How The Bells Stole America's Digital Future

Specific State-Level "Incentive Regulation" Deals

The Bells engaged in intensive lobbying to win the regulatory changes they desired. Many of these efforts were successful. Some specific examples are described below.

Horse Trading in Texas

Southwestern Bell-Texas was especially good at convincing political and regulatory leaders to grant its wishes. Armed with over 100 lobbyists,[31] Southwestern Bell-Texas held out the vision of a future of wondrous new fiber optic services for schools, libraries, hospitals and even prisons. In testimony before state legislators, Southwestern Bell-Texas President David Cole stated:

"Perhaps the most exciting benefit is, of course, the tremendous potential of this package for our schools, hospitals and criminal justice organizations. Our distance learning, telemedicine and video arraignment pilot projects have demonstrated the incredible good that the infrastructure component of this bill (HB 2128) can lead to for our local communications."[32]

The Texas Legislature went along with Southwestern Bell's wishes, declaring that it would raise the standard of living for Texas consumers:

"The legislature further finds that the technological advancements, advanced telecommunications infrastructure, and increased customer choices for telecommunications generated by a truly competitive market will raise the living standards of all Texans by enhancing economic development, improving the delivery of education, health, and other public and private services and therefore play a critical role in Texas' economic future."[33]

Texas established an "incentive regulation" plan in place of traditional rate-of-return regulation. This allowed Southwestern Bell-Texas to reclassify as "discretionary" many popular services, including Call Waiting, Call Forwarding and Caller ID.[34] As a result, these services could be priced at market level regardless of cost to the company, earning SBC huge profits.

Not surprisingly, the Texas-style incentive regulation plan earned a "thumbs up" from Merrill Lynch:

"We view the regulation in Texas as positive for SBC–perhaps the best regulatory plan in the country at the state level from the perspective of the local telco incumbent."[35]

Most of the reclassified services were profitable, and under "incentive regulation" the company was allowed to keep all profits rather than returning them to consumers in the form of lower rates. The resulting over earnings amounted to $228 million in 1997, according to the Public Utility Commission of Texas.[36]

But if the promised services were actually delivered to any Texas schools, libraries, or health facilities, it is one of the state's best-kept secrets. Numerous inquires have turned up only a handful of "trials" of high-speed service.

The Texas experience was not unique. Others are described below, and additional examples are included in New Networks Institute's research.[37]

Opportunity New Jersey

"Opportunity New Jersey" was a state plan that was supposed to bring the information superhighway to Bell Atlantic's Garden State customers. Using the prominent Deloitte&Touche consulting firm, and heavy state lobbying, Bell Atlantic convinced New Jersey regulators that specific new incentives were needed to ensure Bell Atlantic's deployment of advanced networks. In fact, the new regulatory structure resulted primarily in excess profits.

Basically, Bell Atlantic promised to deploy a network that would fix nearly everything: Tele-Medicine, Tele-Learning, and even new jobs. Deloitte&Touche's "New Jersey Telecommunications Infrastructure Study, 1991," dubbed "Opportunity New Jersey," proclaimed that the new network:

If there had been widespread deployment of various "advanced telecommunications capabilities," a number of public benefits might well have accrued. The question that needs to be asked is: why don't we already have these benefits in light of the deployment promises made by the Bells over the past decade?

In a complaint filed with the New Jersey Board of Public Utilities in April 1997, the New Jersey Public Advocate asserted that Bell Atlantic-New Jersey should have spent approximately $1.5 billion more than the $79 million that it did spend to construct fiber optic networks. The Public Advocate concluded that these unexpended funds are largely responsible for some $1 billion in extra dividends reported by Bell Atlantic-New Jersey's parent company.[38]

Bell Atlantic-New Jersey's broken promises were also documented by Economics and Technology, Inc.:

"In the five years following the Board of Public Utilities' adoption of the ONJ Plan, BA-NJ has enjoyed major financial benefits even though it has not increased its investment as promised and has opposed competition at every turn. The increased pricing and earnings flexibility coupled with reduced investment and continued monopoly pricing practices has enabled BA-NJ's profits to soar under alternative regulation. Consumers clearly have suffered under the ONJ Plan from unnecessarily inflated prices for many services, and have received few benefits in the form of new services and increased competitive choices. Since the adoption of the ONJ Plan in 1993:

Advantage Ohio

In the case of Advantage Ohio, Ameritech/Ohio did roll out some of the promised fiber optics, but not as part of an advanced telecommunications network. Instead, Ameritech/Ohio used the money that was supposed to pay for an advanced network to deploy fiber to offer traditional cable service.

This shift in strategy is clearly documented in the differences between Ameritech's annual reports for 1993 and 1997. In the earlier annual report, the cover features a picture of two boys doing homework together using enhanced video-conferencing and tele-learning. "Strategy Two," as described in the 1993 report, was all about interactive services:

"We will deliver interactive services to homes and business through our new video network. We've stated our position in interactive services for health care administration, education, government, libraries, travel and commerce, as well as entertainment, games and home shopping."[40]

Ameritech/Ohio also promised to wire schools, libraries, hospitals and county jails with two-way high-speed networks. The DSL service available today typically offers high-speed transmission in only one direction:

"The Company's infrastructure commitment in this Plan shall consist of the commitment to deploy, within five years of the effective date of the Plan and within the Company's existing service territory, broadband two-way fully interactive high quality distance learning capabilities to all state chartered high schools including vocational, technical schools, colleges and universities; deploy broadband facilities to all hospitals, libraries, county jails and state, county and federal court buildings."[41]

By the time the 1997 annual report was published, Ameritech/Ohio wasn't focusing on anything like fiber optics. The company had three basic strategies: 1) roll out voice mail and other calling features; 2) roll out cable services; and 3) focus on international business:

"Actually, Strategy Two is already teeming with success. Take cable TV, for instance. Our Americast cable service is now up and running in more than 20 communities in or around Detroit, Cleveland, Columbus–and right here in suburban Chicago, where young Jordan Kramer has obviously mastered his Red Jr. remote control!"[42]

Ironically, Ameritech has been applauded for creating a market in which "cable competition is driving down prices." Senator Mike DeWine (R-OH), Chairman of the Senate Judiciary Committee's Subcommittee on Antitrust, Business Rights and Competition, stated:

"Ameritech has been one of the few telephone companies providing cable competition. We want to encourage that. We want it to expand."[43]

Cable competition is a positive development, but it is not what telephone customers paid for. Ohio consumers should not be financing a new cable network through higher phone bills.

Opportunity Indiana

A negotiated settlement agreement with the Indiana Utility Regulatory Commission governed Ameritech's telecommunications services in Indiana from June 30, 1994 through December 31, 1997. Known as "Opportunity Indiana," the agreement provided for reduced regulation of Ameritech by the Commission. The settlement required Ameritech to reduce its annual revenue by $57 million per year, and to invest $120 million over a six-year period to provide digital wiring to every interested school, hospital, and major government center in its service area on a non-discriminatory basis. In addition, Ameritech agreed to invest $30 million over the same six-year period to pay for information processing and telecommunications equipment.[44]

Shortly before the agreement expired Ameritech petitioned the Commission to establish an alternative regulatory framework, to take effect when the settlement agreement expired. The petition proved to be contentious and the Commission's ruling eventually wound up before the Court of Appeals of Indiana. One of the issues in dispute was the Commission's finding that Ameritech had not made the full amount of infrastructure investments agreed to under the "Opportunity Indiana" settlement:

"Ameritech had presented evidence to the Commission that it had been unable to generate sufficient interest in or the required investments among the schools, hospitals and government centers it served. The Commission ruled that if Ameritech was unable to generate sufficient interest to absorb the full amount of the infrastructure investment obligations in Opportunity Indiana, Ameritech should 'propose some other means for its shareholders to provide infrastructure improvements consistent with [the terms of Opportunity Indiana]."[45]

Ameritech appealed the Commission's order that it make the promised $150 million infrastructure investment in compliance with the negotiated settlement. The Appeals Court upheld the Commission's findings:

"During proceedings on its request for interim relief, Ameritech presented evidence that it had provided only $15.6 million of the infrastructure investments required by Section 10(b) of Opportunity Indiana. R. at 2730. Ameritech attributed this shortfall to its inability 'to generate sufficient interest among the schools, hospitals and government centers it serves."[46]

The Commission found that Ameritech had failed to live up to its promise and suggested that Ameritech try harder to fulfill its obligation:

"Opportunity Indiana did not state that Ameritech would make investments 'up to' a maximum amount. Nor is there anything in Opportunity Indiana which suggests Ameritech's infrastructure investments were to be optional. It is clear from the language of the Opportunity Indiana settlement agreement that Ameritech undertook an unconditional commitment to make certain infrastructure investments that would be in effect for the six-year period of 1994 through 1999. Ameritech has not fulfilled that commitment.[47] [Emphasis added.]

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