Universal service and the digital revolution: beyond the Telecommunications Act of 1996.

• Author: LaPointe, Markenzy

1. INTRODUCTION

   For most of the twentieth century, telecommunications policy in the United States has been shaped by one fundamental principle: universal service.(1) Essentially, universal service refers to the nondiscriminatory provision of telephone service to all Americans at an affordable price.(2) In fact, it is this principle that has remained a cornerstone of telecommunications policy, even today.(3) With the recent passage of the Telecommunications Act of 1996 (the "Act"),(4) Congress has reaffirmed what proves to be an even stronger commitment to universal service by redefining and expanding its meaning.(5)

   Although universal service has been significantly redefined, Congress still needs to consider expanding the new definition to reflect current technologies.(6) Specifically, the United States needs to respond to the global digital revolution in which information is transferred and disseminated in unprecedented ways.(7) In order to be part of this new information loop, which contains increasingly more personally and economically relevant data, one can no longer simply rely on the utility of basic telephone services. Certain tools, like computers and their attendant networks, are becoming essential in transferring and receiving important information.(8) Given the magnitude of this digital transformation and its potential impact on persons without access to such technologies, it is imperative that Congress redefine universal service to reflect and encompass this emerging digital world.(9)

   This article begins by providing the history surrounding the development of universal service. Next, Part III reviews the current definition of universal service, as provided by the Act. Part IV then discusses the need for an expanded definition of universal service in light of this digital revolution. Part V of this article illustrates how some other countries, namely Japan and Canada, plan to approach the digital era. Finally, Part VI concludes that Congress needs to reassess and expand universal service to reflect the realities of the digital world.

2. BACKGROUND HISTORY OF UNIVERSAL SERVICE

   As previously mentioned, universal service refers to the public policy of providing a mechanism through which telecommunications service is available to as many members of society as possible.(10) To implement such a policy, it was necessary for regulators to provide funding through various cross-subsidies.(11) In this respect, universal service has been nothing more than a government program aimed at promoting access to affordable telephone service and access to the network.(12) Although this has been the contemporary meaning of universal service, it has actually meant different things at different times.(13) Accordingly, regulators have made policy choices that reflect the meaning of universal service at a given time.(14)

   1. The Birth of Universal Service

      Alexander Graham Bell, in what can be viewed as one of the most historic moments in technology, patented the telephone receiver in 1876.(15) For the following two decades, the Bell Company (the "Bell System") would enjoy an absolute monopoly as the sole provider of telecommunication services.(16) Such a monopoly resulted not from the lack of willing competitors, but because the Bell System rigorously and successfully challenged every competitor through patent-infringement litigation.(17) As a result, the Bell System established a huge and powerful enterprise that revolved entirely around Bell's patents.(18)

      In 1894, when the Bell patents lapsed, the telecommunications landscape started to take on a new look almost overnight.(19) The most significant change was that the Bell System was no longer the sole provider; almost instantly, a variety of smaller competitors (the "independents") emerged and started to compete directly with the Bell System.(20) Since the independents had their own operating companies, manufacturers, and marketers, their businesses were conducted separately from the Bell System.(21) That also meant that the independents' systems were entirely closed to the Bell System, and vice versa.(22)

      The separateness of the systems proved to be a catalyst for the development of universal service.(23) One key unfavorable characteristic of the separate systems was that the subscribers of one system could not place calls to subscribers of other systems.(24) Effectively, customers were restricted to the scope of the network to which they subscribed.(25) This access restriction was very frustrating to customers who could not access everyone they wished to call.(26) Moreover, as subscribers to a system increased, the incremental cost to the particular network simultaneously increased, making it an inefficient operation.(27)

      As the dissatisfaction of telephone users increased and diseconomies of scope for the networks continued, the idea of integrating the networks became inescapable.(28) In 1907, at the peak of the competition between the Bell System and the independents, Theodore Vail, then president of AT&T, uttered for the first time: "one system, one policy, universal service."(29) At the time, the term "universal service" was no more than a slogan, similar to those currently used in popular commercials by major long-distance companies.(30) Of course, for Mr. Vail, it was also a way to promote connection to AT&T's network in the midst of fierce competition from the independent telephone companies.(31) It is clear, therefore, that universal service did not begin as a social policy, but was simply a response by the Bell System to the inefficiencies of separated networks.(32)

   2. The Expansion of Universal Service

      The concept of universal service was to be forever redefined when Congress enacted the Communications Act of 1934.(33) It is important to note, however, that the term "universal service" never appeared in the congressional records.(34) Some commentators have even pointed out that the term was not explicitly mentioned in the text of the 1934 Act.(35) Rather, the 1934 Act was merely a reaffirmation of federal authority over the growing telecommunications field at the time.(36) Nevertheless, the 1934 Act's preamble provides strong language that is consistent with the modern concept of universal service:

      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 people of the United States ... a rapid, efficient, Nation-wide, and world-wide wire and radio communication service with adequate facilities at reasonable charges, for the purpose of the national defense, for the purpose of promoting safety of life and property through the use of wire and radio communication, and for ... centralizing authority heretofore granted by law to several agencies and by granting additional authority with respect to interstate and foreign commerce in wire and radio communication, there is hereby created a commission to be known as the "Federal Communications Commission", which shall be constituted as hereinafter provided, and which shall execute and enforce the provisions of this chapter.(37) First and foremost, the preamble clearly grants the FCC the authority to regulate the telecommunications industry.(38) Admittedly, it creates a broad mandate by including the national defense language; yet, the preamble clearly indicates that the availability of affordable telephone service to all was a significant goal of the 1934 Act.(39)

      The mere fact that such a mandate was not specifically referred to in the Act as "universal service" is immaterial.(40) This does not imply that the classical meaning of universal service should not be recognized. Rather, it implies that whatever the term may have meant at the beginning of the industry was no longer controlling after the enactment of the Communications Act of 1934.(41) The important fact is that a social policy was mandated by the 1934 Act that would incidentally and perhaps conveniently come to be referred to as "universal service" by those who later tried to implement it.(42)

      As regulators proceeded with developing the modern version of universal service, it became necessary to create a workable financing mechanism. Accordingly, a pricing structure was developed that would facilitate the financing.(43) In order to fully comprehend the framework that has supported the modern concept of universal service, one must understand the relevant pricing mechanisms. The following is a brief overview of the traditional pricing structure and concepts as they relate to modern universal service.

      1. Separations and Settlements

      Telephone prices have been set based on fully-distributed costs.(44) In 1930, the Supreme Court reasoned that since a long-distance phone call (toll) uses the local equipment at each end (originating and terminating), the long-distance carrier owes a portion of its revenues to the local companies for the use of their access lines.(45) This cost allocation method became known as "separations and settlements."(46) The term "separation" refers to the portion of the operating costs that was separated and assigned to the long-distance companies.(47) The revenues collected from the separations method were then given to the local companies in the form of settlements.(48)

      The separations and settlements method effectively resulted in the subsidization of local service by long-distance companies.(49) Even after the AT&T divestiture in 1982,(50) the method has continued through the carrier access charge.(51) For every minute of usage on both the originating and terminating ends of the call, the long-distance company must pay an access fee to the local exchange carrier (the "LEC").(52) That cost-sharing relationship between the long-distance company and the LEC has been justified by regulators on the basis of the necessity to provide local service to all.(53)

      2. Value of Service

      Another method used in determining local rates is the...