The USA
Regulation:
History of Regulation: The USA
Pedro Pereira
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
The USA
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
Seven Periods
1
Bell’s Patent: 1876-1894
2
Competition: 1895-1913
3
End of Competition: 1914-1934
4
Creation of a Monopoly: 1935-1956
5
Competition in Long Distance: 1957-1982
6
Divestiture: 1984-1996
7
Telecommunications Act: 1996-
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(1) Bell’s Patent: 1876-1894
1876: Alexander Graham Bell patented telephone
1877: American Bell Telephone Company formed
1878: …rst telephone exchange
1882: Bell buys Western Electric Company
(supplier phone equipment)
1885: American Telephone and Telegraph Company formed
1887: Interstate Commerce Act
1894: Bell’s second telephone patent expires
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(1) Bell’s Patent: 1876-1894
Period Characterized by:
1
Monopoly of AT&T
2
Creation of Interstate Commerce Commission, ICC
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(1) Bell’s Patent: 1876-1894
Monopoly
Only AT&T could operate telephone systems in US.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(1) Bell’s Patent: 1876-1894
Interstate Commerce Commission
First independent regulatory body
Regulate common carriers
(Interstate Commerce Act of 1887)
.
(ensure fair rates, eliminate rate discrimination, etc)
Later powers extended to telecommunications
.
(Mann-Elkins Act 1910)
A common carrier is a business that transports people, goods, or services and o¤ers its services to the general
public under license or authority provided by a regulatory body.
Pedro Pereira
Regulation:History of Regulation: The USA
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The USA
The USA
(2) Competition: 1895-1913
After 17 years of Monopoly
US had limited telephone system.
270,000 phones in city centers; service unavailable elsewhere.
By end of 1894, over 80 entrants had 5% of market share.
By 1904, over 6,000 companies entered the market.
# of telephones " from 285,000 to 3,317,000. Many unwired areas got
telephone service; many areas got competing companies.
No interconnection. Clients of di¤erent …rms could not call each other.
By 1907, Bell rivals controlled 51% of market share.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(2) Competition: 1895-1913
After 13 years of competition
US had 6 106 telephones, divided between Bell and
independents, with service available anywhere.
Prices #.
In late 1800s AT&T earned average return of 46%; by
1906 the return # to 8%.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(2) Competition: 1895-1913
Natural Monopoly: scale economies, entry barriers?
The rapid ascendancy of competition
questions whether industry is a natural monopoly.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(2) The End of Competition: 1895-1913
In response to competition, in about 1910,
AT&T began buying up rivals.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(3) The End of Competition: 1914-1934
AT&T’s acquisitions troubled federal authorities, who
considered antitrust action.
In 1913, AT&T proposed the “Kingsbury Commitment”.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(3) The End of Competition: 1914-1934
Kingsbury Commitment
AT&T agreed to:
sell Western Union stock
allow competitors to interconnect with its network
get ICC approval for acquisitions and for every new local
system acquired, it would sell an equal share of lines to rivals
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(3) The End of Competition: 1914-1934
Kingsbury Commitment
Interconnection: AT&T gained greater control over industry.
Reduced Bell’s ability to expel independents, but eliminated the
independents’incentive to establish a competitive long-distance system.
Line Swapping: incentive for monopoly-swapping.
Bell and independents exchanged telephones to create geographical
monopolies: no price competition.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(3) The End of Competition: 1914-1934
Kingsbury Commitment
Established AT&T as a government sanctioned monopoly.
Markets carved up:
(i) monopoly telegraph company;
(ii) monopoly local telephone exchanges;
(iii) monopoly long-distance operations.
AT&T did not own everything, but some monopolist dominated
each market.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(3) The End of Competition: 1914-1934
Notion that in telecommunications monopoly is natural began to
emerge.
Competition resulted in wasteful duplication of investment.
Many state regulatory agencies began refusing requests by telephone …rms to construct new lines in areas already
served by another …rm, and continued to encourage monopoly swapping and consolidation in the name of e¢ cient
service.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(3) The End of Competition: 1914-1934
Initially AT&T opposed the regulation of the sector.
Eventually welcomed regulation because it eliminate competition.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(3) The End of Competition: 1914-1934
On 1918 the federal government nationalized the
telecommunications industry for national security reasons.
On 1919 the industry was privatized again.
On 1927 radio spectrum was nationalized
Pedro Pereira
Regulation:History of Regulation: The USA
(Radio Act)
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The USA
The USA
(3) The End of Competition: 1914-1934
After privatization, federal government and later state government
started average rate regulation with the "objective" of
promoting universal service.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(4) Creation of a Monopoly: 1935-1956
Creation of Federal Communications Commission, FCC
(Communications Act, 1934)
.
"for the purpose of regulating interstate and foreign commerce in
communication by wire and radio so as to make available, so far as
possible, to all the people of the United States a rapid, e¢ cient,
Nation-wide, and world-wide wire and radio communication service
with adequate facilities at reasonable charges."
Institutionalized Universal Service.
Left most regulation of intrastate telephone services to the
states.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(4) Creation of a Monopoly: 1935-1956
To promote universal service, FCC given powers to:
(i) regulate rates
(ii) restrict entry into the marketplace
entrants required a "certi…cate of public convenience and necessity" to prevent "wasteful duplication" and
"unneeded competition"
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(4) Creation of a Monopoly: 1935-1956
“One Policy, One System, Universal Service”
(Theodore Newton Vail)
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(4) Creation of a Monopoly: 1935-1956
1941: non-experimental installation of coaxial cable
(1925)
.
1948: commercial microwave–relay system into operation.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(4) Creation of a Monopoly: 1935-1956
Final Judgement (Consent Decree)
In 1956 AT&T and DOJ agree on a consent decree to end
antitrust suit of 1949, which sought separation of the Bell
System’s manufacturing from its operating and research
functions.
Bell System limited to common carrier communications and
government projects, but preserving the long-standing
relationships between the manufacturing, research and
operating arms of the Bell System.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(4) Creation of a Monopoly: 1935-1956
Final Judgement (Consent Decree)
The results were:
AT&T Long Distance was a Long Distance
Telecommunications …rm
Bell Companies separated from AT&T
AT&T not allowed to enter computer and information services
Keep Western Electric a separate subsidiary
Bell Labs separated as Telecommunication Research
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(5) Competition in Long Distance: 1957-1982
In late 1940s, appeared new technologies alternative to
copper wires for long-distance telephone transmission.
Transition from electromechanical to electronic components
permitted cheaper customer premises and network equipment.
This lowered entry barriers
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(5) Competition in Long Distance: 1957-1982
Slowly FCC allowed competition using these technologies.
In 1970s, competition entered long-distance service: MCI.
Local service remained o¤ limits to competition.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(5) Competition in Long Distance: 1957-1982
1958: AT&T introduces the …rst commercial modem.
1962: AT&T launches Telstar I
(…rst active communications satellite)
1977: AT&T installs the …rst …ber optic cable
Pedro Pereira
Regulation:History of Regulation: The USA
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The USA
The USA
(6) Divestiture: 1984-1996
In 1974, DOJ …led an antitrust lawsuit against AT&T based
on complaints by MCI and other long distance service
providers.
In 1982, AT&T settled with the government under conditions
ordained by Judge Harold H. Greene, of the Federal District
Court for the District of Columbia. The agreement become
known as the Modi…ed Final Judgement.
AT&T agrees to divest from local telephone operations. In
return, the Justice department agrees to lift the restrictions on
AT&T activities contained in the 1956 Consent Decree.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(6) Divestiture: 1984-1996
In 1984, the Bell System ceases to exist.
Replaced by 7 Regional Bell Operating Companies and a new
AT&T that retains its:
(i) long distance telephone,
(ii) manufacturing,
(iii) research and development operations.
Of the $149.5 billion in assets it had, it retained $34 billion; of
its 1,009,000 employees it retained 373,000.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(6) Divestiture: 1984-1996
Separate parts of AT&T which were natural monopolies, the local
exchanges, from parts where competition was appropriate, long
distance, manufacturing, research and development.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(6) Divestiture: 1984-1996
Competition in long distance service yielded large consumer
bene…ts.
AT&T’s market share fell from over 90% in 1984 to around
50% a dozen years later.
Average revenues per minute for interstate and international
calls originating in the US dropped from 62 cents per minute
in 1983, to 10 cents per minute in 2001.
Non-tra¢ c sensitive costs moved from rates to local-company
administered access charges.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(6) Divestiture: 1984-1996
Prices dropped by an average of 40% by the end of the 1980s
due to: (i) competition, (ii) new technologies, e.g., …ber optic
transmission, and (iii) the shift of some …xed costs.
Volume exploded. In 1984, AT&T carried an average of 37.5
million calls per average business day; in 1989, the equivalent
volume was 105.9 million, and in 1999 270 million.
In the 1990s, the growth of computers, and the internet led to
an increasing percentage of what customers sent over the
network taking the form of data rather than conversation.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(7) Telecommunications Act: 1997-
In the 1970s and 1980s, a combination of technological
change, court decisions, and policy changes permitted
competitive entry into some telecommunications and
broadcast markets. The Telecommunications Act intended to
further open up markets to competition by removing
unnecessary regulatory barriers to entry.
The arti…cial distinction between local and long distance
services created by the Bell breakup produced regulatory
upheaval as new technologies and services developed.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
Congress sought to calm the chaos with passage of the
Telecommunications Act of 1996. Cognizant of the bene…ts
realized through long distance competition, lawmakers
declared an end to the monopoly franchise system governing
local calling.
The bill’s purpose is to promote competition between local
telephone companies, long distance telephone companies and
cable companies, by establishing procedures for the elimination
of legal and regulatory barriers between these industries.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(7) Telecommunications Act: 1997Inncumbent local telephone …rms forced to share their
facilities with rivals at regulated rates.
Competitors would need to establish market share before they would
build independent facilities with which to compete. The regulatory
seizure of private property invariably skews investment incentives.
Congress delegated to the FCC the authority to determine
which facilities should be shared, and how various parts of the
network, called unbundled network elements, UNE, as well
as the entire network platform, UNE-P, would be priced.
Not intended to be an entitlement. Eligibility was supposed to
be based on whether a competitor would be “impaired” from
competing if they were denied access.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(7) Telecommunications Act: 1997-
The FCC established a pricing formula for network elements,
called “Total Element Long-Run Incremental Cost”,
TELRIC.
Based on the cost of building and operating a hypothetical
maximum-e¢ ciency network. The rates subsequently calculated by most
states cover an irrationally broad range, and most have proven to be
economically unsustainable.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(7) Telecommunications Act: 1997Interconnectedness. Set obligations for incumbent carriers and
new entrants to interconnect their networks with one another,
imposing additional requirements on the incumbents because
they might desire to restrict competitive entry by denying such
interconnection or by setting terms, conditions, and rates that
could undermine the ability of the new entrants to compete.
Intercarrier compensation. In the US the calling party’s carrier
pays the called party’s carrier for completing the call and, in
turn, recover those costs in the rates charged to its
subscribers. The Act requires that intercarrier compensation
rates among competing local exchange carriers be based on
the “additional costs of terminating such calls.”
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(7) Telecommunications Act: 1997RBOCs may enter long distance. Act created a process by
which the RBOCs would be freed from the restriction on their
o¤ering long distance service (1982 Consent Decree) once
they made a showing that their local markets had been
opened up to competition.
Wholesale access to incumbents’networks. To allow new
entrants time tobuild their own networks, the Act requires the
incumbent local exchange carriers to make available to
entrants, at cost-based wholesale rates, those elements of their
network to which entrants needed access in order not to be
impaired in their ability to o¤er telecommunications services.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(7) Telecommunications Act: 1997-
Universal service. Universal service had been funded through
implicit subsidies, levied as above-cost business rates, urban
rates, and above-cost rates for the “access charges” that long
distance carriers paid as intercarrier compensation to local
telephone companies for originating and terminating their
subscribers’long distance calls. Recognizing that new
entrants would target those services that had above-cost
rates, and thus erode universal service support, the Act
requied universal service support to be explicit.
Pedro Pereira
Regulation:History of Regulation: The USA
The USA
The USA
(7) Telecommunications Act: 1997The regulatory framework created by the Act was intended to
foster “intramodal” competition within distinct markets, i.e.
among companies that used the same underlying technology
to provide service. It did not envision the intermodal
competition that has subsequently developed, such as wireless
service competing with both local and long distance wireline
service, VoIP competing with wireline and wireless telephony,
IP video competing with cable television.
Ccurrent statutory and regulatory framework may be
inconsistent with current market conditions. Service providers
that are in direct competition with one another sometimes
may be subject to di¤erent regulatory rules because they use
di¤erent technologies.
Pedro Pereira
Regulation:History of Regulation: The USA
The EU
The EU
The EU
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
Three Periods
1
State Monopolies: 1900-1979
2
Privatization: 1980-1989
3
Liberalization: 1990s-
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(1) State Monopolies: 1900-1979
In EU the telecommunications sector was a legal public monopoly
for most of the twentieth century.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(2) Privatization: 1980-1989
In some EU countries there was a total or partial privatization, but
without liberalization.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(3) Liberalization: 1990-
The objective of establishing an internal market for
telecommunications services led the EU to initiate the
liberalization of the sector in the late 1980s.
The United Kingdom, Sweden, Denmark and Finland followed
a di¤erent course and achieved the full liberalization of the
telecommunications sector before the other members of the
EU; the United Kingdom in 1991 Sweden in 1993, Denmark in
1996 and Finland in 1994.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(3) Liberalization: 1990-
The liberalization of the sector proceeded in 4 steps.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(3) Liberalization: 1990First Step
Publication of Green Book on the liberalization of
telecommunications by the Commission on 28/11/1987.
The Green Book contained proposals for the gradual
introduction of liberalization, beginning with accessory
services. In addition, it introduced the notion of competitive
services, indicating the need for the liberalization of terminals,
and the way towards a separation between regulation and
operational activities.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(3) Liberalization: 1990Second Step
Two Directives:
(i) the Council Directive 90/387/EEC: institution of the internal market for telecommunication services through
open network provision, the Open Network Provision Framework Directive and (ii) the Commission Directive
90/388/EEC: competition in the markets of telecommunications services.
First is …rst signi…cant step towards the harmonization of the sector in member countries. It addresses the access
to networks, and required the network infrastructures to be placed at the disposal of new …rms, including those of
other countries. Imposed separate accounting for the di¤erent company segments to avoid discrimination. Initiated
competition on leased circuits, data transmission services, and circuit and packet switching.
Second liberalized all services except voice telephony, radiomobile and satellite services, and abolished all special
and exclusive rights for the supply of these services. Set the date for the end of any monopoly in the installation
and management of vocal telephone networks on 31/12/1997. Member states obliged to abolish special or
exclusive rights for almost all the other services whose sole agent up to then had been the monopoly incumbent.
Imposed the separation between operational and regulatory activities in the sector.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(3) Liberalization: 1990Third Step
Council Resolution 93/C213/01, which established the
deadline of 1/1/1998 for the liberalization of all public voice
telephony services. The Resolution also and granted Member
States with less developed networks, i.e., Greece, Ireland,
Portugal and Spain, an additional period of up to 5 years in
order to achieve the necessary structural adjustments.
Additional period intended to allow: (i) extending service
coverage, (ii) adjusting pricing structures to competitive
conditions, and (iii) establishing the way in which public
service obligations with respect to voice telephony would be
de…ned and …nanced.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(3) Liberalization: 1990Fourth Step
99 Review aimed at:
(i) deregulating further the sector, (ii) harmonizing the legislation of the members states, particularly with respect
to access and interconnection, and (iii) making regulation policies evolve towards technological neutrality. These
steps were of course complemented with many other measures such as the Directive 96/19/EC, the Full
Liberalization Directive, aimed at full competition in the telecommunication market and required Member States to
mandate interconnection with the public switched telecommunications network at non-discriminatory, proportional
and transparent conditions.
The use of ex-ante sector-speci…c regulation should be restricted to cases of where proven market failures in form
of enduring bottlenecks need to be corrected, otherwise the market should be disciplined by the applixcation of
competition law. Maintaining or reducing the present scope of Universal Service Obligations to avoid intervention
in the market driven development of new services, move towards a lighter authorisations regime with individual
licenses to cover scarce resources.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(3) Liberalization: 1990Fourth Step
The 99 Revision consisted of 5 Directives:
(i) Directive 2002/21/EC of March 7, the Framework Directive, (ii) Directive 2002/19/EC of March 7, the Access
Directive, (iii) Directive 2002/20/EC of March 7, the Authorisation Directive, (iv) Directive 2002/22/EC of March
7, the Universal Service Directive and (v) Directive 2002/58/EC of July 12, the Directive on Privacy and Electronic
Communications.
Directives were complemented with:
(i) Decision 676/2002/EC of the European Parliament and of the Council of 7 March on a regulatory framework for
radio spectrum policy in the European Community, the Radio Spectrum Decision, (ii) the Commission Guidelines
on Market Analysis and the Assessment of Signi…cant Market Power under the Community regulatory framework
for electronic communications networks and services, 2002/C 165/03, and (iii) the Commission Recommendation
on Relevant Markets 2003/311/EC, of February 11.
Pedro Pereira
Regulation:History of Regulation: The EU
The EU
The EU
(3) Liberalization: 1990The Council Resolution 93/C213/01 established the deadline
of January the 1st of 1998 for the liberalization of all public
voice telephony services. The Resolution also granted Member
States with less developed networks, i.e., Greece, Ireland,
Portugal and Spain, an additional period of up to …ve years to
achieve the necessary structural adjustments.
The Portuguese telecommunications sector was fully
liberalized in 2000. Any …rm licensed by the sectorial regulator
can o¤er …xed telephony services, either through direct access,
based on own infrastructures, or through indirect access,
available for all types of calls.
Pedro Pereira
Regulation:History of Regulation: The EU