A playbook for competition
Technology is advancing at a rapid pace and telecommunications companies warn Illinois could fall behind
by Bethany Carson
Don't blink or your mode of communication could become outdated. The cell phones that play music, take pictures and send e-mails are light years away from the invention of the telephone 130 years ago, but wireless services aren't even at the top of their game yet.
In fact, the entire telecommunications industry is entering a new era. Companies now are eager to compete in multiple sectors: local and long-distance telephony, cable, Internet, wireless and fiber optics.
"The wireless industry is in the first inning of a seven-game World Series," says Michael McDermott, regional director of state public policy for Verizon Wireless. "Things that are yet to be invented will be developed, will be enhanced and brought to the consumer base far beyond our consumers' wildest dreams."
Time out. There's a catch: "But if you throw the regulatory blanket over us," he says, "you're going to slow down the progress."
McDermott is referring to Illinois' telecommunications law, which has exceeded the life expectancy of a cell phone. It's been five years since lawmakers updated it. Meanwhile, some states, including Indiana, have relaxed regulations on the local phone lines. Others, including Kentucky, also are considering some deregulation with the intent to spur innovation and give consumers what they want: simplicity and reliability.
Two decades ago, Illinois led the nation in trying to enhance competition by requiring local phone companies to lease their wires to competitors at a fair price. Then, 10 years ago, Illinois came to the forefront again when it changed the way rates were set to protect consumers from unreliable services.
The federal government even looked to Illinois in 1996 for insight when enacting a deregulation law at the national level. The Illinois Commerce Commission began tying rates to inflation, which limited the amount companies could charge for individual services but also rewarded them for being efficient in delivering those services. The under-lying law was scheduled to expire in 2005, but lawmakers extended it until July 2007.
Now AT&T, Verizon Communications Inc. and other competitors warn the Land of Lincoln may lose appeal to telecommunication companies and fall behind states that have already deregulated the industry, including California, Indiana and Texas. For Illinois consumers, that could mean slower progress in addressing the digital divide — the gap between people, typically in urban areas, who have more access to high-speed Internet and advanced services than those who live in more rural areas. But it also could mean fewer jobs if major companies invest in other states before doing so in Illinois.
As a result, state officials are preparing to step in. Before they do, however, lawmakers want to explore ways to ensure that all Illinois residents have access to affordable high-speed Internet as a way to prepare for a more comprehensive rewrite. Nothing is likely to happen before next year.
As the competition continues to evolve at a rapid pace across multiple sectors, the government is approaching regulations differently from what it did 20 years ago.
In the mid-1980s, economists believed the best way to serve customers was to give them as many options for phone service as possible, according to Jon Feipel, assistant director of the telecommunications division of the Illinois Commerce Commission, the state agency that regulates utilities. "You would have choices for telephone services like you would tennis shoes," he says.
When the natural monopoly of AT&T — American Telephone and Telegraph — was broken into seven regional "Baby Bells" in 1984, Illinois was one of the first states to make a distinction between local phone and long-distance services. The commission preserved its oversight of the local wires to ensure basic phone service stayed affordable and reliable, Feipel says.
A decade later, the sectors in telecommunications started to blend. Long-distance phone companies wanted access to the local phone lines in order to take advantage of the lucrative local phone market, and local phone companies wanted to offer long-distance services to protect their vitality. Wireless services entered a gray area because they are owned by the big players, Feipel says. The state commission was charged with the role of arbiter and with creating a level playing field between start-up companies and those that had been controlling the wires in the ground for decades, all while shielding consumers from higher prices.
The goal was to give consumers choice, but no one knew how competition would develop, says Charlotte TerKeurst, who headed the commission's unified telecommunications division in 1999. "But we wanted to give it the opportunity to do so if the economics were there."
The economics were only partially there. Competition took off in the business sector of the Chicago area, but not in residential areas throughout the state. Feipel says that relates to the 1990s Internet boom, when federal commercial restrictions on the Internet were lifted and thousands of public and private entities began posting information online. Local carriers benefited because, back then, people were using local phone lines to dial up the Internet. Suddenly, they didn't have as much incentive to enter the long-distance market.
At the same time, Feipel says there was a consumer backlash to the dizzying number of choices. "Consumers don't typically spend the time and effort to shop around for phone services like we wanted them to," he says.
As a result, state and federal officials have started to change their focus from how prices are set to how well consumers understand their options. Rather than giving consumers a la carte choices, Feipel says economists in the new millennium have a "brave new philosophy: We want these gigantic companies offering bundled services."
Consider the trend. AT&T merged with SBC Communications last year, and Verizon acquired MCI Inc. Now competitors, AT&T and Verizon are offering all communications services in one package. That means consumers can pay one bill for telephone, cell phone, television and high-speed Internet services. Industry insiders call it the "triple play."
Going one step further, AT&T and Verizon also are investing in fiber optics, which use ultra-thin strands of glass to deliver information faster and in more ways than cable or phone lines can. Both have already rolled out fiber optics for television service in Texas.
Verizon also has begun construction in Fort Wayne, Ind., according to Philip Wood, vice president of public affairs policy and communications for Verizon Illinois. "It's unlike anything you can imagine or can describe," he says. "There are literally a couple hundred channels, a tremendous amount of [high-definition channels] and customized programming at a price level that is significantly less than a traditional cable."
Currently, Verizon Illinois is not on the list for getting the fiber-optic services in 2006, according to Wood, but it's a huge, long-term investment that requires digging up streets and replacing the existing cable. "It's realistic for some areas, but this is not a product or service that we're going to be able to deliver to every customer in every state, whether it be Illinois or Texas," he says. "It's driven by the market economics, as well as the external factors."
Whether deregulation would enhance Illinois' chance of landing on the future to-do list, Wood says he can't say. "This gets momentum and recognition in the marketplace. If that continues, you can draw your conclusions about where the industry is headed. Obviously, you need the infrastructure to go there."
Wood's co-worker McDermott says Illinois has an opportunity to attract those advanced services if it deregulates local phone lines and wireless services as Indiana did in March. Indiana's new law also creates a statewide video franchise, which means telecommunications companies can buy access to the local wires through the state rather than through individual cities or municipalities.
"If we have to negotiate torturous regulatory waters in Illinois, then our investment dollars will likely go elsewhere," McDermott says.
AT&T spokesperson Rick Fox says the same. AT&T wants to be able to compete freely with cable companies in Illinois, but Fox says Indiana is a more attractive place for companies because of the regulatory environment there. Illinois still regulates the local phone lines, which means AT&T must get Commerce Commission approval to change the rates of its bundled services that include local phone service. That could take 45 days to a year, and its cable competitors, such as Comcast Corp., don't have to do that because they do not own the majority of lines that go into homes, says Beth Bosch, spokeswoman for the commission.
She adds the commission is currently reviewing a proposal by AT&T to declare all the remaining services offered to customers in the Chicago area competitively available. That means rates are competitively set because the same services are available from other telecommunications providers. The commission is still deciding if the services are truly competitive. Meanwhile, AT&T's rates are still reviewed by the commission.
"That does put the state at a competitive disadvantage," Fox says, but Illinois might not have to go as far as Indiana. "This environment changes so quickly that it's difficult to tell nine months from now what Illinois will have to do to keep up. The policies need to change to reflect today's marketplace, not the marketplace of five years ago. Five years ago, we were not competing with cable companies for local telephone service. Today we are."
But Illinois isn't sitting idle. Lawmakers have been considering a plan similar to the one implemented by he Hoosier state, much to the pleasure of the Illinois Telecommunications Association. President Douglas Dougherty says a comprehensive rewrite could bring Illinois one step closer to enacting the next trick in the playbook: Internet Protocol Television. IPTV, for short, uses phone lines to deliver channels to the television set. While similar to high-speed Internet, it's actually more interactive for the customer and can lead to more niche programming.
While the new package of services may be convenient, consumer groups question whether they will be affordable and reliable for average customers. They fear deregulation won't create a level playing field, but an unwieldy monopoly that will drive up the costs for basic services.
The Citizens Utility Board, a Chicago-based consumer watchdog group, warns the state shouldn't move too fast. Executive Director David Kolata says the absolute first step must be to close the digital divide and expand the high-speed Internet structure. "The new form of competition depends on access to high-speed Internet. Voice-over Internet, cable telephony, all of them require, in some shape or form, access to high-speed Internet. You can't deregulate without leading to large rate increases."
While Illinois customers already have the option of buying the triple-play packages, he says that's not really the issue. "The issue is people who can't afford it or who don't want those types of options — how can we maintain the fair phone rates for them?"
While the state's telecommunications law is set to expire July 2007, Kolata says next year will be too early for a rewrite with deregulation. "We're in a transition period. The future is very promising, but that future isn't here yet. We need to advance incrementally. Let's choose policies that will bring advanced telecom and high-speed Internet as soon as possible."
That's exactly what state lawmakers began studying in the spring session. They formed a committee solely to address the digital divide. Rep. Julie Hamos, the Evanston Democrat who co-sponsored the 2001 rewrite, says the discussions are preparation for a comprehensive rewrite next spring.
Hamos says the challenges will be three-fold: determine how the state can promote competition, protect consumers and create incentives for businesses to deploy high-speed Internet to rural areas. "We have too many pockets of unmet need," she says. "Government needs to pay attention, and we need to ask as a policy matter, 'What is the role of government?' We don't have the answers to that yet, but that is squarely the question before us."
Last year, lawmakers bobbled the political football, but didn't break the plane of the end zone. Feipel of the Commerce Commission says the Senate approved deregulation as a way to spur innovation. But the idea stalled in the House, which sided with the consumer groups and feared deregulation would cause a monopoly and fail to ensure quality.
"This telecom stuff is so brutal when you get down to the Statehouse because, right away, you get diametrically opposed viewpoints," Feipel says. "You get big companies on [one] side. On the other side, you've got the attorney general's office, CUB, Citizen Action, probably Boy Scouts of America, anyone on the side of consumers. It's a really curious paradox."
Sen. James Clayborne Jr., the Belleville Democrat who sponsored last year's stalled measure, says, "Just because we're not doing it now doesn't mean that we won't get it done. I think that everybody from both sides understands what the issues are. And the issue is: Are we going to regulate everything — which is cable, voice-over Internet, land lines, cell phones — or are we going to place our current AT&T in the same position with their competitors? That's the real issue."
Issues, May 2006
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