processing, videotex). Under the policy goals of the 1934

Communications Act, paralleled by similar state statutes

throughout the country, our telecommunications infrastructure has matured as part of an industry whose stellar performance in research and development, technological progress, capital investment, productivity growth and stable earnings goes virtually unmatched in the American marketplace.1

b. A History of Declining Costs and Prices

During the 50 years prior to the breakup of AT&T, increased telecommunications industry productivity and technological development led to dramatic real price reductions for residential telephone ratepayers. As a result of increasingly efficient use of the telephone network and unit-cost reductions (i.e., economies of scale) related to usage and subscribership increases, federal and state regulators developed pricing policies that reduced the price of basic phone service.

From implementation of the 1934 Communications Act to January 1, 1984, when the AT&T breakup took place, local residential phone rates rose only about two-fifths as fast as the consumer price index.2 In other words, when measured in real

1 See Comments of CFA, In the Matter of Policy and Rules Concerning Rates for Dominant Carriers, CC Dkt. No. 87-313, Oct. 19, 1987 at 12-13.

2 U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index.

dollars, the price of local residential service declined about 60 percent in the 50 years preceding the Bell breakup. During this same period, overall residential phone bills declined 64 percent, factoring out inflation.3

Obviously, regulatory and industry pricing policies promoted the development of an increasingly efficient telecommunications infrastructure and split the benefits of declining costs between ratepayers and investors. The Bell system's policy of "universal keeping the price of basic phone service low enough

service"

to make it affordable to all Americans

-

became enshrined in

state and federal regulation through pricing principles that

reduced local rates by spreading network costs among all services that connect to the local telephone network.

c.

Judge Greene's Oversight of the Bell Breakup

Although the terms of the AT&T breakup emanate form the procompetition precepts established by Congress in the antitrust laws, they have been implemented to parallel and reinforce the accomplishments and purpose of the Communications Act. Το prevent the Bell companies from engaging in anticompetitive practices, like raising monopoly local phone rates to subsidize competitive ventures, the breakup's Modified Final Judgement (MFJ) prohibited the Bell companies from entering increasingly

3 U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index.

competitive markets, like interstate long distance, manufacturing By limiting the local Bell companies

and information services.

to the provision of predominantly monopoly services, the MFJ was designed to reduce incentives to load network costs onto local service and thereby undercut or discriminate against potential competitors in other markets.

Although local rates shot up significantly immediately after

the Bell breakup, state regulators have reinstituted the declining cost tradition of the pre-divestiture era during the last two years. Without the MFJ restrictions, it is unlikely that state regulators would have been able to track the Bell companies closely enough to monitor for cross-subsidization and squeeze out excessive charges. In addition, Federal District Judge Harold Greene, following Congress' Tunney Act publicinterest guidelines, required that the MFJ preserve the Communications Act's universal service goal by ensuring that state regulators could use profits generated by the Yellow Pages advertising business to reduce local phone rates.

Since the Bell breakup, long distance competition has grown, more manufacturers are competing to equip the network and users, network gateways are being tested and new information services are being developed as more consumers become computer literate. The MFJ's strictures, by limiting opportunities for competitive ventures to siphon regulated revenues, also enabled regulators to temper local rate increases. Thus the pro-competitive purposes

of the AT&T consent decree have reinforced the pre-divestiture

Communications Act tradition of promoting affordable basic phone

service.4

II.

CONSUMER VISION OF THE INFORMATION AGE INFRASTRUCTURE

CFA's vision of tomorrow's optimal telecommunications infrastructure includes a steady increase in network efficiency and technological growth within a regulatory environment that translates cost reductions into declining prices for consumers. If more data and voice messages are pumped through increasingly efficient transmission lines and computerized gateways to a proliferating array of information services, the per unit cost of both basic phone service and all other services should decline. Therefore, we believe it is possible to build upon today's Communications Act/MFJ policies to preserve the declining price and network modernization tradition of the past.

This vision recognizes that consumer demand for information age services has not developed nearly as fast as technology and consumers are much more interested in cheap, basic phone services than high-tech telecommunications gadgets.5 The steady evolution of our nation's telecommunications infrastructure has offered

4 The only exception to this consistent, pro-consumer policy tradition is the FCC's decision to transform billions of dollars of long distance charges into local rate increases. See Kimmelman and Cooper, Divestiture Plus Five, CFA, December 1988 at 16-18.

5 Dr. Mark N. Cooper, The Telecommunications Needs of Older, Low Income and General Consumers in the Post-Divestiture Era, AARP and CFA, October 1987.

consumers new communications options at a pace that is digestible and manageable, without undermining the goal of reasonably

priced, affordable basic phone service. Unfortunately, many who propose restructuring the telecommunications industry and

altering traditional regulatory tools jeopardize the potential consumer benefits described above in the name of jump-starting a fiber optic revolution.

III. REGULATORY PROBLEMS WHEN NETWORK FUNCTIONS AND INFORMATION AGE SERVICES ARE INTEGRATED IN LOCAL NETWORKS

While the notion of adding new, fancy equipment to the local exchange infrastructure to speed up development and dissemination of information age services has superficial appeal, it does not take into account the historical regulatory impossibility of effectively policing cross-subsidization. In simple terms, regulation has never been able to prevent misallocation of the costs of equipment and resources jointly used in the telephone network to provide both basic and enhanced phone services.

If local exchange carriers are allowed to integrate

information services into their local networks, they would have a strong incentive to replace cheaper copper wire and analog switching equipment prematurely with more expensive optic fiber cable and digital switches. To maximize profits, local carriers would have a strong incentive to spread as much of the cost of this network upgrade to monopoly basic services while taking advantage of everything from predatory pricing to name