FRIEND OR FOE?

The 1996 Telecommunications Act had twin goals: facilitating competition and promoting advanced service deployment throughout the United States. Congress viewed these goals as largely compatible--unfettered competition was the preferred vehicle for delivering advanced infrastructure and advanced services.

When it came to rural America, however, Congress expressed ambivalence about competition. The act required incumbent local exchange carriers (ILECs) to interconnect, unbundle and resell services. Rural telephone companies were permitted an exemption from the unbundling and resale requirements, subject to appropriate determinations by state regulators.

At the same time, Congress stated that all areas of the nation, including rural insular and high-cost areas, should have "reasonably comparable" access to advanced telecommunications services at "reasonably comparable" rates to those in urban areas. The FCC was charged with implementing these provisions with little guidance about whether competition was a vehicle for, or an obstacle to, delivering these goals to rural areas.

The Rural Task Force (RTF), which was formed in 1998 to offer guidance on universal issues impacting rural telephone companies, has sidestepped this fundamental issue, despite making some appropriate recommendations (notably that embedded cost, and not a proxy model, should be the basis for high-cost funding, and the fund cap should be partially lifted). The task force echoed congressional ambivalence by attempting to balance the goals of facilitating competition in rural areas and preserving and advancing universal service.

This begs the question of whether competition is compatible with the goal of preserving and advancing universal service. It is unfortunate that policymakers are not asking this question. Instead, they are embarking on a course that actively promotes competition in rural areas on the one hand, and worries about advanced service provision in rural areas on the other.

Raising the Debate

This article does not profess to answer these public policy questions, but it will attempt to elevate these questions to the center of the debate. Several facts should be evident to any observer of rural telecommunications (or rural areas in general):

* Scale economies are present in rural areas; it may be less costly to deploy infrastructure and services in the absence of competition. While the extent of these scale economies is debatable, it is evident that many rural services (e.g., air travel, banking, etc.) exhibit little competition in rural areas.

* Rural policy-makers often promote the idea of "anchor tenancy," whereby essential users (e.g., the government sector) may drive the demand for advanced service deployment. It is repeatedly emphasized that demand for advanced services in rural areas should not be fragmented, otherwise, the demand for service from any single provider may be insufficient to warrant the investment.

* Competitors in rural areas are likely to target a different set of customers than incumbent carriers. In fact, this is desirable, as it is not efficient to have entrants attempt to replicate the incumbent's network in its entirety. This means, however, that entrants will have a different set of goals and obligations than incumbents; entrants will be driven almost solely by the profit motive and will not (and should not) generally seek to universally deploy the services that rural communities need. It makes little sense to ask competitive entrants to adopt goals inconsistent with the profit motive.

* Rural policy-makers often fail to distinguish between rural areas served by small telephone companies and those served by larger carriers. Most of the complaints about service quality and services available, however, come from rural communities served by large carriers, and regulatory concerns with promoting competition are mostly driven by efforts to pry open the urban markets served by these carriers. Small rural companies are swept along with the tide, and little attention is paid to whether the same problems exist in the areas they serve, or indeed, whether the same solutions are appropriate in areas served by rural telephone companies.

Looking Past the Bottom Line

The business case for widespread deployment of advanced services such as digital subscriber line (DSL) is weak at best. Despite poor financial prospects of making a profit on this service, most rural telephone companies have been vigorously deploying DSL service-- far more extensively than their large-company counterparts in rural areas.

Competition in rural areas will not improve this business case. Competition may spur large companies to pay more attention to the rural communities they serve, but it is of little relevance to the rural communities served by rural telephone companies. These companies have a history of being responsive to the needs of their communities and of deploying services that the public interest demands but that do not necessarily contribute to the "bottom line."

It is inconceivable that the goal of providing "reasonably comparable" rates and services can be promoted by simultaneous subsidization of competition in rural areas and constraints on the availability of high-cost funds for infrastructure investment.

This is not to say that competition should (or could) be banned. In fact, many rural carriers are themselves involved in providing competitive services in nearby communities. But there is a difference between permitting competition and actively subsidizing it. The idea of multiple eligible telecommunications carriers (ETCs) in rural areas answers the very question that has not explicitly been addressed: Does rural competition promote the goals of the 1996 Act or inhibit them?

A Funding Quagmire

By default, policy-makers have embarked on implementing an expanded subsidy scheme to include subsidizing competitive entry in rural areas, while at the same time limiting the funding available for future infrastructure investment. The RTF presents this as consensus and compromise. But it really is an abdication of the responsibility to analyze the impacts of competition in rural areas.

Competition has become the goal rather than the means, and a dubious one at that. Surely it is time to raise the questions of how, where and why competition will further the ambitious goals of the act in rural areas.

Dale Lehman is associate professor of economics at Fort Lewis College in Durango, Cob., and author of the second and third white papers in the NTCA 21st Century White Paper Series. The white paper series, including the latest paper "The Cost of Competition," can be found on NTCA'S Web site at www.ntca.org. Lehman, with Dennis Weisman, also recently published "The Telecommunications Act of 1996: The 'Costs' of Managed Competition" (Kluwer Academic Publishers).