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JILT 1997 (1) - John A K Huntley, Niall Levine and Douglas C Pitt

Laboratories of De-Regulation?

Implications for Europe of American State Telecommunications Policy

John A K Huntley Niall Levine Douglas C Pitt
The Law School Dept of Human Resource Management
University of Strathclyde

1. Introduction
  1.1 Telecommunications and Economic Development  
  1.2 The US - Federal Initiatives  
  1.3 States as Laboratories  
2. Competition, Industrial Policy and Deregulation  
  2.1 The Telecommunications Regional Development Policy of the European Union  
3. Conclusions  

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This paper investigates socio-economic restructuring in the field of telecommunications initiated at various policy levels. [1] The paper assesses the relationship between such policies and their socio economic-effects, and suggests that the claims made for them merit further investigation. The establishment and maintenance of universal service is arguably the original policy objective of many national telecommunications systems. That objective has in recent years given way to the creation of a telecommunications environment, where competition is the main driver for innovation. Whatever the benefits generated by competition, groups of consumers - be they rural populations or other groups - might now suffer telecommunications 'disenfranchisement'. Unable to rely on a clear mandate of equality of service in telecommunications provision, policy makers continue to feel the pressure of such interest groups. Both in the United States and in the European Union there is a clear awareness of this issue. The policy effects, however, are markedly different. In a European context, the prime policy influence has been in regional development policy, emanating centrally from the supra-state level. By contrast, in the US, at supra-state level, a largely non-interventionist policy path (with few exceptions) has been followed until passage of the new 1996 Telecommunications Act. At state level in the US on the other hand, Public Utility Commissions (PUCs) have attempted to compensate through their own regulatory initiatives. That, indeed, has been their traditional role - the jurisdiction over in-state service provisioning and the well-being of their rate-payers.


Telecommunications, economic development, states, infrastructure, de-regulation, EU.

This is a refereed article.

Date of Publication: 28 February 1997

Citation: Huntley J.A.K et al, 'Laboratories of De-Regulation? Implications for Europe of American State Telecommunications Policy', 1997 (1) The Journal of Information, Law and Technology (JILT). <>. New citation as at 1/1/04: <>

1. Introduction

This paper investigates socio-economic restructuring in the field of telecommunications initiated at various policy levels. The paper assesses the relationship between such policies and their socio economic-effects, and suggests that the claims made for them merit further investigation. The establishment and maintenance of universal service is arguably the original policy objective of many national telecommunications systems. That objective has in recent years given way to the creation of a telecommunications environment, where competition is the main driver for innovation. Whatever the benefits generated by competition, groups of consumers - be they rural populations or other groups - might now suffer telecommunications 'disenfranchisement'. Unable to rely on a clear mandate of equality of service in telecommunications provision, policy makers continue to feel the pressure of such interest groups. Both in the United States and in the European Union there is a clear awareness of this issue. The policy effects, however, are markedly different. In a European context, the prime policy influence has been in regional development policy, emanating centrally from the supra-state level. By contrast, in the US, at supra-state level, a largely non-interventionist policy path (with few exceptions) has been followed until passage of the new 1996 Telecommunications Act. At state level in the US on the other hand, Public Utility Commissions (PUCs) have attempted to compensate through their own regulatory initiatives. That, indeed, has been their traditional role - the jurisdiction over in-state service provisioning and the well-being of their rate-payers.

The advent of the 1996 Telecommunications Act has made competition a contingent probability throughout America. Hitherto, the states and their PUCs had a policy dilemma - whether to deregulate (and introduce competition), or remain interventionist, with all the concomitant restrictions on competition and service diversity. Some have chosen enthusiastically to deregulate - others are increasingly having deregulation thrust upon them. The central dilemma continues to be how to protect the frequently contradictory interests of their consumers in a competitive environment, while at the same time furthering the success of their local economies.

Looking at the US experience, contrasts will be drawn between diverse regulatory approaches - ranging from the 'light rein' approach evident in, for example, Nebraska, to the more retentionist rate of return regulation traditionally practised in states like New York or California. In the European context, the regulatory stance and industrial policy approach of the European Union will be considered in the light of developments in Greece, as an exemplar of the less developed and, until very recently, totally regulated regimes in the European Union. Particular focus will be placed on a discussion of the phenomenon of the urban/rural dichotomy and whether regulatory policies can produce permanent solutions to such economic imbalances.

The paper will suggest that, while advanced telecommunications infrastructures in a liberalized, competitive environment can help reduce the ' 'tyranny of distance' (Blaine G; 1968) economic, social, and cultural - integrated 'development' strategies may also be required, if the advantages so bestowed are not to be dissipated. State governments' continued prominence in telecommunications policy and hence the state economy, according to de Fontenay and Hayashi (1994) is based on three spheres of influence. These they identify as:

•Direct local PUC regulation;

•Direct state government procurement and consumption of telecommunications;

•Indirect intervention like tax incentives, or telematic educational and health initiatives.

It is the writers' contention that these spheres of influence impact differently, depending not only on the adoption of individual regulatory policies, but also on the standard of service provision within that state's jurisdiction and the existence of other external factors. In particular, the lesson to be learned from the American experience is that as states strive to create a deregulated, competitive environment, they do so in the light of extant service disparities and the competitive position of their state and sub-state economy. Their tendency is to shift from 'retentionist' rate of return regulation to a competitive environment via an incremental strategy of 'light rein' regulation. By the adoption of incentive mechanisms, politicians have traded protection from competition for the adoption of strategies which retain universal service and which a competitive environment might delay or entirely fail to produce. The general lesson for Europe is that, whatever the role for centralised, supra-state policies in achieving these levelling objectives, much might be achieved if state and sub-state policy initiative is encouraged.

1.1 Telecommunications and Economic Development

A key factor in Atlanta, Georgia winning the Olympic competition for 1996 was the highly developed telecommunications network of that city. "You'll be able to put Atlanta up against any city in the world for sophistication of its communications infrastructure. That's a pretty powerful incentive for any company deciding where to do business these days." (Griffith V; 1996). Much-vaulted claims made for telecommunications' economic benefits bear restating. Cronin et al (1993) for example, found that between 1982 and 1992, the average annual US productivity growth in telecommunications (2.4%) outpaced the US economy as a whole (0.5%). They concluded unequivocally that "telecommunications ... has contributed to overall productivity growth." This is partly accounted for by the increased productivity of the telecommunications industry itself. Mostly it is accounted for by the fact that "dependable telecommunication and power networks " are now critical 'supporting infrastructure' for other industries that produce and utilise information technology (Dedrick J and Kramer K; 1994). Not only is telecommunications integral to the 'information communication and technology' (ICT) sector, but even in sectors as diverse as agriculture or medicine, it has become almost as vital an input as fertile land or skilled practitioners. Policy makers increasingly see this facilitative function of advanced telematics as technological 'leveller' of regional imbalances.

Claims are often effusive. A recent survey commissioned by the Alliance for Competitive Communications lobby (WEFA; Feb 1995) estimated that further telecommunications 'de-regulation' (anticipating the enactment of the then Telecommunications Bill) would create 3.4 million new jobs in ten years. Immediate elimination of "all legal and regulatory barriers to competition" would, WEFA estimated, stimulate economic growth and employment levels, through a process of "dynamic linkages" operating throughout the US economy. The trickle-down process would impact on diverse sectors ranging from manufacturing (498,000) to the service sector (1.4 Million), its effects varying spatially from California (267,000 new jobs) to Florida, Nevada and Arizona (1.9% more jobs). Such claims make it difficult to assess the extent to which economic expansion is an outcome of competition, or the result of industrial policy inspiration, regulatory initiatives, and economic incentives, at supra-state, state and sub-state levels. Viewed from a supra-state level, a criticism can be levelled that 'central' communication strategies may simply redistribute employment and at various levels, rather than actually creating new opportunities, what Melody has described as the 'sucking out' effect. Nor is it clear that, left purely to the market, Advanced Communications Technology (ACT) will diffuse evenly throughout what are often heterogeneous areas. Even in America, Hudson and Parker (p43 1990) conclude "a modest commitment by government" is required. Without it, the dynamics of private investment in telecommunications "make it unlikely that rural communities will in fact share in the bounties of the information age." Unitary, centrally imposed ACT policies are unlikely to have uniform effects in all regions. [2]

One consequence of technological change has been the reduction of employment levels in telecommunications. During the period 88-92, 70,000 jobs were eliminated during 'restructuring' in the US telecommunications industry [3] while in Britain, BT is estimated to have downsized by over 100,000 since 1990. Clearly not all losses are a direct result of advances in telecommunication technology itself. Although it is difficult to correlate the precise relationship between advances in communication technology and job losses in other sectors, evidence in Texas suggests that structural changes have occurred. Here, employment in Plain Old Telephone Services ('POTS') fell by several thousand between 90-92, while cellular and cable recorded employment increases during the same period.(Texas Comptroller of Public Accounts 1993) The question is, whether the evolving technology will offset the reductions in 'conventional' POTS employment.

1.2 The US - Federal Initiatives, Incentives and Implementation

Despite the advent of the Telecommunications Act 1996, the existing regulatory hierarchy for American telecommunications remains untouched; it is unlikely to disappear in its entirety, and certainly not in the near future. Extensive regulatory powers will continue to be exercised at state level, where there is a history of state action to encourage infrastructural and other telecommunications development. There is also a history of Federal telecommunications infrastructural policy initiatives. [4] For example, after the 1940s, the Rural Electrification Administration's (REA) 'loan' programme provided capital to independent telephone companies serving populations of less than 10,000 to help them provide a 'universal' service and upgraded infrastructure for their rural - and hence more expensive - areas. The REA provided a telephone 'lifeline' to an estimated additional 3 million subscribers. Thus 'linked,' rural usage of the telephone evolved into a commercially significant infrastructural factor [5] Additionally, the Federal Communications Commission (FCC) and the states oversee the Lifeline assistance and Link-up America programmes, aimed at financially or other disadvantaged groups.

More recently, the National Infrastructure Initiative (NII) - the blueprint to provide America with universal access at a reasonable cost to an information infrastructure - has operated a 50:50 partnership between the public and private sectors whose objectives include "the promotion of private sector investment through appropriate tax and regulatory policies" and the extension of the universal service concept "to ensure all Americans have access to the resources and job creation potential of the information age" at an affordable price (Information Infrastructure Task Force;1993). There have been successful initiatives at state level, like Georgia's INPHO health network, where a combination of NII federal funding and private Foundation investment has enabled "authoritative health information at the finger tips of customers, clinics and practitioners."

1.3 States As Laboratories Of De-Regulation: A Spectrum-Shift In Policy Pro-Activity

Initiatives like this aside -and they abound - it is clear that the individual states themselves have anticipated substantial FCC inspired regulatory reforms by almost a decade. Acting independently as the so called 'laboratories of democracy' (Pitt and Trauth ; 1992), they have competed, using a variety of economic and regulatory tools, to maximise leverage in attracting business. Traditionally pro-active, the states "will continue to be influential", despite the 1996 Act, because of their continued jurisdiction over the 'last mile' in the local loop, "focused on the interface between the industry and the end-user"(de Fontenay and Hayashi, 1994).

A condition of AT&T divestiture in 1982 was that restrictions would be placed on the lines of business that could be entered by the Regional Bell Operating Companies (RBOCs) or 'Baby Bells' spawned by that divestiture. A natural consequence of this 'quarantining' during the decade which followed was persistent efforts by the RBOCs to break those shackles. Prior to the 1996 Telecommunications Act, the strategy was to persuade both the regulatory authorities and the Courts (through the Department of Justice) of the justification of their case. This approach was founded on trading the introduction of local competition in exchange for RBOC entry into long-distance (inter-LATA business). This tactic was employed by one of the most aggressive RBOCs (Ameritech) in accepting local competition in Michigan in return for the prospect of Department of Justice support for lifting of the ban on entry into long distance. The effect of such efforts has been to encourage the trend towards competition in the local loop and this has in part forced the hands of individual state PUCs towards de-regulation of previously monopoly territories (Huntley JAK and Pitt D; 1995). Ultimately, this pro-competitive ethos has been echoed in the supra-state 1996 Telecommunications Act which specifically sets down the criteria an RBOC must fulfil if it is to be allowed entry to the long distance market. To date, (February 1997) no RBOC has successfully fulfilled the so called 'competitive checklist' to the satisfaction of the authorities, although Ameritech was the first to attempt an application, which was withdrawn, at the behest of complaints by the largest existing long-distance provider AT&T, (on technical grounds).

Gubernatorial perceptions of the role of competition in state telecommunications have shifted radically. Governor Weld of Massachusetts has stated: "Telecommunications infrastructure does not necessarily require government funding.... the best incentive that government can provide is to ensure competition and free markets to achieve this goal despite other financial constraints."(Weld W; 1994).

Although the driving philosophy at federal level has been pro-competitive for some time, the initial reaction of states was to protect their incumbent Bell companies from competition. In the decade since AT&T divestiture in 1984, states have shifted from their original anti-competitive stance, to experiment with the "costless mechanism" of regulatory reform to enhance infrastructural capability and hence their state's competitiveness (NRRI ; 1995a, p565). That process has snowballed. By 1995 all but one state were adapting alternatives to traditional 'rate base rate-of-return' regulatory approaches, including 11 with price cap reforms, over 25 States with open access competition to their BOC on the legislative agenda, and 11 who had ordered unbundling (another 12 had it under consideration). More interestingly, however, 46 of the 48 Commissions were also intending to deploy advanced telematic projects "on distance learning, telemedicine... for the use of advanced telecommunications technologies for education, medicine and other public service purposes", with many conducting wide ranging strategic assessments of telecommunication trends and benefits. The National Regulatory Research Institute (NRRI) concluded: "far from standing in the way of the evolution of new technologies and industry structure, commissions appear to be in the forefront of facilitating institutional changes." (NRRI ; 1995b, p251).

This is particularly evident with the case, for instance, of number portability, where given the absence of any federally crafted long term solutions, an incremental policy approach was evident. Thus in states where competition is now seen as an imperative such as NY, Maryland Illinois and Washington, different interim 'solutions' to the (local) number portability problem are being devised in order to 'level the competitive playing field' to the satisfaction of the new entrants, anxious to start competing on equal terms with the incumbent BOCs. Unfortunately, the inherited infrastructure itself is influencing the availability and viability of possible solutions. For example, the antiquated nature of the New York City switching infrastructure has made it difficult to retain the existing feature-rich functionality that customers have come to expect from the telephone system and simultaneously introduce the necessary modifications to permit number portability. This is impeding the introduction of competition, something that more modern digital SS7 switches would have made feasible. Introducing innovation in such a variable terrain would tax the regulatory abilities of the PUCs, whatever their attitude to competition.

That there was a general need to introduce innovation at the state level (regardless of what was happening to competition at the federal, long-distance level) is not in dispute. The standard of infrastructure and of service provision, although theoretically "universal", varied considerably at the time of AT&T' s divestiture. In the main NYNEX segment of New York City, for example, the infrastructure was amongst the oldest in the world. Introduction of modern switching and cable was an immensely expensive programme which the company would itself have had to bear. This in turn imposed further restrictions on innovations like number portability, and hence competition.

Generally speaking, the PUCs have responded to the challenge. The approaches which they have adopted, however, have changed over time. They are to a great extent influenced by their traditional regulatory philosophy - that is, standard rate of return - but increasingly by the light rein approach, which is now apparent. In what we have described [above] as the historically retentionist - or rate of return - approach, the regulator tolerates the incumbent's monopoly position but may impose price caps and service obligations on the RBOC. Given this tacit regulatory 'bargain' the PUC may attempt to mandate infrastructure investment and service innovation on the incumbent. In a deregulated environment, competition is the mechanism relied upon for the introduction of innovation. In what we have described as a light rein environment [above], innovation is encouraged by a variety of incentive-orientated mechanisms. These could include:

•the elimination or curtailment of restrictions on rate of return;

•the elimination of price caps;

•reduced periods of amortisation;

•direct subsidy.

PUCs have differed in their policy approaches according to individual strategic State objectives. Any initial 'protectionist' homogeneity following divestiture rapidly dispersed as diverse policy paths emerged. Regulatory strategies to promote competition, social and economic development, and advanced infrastructure (not all mutually exclusive)were adopted by some states, while others maintained retentionist positions.

This spectrum shift in PUC policy has been achieved during a period of considerable technological and economic flux. The trend most discernible in this emerging policy continuum is one of innovation.

Innovation is seen as essential both to engendering and sustaining economic advantage. At one extreme is the approach taken by California, which has taken the bold step of becoming a gradualist convert to light rein regulation. At the other end of the policy spectrum lies the ultimate deregulatory stance - closer to no rein than light rein - of Nebraska.

Initially California and New York were among the regulatory retentionists, keen to protect both their consumers and the revenues from their incumbent Bell companies. Cost reduction programmes were deployed to improve efficiency, but earnings caps deterred the incentive to invest in modern infrastructures (Telecommunications Reports ;1992a). Similarly, Massachusetts, in the immediate post-divestiture era, maintained a retentionist stance (Porter Michael; 1994). By 1985, however, the Massachusetts PUC concluded "that there are benefits inherent in a competitive marketplace that encourage greater levels of economic efficiency....than does a regulated monopoly environment. These benefits have the clear potential of encouraging the development of a more efficient and modern telecommunications network." (Mass. PUC, 1985)

Nebraska's legislature first attempted to deregulate its telecommunications market partially in 1986, by abandoning traditional 'rate capping' and 'rate-of-return' regulation of its BOC in favour of a more incentive orientated tariff structure. The Nebraska Telecommunications Act 1986 provides for:

•deregulated local carrier rates (other than basic rates);

•de-regulated interexchange rates ;

•a maximum 60 day 'notification' period for changes to the rate structure;

•automatic review powers if customer complaints or rates exceed defined targets;

•power to authorise new entrants.

This liberalised regime has been exploited to the full at sub-state level by Omaha. Its position in America's central time zone and its historical telecommunication's expertise (it has been home to Strategic Air Command since World War II) gave it a modern telecommunications infrastructure; but the city's telecommunications was overhauled in the 1980s following liberalisation. An AT&T survey revealed Omaha's volume of telemarketing calls to be eight times higher than that of the next most active city, Atlanta. Amongst the city's twenty-five local telemarketing and reservations companies is Ford Motor Company's credit subsidiary, whose 325 staff handle over 6 million calls annually.

Nevertheless, the results of alternative regulatory strategies have not always been quite as intended. Nebraska's 1986 reforms left a patchwork geographical quilt of variable deployment of advanced technology throughout the predominantly rural state. Reflecting the state's urban/rural dichotomy, this same advanced infrastructure that has proved such a boon for Omaha excludes many of the state's peripheral areas. Nebraska's PSC (PUC) concluded in a 1992 review that "After the promised benefits made to justify de-regulation in 1986, the existence of this level of service is not praiseworthy." (Telecommunication Reports; 1992b). With the decline of traditional industries like mining, there is no significant demand for state-wide ISDN or a fibre optic, infrastructure. Investment in cost-minimising digital technology and switching can only be justified where utilisation rates are high enough to give returns on that investment. One suggested solution to this perennial problem is the Rural Area Network (RAN). While "it is inconceivable that all small communities in Nebraska could be served by a costly network some time soon ... it is not inconceivable to install a high-technology network to approximately 22 townships." (Nazem S in OTA; 1991) Instead of linking all towns to a state-of-the-art infrastructure, the RAN would link hub towns serving populations within a 40 mile radius. US West has noted that the diversity of rural areas means that the emphasis should be on the institutional policy architecture as much as on policy itself, and that a single federal policy cannot provide a single solution to such diverse problems.

California, badly affected by population and economic growth changes during the Reagan years, has determined to learn from past mistakes (Parkes C; 1995). Liser (1995) projects that California's future economic prospects would be dependent on "its position at the centre of the revolution spawned by the Internet." The California PUC, until recently noted for its retentionism, recently allowed its RBOC, PACTEL, to retain 70% of all returns above a 15% cap, while returning the remaining 30% to its customers. The incentive is intended to generate efficiencies, and PACTEL has been actively involved in finding an appropriate solution to the vexed issue of number portability, adopting the 'Location Number Routing' algorithm, despite unresolved cost allocation problems. Nevertheless, the 'League of California Cities' is a local lobby advocating more radical changes. [6]

Colorado has promoted its "telecommunications capability as...largely determining the future of Colorado" (<>) The local hospital in Lamar faced closure due largely to inadequate continuing education facilities leading to threatened withdrawal of staff medical certification. Sending staff to Boulder, several hundred miles away, was proving uneconomic, and closing the hospital temporarily for 'in-service training' was impractical. The solution was distance learning by the University of New Mexico - employing advanced telecommunications. Similarly, on-line data provides farmers in Olanthe with up to the minute data prices that enable them to sell their produce to the highest bidders, including squash importers in Japan! Such a pro-active approach towards rural communities has not precluded "light rein" regulation. Legislation passed in May 1995 will open up local telephone providers to competition from July 1996 and permit the LEC to increase rates by a maximum of 5% per annum - but only if costs rise - in order to recoup any investment costs ordered by the Colorado PUC.

The trend has been away from what we have described as a retentionist approach to regulation, towards a "light rein" approach intended to induce innovation in state telecommunications. However, this trend has not been uniform and we have witnessed a series of state experiments, some more radical than others. The future of state policy will perhaps generally lie towards light rein regulation, rather than total deregulation. Much will depend on the relationship between the FCC and the state regulators now being crafted in the wake of the 1996 Act. Under that Act, we are witnessing the emergence of a policy consensus, or at least compromise around competition. This is the result of a trend towards a supra-state concerted policy - perhaps the first such trend since the crystallisation of a policy consensus in the 1934 Communications Act around universal service. The FCC therefore has a Congressional mandate to introduce more competition. This it must do, ironically, by more intervention in state/federal relationships. The direction of this intervention remains, for the present, unclear. What, for example, will be the relationship between states which have already gone down the deregulatory track further than the Act requires and those which remain retentionist? Federal pre-emption hovers in the wings, with the possible consequence that states' freedom of movement in policy making is restricted - even to the extent that they might be criticised for being too proactive.

This may be a belated attempt to bring about some degree of concertation at all levels in the telecommunications environment. The devil, however, lurks in the details and state/federal relations may become the crucible in which the new policy is crafted. It is certain that such a complex policy will not be unilinear, bearing in mind that states will remain the laboratories on matters like number portability, interconnection agreements, and costing methodologies) and are likely to guard jealously their prominence as policy initiators. The threat of pre-emption, however, remains and some argue that within ten years the states will have vacated telecommunications as a regulatory arena. But in a market which displays inexorable concentrative trends -for example the recent Nynex and Pactel take-overs - the states may at least be expected to attempt to exercise regulatory oversight. It is unlikely in such an environment that the states will relinquish readily their responsibilities for universal service provision -howsoever retextured by the 1996 Act - and for ensuring the ubiquity of telecommunications provision.

In a sense, therefore, the concertation around competition policy at supra-state level in American telecommunications reflects what has happened in the European Union since the Green Paper of 1986. It is to a consideration of those European trends to which this paper now turns.

2. Competition, Industrial Policy and Deregulation in European Telecommunications

European Commissioner Sir Leon Brittan (1995) stated "that that the more liberalised US market is well ahead of the EU in terms of developing the interaction between telecommunication services and equipment which go to make up the information society." This is, of course, an over-simplification as any observer of telecommunications in the United States knows. Telecommunications at state level in the United States has, until relatively recently, been neither "more liberalised" nor notable for "Developing interaction". It was, arguably, more closely regulated than many European markets. Any comparison of American telecommunications policy with that of the European Union must thus take account of several key factors.

The first factor is that American and European policy makers in telecommunications carry contrasting and often contradictory cultural baggage (Huntley JAK; 1994). Although we are all conscious of them , they are worth restating at this point for lending perspective to our discussion. Whereas the American tradition is one of private ownership of the network, that in Europe is one of public ownership; whereas the American network has been a regulated private monopoly, its European counterpart has been a publicly owned monopoly; whereas there is a clear separation between the telephone operator and the telephone regulator in America, the two in Europe have been traditionally blurred; whereas in the American tradition policy makers have seen telecommunications as a means for opening up the country and disseminating information, there is more a tradition in Europe of keeping the frontiers closed and information under control, despite telecommunications. These are, of course, over-simplifications, but, it is arguable, more readily agreed than that of Mr Brittan.

A second point of difference is that whereas the American telecommunications network has been a single system virtually from the beginning, there was never a European trans-continental network; only disparate and loosely interconnected national networks.

There is, however, a third and, perhaps, more central difference. There has always been, in Europe, a far more elaborate - and more interventionist - approach to industrial policy. Not infrequently dirigiste, this approach contrasts starkly with the policy diffusion (frequently polyarchic) so common in the United States (Huntley JAK and Pitt; DC; 1990). There industrial policy at federal level is not frequently talked about, in contrast with the policy path pursued by European states and by the European Union. A central issue in this paper is the appropriate level of regulation and the appropriate form of regulation at any particular level. There is a different community of interests at each level. Because of these significant differences of approach between the US and the EU in this context, direct comparisons cannot, of course, be made. What can reasonably be done, however, is to identify common patterns of policy making and of policy mechanisms, so that gaps in experience might be filled.

The difference of attitude to industrial policy is reflected in the approach to telecommunications taken by America and the European Union, that is at supra-state level. This paper contends that this in turn reflects on what happens at lower levels of policy making and implementation. We have argued above that there are, in general terms, three methods of policy intervention in telecommunications States (Huntley JAK and Pitt; DC; 1990). What we find is that there are clear and sharp contrasts in the methods of policy intervention followed by America and Europe at supra-state, state and sub-state levels respectively. As a consequence, we contend, there are lessons to be learnt by both jurisdictions.

The first purpose of this section of the paper is to identify the role of industrial policy within the European Union's approach to telecommunications. It is possible to argue that there is an economic constitution of the European community. The Treaty of Rome operates as a constitution both at a political and at an economic level. Central to this economic constitution, some argue (Sauter W; 1996) is the central objective of establishing and maintaining a competitive free market economy for the Union. The competitive economy is established and maintained through the competition policy which, being the only policy which is effectively in the hands of the European Commission rather than the European Council of Ministers, theoretically takes prominence over other policies. A key issue which arises from this is the interrelationship between competition policy and industrial policy within that constitutional framework. This is different from and far more formalistic than in the United States (Huntley; 1994), federal regulators, be they the Department of Justice's Antitrust Division or the FCC, have limited power to interfere with state governments' pursuit of industrial policies which affect competition. Notwithstanding fears that the 1996 Act may increase the potential for pre-emption, the United States currently allows far more scope to the member states of the Union than that of the European Union allows to the Member States (despite the constitutional independence of the Union's Member States). The doctrine of subsidiarity has not yet been applied to define the boundaries to state and supra-state powers in the field of telecommunications..

The impact of EC competition law on the deregulatory process has been significant. [7] Developments in the European Union appear to confirm the supremacy of competition over other policies, including industrial policy. [8] This is nowhere more obvious than in the field of telecommunications. The moratorium on application of treaty rules - most particularly the competition rules - to utilities- including telecommunications - effectively ended with the approach of 1992 and the Single European Market. Part of the new policy direction was the development and implementation of a common telecommunications policy. Unlike the United States, where the original move to deregulate telecommunications and introduce competition came from the federal level during the period from 1956 to 1984, (Huntley and Pitt ibid) in Europe the pattern was more patchy. The earliest moves to deregulation came from certain member states, notably the United Kingdom, but were taken up by the Commission in the period 1986 to the present. Today, everyone is a deregulator and all sing in harmony the praise of competition; but at the state and sub-state level, the picture is as patchy as it ever was.

The main cause for this disparate European pattern remains that, unlike the United States, where there is the highest degree of universal service, the provision of such a universal service is still an aim to be attained in many European States. The disparity between, say, the high level and universal nature of service provision in the United Kingdom, and the relative lack of provision in, for example, Greece, is a major problem (Huntley JAK; 1989). In such an environment, introducing competition might not be enough. There should remain scope, therefore, within this deregulated competitive environment, for the pursuit of a European industrial policy which will achieve two things: first, that peripheral states - and there will be many more of them as the Union spreads into its "wild" east - catch up; and, second, that a single, uniform market in telecommunications, with the widespread use of advanced telecommunications infrastructure and services, is developed. Bearing in mind the interventionist traditions of most Member States in this field, the tension between competition law and policy and industrial policy in the realm of telecommunications is therefore strong (Sauter W; 1996). The underlying assumption is that the goal of economic development is attainable (within and despite a competition policy and a competitive telecommunications environment) by the pursuit of two industrial policy objectives (see generally, (Wilks S ; 1989), (Wright; 1988), (Marsh and Rhodes; 1992) and (SchneiderV; 1992) These are:

•the elimination of disparities (regional policy); and

•socio-economic changes which will encourage the growth and development of this and other sectors of the economy.

This, it is believed, can be achieved despite the destruction or shackling of the national monopolies. A further underlying assumption is that the goal of economic development can be achieved in the context of a policy of universal service. Such universal service will continue to be provided even though the state monopolies (which, privatised or not, are burdened with providing that universal service) will no longer be in a position to support that universal provision by subsidy, whatever its source.

Unlike the position in the United States, where it has hitherto been extremely difficult for the federal authority to affect what happens at state level, (Huntley JAK; 1989) the European Community's approach is different. First, policies written into the treaties must be implemented in accordance with any programme stipulated and authorised by the Community. Secondly, national policies favouring the PTT would be in violation of Treaty provisions. Therefore, unlike the United States, where there has hitherto been nothing to preclude a state government from adopting policies within its territory favouring, say, its local RBOC, it would (in theory, at least) be virtually impossible for a Member State of the European Union to do so, without incurring the wrath of the Commission. Ironically, therefore, there is much more scope for a constituent state in the United States to pursue an independent industrial policy, than it is for a European Member State to do so.

2.1 The Telecommunications Regional Development Policy Of The European Union

The Green Paper on Telecommunications 1987 established a common strategy for European telecommunications. To that extent, it appeared to ignore disparities of development, size and character in the various domestic markets. How might such disparities impede the development of a pan-European telecommunications system and to what extent might the drive towards pan-European telecommunications distort the development of the telecommunications infrastructure in the less developed economies of the Community?

The basic strategy outlined in the Green Paper, aimed as it was towards the establishment of a uniform, developed European telecommunications system, took little account of differences between the extant telecommunications systems in the various Member States; yet, as Ungerer and Costello point out,(1992) "The Community will have to maintain - or build-up - cohesion between its Member States throughout the difficult process of adjustment. Europe must avoid a Europe of two speeds in telecommunications - future information-rich and information-poor regions within the Community - because such a gap would translate into an economic and social gap within Europe."

Yet this gap persists. Although in geographical terms Greece compares with Belgium and has a population of 10m, in terms of gross domestic product Greece is one of the poorest of the Member States. Unlike many northern Member States of the Union, Greece has severe infrastructural deficiencies and a relatively unbalanced economy. There is still heavy reliance on agriculture, which is reflected in the relatively low unemployment rate of marginally over 3%. Yet the infrastructural deficiencies, as one would expect in a recently developing state like Greece, are far more fundamental. There is evidence of what may be termed an information-rich centre and an information-poor periphery in the Community. That periphery generally comprises the island of Ireland, Portugal, Spain, excluding the major industrial zones and the Balearics, the Italian Mezzogiorno and the Greek mainland, with the exception of Attica. Again, to quote Ungerer and Costello, "The less developed peripheral regions of the Community...are at present prevented from participating fully in the European economy both by physical transport costs and by an often sub-standard telecommunications infrastructure. As the knowledge content of economic output increases, this last factor represents a larger danger of isolation than mere geography ever did. On the other hand, proper telecommunications can suppress geographic distance like no other technology before" (Ungerer H and Costello P ; 1992).

A limited attempt to redress this imbalance was the STAR (Special Telecommunications Action for Regional Development) five- year programme, established in 1987 and financed by the Community's Regional Development Fund. Apart from its limited duration, the programme is further limited in that it is aimed at assisting business telecommunications users (particularly SMEs), rather than simply to encourage the provision of universal service.

The main objectives of the STAR programme were to help establish telecommunications infrastructures appropriate to the provision of enhanced telecommunications services for the business sector in the less favoured regions; and to stimulate demand and encourage use of such infrastructure. The major infrastructural developments envisaged by STAR were to improve the links between these regions and advanced networks; the encouragement of digitisation, so as to ensure the availability of ISDN; and the establishment of data networks in advance of ISDN. In addition, STAR funded various activities aimed at encouraging the use of advanced telecommunications services in those regions, especially in assisting with the establishment of such services. As one Commission spokesman put it: "Economically disadvantaged regions already lag dangerously far behind their neighbours in the levels of telecommunications equipment and services and the gap is widening."

The funds available under STAR were relatively limited. The total funds available under the programme were approximately 1.3 bn. ECU, with the Community's RDF (Regional Development Fund) contributing about 60%. However, loans were also available from the European Investment Bank for telecommunications developments.

There is, therefore, a marked ambivalence in the Community's telecommunications strategy. Whereas the main thrust is towards the establishment of a level playing field for telecommunications equipment and services suppliers(in an market which is expanding at exponential rates) and the curtailment of PTT market dominance, there is a recognition that the peripheral regions of the Community might be left behind. To that end, some limited support has been made available to those regions to help provide the benefits of the overall telecommunications strategy.

Yet closer inspection of peripheral states like Greece suggests that even that is an oversimplification. The Greek telephone network is relatively extensive, with 33 telephones per inhabitant (compared with 21.2 in Eire, 38.3 in the UK and an EC average of 35.8) in 1986. The vast majority of those telephones are in the Attica region and the Athens conurbation, where over half the population of Greece lives. This creates intolerable strains on the overstretched network in the Athens area, while the remainder of the country remains starved of telecommunications infrastructure. "The wide disparities between the cost of provision to Athens and the cost of provision to the eparchy create the kinds of pressures for cross-subsidy from the more profit-generating telecommunications services which are commonplace in most PTTs, but are accentuated in Greece." (Mocenigo T; 1996).

As a beneficiary of the STAR programme, nine regions of Greece were allocated a total of over 100m ECU (compared with about 50m ECU for Eire and approximately 25m ECU for Northern Ireland), or over 10% of the total budget. A total of 1.7 bn ECU were allocated to infrastructure schemes under the Community Structural Fund. Within this total was included an allocation complementing the STAR budget of 200 m ECU for 1990-1993.

To a great extent, Greece has developed a telecommunications strategy very much in line with STAR objectives. The undoubted emphasis has been, as would be expected, upon the establishment and extension of telecommunications infrastructure, primarily through conventional cabling technology. The emphasis has also been on the provision of a basic voice service. This is an indication of the vast gap that exists between the information-rich and the information-poor within the community.

Nevertheless, in pursuance of a digitisation strategy envisaged by STAR, the Greek authorities have attempted to update the network, particularly in long-distance. The Greeks plan to expand the network by 200,000 lines per year through digitised switching.

The STAR programme was succeeded by TELEMATICS, 1990-93, specifically to develop telecommunication services in the least-favoured, or Objective 1 Regions of the Community. Like the STAR programme, TELEMATICS was designed to encourage the use of advanced telecommunications services by small and medium-sized enterprises (SMEs), but also to develop public telecommunications services as a contribution to regional development. Most importantly, the emphasis was to be on specific services, rather than general infrastructural development (Telematique 1991, OJ C 33/7). A particular programme within TELEMATICS was the initiative on telematics under Opportunities for Rural Areas (ORA). A specific Project established under ORA was BIRD (Better Infrastructure for Rural Development), to explore infrastructures capable of supporting Advanced Telematics Services (ATS)in rural areas. The concern was that a bottomless subsidy pit could develop in the effort to provide expensive telecommunications service infrastructure to small and dwindling rural communities. The cross-subsidy from rural and business customers would be an increasingly unstable source of revenue for such projects. According to the authors of a recent BIRD Report, "One global result of the BIRD Project is to provide evidence that networks providing communications services equivalent to those currently being implemented in many urban areas across Europe, may be economically viable in rural areas. The prospects for viability are greatly enhanced if networks are capable of delivering entertainment and other services in conjunction with telephony services. The trend towards technological convergence between telecommunications and related services was thus a likely propellant for rural telecommunications infrastructural and services development.

The TELEMATICS Initiative has now run its course, but within the European Regional Development Fund (ERDF) programme for 1994-99 there are several initiatives on telecommunications in Objective 1 Regions and specifically in Greece, Portugal, Ireland and the United Kingdom (Northern Ireland and Highlands and Islands). The pattern of funding is similar for all. The Operational Programme for Greece places emphasis on reducing disparities between urban centres and rural areas by improving infrastructure (primarily through digitalisation of the network) and providing business access to advanced services. "The programme will thus favour productivity, competitiveness and job creation while helping to sustain populations in remote areas. It will, among other things, help remedy the peripheral situation of this country within the Community." (DG XVI) To the estimated programme cost of 321.820 MECU, the EC contribution will be 172.742 MECU (54%), while Greek national authorities will contribute 45% and the private sector 1%. The Portuguese Programme, amounting to 3,913.639 MECU, is a far wider Programme for Infrastructure Support, of which telecommunications is one component. The Community is funding marginally over 50% of the total cost (1,987.000 MECU). The Community is also providing 34% (108.000 MECU) of a 319.600 MECU Economic Infrastructure Programme for Ireland, of which telecommunications services is one component; and 35% (376.700 MECU) of a 1,076.050 MECU Programme for Telecommunications in Italy's Mezzogiorno (the Italian authorities are not making a financial contribution, the remaining costs being borne by the private sector). Within the United Kingdom, no funding is being provided for telecommunications, neither within the Highlands and Islands Programme, nor the Northern Ireland Programme for 1994-99.

The evidence therefore suggests that there is little scope for state and sub-state support for telecommunications development except within the strategies centrally directed at supra-national level. Furthermore, these strategies are increasingly aimed at infrastructural and service development in the peripheral regions, with the dual purpose of establishing universal service and developing the rural economy. Increasingly, reliance is being placed on technological convergence as the engine for sustaining such developments.

The lessons to be learned are that introducing competition without ensuring a general universal service will be problematic without adjustments. The most appropriate method for those adjustments is to follow the strategy which the Commission has followed: provide central EC funding for private initiatives which will bypass existing network or enhance them to appropriate levels to fill specific gaps in provision.

Despite such trends towards supra-statism in European telecommunications, there appears to be continuing scope for micro-level policy initiatives. This is seen in developments in Scotland, where a purely sub-state approach has been adopted. During initial investment appraisal for an ISDN link in the highlands of Scotland, revenue growth rates forecasted would not be commercially viable. Highlands and Islands Development Board considered the "implications to the region in not having an advanced telecommunications infrastructure" as serious. A late and unlikely candidate for inclusion in the STAR programme, the project was supported with £16m. From the Region's own budget between 1989 and 1992. Having supported this infrastructural development, the Region was aware that "it was clearly provide only an infrastructure without taking actions to stimulate its use." The HIDB therefore commenced an awareness campaign and established A Network Service Agency in Inverness to promote computing and on-line services to a community which hitherto had regarded such practices as something of a 'black-art.' As a consequence, there have been notable successes in attracting inwards investment, as well as attracting some virtual transatlantic telecommuting. Telework has been at the centre of this initiative and now represents a new employment classification for the region. [9] Although estimates vary dramatically, there are thought to be over 10 million (10%) 'formal' telecommuters and a further 9 million part-time, self-employed teleworkers in the United States.(Link Resources US 1990 Annual Work at Home Survey; New York Telephone Survey `991) The United Kingdom, with an estimated 7%, is at the top of the European Union's teleworking league, where the average is 5%. [9]

3. Conclusions

The recent moves by many states in America to contrive light rein regulatory strategies do not mark a radical break with industrial policy in favour of competition; rather, they indicate a pursuit of industrial policy by other means, creating a double helix of industrial policy with clearly competitive components. This is neatly encapsulated by the dilemma over universal service, the prime exemplar of the limitations of a policy of total competition. The 1996 Act, in the view of contemporary commentators, constitutes a major paradigm shift and a major break in the continuity of US telecommunications policy. The admittedly cursory analysis in this paper of selected US telecommunications developments suggests that America has been fertile in telecommunications policy initiatives emanating both from state and supra-state levels in pursuit of key policy objectives. Commentators often note a lack of industrial policy in America; but even the limited evidence to which we refer suggests that this is a simplistic and ultimately an inaccurate view of a highly complex policy process. Industrial policy was arguably influential in the formulation of the 1934 Communications Act which stipulated vertical monopoly under strict regulation as the deliverer of universal service and the protector of rural interests. This paper has also argued that industrial policy has occupied an important place on the policy agendas of the states. As we have seen, states have frequently resorted to telecommunications policy as a means of leveraging economic policy objectives which favour rural and industrial development. Of particular importance has been the deployment of telecommunications as an indirect means of encouraging inward investment.

At face value, the United States Telecommunications Act of 1996 gives every impression of substituting competitive drivers for regulatory drivers; yet experience suggests that government will continue to intervene through executive agencies in the shaping and direction of telecommunications affairs. This suggests a new balance of state/federal relationships which, although its shape is yet to emerge, should not be entertained as a development which will negate state initiatives. We predict a continuing and perhaps developing role for the states as they craft policy (perhaps in concert with federal agencies) in pursuit of socio--industrial objectives. The states, even in muted form, seem destined to continue to act as important laboratories of democracy.

Europe, armed with a centrally driven set of industrial and competition policies, may appear better positioned than America to take advantage of technological development in telecommunications. Yet the lesson of Lindblom's (1959) 'disjointed incrementalism' should not be prematurely overlooked. Policy synopsis may contain the incubus of success and coherence in the pursuit of policy objectives. However, as the lessons of number portability in America and of deregulation in Britain make plain, state initiatives are often in advance of central thinking and can act as important test beds for new ideas. This is a lesson that European policy makers should heed. A rush to concertation may bring about the dysfunctional consequences of costly mistakes which are difficult, if not impossible, to remedy or reverse. Perhaps all policy makers should remember Hegel's wise admonition that "the owl of Minerva takes flight in the gathering twilight." Over-centralising tendencies and the search for the 'one best solution' to all telecommunications problems, to the exclusion of state and sub-state initiatives, will be self-defeating. Ironically, this is a lesson which American policy makers ought also to heed. The paradox of the 1996 Act is that the laudable attempt to introduce competition may end in the denouement of policy homogeneity, but against the contemporary needs for flexibility and polyarchal policy formulation. Ideas, as Hegel reminded us, come into good currency at the precise moment when they should be open to question and debate.


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[1] In describing these levels we have generally avoided using words like ‘federal’, 'national' and 'regional' because their meanings are construed so differently in a United States or European Union context. We will use our own general taxonomy of 'supra-state', 'state' and'sub-state'.

[2] This is borne out by Fuller, T and Jenkins, A (Public Intervention in Entrepreneurial Innovation and Opportunism BABSON Conference, LBS, 1995) who assessed the introduction of advanced telematic communication by small businesses in North-east England. Their preliminary findings revealed that the potential value of computer mediated communication networks such as those on the Internet not only required a considerable degree of learning and technical support, but "intervention" to trigger the motivation to use such resources.

[3] (Chong /NRRI Spring 1996.) Chong claims that half a million new jobs have been created in the communications and 'emerging information' markets during the period 88-92, while in Europe Carter concludes that "competitive advantage is directly linked to telematics infrastructure" (Carter, 'Telecities', EIS Jan 1995.)

[4] An example of federally funded development is the Applied Rural Telecom Resource Guide, which 'provides rural communities throughout the United States and the world a tool kit of resources to help them meet their economic and community development goals using telecommunications. The Guide offers a directory of economic development resources, an overview of basic telecommunications concepts, a schedule of upcoming conferences and events, and background information on rural infrastructure.' The Guide was developed by the Colorado Advanced Technology Institute (CATI), as part of the Colorado Rural Telecommunications Project (CRTP), with funding from the Economic Development Administration, part of the US Department of Commerce. The development resources are organised according to the following economic and community development sectors: Community Development and Public Access Networks; Health Care and Telemedicine; Education and Distance Learning; Tourism and Regional Marketing; Non-profit and Social Service Agencies; Agriculture, Ranching and Mining; Business and Telecommuting; Environmental and Natural Resources; Government.

[5] The REA is estimated to have contributed an estimated 6 times more in domestic GDP than the cost of the initial interest rate subsidies (Hudson and Parker et al 'Rural America in the Information Age,' 1989 p32.)

[6] These include removal of the telco-cable cross-ownership ban, a levelling of the regulatory playing field, symmetrical application of regulation to all telecommunications service providers, local control over construction permits, service standards , city determination of telco rates, and the use of telecommunication resources for local public/educational needs. League of California Cities, Model telecommunications Policy - Role of the City in Regulation.

[7] The main features of this has been the application of the competition rules of the community to telecommunications. This has had several consequences. Article 90 has been applied to force the introduction of a competitive environment upon the member states, often against their instincts and general government policy. the Article 90 Directives. Secondly, Articles 85 and 86 have been enforced in a series of decisions. Thirdly, the Concentration Regulation and the Joint Venture Guidelines, have been applied, with limited success, as vehicles for ensuring that the European telecommunications industry is reconfigured as a competitive structure without unnecessary concentration with all the problems that brings with it. The emphasis, if anything, has been on establishing companies with a European dimension and with the ability to compete internationally.

[8] This is so to the extent that every Green and White Paper so far has emphasised the importance of competition and the competition rules.

[9] Although estimates vary dramatically, there are thought to be over 10 million (10%) 'formal' telecommuters and a further 9 million part-time, self-employed teleworkers in the United States.(Link Resources US 1990 Annual Work at Home Survey; New York Telephone Survey `991) The United Kingdom, with an estimated 7%, is at the top of the European Union’s teleworking league, where the average is 5%.

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