CHAPTER 1

INTRODUCTION

Technological changes in the domestic common carrier telecommunications industry have prompted a critical reexamination of the basic communications policy and regulatory methods contained in the Communications Act of 1934 (47 U.S.C. 151 et seq.), the enabling legislation of the Federal Communications Commission (FCC). During the last several Congresses, extensive hearings have been held and, although none was enacted, legislation was introduced to amend the Communications Act. At present a bill (S. 898, 97th Cong., 1st Sess.) is pending before the Congress which would set new common carrier communications policy goals and provide FCC different regulatory tools.

These same technological changes have spurred the growth of the domestic common carrier industry. In 1979, the over 1,500 carriers in the domestic common carrier industry generated over $53 billion in service revenues, employed over one million persons, and had a gross investment in plant and equipment of about $155 billion.

This report contains conclusions and recommendations which provide a framework from which the Commission can improve its regulatory program and the Congress, through legislative change, can clarify the methods for regulating domestic telecommunications common carriers.

ACHIEVING THE NATION'S
TELECOMMUNICATIONS

POLICY GOALS

Title I of the Communications Act contains this Nation's policy for common carrier telecommunications. The act created FCC

* * for the purpose of regulating interstate and
foreign commerce in communication by wire and radio
so as to make available, so far as possible, to all
the people of the United States a rapid, efficient,
Nation-wide, and world-wide wire and radio communica-
tion service with adequate facilities at reasonable
charges ** *."

While general in nature this policy statement encompasses several goals--rapidity, efficiency, universality of service, adequate facilities, and reasonable charges.

To satisfy these policy goals and the goals of earlier State regulation a regulated monopolized industry structure developed, reflecting the traditional belief that the domestic common carrier telecommunications industry was a "natural monopoly."

A natural monopoly exists when the production of a good or service is characterized by economies of scale; that is, per unit production costs decrease as the firm becomes larger. Consequently, an industry's largest firm has the lowest cost per unit of output and is the most efficient. This firm is able to underprice its competitors and drive them out of business; a monopoly by the largest firm is the "natural" result. A key attribute of a natural monopoly is that a single firm can supply the entire market for a good or service more cheaply than any combination of smaller firms.

To secure the benefits from the natural monopolist's lowcost production for society, while preventing the monopolist from exploiting its monopoly position, regulation is imposed. Unregulated monopolists, for example, may produce too little, charge prices that are too high when compared to a competitive situation, engage in discriminatory pricing, and reap monopoly profits. Regulation, thus, attempts in such circumstances to establish a means for assuring good performance. To accomplish this, the regulatory agency may take actions such as limiting the number of firms which may provide service in a particular market and placing restrictions on firms' freedom to compete. In addition, the agency, rather than the marketplace, becomes responsible for determining price, quality, and conditions of service.

Title II of the Communications Act sets out FCC's regulatory structure for dealing with a monopolistic industry structure. The act requires every common carrier to furnish services upon reasonable request and at reasonable charges. Consequently, common carriers must file interstate tariff schedules with FCC, and the rates and requirements in those schedules are subject to FCC review and regulation. No carrier may construct or acquire additional interstate telecommunications transmission facilities or curtail or discontinue service over these facilities without FCC approval. Carrier accounting and depreciation practices are also subject to Commission regulation. Appendix I highlights the key sections of titles I and II of the Communications Act pertaining to domestic common carriers.

For

The natural monopoly characteristics of an industry, including telecommunications, however, are not fixed over time. The particular economies of scale which determine whether one or many firms can serve the market at the lowest cost depends on the technology available at a specific time. A natural monopoly, therefore, is the best structure for an industry only as long as the technology which gave rise to the monopoly dominates. example, technological changes may allow lowest cost production to occur at relatively small output levels, thus changing the optimum industry structure from a natural monopoly to a competitive system. Conversely, technology may change in the other direction, allowing lowest cost production to occur only in a monopoly. In either case, preserving an industry structure no longer warranted by the available technology can impose various costs on society, such as potentially higher prices.