Silviase/jgov_v1.4_full_ann huggingface dataset:
Street Journal special section on wireless communications that there will be widespread, if not ubiquitous, use of wireless telephony for data and voice communications by 1997. $ ^{64} $

### 3. Competitive Access Providers

Building on their success in the access market, CAPs have begun moving toward becoming full service telecommunications companies for the business market. This is a logical move for CAPs. As an industry analyst explains, “In the long run, competitive access providers will find switched services to be more profitable than access, particularly because it is more difficult for the local telephone companies to redesign tariffs to meet this competition.” $ ^{65} $ CAPs have several alternatives for expanding into the exchange market. First, they can expand their own networks and add switching capabilities to support local services directly. The CAP investment in local loop networks is now well in excess of 1 billion, $ ^{66} $ and is likely to continue to grow rapidly. Moreover, CAPs are installing switches throughout the country. $ ^{67} $

Like CAPs, IXCs are beginning to position themselves to offer exchange services to businesses by expanding into parts of the local loop. They are entering the market from the “opposite direction” of the CAPs by adding network access facilities to their extensive, existing switching capabilities. MCI is aggressively pursuing this market through a wholly owned subsidiary, MCI Metro, a new company being positioned as “a full-service local telephone company.” $ ^{68} $ MCI Metro will spend 2 billion to develop intraexchange capabilities in the top 20 metropolitan areas and intends to serve not only MCI’s interexchange customers but those using other IXCs as well. $ ^{69} $ MCI is also planning to compete in the exchange market through strategic alliances with independent telephone companies. For example, MCI has an alliance with Hancock telephone company (an
independent LEC located in suburban Indianapolis) with the intent of offering local exchange services in direct competition to Ameritech in Indianapolis. $ ^{70} $

### 4. Cable Entry into Exchange Services

Cable companies are well positioned to compete for exchange services, particularly to residences, because of the extensive network that now serves more than 95% of U.S. homes. The industry invested more than 20 billion in plant and equipment during the 1980s. Much of the recent investment has been fiber optic transport and advanced digital electronic equipment which permit two-way telephony. According to the National Cable Television Association, “by late 1992, 77% of cable plant was capable of two-way communications, and virtually all newly built cable plant is two-way capable. In short, the cable industry stands poised to expand beyond its core business and become a full participant in the nation’s telecommunications infrastructure.” $ ^{71} $ The first full cable telephony offering will begin in Rochester in 1995. In May 1994, Time Warner won authorization to offer phone service over its cable network in the Rochester area. $ ^{72} $ Time Warner has contracted with AT&T to provide network equipment and installation services valued at more than 200 million to deliver telephony on its networks. $ ^{73} $

A recent study has estimated that the costs of upgrading existing cable plant to provide telephony services (assuming the cable company has already upgraded its backbone transmission plant to fiber optics) would be about 207 per subscriber. If both telephone and distributed video services were provided, the cost per subscriber would only increase to 297 due to significant economies of scope in the provision of telephony and distributed video services. The analysis further demonstrates that upgrades to existing plant represent a large cost advantage to deployment of new networks and that there may be economies of scope between distributed video services and PCS. The author concludes “this outcome increases the value of the incumbent cable television network.” $ ^{74} $

Through CableLabs (a research and development consortium of cable operators in North America), the cable industry is working to develop telecommunications services that compete directly with LECs on functionality, quality and reliability. In July 1994, CableLabs issued a Request for Proposal (RFP) for equipment and services “necessary to realize a local exchange replacement
telephony service capability for member companies." The RFP addresses telecommunications requirements for residential, multiple dwelling unit and business customers. $ ^{75} $ CableLabs intends to move quickly on this RFP. Proposals were due at the end of September, and a proof-of-concept is to be demonstrated by December 1994. This effort is backed by some of the largest cable companies. TCI, Comcast, Time Warner, Viacom, Cox Cable and Continental Cablevision have announced intentions to invest more than 2 billion on equipment chosen through the RFP process. $ ^{76} $

### B. State Regulatory Policies Toward Competition in Exchange Services

This sub-section will outline recent developments in some of the states in which commissions have acted (or are in the process of acting) to permit local exchange switched services. With a few notable exceptions, local competition policy making has proceeded in an ad hoc manner, typically reacting to applications by alternative exchange carriers for certification. Few states are addressing local competition policy issues in a synthetic or comprehensive fashion; few states have yet reached any significant policy decisions regarding unbundling and interconnection; and no state has developed or articulated a cohesive, coherent set of economic principles upon which their respective local competition policy decisions have been or will be based.

In four states state regulatory commissions have issued decisions regarding interconnection and unbundling of local exchange services: Illinois, Maryland, Michigan, New York and Tennessee. Even there, significant issues remain to be resolved. In Maryland, the Commission granted co-carrier status to applicant MFS in its Phase I order, but Phase II proceedings - which will work out the details of interconnection tariffing and universal service pricing - are just beginning. In New York, the Commission approved Rochester Telephone's "Open Market Plan," but many critical issues have been deferred to the ongoing "Competition II" proceedings. A few states, including California, Connecticut and Kansas, are in the process of generic rulemaking proceedings regarding local competition, interconnection, unbundling and regulatory reform. Many other states are merely reacting to applications for local exchange certification, with no comprehensive or even coherent set of rules to govern local competition and no rulemakings in progress to develop such rules. $ ^{77} $

The main issues involved in the debate over local competition policy include
a. Unbundling of switching, local loops, transport, signaling and numbering, to remove any remaining technical barriers to entry, allowing entrants to purchase component services from LECs.

b. Number portability, through one or more of several interim means, $ ^{78} $ enabling customers to keep their current number(s) even if they change carriers, also a commitment to actively pursue development of the means to provide “true” (i.e., data-based) number portability across local exchange carriers.

c. Reciprocal interconnection and compensation of alternate exchange carriers, to lower entry barriers and increase competition in exchange services by ensuring customers of competing carriers of full interconnection and interoperability.

d. A universal service charge to recover subsidies to the non-traffic sensitive portions of the network (i.e., basic exchange service).

e. IntraLATA usage subscription, so that customers' interexchange calls would be routed automatically to their subscribed carrier (1+ or 0+ dialing).

f. Linkage of unbundling, interconnection and intraLATA usage subscription to the BOC obtaining a waiver at the Federal jurisdiction to provide the interLATA services to customers in that respective state.

g. Regulatory safeguards to prevent discrimination in access and prevent cross-subsidies, including: the use of long-run incremental cost as price floors; and monitoring reports on operations, service quality, cost allocations, revenues, investments and network planning.

In an effort to obtain a waiver from the MFJ, Ameritech submitted its Plan to the U.S. Department of Justice (DOJ) in November 1993. $ ^{79} $ In the proposal, Ameritech offered to voluntarily unbundle its local exchange facilities and provide intraLATA equal access and interconnection to its competitors in return for the right to offer interLATA toll services. Ameritech conceived the plan as a means of breaking the policy stalemate on the interLATA restriction, by demonstrating that Ameritech was willing to take exceptional steps to remove any remaining barriers to, and facilitate more rapid development of, competition in local exchange services in its region. Then, in February 1994, Ameritech Illinois filed a tariff application with the Illinois Commerce Commission seeking approval of its Customers First Plan on a trial basis in the state of Illinois. In its draft decision circulated for public comment, the DOJ recommended that the Ameritech plan should proceed on a
trial basis, only in the Chicago LATA. Hence, Ameritech has not filed its Plan with the other states in its region.

After several rounds of written evidence and several days of public hearings, the Hearing Examiner issued his Proposed Orders (HEPO) on January 24, 1995. $ ^{80} $ The main provisions of the Proposed Orders include:

a. Unbundling: Provides that certificated carriers (those which have received legal authorization to provide local exchange services) may request loop and subloop element unbundling; a LEC may reject such a bona fide request only upon a showing that it is not technically or economically practical in light of demand for the service and the public interest. Ameritech's pricing for unbundling loops and ports must be revised, so that the sum of the prices of an unbundled loop, port and service coordination fee will be no greater than the bundled network access line. $ ^{81} $ Agrees with Ameritech that customers should not be permitted to combine unbundled loops and ports (i.e., they must be purchased out of the bundled tariff). Resellers will only be permitted to purchase the company's unbundled port with business (not residence) usage rates.

b. Number portability: Directs Ameritech Illinois to tariff the interim number portability approaches it proposed: FX, Remote Call Forwarding (RCF) to DID trunks, and Enhanced RCF. Finds that MCI's request for a database trial is premature, but directs that an industry task force be established to develop permanent number portability solutions for Illinois.

c. Reciprocal interconnection: Finds that arrangements between all LECs (including independents) should be pursuant to tariff. Accordingly, the company must make its interconnection tariffs available to all LECs and AECs. Permits Ameritech to withdraw its physical collocation offering. Directs that there be workshops to develop criteria to evaluate meet point requests from carriers who do not wish to interconnect via virtual collocation. Adopts two-tiered switched access rates for interconnection, with the upper tier set at existing switched access rates, and a lower tier (by 40%) that would be available only to competing AECs.
d. Bulk billing: Includes no provision for bulk billing or other universal service cost recovery mechanism. The Commission has initiated a generic proceeding to address universal service issues.

e. IntraLATA usage subscription: Requires implementation of a “2-PIC” form of presubscription, to be implemented within one year from the date of the Commission’s order. $ ^{82} $ Under 2-PIC, the customer makes two different choices, one for an intraLATA toll carrier and one for an interLATA toll carrier.

f. Regulatory safeguards: Impose no significant additional regulatory safeguards or reporting requirements on Ameritech.

g. Linkage: concludes that it cannot condition unbundling, interconnection or presubscription on interLATA relief because the statutory criteria for approval of exchange certification does not allow for such conditional approval. Supports “a critical reassessment of federal telecommunications policies, including Consideration of the advisability and continued need for the interLATA restrictions contained in the MFJ.” Notes that “... if the federal court deems it appropriate, the Commission would not object to the selection of Illinois or a selected geographic area within the state as the site for a trial such as that proposed by Ameritech.”

It should be noted that Illinois is among the vanguard of state regulators in reforming telecommunications policies and promoting competition in telecommunications services. Illinois was among the first -- and has proceeded the furthest -- toward economically rational pricing in local telecommunications services. The Illinois Commission has moved prices toward costs; adopted mandatory usage-sensitive prices for all local calling; deaveraged prices across geography to reflect cost differences; granted significant pricing flexibility to Ameritech; and replaced rate of return regulation with price cap regulation. Chicago is a “hot spot” of emerging competition in access and exchange competition: MFS $ ^{83} $ and Teleport $ ^{84} $ have been granted certificates to provide local telephone service and MCI Metro has applied for local exchange certification. $ ^{85} $ In spite of this progressive record, though, there was no substantial evidence developed to support findings as to
which specific elements of Ameritech's local exchange services are, in fact, essential facilities that would justify mandatory unbundling. Because Ameritech was volunteering to unbundle loops and ports in return for being allowed to offer interLATA services, the Commission never squarely addressed this fundamental question.

In response to an application for certification as a local exchange carrier, the Maryland Public Service Commission granted MFS co-carrier status as a local exchange carrier, effective October 1994. $ ^{86} $ Co-carrier status means that Bell Atlantic must treat MFS the same way it would treat an independent LEC that operates within a given LATA. MFS will get its own “NXX” exchange prefixes, allowing calls to terminate on an MFS switch. Bell Atlantic is ordered to provide number portability to the fullest extent feasible, initially through “flexible direct inward dialing.” $ ^{87} $ MFS has the right to interconnect with Bell Atlantic switching offices through physical or virtual co-location at the access tandem or end-office levels. The PSC rejected MFS’s proposal for a “bill and keep” arrangement under which neither Bell Atlantic nor MFS would have paid each other for local call termination. $ ^{88} $ The Commission concluded that the competitive carrier should be required to make a contribution to joint and common costs of the ubiquitous network, and directed Bell Atlantic to file revised based on 6.1 cents per call intrastate interexchange access charges, stating this would satisfy “about 60 percent” of Bell Atlantic’s claim for contribution from MFS. $ ^{89} $

In New York, the Public Service Commission has approved the “Open Market Plan” proposed by Rochester Telephone, effective January 1, 1995. $ ^{90} $ Rochester was seeking the PSC’s
permission to restructure itself into an unregulated holding company and two New York state operating companies, R-NET (the network operator) and R-COM (a retailer of communications services). In return, Rochester Tel offered to open its local exchange markets to competition. $ ^{91} $ R-Net filed tariffs that will allow R-Com and all independent competitors to buy unbundled elements and bundle them with other services and equipment. R-NET will collect approximately 2.2 cents per minute for terminating traffic on its network, and pay an equal amount for calls terminated on another network, but only when an imbalance of more than 10 percent appears in the traffic volume traded between carriers. $ ^{92} $ The Plan requires number portability through direct inward dialing and remote call-forwarding technologies, while Rochester develops “true” portability through an “area-wide Centrex” system or regional line-information databases.

Recognizing that Maryland and New York are among the first states to confront the difficult and complex issues of local competition, interconnection and unbundling, their decisions are notable as much for the issues they defer or ignore as for those they address. In Maryland, a Phase 2 proceeding will consider: rates for reciprocal termination; unbundling of “links and ports”; and the universal service and provider-of-last-resort obligations for Bell Atlantic, MFS and other local competitors. In New York the PSC deferred critical issues regarding universal service, maintaining a competitive playing field, preserving service quality, future scope of regulation, and local presubscription procedures to its ongoing Competition II proceeding. $ ^{93} $ The approved Open Market Plan allows for modifications upon resolution of issues in the Competition II docket. While perhaps politically pragmatic, the decisions are also notable for their lack of explicit economic principles, rationale or empirical evidence.

In contrast to the reactive approaches to competition policy development in Rochester-New York and MFS-Maryland, a few states are in the process of a comprehensive examination of local exchange competition and rulemaking. In Connecticut, for example, a 1994 law opens all local services to competition. The Connecticut Department of Public Utility Control has developed a comprehensive framework to devise rules and regulations for competition and address universal service issues. $ ^{94} $ The framework consists of four phases: the first will establish a common “vision”
and “architectural direction.” $ ^{95} $ The second “competition phase” includes separate dockets on reclassification of services, certifications tests, universal service, basic service, lifeline service funding, cost of service, unbundling, reserve deficiency, revenue requirements, and rate filings. Third is the “alternative regulation phase, which will address the level of regulatory authority that the Department will have over emerging competitive services, quality standards, filing requirements, and the pricing of noncompetitive services. The fourth phase is the “holding company affiliate phase.” This process is notable because an effort is being made, at least, to deal comprehensively with the whole set of competition policy issues and corresponding regulatory reforms.

In other states, local competition policy making has proceeded in fits and starts, typically in reaction to applications for certification by alternative exchange carriers. In just the past year or so, for example, a large number of applications for certification as a local exchange carrier have been filed before various state commissions, including:

- US Signal, Teleport, MFS and MCI Metro have filed petitions to provide local exchange services in Michigan. $ ^{96, 97, 98} $

- MFS and MCI Metro have filed an application to provide competitive switched local services in Ohio. $ ^{99} $

• MFS and MCI Metro have filed an application to provide competitive switched local services in Oregon. $ ^{100} $

- MFS and MCI Metro have filed applications to be certified as a local exchange carrier in Pennsylvania. $ ^{101, 102} $
- MFS and Teleport have filed petitions to become competitive local exchange co-carriers in Texas. $ ^{103, 104} $

- Electric Lightwave has filed an application to provide switched services in portions of Utah. $ ^{105} $

- The Washington Utilities and Transportation Commission approved MFS’s and Teleport’s applications to provide local switched services; $ ^{106} $ MCI Metro has filed an application to be certified as a local carrier. $ ^{107} $

- The Wisconsin Commission granted interim approval for Teleport to provide competitive local exchange services in Milwaukee. The Commission indicated it will open a proceeding on technical conditions, terms, and rates for interconnection in the near future. $ ^{108} $

The problem with developing policies in an individual applicant's or petitioner's proceeding is that it puts the "cart before the horse." It is a simple but fundamental principle of public policy that one should develop the rules of the game before the game is played. Instead, state commissions have approved certification, applied some ad hoc rules to get the game started (e.g., interim or temporary interconnection charges), and pushed off the really tough choices into the unspecified future. As a consequence, state commissions have, in many respects, actually delayed the competitive process; by issuing "interim" orders and "temporary" measures, they have had to backtrack on many important issues. For healthy, efficient competition in exchange services to develop the U.S., there must be a fundamental change in state regulatory policies.

### Professional Activities of Robert G. Harris in Telecommunications Policy

I have testified before the United States Senate and the United States House of Representatives in support of legislative removal of the MFJ line-of-business restrictions. I have
submitted testimony to the Department of Justice in support of a “Motion to Vacate” the MFJ on behalf of BellSouth, NYNEX and Southwestern Bell, and a request for a waiver from the MFJ, on behalf of Pacific Telesis. I assisted in the development and testified in support of the price regulation plans proposed by Ameritech and adopted in Illinois, Indiana, Ohio and Wisconsin, as well as those proposed by Bell Atlantic and adopted in Pennsylvania and Virginia. I worked with Ameritech to develop, and testified on its Customers First Plan and generic unbundling and interconnection policy and pricing issues at the Illinois Commerce Commission. I testified to the FCC in support of LEC price cap reforms on behalf of the United States Telephone Association. I have also testified in state proceedings on local competition and interconnection on behalf of BellSouth in Tennessee; Southwestern Bell in Kansas; Ameritech in Michigan; Pacific Bell in California and U S WEST in Iowa, Oregon, Utah and Washington.
2. United Kingdom

# DEVELOPMENT OF THE UK TELECOMMUNICATIONS INDUSTRY THROUGH PRIVATIZATION AND DEREGULATION

Martin CAVE

Department of Economics

Brunel University

Support in the preparation of this paper came from the Contracts and Competition Programme of the United Kingdom Economic and Social Research Council. I am grateful for advice to Peter CULHAM, Akira FURUKAWA and Professor Turuhiko NAMBU.