November 3, 1998

GOVERNMENT INTERVENTION IS SOMETIMES NEEDED FOR A FREE MARKET

by Andy Oram
American Reporter Correspondent

CAMBRIDGE, MASS.—Governments are lying down on the job a lot these days. They yell out at the corporations to help themselves to whatever is in the refrigerator, and come in only later occasionally to clean up the mess. But the state of New Mexico, even while it espouses free-market rhetoric, has recently been standing up for the public interest in telecommunications.

New Mexico faces the same problem as telephone users virtually everywhere in the world (insofar as people have phone service at all): a lack of competition in the local market. Bell telephone company U.S. West has hardly any competitors in New Mexico’s largest city, Albuquerque, and none at all in the rest of the sparsely-populated state.

U.S. West doesn’t even offer residents ISDN, a moderately high-speed data service that’s been offered in the rest of the country for a decade. (Significantly, the only ISDN service in New Mexico is offered by competing carriers.)

And now a New Mexico public commission is fighting to obtain ADSL, the next step up in data services. Advanced telecom offerings may seem irrelevant to the neediest communities—geographically isolated, low-income, often Hispanic—but as in other largely rural areas, data services can drive development that benefits the tax base as a whole.

U.S. West had already run a gamut of complaints from potential competitors when trying to offer ADSL in other states. As a regulated monopoly, an incumbent telephone company has to get approval for its prices and marketing plan from the public utility commission in each state. Since lots of ISPs want to offer Internet service to U.S. West’s ADSL users, and some ISPs or competing telecom carriers want to buy or interconnect with U.S. West in various ways, its proposed strategy or “tariff” receives considerable scrutiny in many states.

In New Mexico, U.S. West decided last summer that the heat was climbing too high. Competitors wanted to see proof that its capacity would offer the speed customers were expecting, and to examine its costs in order to know whether they could afford to buy lines and offer competing service—all “highly confidential proprietary information” according to U.S. West.

So in June, the company abruptly tried to withdraw its tariff. And why shouldn’t it have the right to back down? It didn’t want to divulge internal information that was required to offer the service, and it suspected that it would not get the revenue it wanted by following the course laid down by the State Corporation Commission that handles the tariff.

Here is where the government drew a line protecting the public interest. It released an order refusing to let U.S. West withdraw and citing Congress’s mandate in the 1996 Telecommunications Act for states to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans.”

The Commission announced a proactive policy by stating: “Given these important national public policies, as well as our state’s virtually identical declared public interest, withdrawal of the tariff for the MegaBits Service would be contrary to the goal of providing advanced telecommunications technologies in New Mexico.”

U.S. West presented strong arguments, calling the Commission’s order an “unconstitutional taking” and a violation of due process. But the Commission was not intimidated.

On October 29, U.S. West declared that it would take the dispute to the state Supreme Court. While this might be a bluff, it raises warning flags. ISDN was held up for two years pending consideration by the Supreme Court, and New Mexican residents may well look forward to a similar delay for ADSL. On the other hand, the Supreme Court has finally handed down its ISDN decision recently, and has ruled with the Commission that U.S. West must offer it at rates established by the Commission.

A recent ruling by the FCC throws the whole question up in the air. On October 30 they declared that ADSL is an interstate service, because the Internet crosses state lines. The roundabout regulatory reasoning here could lead to ADSL being tariffed at the federal level, by the FCC, rather than by individual states.

The New Mexico State Corporation Commission’s chief clerk, Orlando Romero, told me the state does not lean toward regulation. “When competition comes, then let the market decide.” But in the case of local telephone service, where there is currently no effective competition, the Commission “is here to balance the interests of the companies and the public,” and in this particular case, “the interests of the public outweigh the business interests of the company. The purpose of the Telecom Act is to open markets—but they’re not open yet.”

Romero’s position was matched by Hank LeMieux of the New Mexico Internet Providers Association, which has pushed for information and fair competitive practices from U.S. West. Describing himself as “a free-market Republican,” LeMieux said, “If there’s no free-market competitive force, we need to have a watchdog in the public interest.” He added, “This is all about achieving greater competitiveness in the local loop market.”

We may wait two years to find out how the court resolves the ADSL dispute in New Mexico—or less if the FCC declares it has jurisdiction—but elsewhere in the world users are taking matters in their own hands. A highly publicized “Internet strike” in Spain (where Internet servers shut down access and users refused to log on) forced a steep reduction in telephone company prices for Internet access. Last Sunday, many German users participated in a similar action to protest prices at Deutsche Telecom.

Why are free-market conservatives worried about government interference in the telecom industry? A danger exists that subsidies or other government favoritism distorts the market and sends revenue the way of obsolete technologies. For example, many proponents of wireless communications complain that the “E-Rate” subsidy to schools, libraries, and health care centers discriminates against wireless technology.

On the battlefield staked out by this doctrine, the notion of “universal service” has come under fire in the past few years. Some researchers argue that periods of history where subsidies reduced the cost of telephone service saw no greater growth (“penetration”) of telephone service than periods without such artificial stimulation.

I am open to these arguments, but it’s hard to compare two periods of history; there are just too many uncontrollable economic and social effects besides pricing policy. I can accept that, in urban areas, subsidies might make very little difference in poor people’s ability to afford service. But I believe it makes a difference in far-flung rural areas.

Another technology that is sometimes called a mistake of social policy can be found in the Minitel system offered by the monopoly telephone company in France. Minitel is a quite remarkable phenomenon that impresses many Americans who visit the country.

Developed in the 1970s, Minitel is a modest information delivery service where people can look up phone numbers, make train reservations, engage in online chats, buy things online, and access information services from various businesses at metered rates. According to telecom engineer and political activist Meryem Marzouki, Minitel systems can be found in 15 million homes (25% of French telephone users) a high number compared to 1.4 million Internet users.

Amazing by the standards of the 1970s, Minitel looks rather paltry next to the modern Internet. The Minitel channel is completely owned by the telephone company. It is basically a broadcast service, with much higher barriers to entry than the World Wide Web. You have to sign a contract with French Telecom to provide a service. Minitel’s pay-per-use model also discourages innovation.

The question is whether Minitel should be viewed as an early victory for the dream of universal service in data communications, or a monopoly-sponsored albatross that holds back the move to the Internet. Meryem’s answer is, “Neither, and both.”

Minitel is a a nice service that has outlived its time. It cannot be seen as competition for the Internet, which is so much richer and fun to use. The key barrier to the spread of the Internet in France is the per-minute pricing of local telephone service.

Now French Telecom is trying to promote a stripped-down Internet service called “Kiosque Internet.” It’s once again a pay-per-use system—and a very expensive one; 2 hours of use cost as much as a one-month subscription to an Internet provider. And like Web TV in the United States, Kiosque Internet encourages passive consumption rather than a two-way interchange of ideas.

Monopolies and governments should not be in the business of choosing technologies for consumers. But subsidizing needy users to get the services they want is good government, and perhaps even good business. Advanced information services means more choice for everyone.


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