Telecommunications and Georgia’s Competitive Advantage

EXECUTIVE SUMMARY

From software development to telemedicine to broadcasting, many Georgia industries depend on the state’s telecommunications infrastructure. In addition, the telecommunications industry itself already employs some 50,000 professionals in Georgia. These high-paying jobs in growing, dynamic industries are exactly the kinds of jobs that will determine Georgia’s economic future.

Telecommunications deregulation will allow Georgia to build upon this solid base, enhance its infrastructure and create jobs. Taking the lead in creating a competitive telecommunications marketplace could prove to be the state’s best economic decision since the construction of Hartsfield International Airport.

The primary question being debated today is not whether the local market should be opened, but when and how? The main source of contention revolves around Southern Bell, which now controls most of the local markets.

Georgia legislators are faced with four choices.

§ Status Quo: This is the easy, less risky approach of doing nothing; however, if Georgia falls behind in telecommunications infrastructure development, it would concede a competitive advantage to other states.

§ First Step: This approach calls for the General Assembly to take the first step toward competition by authorizing local telecommunications competition — and then leave the difficult regulatory decisions to the Georgia Public Service Commission.

§ Wisconsin Model: In Wisconsin, the legislature resolved most of the major issues through legislation, rather than a regulatory body such as the Public Service Commission. This model puts the pressure on the General Assembly to gain agreement among the contending parties, each of which is often powerful enough to stop passage of a particular bill.

§ Breaking Barriers: This bold approach calls for the General Assembly to remove all in-state barriers to competition contingent on the removal of all federal barriers. As a result, Georgia would be the first, and only state in the nation that would be fully open to competition.

“[Our state] has a strong interest in the resolution of the challenges facing communications policymakers. In comparison with most other states or the nation as a whole, the significance of telecommunications [to our state] is enormous. Our economy is based on information-intensive industries such as financial services, medical care, technology and education. As the telecommunications industry undergoes a fundamental and welcome transformation from monopoly to competitive markets, the challenge of communications policymakers is to encourage the deployment of advanced infrastructure for the benefit of all citizens as control of pricing shifts from government to the competitive marketplace.”

— William F. Weld 1

William F. Weld, the farsighted Governor of the Commonwealth of Massachusetts, is a voice for deregulation of telecommunications. To Governor Weld “competitive markets will improve the economic efficiency of the industry and ensure development of sophisticated networks that are cost effective and responsive to customer demand.”

When Weld argues that “it would be difficult to overstate the importance of the telecommunications industry to the economic well-being of Massachusetts,” one must wonder whether that statement might appropriately be applied to Georgia as well. By two measures, the answer is clearly yes.

Infrastructure Counts

One such measure is infrastructure. Historically, Georgia has prospered by being a transportation infrastructure state — the port at Savannah and the railway center at Atlanta provide leading examples. While transportation will remain important to the state’s economic future, as is evidenced daily by the hundreds of flights in and out of Hartsfield Airport, the communications industry is forecast to be of growing infrastructure importance.

Vice President Al Gore even has a name for this technologically advanced infrastructure. He calls it the “Information Superhighway.” At the heart of this concept is the notion that the industries of the next century will trade primarily in information — and information does not require transportation, but does require sophisticated telecommunication networks.

Financial services is a leading illustration. Digital bitstreams, not paper currency, is what modern finance is all about. Health care is another industry that increasingly is becoming information-intensive, both to provide better care through techniques like telemedicine, and to control costs through applied information management technologies. Information technology itself is information intensive, particularly in software development and information retrieval services. And then there is the growing array of knowledge creation services ranging from educational institutions to engineering and consulting firms, to lawyers, broadcasters and research scientists.

In each of these activities, success is described in informational terms, and information is becoming more and more reliant on telecommunications. The message then is clear: Georgia cannot fall behind in its telecommunications infrastructure development, for to do so would concede a competitive advantage to other states that are targeting information-intensive industries for economic development.

Telecommunications and Jobs

While telecommunications infrastructure is important to the state’s economic future, there is a second, high value consideration, too — jobs.

Already, telecommunications is one of the nation’s largest industries. Because of “technological convergence” with the computing, electronics, and media industries, telecommunications may well emerge as a mega-industry. Moreover, telecommunications is becoming a “growth story” in nearly every country around the world. From Chile to China, national leaders are seeking catalytic growth benefits by investing in telecommunications. As worldwide demand expands for telecommunications equipment and services, so too do export opportunities for the U.S. telecommunications industry, which in turn creates domestic job opportunities.

This combination of industry convergence, on the one hand, and expanding global markets, on the other, is leading primary industry players to make major strategic investments. Recent examples include the acquisition by AT&T of McCaw Cellular, the nation’s largest cellular company, BellSouth’s wireless technology investment in Israel, and Cox Enterprises’ partnership in a five-way cable-telco consortium with Sprint.

While investors are seeking solid returns on their capital, they often will also be creating new jobs to build and manage these enterprises. What are Georgia’s prospects for benefiting by this new job creation? In the past, the state has done very well. BellSouth, the largest of the Baby Bells, has its corporate headquarters here, as does Cox Enterprises and Scientific Atlanta. AT&T, the nation’s largest telecommunications company, calls Georgia its “second home.” And both GTE and MCI have major business unit headquarters here.

As a matter of public policy, the state should strive to retain the full presence of these corporate citizens who collectively employ some 50,000 telecommunications professionals in well-paying positions in Georgia.

Public Policy: The Regulatory Issue

At the same time, the state should re-examine Georgia’s public policies in telecommunications, asking whether a change in regulatory policy would help achieve the twin goals of infrastructure development and job creation.

This issue is, in fact, already on the table. In the 1994 session of the General Assembly, a telecommunications deregulation bill was introduced, discussed, but never voted on. Southern Bell advocated that it was time for change, but a coalition of other telecommunications interests cautioned against the risk of passing a bill that was too pro-Bell. Since then, a special legislative committee that includes industry representatives has been studying the issue, with an eye towards the 1995 legislation session.

In considering what direction to take, the General Assembly should be aware of three factual situations.

Considerable competition already exists in telecommunications, and the issue at hand is about how much more competition there should be, especially for local service.

The major corporate stakeholders all agree that Georgia should move to greater competition in telecommunications, while disagreeing on how to get there.

Georgia shares jurisdiction with the federal government in telecommunications, with the primary actors being:

— The Georgia General Assembly, which must authorize local competition in Georgia if that market is to be opened.

— The Georgia Public Service Commission, which regulates rates and services of telecommunications carriers in Georgia.

— The U.S. Congress, which last year considered but did not enact major deregulation, pro-competition legislation.

— The Federal Communications Commission (FCC), which regulates interstate telecommunications and cable television rates.

— The Federal District Court that oversees the divestiture of AT&T, including a ban on the Baby Bells from competing in the inter-city long distance and equipment manufacturing markets.

Most, if not all parties agree that the goal of opening all telecommunications markets to competition is a good idea, for it would increase industry efficiency, give consumers more choices, and spur innovation. These benefits did occur when the federal government opened the telecommunications equipment and long distance markets to competition. Will it occur if the local market is opened to competition? The near-consensus agreement is that it will.

So the real question is not whether the local market should be opened, but when and how?

Additionally, there is the question of whether, in opening the local market to competition, the Baby Bells, which now control most of those markets, should be freed to enter markets from which they are prohibited, namely the inter-city long distance and manufacturing markets? When these two questions are put on the table, consensus is not to be found.

AT&T argues that the local markets should be opened to competition, but sees the need for a substantial transition period to “effective competition” before allowing the Baby Bells into either long distance or manufacturing. MCI and Sprint are in general agreement with this position. By “effective competition,” the opponents of Southern Bell mean that there should be strict regulation of Southern Bell until the firm is no longer “dominant” in the market. In economic terms, that usually means until the “dominant” provider yields about 40 percent of its market share to competitive providers.

For its part, Southern Bell argues that opening all or part of the local market to competitors is fine, but that it should be put on a “level playing field” with those competitors. By “level playing field,” Southern Bell means that it should be freed from regulatory control to the same extent that its competitors have regulatory freedom.

In sum, the issue is over whether the government should let the giant telecommunications companies battle it out in a newly deregulated marketplace, or whether the regulators should handicap Southern Bell until AT&T, MCI, the cable television companies, and others, have firmly established themselves in the market. Thus a great divide exists between opposing industry positions on “effective competition” versus “level playing field.”

Bell’s strongest argument is that its would-be competitors are very large companies, a situation very different than when the federal government handicapped AT&T and thereby enabled upstart MCI to get a toehold in the market. Moreover, Bell points out that it has a significant marketing disadvantage with respect to long distance and toll calls. If AT&T, MCI, and Sprint can fully compete for in-state toll calls, Southern Bell believes that those companies will bundle in-state toll service with out-of-state long distance service and thereby achieve a competitive marketing advantage since the federal government prohibits Bell from providing out-of-state long distance service (and even some in-state toll service, too).

The competitors strongest argument is that local competition cannot take hold without interconnection with Bell’s network and that Bell will use its “interconnection power” to the disadvantage of its competitors. For example, for other companies to compete against Southern Bell for toll calls between, say, Atlanta and Athens, the customers of the other companies have to originate and terminate their calls on the Southern Bell network. Without proper regulatory controls, the competitors contend that Bell has an incentive to either provide inferior technical interconnections, or charge unreasonable interconnection fees.

Beyond the in-state toll market, there is the question of whether competitors will try to run their own wires — or wireless services — directly to homes and businesses. Cable television and electric utility companies already have wires running to residences and businesses, and both industries — cable quite aggressively — are examining telephony strategies. Separately, so-called “Competitive Access Providers” (CAPS), are stringing wire to large businesses so they can bypass local telephone companies when making long distance calls. At the same time, the federal government is auctioning new radio frequencies for what are called “personal communications services,” a sort of mini-cellular phone service, that is widely seen as a potential wireless competitor to wired telephony.

Finally, all the major industry players are looking at “broadband” wired services, a technology that would bring a bundle of voice, data and video services into the home. U.S. West, the Denver-based Baby Bell, has bought the two major cable television systems in Atlanta and intends to upgrade them to broadband technology. Meanwhile, Southern Bell has announced that it will test broadband technology in Chamblee.

It’s against this background that the Georgia General Assembly will consider whether to rewrite the state’s basic telecommunications law. Georgia is actually behind a number of other state’s which have legislatively addressed at least some of the issues. In Wisconsin, for example, the question of updating the state’s telecommunications law was considered so important that a special session of the legislature was convened last year for just that purpose.

Public Policy: The Choices

What options are open to the Georgia General Assembly in telecommunications?

At one extreme, the legislature can do what it did a year ago — debate the matter, and then put off a decision pending further study. It could easily happen again, because many issues are highly technical, and the industry, with its large and powerful players, is divided. At the other end of the spectrum, the General Assembly could act boldly, and seek “first mover” advantages by trying to break barriers in telecommunications at both the state and federal levels. Boldness, of course, usually entails risks, as well as potential rewards. Are there courses in between? There are several.

This paper will examine four choices, starting with the no change, or “Status Quo” option, and concluding with the “Breaking Barriers” option which was formulated by the authors.

1) Status Quo

Doing nothing is in fact a policy choice, and it often becomes the “preferred” option because it is the easiest for the legislature to adopt, and carries the least amount of risk at the outset. Georgia would be able to observe efforts and initiatives undertaken in other states regarding telecommunications regulation, and benefit from their respective experiences before acting itself. In effect, this policy envisions Georgia trying to act as a “fast follower.”

However, there are several potential costs associated with this position. First, Georgia risks falling behind — either in fact or in perception. And that in turn could have a negative effect on attracting and cultivating telecommunications intensive jobs and in deploying advanced telecommunications infrastructure in the state.

With a current base of large telecommunications providers already located in the state, adopting a course that seems to ignore the dramatic changes occurring within the industry would have the potential effect of threatening future activities or expansion in Georgia on the part of these industry players.

Finally, there is the risk that competitor states will adopt policies that advantage them to the detriment of Georgia. An analogy can be drawn with North Carolina’s legislative decision to rewrite its state banking laws earlier than Georgia, and thereby successfully positioning North Carolina for “first mover” advantages as a major banking leader.

2) A “First Step” Policy

The General Assembly could take a first step toward competition by enacting a statute that would authorize local telecommunications competition in Georgia — and then leave the implementation of that policy decision to the Public Service Commission.

This model has been adopted in several states. In some other states, regulatory commissions have implemented competitive policies on their own authority (something that has occurred at the federal level, too). For the Georgia PSC to act, however, would require a grant of authority from the General Assembly.

Arguably, this is the leading option. Indeed it has been recommended to the legislature by the Georgia Center for Advanced Telecommunications Technology, an industry-academic-government organization which had the question examined last year by a special Working Group.2

The pros and cons of this option largely focus on individual perceptions of the PSC.

The purpose of this paper is not to engage in a debate on the role and effectiveness of that regulatory body. It should be noted, however, that every regulatory commission is both quasi-legislative and quasi-judicial in nature, and each commission is bound by precedents and procedures. As a consequence, a “first step” policy will likely produce a slow evolution to competition, not unlike what occurred at the federal level in both the long distance and equipment markets, where the FCC cautiously moved towards increased competition step-by-step. Every issue usually is battled twice: first before the Commission and then, on appeal by the losing side, before the judiciary (often only to be sent back to the commission for “rehearing” and a rerun of the entire original process).

3) The Wisconsin Model

As mentioned previously, the state of Wisconsin last year held a special legislative session to enact a comprehensive new state telecommunications law.

Were Georgia to adopt this approach, the legislature itself would resolve most of the major issues. In its effort, Wisconsin rewrote its telecommunications statutes with the result being a transition to competition, and special provisions for safeguarding “universal service,” a term heard often in telecommunications policy debates involving the “availability” and “affordability” of telephone (and in the future perhaps other “advanced” telecommunications) services.

In rewriting legislation of this magnitude, the primary difficulty is one of gaining agreement among the contending parties, each of which is often powerful enough to stop passage of a particular bill (which is what happened to telecommunications legislation in the last session of both the Georgia General Assembly and the U.S. Congress).

The Wisconsin model puts the legislature in the position of deciding critical issues such as universal service, barriers to entry, unbundling of services and interconnections. Given the complexity of the issues and the predictable intensity of lobbying efforts, a reform measure that would result from a legislative session would probably require a grand compromise among key industry players — something that is difficult, but (as Wisconsin has shown) not impossible to achieve.

4) Breaking Barriers

“Breaking Barriers” is the term for a unique, and quite bold option that the authors recently proposed in the belief that it would best position Georgia to reap the benefits of both advanced infrastructure development in telecommunications and job growth, as well.

Under this proposal, Georgia would seek unique “first mover” advantages by being the first state in the nation to have all barriers to competition in telecommunications removed — both state and federal.

It is important to note that significant regulatory and judicial barriers to free and open competition exist at the federal level. Despite its pro-competition posture, the FCC has only recently placed a series of new regulations on the cable television industry. And more than a decade after the federal courts broke up the old Bell System, neither BellSouth, nor any other Baby Bell, can manufacture telecommunications equipment nor carry long distance calls between major cities. And there are other limitations, as well.

Under the “Breaking Barriers” proposal, neither the state of Georgia nor the federal government would either protect a company’s market, or keep in place a legal or regulatory barrier to competitive entry into any telecommunications market in Georgia. Every industry barrier to competition would be removed.

To accomplish this, the Georgia General Assembly would enact a law that removes all in-state barriers to competition contingent on the FCC and the Federal District Court removing all federal barriers to telecommunications competition in Georgia. As a result, Georgia would be the first, and only state in the nation that would be fully open to competition.

What are the likely rewards? And risks?

The incentive to build infrastructure would be enormous. Competitive, full-service, broadband networks would quickly be deployed both by telephone and cable companies (and possibly by electric utilities). To seek competitive advantage, these firms would probably bundle their wired networks with the new wireless personal communications services, or PCS. Innovation and consumer choice would flourish.

At the same time, investing in Georgia would become a priority for the major telecommunications providers, sparking a growth in jobs. Just lifting the ban on manufacturing from the Baby Bells would encourage not only BellSouth to look to Georgia as a manufacturing center, but every other Baby Bell, as well — all seven of these giant companies.

Are there risks? Of course. Competition may be uneven, causing declining prices for some, and increasing prices for others, with worries that increasing prices would threaten “universal service.” Regulatory freedom for Southern Bell, its would-be competitors will argue, would thwart competition, as the entrenched provider seeks to secure its position through predatory pricing, and discriminatory, anti-competitive interconnection practices.

Are these risks too risky? Of course not.

On universal service, the fact is that today more than 90 percent of all Georgia households have telephone service, and there is not a single economic study that shows that number would go down if some Georgians experienced reasonable price increases. Would competition be stillborn given the “dominance” of Southern Bell? No, because this proposal advocates deregulation, not repeal of the antitrust laws. The remedy for predatory pricing, discrimination and other anti-competitive behavior is the nation’s antitrust laws. These are pro-competition laws, designed to encourage free and fair competition. Moreover, the antitrust remedy is available to both government and private parties. And for private parties (i.e., Southern Bell’s competitors) a successful antitrust case has its own rewards — triple damages.

The biggest barrier to full and free competition in telecommunications in Georgia is uncertainty. Every participant wants the certainty of being rewarded, or at least the certainty not to have to bear any risks. In a free market, there ought not to be government guaranteed rewards. Risks are another question. And while existing antitrust laws seem sufficient, policymakers could consider three additional safeguards, even though it is doubtful they will be needed.

For those who fret about “universal service” — that is, the universal “availability” and “affordability” of service — provide a “universal service fund,” with financial contributions by all the telecommunications companies doing business in Georgia. The Wisconsin legislation has a model state universal service fund, which we believe can easily be adopted in any state. Second, provide that any telecommunications carrier, having been unsuccessful in a “good faith” effort to reach an interconnection agreement with another telecommunications carrier, should have the right to declare an “impasse” and seek a form of “binding arbitration” from the Public Service Commission. Finally, provide that an independent body, such as the Georgia Center for Advanced Telecommunications Technology, be given a monitoring responsibility and be charged with preparation and dissemination of an annual report on the state of telecommunications in Georgia.

Again, it is doubtful that any of these safeguards will be needed. But one must recognize that a “Breaking Barriers” option is bold, and there are those who tend to worry more about risks than focusing on rewards that will come to the first state that can truly break all the barriers — state and federal — to full and free competition in telecommunications.

William H. Read, Esq. is a member of the Georgia Public Policy Foundation’s Academic Advisory Board and Southern Bell Professor of Communications Policy at Georgia Tech. Mark H. Read is a graduate student in the School of Management at Georgia Tech. The Foundation is a nonpartisan, member-supported research and education organization based in Atlanta, Georgia, which promotes free enterprise, limited government and individual responsibility.

Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

ã Georgia Public Policy Foundation (February, 1995) Permission is hereby given to reprint this article, with appropriate credit given.

By William H. Read and Mark H. Read