Telecom Informer
by The Prophet
Hello, and greetings from the Central Office!
The rains have returned to Seattle with a vengeance. The power blinked on Thanksgiving, but didn't go out. However, I have the generators fueled and ready to go. Even though this is a major metropolitan area, our power grid was constructed for a different and much more sparsely populated time, with all of our wires overhead. Douglas fir trees are everywhere, and in windstorms the branches snap off, taking power and phone lines with them.
Those lines didn't used to run everywhere. If you wanted power and phone service prior to 1934, utility companies were under no obligation to supply it to you. You could get electricity and telephone service in city centers where providing the service was profitable, but this often wasn't the case if you lived on a farm. In fact, our old family farm in the Skagit Valley (an hour north of Seattle) didn't have electricity or telephone service until just before World War Two.
When the farm exchange was installed, it was originally a party line. One telephone circuit was shared between neighboring farms, each of which were assigned their own telephone number. If someone else was making a call, you could pick up and eavesdrop, just as if you'd picked up an extension. Because each farm had its own telephone number on a shared circuit, there was a specific ring sequence that indicated which number was ringing. It was considered polite never to pick up a call that wasn't for you, and it was also considered polite to keep calls short in order to keep the line free for others.
Notwithstanding the shared infrastructure, the service was in no way profitable for Contel, the phone company (later acquired by GTE, and later still by Verizon). While service in the bustling cities of Mount Vernon and Burlington was profitable, farm exchanges were incredibly expensive to install, and only the wealthiest farmers had them (and if you know anything about farming, there aren't very many wealthy farmers). The same was true for electric service. It just doesn't make much economic sense to serve farms and rural areas when you're a utility. They're widely dispersed. You're running miles and miles and miles of expensive copper cable for a single subscriber. The actual cost of hooking up a farm could be thousands or tens of thousands of dollars, an investment that you'd never recover no matter how long the investment horizon is. So why did our old family farm have electric and telephone service? The answer is remarkably simple: a piece of legislation called the Rural Electrification Act of 1934.
The REA, as it came to be known, was the foundation of a concept called "universal service." The federal government decided that in order to be economically competitive, telephone and electric service should be available everywhere in the United States. The REA gave utilities access to cheap financing, tax breaks, and financial incentives to build infrastructure in economically marginal areas. It further implemented a tax scheme to subsidize telephone and electric service in unprofitable areas. Our old family farm wasn't economically marginal - it was unprofitable. So we never would have had access to telephone and electric service prior to the REA.
I don't talk very much about politics in the column, but having the REA and granting universal service was ultimately a political decision. In the United States, we decided that everyone in the country had the right to telephone and electric service. Not every country has chosen the same path, and there is a definite impact on development and where it occurs.
South Africa for many years didn't have universal service (reserving most infrastructure for the elites favored under apartheid), leaving over 60 percent of the population in the dark (Eskom is now playing catch-up with electrical infrastructure in order to implement universal service). Major cities in South Africa are as advanced as anywhere in the West, but some rural townships and villages are still - even today - in the dark. Myanmar doesn't have universal service either; if you live in a rural area, your power comes from a generator and if there's phone service at all, it is wireless. Meanwhile, in the U.S., it isn't even a question whether these basic utilities will be available.
Regulating all of this stuff used to be fairly simple, at least when it came to telecommunications. Phone service was a fully regulated utility. Phone companies would file tariffs, under which they would detail the services offered (many of which they were legally required to offer) and the prices they proposed to charge. State utility commissions would regulate the rates, ensuring that phone companies were allowed a fair return on their investment, but not allowing the public to be gouged either.
Phone companies were required to meet service levels set by the public utility commissions, and were fined if they didn't. Utility investors expected a safe, steady return, but not high rates of return. And city dwellers were taxed to subsidize the service of rural residents, both by paying more expensive long distance rates (which covered access charges paid by urban utilities to rural ones) and by paying a universal service fee per line of service.
In the late 1990s, cracks in the dam started to appear and the FCC began grappling with the explosion of two telecommunications services that were almost completely unregulated: mobile phone service and Internet service. Ultimately, the FCC ruled that mobile phones would more or less be treated like landlines when it came to the fees charged to subsidize universal service.
Carriers were required to contribute to the universal service fund, and state utility commissions were allowed to tax mobile phones in order to pay for 911 service. And in 1996, the Telecommunications Act of 1996 added broadband Internet access to universal service requirements. Unfortunately, the required speeds were set so low that a "digital divide" was created. In 2009, the FCC was required to craft a national broadband strategy, and this was released in 2010. Unfortunately, it's largely window dressing. Not only does it allow wireless broadband to meet the definition of universal service, but it sets the minimum speeds to 4 Mbps. However, these aren't required to be delivered until 2020, and 4 Mbps is very slow by today's standards.
In 2015, after a controversy in which Comcast, facing the loss of cable subscribers, throttled Netflix, the FCC implemented net neutrality provisions. This wasn't a crazy concept out of left field; it was basically a cut-and-paste of telecommunications policy. Verizon is required to deliver calls even if they came from AT&T, and vice versa. They're required to add trunks when there is blocking. This is logged and regulated and reported to state utility commissions, and there are fines involved if the engineering is wrong, so phone companies tend to be conservative with tandem trunk capacity (it's a lot easier today when SIP trunks are used and can scale almost infinitely). The same concept was effectively applied to Internet service providers: no games were allowed.
Well, just like the idea of universal service being delivered by a wire to your farm at equivalent service levels to the city, Internet service will now depend on the site to which you're connecting. The FCC has gutted net neutrality provisions, saying "Let the free market decide!" The problem is that this isn't a free market. There are one or (at most) two providers of Internet service in most rural areas. While people living in cities will have more broadband choices (which is likely to drive better behavior), rural residents face having their Internet service sold to them in packages like cable packages. Email service could be a fixed price, while social media sites could cost an extra five dollars to use, and streaming video could cost an extra ten dollars to use.
Given that bandwidth at wholesale is close to free these days, what I expect to happen is just a money grab. There are no economic fundamentals underlying it. And this is likely to create a greater digital divide than already exists in the United States - the exact situation that the REA was constructed to prevent.
And with that, I'll leave you to enjoy your winter. Be safe, stay warm, and I'll see you again in the spring!