Preface September 2001 This prophetic document was written in 1992 (some of the data was updated in 1993.). After years of research we concluded. that because of the Bells were a total monopoly for local services, there was a lack of any local competition to drive down major price increases. Also, we showed that the Bell holding companies had lost focus of the local phone customerand therefore, would not adequately serve the American public. Therefore, we concluded that in order to move forward and have competition as well as broadband services, we would need to divest the Bell companies from the local operatingf companies. We called it Divestiture II. As you can see, it's a literally a decade later, and the situation never got fixed--- it only got worse. 10 Years Since Divestiture: The Future of the Information Age Overview of research project 1993 marks the 10th anniversary of the Divestiture of AT&T, once the world's largest company. Divestiture was spurred on because of the de facto monopoly AT&T had on telecommunications in the United States and with it came the creation of seven, very large regional companies, known as Regional Bell Operating Companies(RBOCs), each owning a land mass of networks, telephones and customers. These companies were comprised of existing local Bell Operating Companies (BOCs), such as Pacific Bell or New York Telephone. Even though Divestiture of the Bell System was one of the largest antitrust decisions in history, and affected every American directly, little data to date gives a true understanding of the impacts this change has wrought. Three majors issues remain unaddressed: What effect has the creation of the RBOCs had on the consumer and business telecommunications customer? Were the customers of divestiture well served by these new companies, or were they adversely impacted? What should be the next steps? What changes should be implemented? These issues are not simply an academic study due to the passing of a decade, but are at the core of the future of telecommunications in America. For example, today there are at least four bills before Congress, some of which wish to restrict the business practices of the Regional Bells, such as the Brooks bill, while others, such as the one introduced by Senator Burns, believe that the Regional Bells should be "Freed" and allowed to pursue many other activities currently restricted, such as long distance services, or competition with cable companies for viewers. In 1992, research by New Networks Institute started with a question of a charge found on a NY Telephone residential telephone bill. "Why did a call to Connecticut from NYC handled by New York Telephone, cost almost 95% more than a call from NYC handled by AT&T to California?" With this as the departure, and a collection of 12 years worth of telephone bills, the project started by examining the hard facts, the actual charges and payments. This information was then combined with data about the rest of America, from over 1,600 separate documents, sources including the FCC, the Department of Justice, Bell Core, NARUC (National Association of Regulatory Utility Commissioners), telephone company annual reports, tariffs and product literature, and telephone bills from across the United States. To see the complete bibliography of reports (completed in 1996) see:  http://www.newnetworks.com/biblio.html The picture of what has transpired over the last 10 years brings up serious issues about the current and future state of telephone services, and even who should regulate them. Though it was not the intention of the original study to have strong opinions about the research, it has become obvious that there is an overwhelming sense that significant changes are required for the Information Age to proceed, and be able to maintain the philosophy of "Universal Service at a Reasonable Price". Taking the vantage point of consumer and business users, the findings show that the Regional Bells have significantly abandoned their original mandate, to first serve their local constituency, and now first serve their investors. In short, the impact of divestiture has been the creation of new natural monopolies, which, using their privileged market position, have dramatically raised expenses for the local subscriber and have taken the revenues from the local subscriber services, the regulated business side, to fund a multitude of investments (non-regulated), much of it overseas. We do not make this statement lightly, but have based this primary finding on a volume of disparate data, supplied by the telephone companies and government agencies, and more importantly, on the only true test, the charges on telephone bills. After almost a decade, the crux of the issue is that the utility subscriber may not be best served by the RBOCs new direction. Therefore, we are proposing: Exploration of Divestiture II: Divesting the Regional Bells of the Operating Companies Requiring Local Operating Companies' profits returned to consumers and businesses or used to pay for "Universal Fiber" Allowing local competition, and adding new regulation and regulation of services Also, research has revealed a patchwork quilt of regulation and governance, allowing serious gaps in jurisdiction between national and state governing bodies. This has fueled a dramatic increase in local charges , with RBOC revenues to follow suit. Therefore, we are proposing a new cabinet level government agency be founded to control local and national interests, including complaints, paid for by the divestiture of BellCore and combining others current regulatory assets. Here is an overview of highlights from Phase One of "10 Years Since Divestiture: The Future of the Information Age". I. Change in RBOC focus: Investor over Utility Subscriber One of the most disturbing aspects of reading the annual reports of the Regional Bells is the focus of the companies' primary objectives and the omission of the first, and most important, basic premise of local service, the anthem of the pre-divestiture telecommunications: "Universal Service at A Reasonable Price" This dogma of telecommunications services did not appear even as a line item in any of the reports analyzed. Instead, the companies defined their business and objectives as global companies, who believe their primary path is information. For example: "The objective we have set for ourselves is our vision of being a leading international communications and information management company". Bell Atlantic Annual Report 1990 While some of the companies discuss in detail their commitment to bringing future technology and telecommunications to the local subscriber, what we find is a basic dichotomy of companies whose path is to create revenues for their investors, instead of investing in their primary constituency, the local subscriber. For example: Regulated Business cross subsidizing other investments: 89% of all revenue comes from the Local Operating Companies' telephone services, which accounts for 94% of all profits. These profits are the primary funder of the RBOC's past and current investments in non-regulated services and have been and will continue to be loss leaders. Foreign Investments: $11.3 billion has been spent in overseas operations since 1989. One of the primary uses for the local operating company's profits has been the purchasing of a percentage of anything foreign, such as telephone, cable, or cellular firms, from Czechoslovakia and Russia to New Zealand and the Pacific Rim. NYNEX has offices in Hong Kong, Singapore, Geneva, Frankfurt and London. Bell South has over 2,000 employees overseas, and Bell Atlantic has over 700 employees in 51 offices, representing 10 nations. Other Investments- Purchasing companies: The RBOCs' overall investment habits have been to purchase businesses. During the 1980's, they purchased computer stores and made extensive investments in real estate and financial services, including leases on a tire plant. Today, the RBOCs are showing combined losses of over $1.7 billion a year from purchases made in the mid 1980's. II. Where Does The Money Come From? : Steady growth in calls and lines: There has been continued steady growth in the use of telecommunications services over the last 10 years. There are more calls, more lines, and more demand for enhanced services, such as Call Waiting. Long distance calls increased over 30% in the last five years, and the Regional Bells now supply some 107 million telephone lines in the US, a growth of over 10% in five years. Dramatic increases in cost of local services, decreases in long distance: While there has been steady, dependable growth, the cost for local services has also increased dramatically. If you do an "apples to apples" comparison of service offered in 1980 to service offered today, and compare the value received for the price, nationwide, local service costs have risen 315%, and in NY City, local charges have increased as much as 553%. These changes occurred by a number of methods, including the reduction or elimination of "allowances" (calls that were included with local service), the addition of new charges, such as the FCC Surcharge or Wire Maintenance, or an array of taxes and surcharges, many of which are also revenue to the Regional Bells. (The FCC statistic of 50% increase for local service is woefully incomplete!) Meanwhile, because of aggressive competition, long distance prices have decreased over 60% since 1980, and there are now packages with 20% off that. Also, the long distance carriers now offer toll-free, 24 hour customer services, as well as specials, including airline type frequent flyer programs. The RBOCs still maintain 9AM-5PM weekday live operator services. Also, 44% of all long distance company long distance revenues are paid to the Regional Bells for 'Access fees', i.e.- a fee to handle the connection between the long distance company and the caller. III. While expenditures have been used to fuel other projects, the local subscriber has been forgotten. Still No Equal Access : In 1983, the FCC mandated that Equal Access (i.e. the instillation of new digital switches that have the ability to handle all long distance carriers) was to be completed by December, 1986. While an ambitious schedule then, NO RBOC has yet completed implementation of Equal Access. Rate Reductions and Mandated Customer Service and Modernization:78% of the Public Utility Commissions mandated rate reductions or refunds for excess profits from 1989-91, totaling $1.7 billion. Meanwhile, over 12 states have had to require that more money be spent on modernization and customer service. No Competition: No Lower Prices, or Better Service: Prices across the United States have gone up an average of 315% since 1980. In fact, because of a lack of competition, toll charges are costing America $5.9 billion annually. Staff Reductions, Operating Company Staff Only: The RBOCs have been pruning their work forces, with some 54,000 staff having been laid off in the last 5 years. However, the staff being laid off is primarily from the Local Operating Companies, with almost 7% decrease in staff, while the total parent RBOC staffs have actually been increased over 20%! IV. How did this all come about? : Split Brain Personality: Regulated, De-regulated, Unregulated, Restricted: The Regional Bells' business practices are controlled by a compendium of different state and national regulations. There are four basic categories of regulations for both state and national laws: Regulated Business: This is the primary business of the local operating telephone companies, which includes Local Access and local and toll calling. These services have regulated 'Rate of Returns' on profits. Deregulated businesses: Deregulated Businesses were once part of the core business, and might have been regulated, but today are "allowed to earn according to the market". These services include Billing and Collections, Directory Advertising, Cellular, Dial-it Services, among others. Restricted Services:: Today, the Regional Bells are restricted from offering (in the United States) long distance (Interstate, InterLATA), cable services, or the manufacturing of telecommunications products. The ban allowing the RBOCs into information service has recently been lifted. Non-Regulated services are services of purchased companies that have not been part of the core telecommunication products or services (or are not in the US). For example, the Regional Bells all own real estate and financial services companies, as well as a myriad of foreign investments, including cellular or cable firms. Regulation does not see the whole picture of either telephone subscriber increases or RBOC expenditures. The Total Telephone bill is not examined or controlled by any one regulator: The telephone bill is an amalgam of state and national regulatory controlling interests, and therefore, the total bill is not under total scrutiny by any one party. For example, the FCC has imposed a national charge, State legislatures impose taxes and surcharges, and local Public Utility Commissions' control only specific rates of return for some of the services, not all. This has allowed expenses for phone service to increase dramatically, because different regulators can add different charges. Total Revenues of the RBOCs are not examined by any one regulator: While state PUCs can monitor and effectively control the price of specific services, they have little or no control over any deregulated or non-regulated income or expenditures. For example, while rate of return for local access and toll calls have been set between 11-13%, actual telecommunications returns for NYNEX averaged 21% for the last three years. This figure includes de-regulated services, such as Billing and Collections revenues or wire maintenance. Deregulated revenues and profits are substantial. According to NYNEX's 1991 Annual Report, when NY Telephone eliminated inside wire related rates from the regulated businesses and began to offer wire- maintenance services on a deregulated basis, revenues of approximately $ 367 million shifted from regulated to deregulated income. Meanwhile, Billing and Collections, a deregulated service provided to long distance companies, generated $3.6 billion for the Regional Bells, none of which directly benefits the rate payers. Cross Subsidy is the use of a regulated service or company by another non-regulated company to either give undo advantage or receive services at below market value. Today, many states are finding that this line of demarcation is drawn in the sand. For example, an article in Communications Week stated "State regulators expressed concern that they and their federal counterparts cannot adequately monitor attempts by the Bell Companies to use their local exchange monopolies to competitive advantage in information services and manufacturing". In fact, one could say that all utility RBOC revenues are cross subsidizing all other ventures. V. Where do we go from here? : While the statistical information presented is only a snapshot of the findings from"10 Years Since Divestiture: The Future of the information Age", the details indicate that consumers and businesses may not have been best served by the creation of the Regional Bells. Consumers are completely confused about the current situation and feel 'ripped off' over services, but powerless to do anything. Based on preliminary data of 100 survey respondents, to be expanded to 1000 interviews in Phase Two, we found that: Less than 1% of those surveyed had any idea of the costs of their local service, either per minute, or per plan. When asked about specific charges, less than 1% knew if they were paying "FCC Line Charges or Wire Maintenance" charges. When informed about the above charges, 89% felt that they were unfair but felt powerless to do anything to change it. 94% believe the local company is a monopoly. As one respondent said: "It's not like I have a choice over my local phone company. I'm gonna pay what they charge. Why drive myself crazy over it?" While the exploratory plan for the next steps is both long and somewhat technical, the pragmatic reality is simple. We are proposing: A. Exploring Divesting the Regional Bells: Divestiture II Divesting the Regional Bells of the Operating Companies Requiring local operating companies to have profits returned to consumers or pay for Universal Fiber Require competition at the "Second Switch"* Divest Bell Core (*Second Switch -Every telephone is connected directly to a 'wire center', which aggregates calls to be sent either across the street or across the globe. These calls go to other companies, such as a long distance carrier, or can be carried by the Regional Bell for a local or toll call. This hand-off of the call goes from One Switch - i.e. the wire center to another Second Switch, such as the long distance carrier.) We believe that instead of allowing the RBOCs into other services, such as long distance or manufacturing, the real discussion should be focused on exploring the dismantling of the local monopolies, and that excess profits should be returned to the consumer and business, either in lower prices or in creating the next generation of network. This plan has some basic benefits to the telephone user, and even the RBOC alike. Creates competition, lower prices, and provides better services Spends the money on the local subscriber Use the excess profits to fund new wire and competition Allows RBOC investors to sell off assets and receive appropriate monetary relief While many of the readers may wonder if such radical approach is appropriate, much less do-able, the idea is currently being explored by Public Utility Commissions and even the RBOCs themselves. During the research and writing of this document, two important events occurred which corroborated the need for further exploration of divesting the Regional Bells. Pacific Telesis - has already stated publicly that they are exploring the possibility of divesting the operating companies from Pacific Telesis, the parent corporation. NY Public Utilities Commission - Because of a recent scandal related to cross subsidy issues between NYNEX's subsidiaries and the local operating company, NY Telephone, the NY Commission requested NYNEX submit a plan for complete disassociation of the operating companies from its other companies, or face the possibility of forced divestiture of these companies. B. Create A New Government Agency dedicated to Communications While the states have done an admirable job of keeping specific telecommunications services reasonably priced, there are still severe problems of even handed national regulation, considerable duplicate work, and as we have pointed out, gaps in jurisdiction. On top of that, both Congress and the FCC seem to have offered either limited solutions or even contradictory rulings. For America's telecommunications industry to be state of the art, it needs coordination of state and national concerns which is missing today. Therefore, we are proposing the formation of a new government agency dedicated to communications. Its activities would include coordination of state and national activities, handling and centralization of all complaints, creation of a policy and a national agenda by consensus of the telecommunications companies, users and regulators to better "synthesize and homogenize" national and state laws, into coherent, enforceable policies. This new organization could be paid for by divesting BellCore and using a small portion of the current revenues, as well as removing duplicative state work, but coordinating complaints and regulatory issues. C. Universal Fiber: A Highly Regulated "One Switch" Business Within the next few years, a plan will be implemented that finally builds America's fiber infrastructure. While the debate will continue about how it should be funded and who should own it, our perspective and research indicate that there should only be one more wire into the home, "The Universal Fiber". Wire costs money to implement and maintain. We propose that one Fiber Optic wire be attached from the home or office to a designated wire center (One Switch) where all service providers (Two switch), such as cable companies, telephone companies, information companies, and even gas and electric remote reading would all be aggregated through one wire to the home. This service should be highly regulated and owned directly be the ratepayers, to keep the price low cost. Upkeep and enhancements would be paid for by usage and access fees.