An additional crucial barrier to carriers seeking to enter the services market is interconnection to the local network and the charge which is assessed for this interconnection. This area is discussed in chapter 8.

Mergers and acquisitions

A pattern of mergers and acquisitions could reduce the absolute number of competitors in the services market, although it may serve to make the remaining competitors more viable. Already several mergers and acquisitions have occurred. Most prominent was the merger of GTE, the largest independent telephone company with Telenet, a major value-added carrier. Satellite Business Systems represents a partnership of Communications Satellite Corporation, International Business Machines Corporation, and Aetna Casualty and Surety Company. Other actions include the acquisition of 50 percent of American Satellite Co. by Continental Telephone Corporation.

Potential new entrants

Considerable attention has focused on new firms proposing to enter the telecommuncations industry in response to its expected rapid growth. One cited example is Xerox Corporation which has proposed a digital network (referred to as X-TEN) which will cover about 200 cities. This network will use satellite facilities for interexchange services and will use rooftop terrestial microwave facilities to bypass the local exchange network. Xerox, however, in May 1981 announced it would not pursue this network with further investment. Consequently, the future of this network is not clear. Exxon Corporation is also viewed as a potential market entrant as a logical extension of its involvement in the terminal equipment submarket.

FACTORS WHICH CAN FURTHER

THE DEVELOPMENT OF COMPETITION

Based on our review, we believe the trends toward competitive service and equipment markets are established. These trends reflect the impact of technological change on the telecommunications industry, and the subsequent decisions by FCC and the courts to allow new entry. In allowing new entry FCC has recognized the benefits of competition--increased innovation, the introduction of new techniques and services, potentially lower costs, and increased responsiveness on the part of the existing carriers. Having set the industry on the road to a more competitive structure, FCC needs to establish an industry analysis function to monitor the industry and the growth of competition.

If it wishes to endorse the trend toward competition, the Congress may want to amend the Communications Act to direct FCC to rely on competition to achieve the act's broad policy goals and to allow FCC to relax regulation for those carriers which it finds do not possess market power.

FCC needs an industry

analysis function

FCC must be in a position to analyze information regarding market structure, barriers to entry, and other aspects of an analysis of the domestic common carrier industry. Such analysis, we believe, represents an important input into the establishment of appropriate regulatory policies and programs and initiating legislative change. For example, the regulatory constraints placed on a particular carrier should reflect the market power that the carrier possesses in the relevant markets and submarkets in which it operates. Where a carrier is dominant and the potential for abusing its market power exists, the Commission should continue to regulate. Conversely, where a particular firm does not possess market power the full range of regulatory requirements is not warranted. The particular regulatory approaches used--traditional price/earnings regulation, cost allocation requirements, separate subsidiaries and their attendant conditions--should flow from a comprehensive, ongoing analysis of the industry. Finally, the assessment of the success of policy initiatives to promote competition must ultimately rest on an analysis of their effects on the industry's structure-has the industry become more competitive?

The Economics Division in the Common Carrier Bureau is responsible for conducting and coordinating economic research required for the development of common carrier regulatory policies including such subjects as industry structure and competition. The division is also responsible for developing guidelines for evaluating the economic performance of the industry. These responsibilities, however, are not being carried out. For example, in developing the industry structure data presented previously, we found that no such information was being prepared or collected by the division or anywhere else in the Bureau. Division economists responsible for industry data collection told us that developing comprehensive market share data using FCC information would be difficult because in some cases detailed market data is not reported, and in other cases, such as for Domestic Satellite Carriers and value-added carriers, no system of accounts has been approved and, consequently, FCC receives no regular financial reports from these carriers. Beyond the collection of such basic data, we found that no group of individuals is engaged in analyzing the industry.

Economists in the Economics Division, analysts on the Program Evaluation Staff, and a former Bureau Chief have all acknowledged that this key function does not exist. The former Bureau Chief also stated that the lack of industry analysis in the Commission's decisions, in particular, the Second Computer Inquiry, has reflected the absence of this function. We agree. For example, the assessment of the competitiveness of the terminal equipment market in the Second Computer Inquiry was based largely on less than complete information. No data on relevant market or submarket shares was presented.

We believe the principal contributing factor to this situation has been the fact that the Economics Division has been in a state of turmoil over the past several years. There has been a continual turnover of Division Chiefs and prior to November 1980 no full-time Division Chief for over a year. this leadership vacuum, Division economists have tended to become involved in projects which reflected their personal interests, and the industry analysis function has been neglected.

In

The former Bureau Chief had initiated an effort to improve this situation. This involved identifying the industry data collected by the Bureau and determining what information is necessary as part of an industry analysis process. A new quarterly report on carrier market structure and carrier financial conditions was developed and the first report was issued in May 1981. FCC has also taken some steps to consolidate in the Economics Division information on the various reports the Commission receives from the carriers.

While collecting information is an important first step, we believe the Bureau needs to establish a group responsible for ongoing analysis of the industry. This group's analysis would serve as the foundation for future Commission decisions on regulatory policies for dominant and nondominant carriers as well as a basis for evaluating the impact of Commission policies designed to foster competition.

Congress can facilitate

competition's development by

amending the Communications Act

According to the broad policy goals of the Communications Act, FCC is to regulate communications to make available a rapid, efficient communications service with adequate facilities at reasonable charges. FCC's decisions allowing competition have flowed from its determination that a competitive environment would facilitate achieving the act's policy goals. While these decisions have been sustained by the courts, several attempts have been made to legislatively limit the development of competition. In particular, the established carriers supported legislation in the 94th and 95th Congresses to affirm a regulated monopoly in all markets in which they operate. they operate. In recent years, however, these carriers have altered their view to an acceptance of competition as the appropriate long-run structure for the industry. Legislation introduced in the last Congress and the current Congress contain provisions which in essence would codify FCC's and the courts' decisions supporting competition.

If the Congress wishes to support the trend toward competition and endorse the decisions reached by FCC and the courts in favor of competition, we believe the Congress needs to amend title I of the Communications Act to direct FCC to rely on competition and the private sector to the maximum extent possible to achieve the overall goals of the act.

Where firms do not possess market power, we believe the kind of pervasive regulation applied to a dominant carrier is not warranted. FCC has recognized these facts in its Docket 79-252 proceeding and is attempting to relax regulatory requirements for competitive carriers. FCC is attempting this "deregulation" through what it believes are several novel interpretations of the Communications Act. Certain carriers like MCI or Southern Pacific Communications Co., which were found to not have market power would no longer be defined as common carriers and would no longer be subject to title II regulation. Other carriers, like Western Union, which we noted earlier in this chapter, have market power in certain market sectors but not others would still be defined as common carriers but FCC would "forebear" from regulating under title II the nondominant aspects of their business.

According to an attorney in the Policy and Program Planning Division controversy exists regarding whether FCC can take this proposed action, and several existing Commissioners have raised doubts about the appropriateness of this overall approach. Even if approved by the Commission this overall approach will likely be litigated over several years. Further, the "definitional" aspect may beget other problems. For example, under FCC's spectrum allocation rules, common carriers are given key portions of the frequency spectrum which are better in quality than other portions. The issue is, therefore, raised whether previously defined common carriers would still have rights to these portions of the frequency spectrum after the Commission had defined them not to be common carriers.

We believe that the thrust of the Commission's actions is correct. Deregulating carriers without market power will reduce the costs of regulation for these carriers and society as a whole. Further, as subsequent chapters will demonstrate, much needs to be done, including the more appropriate application of personnel resources, to improve FCC's regulation of dominant common carriers. By freeing nondominant carriers from title II regulation, FCC can simultaneously release scarce Common Carrier Bureau resources for regulation of dominant carriers. The Congress by amending title II of the Communications Act to allow FCC, upon a finding that it is in the public interest, to exempt any carrier from any or all provisions of title II will provide the certainty FCC needs to shift the focus of its regulation.

CONCLUSIONS

Domestic common carrier telecommunications is in the midst of an evolution--from a highly monopolized structure to a competitive structure. Rapid technological change has been at the heart of this evolution--reducing barriers to entry into the industry and expanding market opportunities for a variety of firms. FCC and the courts have reacted to the impact of technological change by removing regulatory restrictions on entry and, as a result, numerous firms have entered the industry.

We believe the trends toward competitive service and equipment markets are established. From our analysis, it does not appear that competition has developed to the point that the telecommunications services market can be considered competitive. Detailed analysis of whether domestic common carriers are dominant and possess sufficient market power that regulation should be applied or relaxed, however, needs to be done by FCC. To facilitate such analysis, FCC needs to establish an industry analysis group to monitor and report on developments in the industry and the growth of competition. This group would assemble and analyze information on which carriers were dominant and which were nondominant so that the appropriate regulatory programs and policies can be applied to these carriers. This group's analysis would also serve as a basis for measuring the effectiveness of FCC's policies designed to foster and encourage competition.

In the equipment market, competition in some sectors is more highly developed. Reflecting this situation, FCC has decided to relax price/earnings regulation for AT&T's equipment offerings while still subjecting them to regulation under a separate subsidiary approach. (See ch. 6. )

If the Congress wishes to endorse the trend toward competition and the decisions reached by FCC and the courts in favor of competition, we believe the Congress needs to amend title I of the Communications Act to direct FCC to rely on competition and the private sector to the maximum extent possible to achieve the overall goals of the act.

We believe deregulating carriers without market power is an appropriate regulatory approach which will reduce the costs of regulation for these carriers and society as a whole. By focusing its regulation on dominant carriers, FCC can optimize the use of its regulatory resources. The Congress can facilitate this shift in regulatory focus by amending title II of the Communications Act to allow FCC to exempt any carrier from any or all provisions of title II when it finds such exemption is in the public interest. By reducing the uncertainty surrounding FCC's ability to exempt carriers Congress would allow FCC to relax its regulation of nondominant carriers and focus its attention on dominant firms.

RECOMMENDATIONS TO THE CONGRESS

If the Congress wishes to endorse the development of competition, we recommend that the Congress

--amend title I of the Communications Act to direct FCC to rely on competition and the private sector to the maximum extent possible to achieve the overall goals of the act. --amend title II of the Communications Act to allow FCC, upon a finding that it is in the public interest, to exempt any carrier from any or all provisions of title II.