Ch 13 An Introduction To Telephone Regulation

Ch. 13 – An Introduction to Telephone Regulation
a. Telephone History
i. March 19, 1876 – Alexander Graham Bell; “Mr. Watson, come here, I want you.”
ii. After Patents wore off, most early competitive providers served the rural areas – only 3% of Bell subscribers were rural areas.
iii. By 1920’s – 50% of US population had a choice of provider.
iv. Vail introduced the idea of Universal Service – a service that could contact anyone was more valuable than a restricted service.
v. The Express Cases of the Supreme Court (1880s) said that Bell did not have to let others interconnect with their system, since they were the strongest, and universal service was a goal – their monopoly became a possibility.
1. Because of this Bell pursued dominance of the market
vi. Government brought first anti-trust suit in 1913 which led to Kingsbury Commitment
1. Bell System submitted to regulation in return the gov’t bought into the universal service idea.
b. Infrastructure and Intuitions
i. Telephone System Vocabulary
1. CPE – Customer Premises Equipment: devices that can encode and receive voice communications, phones, answering machines, fax machines, modems, PBXs
2. POTS – Plain Old Telephone Service: Basic services
3. LEC - local exchange carrier: local phone company
4. IXCs – Interexchange carriers: long distance phone companies
5. Local Loop/Last Mile – part of network that connects individual subscribers to main local switch
a. This relates to the ideas of natural monopolies – the cost of connecting a telephone to two local switches vs. one is higher – thus one (and a monopoly) is better.
ii. Telephone Economics
1. Without interconnection forced by regulation – then a monopoly is a better idea
2. And the cost of interconnection is not slight – as well as the cost of regulating it
3. Economies of Scope/Scale create an argument where one local carrier and one long distance carrier is most efficient – Vail’s argument and he wanted Bell to be both.
c. Telephone Regulation
i. Categories of Regulation
1. Early regulation focused on ensuring Bell was the only telephone option, yet pricing remained in check due to anti-trust concerns.
2. Second Area related to scope – Since Bell had multiple regional networks as well as the largest national network, how many different markets should Bell have a monopoly over?
3. Third Area of regulation related to Universal Service Policies – if a state gave Bell a monopoly over services then they could require or enforce universal service accommodations. They have to be carrier of last resort.
ii. Who Regulates
1. 1934 Telecommunications Act established the FCC as the regulator over interstate service – before that it was the Interstate Commerce Commission ICC.
a. The ICC had preemption authority where intrastate regulation from state statutes frustrated federal ones via Shreveport Rate Case
b. Smith v. Illinois Bell Telephone Company established that state regulations must be strictly reserved for intrastate services
c. However, the 1934 Act removed the power of preemption of Shreveport
d. In the NCUC cases the court ruled that while federal rule cannot be nullified by contrary state provisions, preemption of state regulation can only occur where specifically stated by statute.

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