
              customers converted to equal access prior to the default
              order, and the applicability of charges for customers
              requesting changes to their initial presubscription.  See
              Investigation of Access and Divestiture Related Tariffs, 101
              F.C.C.2d 911, modified on recon., 102 F.C.C.2d 503 (1985)."



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                                        - 25 -



          Opening up the local loop to competition by allowing more than
          one wire to the home will open up the local exchange market.
          There is no reason that I can think of why this would not be
          feasible under our current technology. As a possible
          implementation using "copper wire" technology, one could have
          poles along public streets which are owned by the state or local
          government, and then have many cables from different local
          exchange companies sharing the same poles.  At the same time, you
          could have the various local exchange companies set up their own
          poles along private property; as an incentive for an owner to
          allow a telephone pole in his/her own private property, the local
          exchange could give the owner X dollars' worth of free telephone
          calls. What you would have is a situation where, within one
          geographical area, several exchanges offer local telephone
          service with trunk connections to different competing telephone
          networks; and with today's microwave/radio technology those
          trunks would be even easier to establish with various networks
          since there are no right-of-way problems.  The telephone user
          when making a call could always indicate over what network to
          make the call in the PIC portion of the called digits.  There
          would develop a symbiotic relationship between the local exchange
          companies and the telecommunications network companies. It would
          be in the interests of the local exchange companies to connect
          with as many telephone networks as possible, and it would be in
          the telecommunications network companies' interests to connect to
          as many local exchanges as possible. Central office switches
          could even be set up in apartments and homes. Having nearby
          neighbors connected via wire, or even more convenient wireless
          local loop, to the central office switch is entirely possible in
          a competitive telecommunications industry with our current
          technology. The development of cellular technology for the local
          loop would probably even fix the problem of being able to access
          more than one local loop as well as the telephone pole problem.
          Also, the cable company wire to the home could potentially serve
          as a second local loop.

          "It... [definitely] appears that developing technologies and
          financial innovation... [will] make the competitive industry
          paradigm the most appropriate long-term model for the local
          exchange markets. Those markets still must be considered
          [government-enforced] monopoly markets [with respect to the
          hardwire local loop] in most areas.  They have, at least until
          now, experienced the least amount of technological innovation.


          _________________________________________________________________

          86. Ibid.: 160.



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                                        - 26 -



          Limited local exchange competition, however, has already begun to
          appear.87 Digital Termination Systems (DTS), a microwave digital
          service, has been introduced in several cities for data
          transmission. Cellular radio systems have begun to operate in a
          number of cities across the country and will be extended into
          hundreds of additional cities.... As cellular technology advances
          and costs are reduced, cellular systems may become direct
          competitors of local exchange carriers. Similarly, fixed
          microwave or cellular systems may prove to be more efficient for
          hooking up end users in rural states than traditional copper
          wire. At least some interexchange carriers have begun to provide
          interexchange access service directly to end users in competition
          with the local exchange carrier. Some real estate developers have
          started placing electronic switches in multitenant buildings to
          provide tenants with more efficient access to the local exchange
          carrier's central office and to various interexchange carriers.88
          Apartment buildings with master antennas and cabling for TV
          should also be providing local telephone service in the near
          future. Competition is likely to develop between cable companies
          and local exchange carriers for the provision of local voice,
          data, and video services as the telephone companies lay more
          wide-band capacity and institute an Integrated Services Digital
          Network (ISDN), and the cable companies begin installing switches
          in their existing systems.89 "90


          __________

          87. Mark S. Fowler, Albert Halprin, and James D. Schlichting,
              "`Back to the Future:': A Model for Telecommunications,"
              Federal Communications Law Journal Vol. 38, No. 2 (August
              1986): 161. " See, e.g., Pepper, Competition in Local
              Distribution: The Cable Television, in Understanding New
              Media: Trends and Issues in Electronic Distribution of
              Information 147 (B. Compaine ed. 1984)."

          88. Ibid.: 161. " See, e.g., Aronow, Smart Buildings and Shared
              Tenant Services: A Preliminary Analysis, 37 Fed. Com. L.J.
              521 (1985)."

          89. Ibid.: 162. "An ISDN would provide end-to-end voice and data
              communications through the same digital transmission media.
              At present the Communications Act prohibits telephone
              companies from providing video programming directly to
              subscribers in their telephone service areas. 47 U.S.C.A. @
              613(b)."

          90. Ibid.: 162.



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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 27 -



          "The appearance of competitive markets throughout the
          telecommunications industry will allow a maximization of public
          benefits.... As competition invades the entire marketplace,
          producers will have to price their services at cost and to lower
          costs as much as possible, or risk losing customers. This
          efficient telecommunications pricing system could well reduce the
          use of averaging, allowing prices to vary more directly with the
          marginal costs of serving customers.91 At a minimum, it appears
          likely that firms will find it necessary to treat customers or
          classes of customers with reasonable marketplace alternatives,
          and therefore high demand elasticities, on a special basis in
          order to retain them on the network. Many carriers are likely to
          employ two-part tariffs, with lump-sum access charges for non-
          traffic-sensitive costs of the local loop and separate usage-
          sensitive charges for traffic-sensitive costs. As in other
          competitive markets, a firm's ability to judge accurately the
          relative cost efficiencies of various pricing alternatives will
          be an important factor determining its success in the
          marketplace. Only firms using the most efficient methodologies
          will ultimately be able to provide the greatest values to
          consumers and thus survive the discipline of the marketplace."92

          "Besides precipitating changes towards more rational pricing of
          telecommunications products and services, the advent of a
          competitive marketplace will leave no companies with sufficient
          market power to present a significant danger of anticompetitive
          behavior. Whenever a firm attempts to engage in improper cost-
          shifting or to discriminate against competitors, it will run
          serious risks of losing customers and revenues. Regulation to
          constrain such acts simply will be unnecessary."93

          "The significant increase in technological and financial
          innovation caused by competition in telecommunications may also


          __________

          91. Ibid.: 162. "Kahn, supra note 6, at 149. Of course, the
              entire fragmentation of the network by individual customer is
              unlikely to occur because it would be administratively
              inefficient. Most businesses in competitive markets today use
              some averaging techniques to achieve administrative or
              transactional efficiencies that may more than counterbalance
              losses from pricing inefficiencies."

          92. Ibid.: 162.

          93. Ibid.: 162 - 163.



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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 28 -



          in fact resolve the chief fairness issue in telecommunications
          today, ensuring that everyone who desires telephone service can
          obtain it at an affordable price. Competition may drive prices
          and costs so low that no need will exist for subsidies for
          telephone service to any American consumer."94

          "Thus, achievement of a competitive world in telecommunications
          promises enormous benefits in efficiency and fairness. Prices
          will accurately reflect costs, leading to the production of goods
          and services only when there are consumers willing to pay those
          costs. All companies will find it necessary to reduce costs to
          the minimum, seeking more efficient methods of organizing the
          production of telecommunications services. Both these
          developments will advance fairness in the industry. No longer
          will certain classes of ratepayers be required to contribute the
          costs of providing services to others who have the ability to pay
          for them. And no longer will the costs to society of providing
          universal service be significantly higher than necessary."95


          6.  Conclusion

          "In a sense all business enterprise is a flight from competition.
          The penalties of competition - low or nonexistent profits - may
          be avoided by superior efficiency, by product innovation or
          differentiation, or by attenuation of the competitive process
          through [(a)] control over supply and price wielded
          monopolistically [through exclusive franchises] or [(b)] through
          conspiracy or tacit understanding with competitors. Confronted by
          the vigorous competitive inroads of independent operating
          companies, the Bell System sought to escape the unaccustomed
          hardships of competition by acquiring competitors [, who were not
          allowed by law into certain high-volume, profitable cities that
          Bell was serving], by limiting their markets and their services,
          and by espousing the development of governmental regulatory
          functions. The public service commissions, which ultimately
          stabilized rates and earnings, adopted the norms of business
          policy urged by the [Bell] System and imposed strictures on the
          `unintelligent competition.' The advantages thus gained by the
          Bell System over its remaining competition have been parleyed
          into a practically unassailable market position fortified by


          __________

          94. Ibid.: 163.

          95. Ibid.: 163.



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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 29 -



          political and legal ramparts [up to the year 1984, which was when
          the MFJ agreement was reached with Judge Green.]"96

          "[T]elephone competition during the years 1893 - 1920 was neither
          inefficient nor costly but was, on the contrary, productive of
          benefits sharply outweighing the costs. It was not... the working
          out of the competitive market process toward the emergence of
          inevitable `natural' monopoly which destroyed the structure that
          permitted competition to flourish and its benefits to be enjoyed;
          it was... [(1) the issuing of exclusive franchises to the Bell
          System at many of the key high volume cities and (2)] a poorly
          conceived, Bell-inspired, protectionist regulatory policy which
          failed to preserve such competition...."97

          We should seriously start moving towards a formal deregulation
          plan for the telecommunications industry, even up to the local
          loop. Given today's technology and the evidence presented
          pertaining to telephony history and public regulation, there is
          no excuse for keeping the local wire loop owned by a government-
          enforced, publicly regulated, private monopoly telephone firm or
          for that matter, any part of the telecommunications industry.

          As a general aside, the leaders of the telecommunications
          industry should seriously consider supporting a constitutional
          amendment that advocates the separation of State and Economics in
          order to take away the authority of government officials to give
          exclusive franchises or special subsidies. "If men are concerned
          about the evils of monopolies, let them identify the actual
          villain in the picture and the actual cause of the evils:
          government intervention into the economy. Let them recognize that
          there is only one way to destroy monopolies: by the separation of
          State and Economics - that is, by instituting the principle that
          the government may not abridge the freedom of production and
          trade."98 This will not only help the telecommunications
          industry, but help other industries and the nation as well.



          __________

          96. Richard Gabel, "The Early Competitive Era in Telephone
              Communication, 1893-1920," Law and Contemporary Problems 34
              (Spring 1969): 358.

          97. Ibid.: 358 - 359.

          98. Ayn Rand, Capitalism: The Unknown Ideal (New York: The New
              American Library, 1966), pp. 76 -77.



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          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.








                                        - 30 -






          Franklin Perez















































          Copyright 1992 by Franklin Perez. All rights reserved. No part of
          this document may be reproduced, in any form or by any means,
          without permission in writing from the author.