“Mr. Watson, come here. I want you.” These simple words,
spoken on March 10, 1876, were destined to go down in history —
they were the first words ever spoken over a telephone. Alexander
Graham Bell and his assistant, Thomas Watson, patented their new
device only hours before another inventor attempted to patent his
version of the telephone. So the telephone was born in a climate of
competition.

After almost a century as a monopoly, today, the telephone
industry again finds itself in a competitive environment. What does
this newly competitive climate mean for the industry, and for the
public? To understand this, let’s take a look at the history of Mr.
Bell’s remarkable device.

A year after Bell’s first phone call to Watson, the newly-formed
Bell Telephone Company placed six experimental telephones in
service; only two years later, in 1879, there were more than onehundred
thousand telephones in service. Soon, long-distance
service was being offered between major American cities.

At the turn of the century, Bell merged with its long-distance
subsidiary, to become American Telephone and Telegraph —
“AT&T.” By this time, however, AT&T was not the only phone
company around. Bell’s patent on the telephone had expired, and a
number of other companies raced to compete with AT&T in the new
telephone market.

In many industries, competition is a driving force; but in the
telephone industry, it was a source of serious problems. In 1905,
The Merchants Association of New York prepared a report for the
city government outlining the problems caused by competition in
the telephone industry. The streets of New York were crowded with
the phone lines of competing companies. One company would put
its lines on one side of the street, and a competitor would put its
lines on the other side. In the early part of this century, the streets
of many American cities were being filled with a web of black lines
that had even begun to interfere with traffic.

Worse than this, different companies controlled different parts
of a city. To be in touch with the entire city, customers were forced
to subscribe to several different phone companies — and each
company provided its own hardware; to have access to the entire
city, you needed three, four, even five different telephones.

Not only did competition cause serious inconveniences, it
actually increased the cost to customers: customers had to pay for
four or five different phone services, each of which had to charge
for maintaining its own phones, lines, switching plants, and
transmission plants.

Faced with these problems, many city governments refused to
grant operating licenses to new phone companies. So in many
places, AT&T and its regional Bell subsidiaries had the market to
themselves. This allowed AT&T to expand, to standardize, and to
make telephone service more efficient.

By 1913, however, the US Department of Justice began to raise
a question: was AT&T an illegal monopoly? The Department of
Justice reached an agreement with AT&T known as the Kingsbury
Commitment. In this agreement AT&T was prohibited from
acquiring any more smaller phone companies; it was also required
to grant the remaining local independent companies access to its
long-distance lines. In return, AT&T was guaranteed immunity from
any anti-trust action. This agreement seemed natural, since the
telephone industry was quickly becoming recognized as a public
service industry.

In the same year — 1913 — the Missouri Public Service
Commission was founded. The Missouri PSC was created to oversee
public service corporations in Missouri, which included railroad
companies, power companies, and telephone companies. Part of its
mission was to ensure that telephone companies provided universal
and affordable service to Missouri residents.

The Missouri PSC faced a number of challenges in regulating
the new telephone industry. The most crucial of these was the
problem of competition. In a competitive environment, customers
had to pay for expensive duplication of services: a single customer
needed many phones to have access to all of Missouri; expensive
lines and switching stations were duplicated, and the costs passed
on to customers. In 1919, the Missouri PSC made this assessment:
“Competition between public service corporations was in vogue for
many years as the proper method of securing the best results. . . .
The consensus of modern opinion, however, is that competition has
failed to bring the result desired.”

For this reason, the Missouri PSC accordingly supported the
emergence of a single telephone service provider, and Southwestern
Bell — AT&T’s regional subsidiary — quickly unified Missouri’s
communication network, connecting all Missourians with each
other, and Missouri with the world.

To ensure that the public interest would be served, the
Missouri PSC, following the lead of Public Service Commissions in
other states, carefully regulated the activity of the various local
phone companies. The principle form of regulation was called “base
rate of return” regulation. This meant the amount of profit the
phone companies could make was strictly limited; thus the amount
of capital that could be reinvested in the network was also limited.
In the absence of competition, such regulation was intended to
balance the needs of the phone companies’ shareholders with the
needs of the public.

From the beginning, Southwestern Bell had made a
commitment to the public. Its goal was to offer affordable and
dependable service to everyone in Missouri: to ensure that rural as
well as urban customers, residential as well as commercial
customers, be given access to the network at a fair and stable price.
The two organizations, Southwestern Bell and the Missouri PSC,
worked together for over half a century to provide impeccable
service to Missouri residents. When Southwestern Bell Missouri
customers picked up a telephone, they could be certain of finding a
dial tone; and when they received a bill at the end of the month,
they could be certain it was for the lowest amount in return for the
highest quality service.

This system functioned well for over half a century until, in
1982, the US Justice Department reversed its policy, and forced
AT&T to divest itself of its subsidiary Bell companies. This decision,
known as the “Modification of Final Judgment,” ended the AT&TBell
system that had provided Missouri, and America, with
superlative phone service for over a half a century. In the wake of
divestiture, Southwestern Bell, along with all of the other “Baby
Bells,” was left with the responsibility of providing local phone
service, but could no longer offer most long-distance services. Much
of the regulation which had been imposed on the AT&T system was
now imposed on the individual Bell companies.

Since the break-up of AT&T, new companies have begun to
enter the telecommunications market. These companies are wellequipped
to compete with Southwestern Bell in offering local
telephone service. And they will soon begin to do so. They include
cable TV companies — who already have networks capable of
transmitting voice and data into almost every home in Missouri —
as well as various telephone companies that previously offered only
long-distance service. The possibilities of a competitive market, as
well as the possibilities opened up by burgeoning technologies,
make this an exciting time to be involved in telecommunications.

But the new competitive climate is not yet truly competitive.
The base rate of return regulations reasonably imposed upon the
local phone companies back in the old days of monopoly are unfair
in the new competitive climate. “Base rate of return” regulation had
been intended to prevent a monopoly from unfair profiteering.
Now it gives new competitors distinct advantages over Southwestern
Bell. None of Southwestern Bell’s new competitors — cable
companies and expanding telephone companies — are burdened
with base rate of return regulation at all. Until new regulations are
adopted, and imposed equally on all competitors, base rate of
return regulation will continue to create an uneven playing field for
competition in the telecommunications market.

For Missouri to enjoy the benefits of the new, competitive
telecommunications market, new regulatory policy is essential. Base
rate of return regulation needs to be replaced with regulation that
would ensure affordable basic service, while freeing up
Southwestern Bell’s capital returns; Southwestern Bell would then
have the same opportunities for growth and development that other
companies in the telecommunications market already have. This
would allow Southwestern Bell to reinvest in the communications
infrastructure — to build a fiber-optic network that would be an
information superhighway for all of Missouri.

Over twenty states have already reformed their regulatory
policies, opening the way for the modernization of their
communications infrastructures. Most of these states have already
reaped the benefits of regulation reform — such benefits as new
business attracted by sophisticated fiber-optic networks; and
advanced services such as telemedicine, distance learning, and
telecommuting.

Regulation was beneficial in the days of monopoly. It can
continue to be beneficial in an era of competition. In the old days,
with older, more cumbersome technologies, competition in the
telephone industry proved to be inefficient, costing the public much
more than it saved; today, with highly advanced modern
technologies such as fiber-optics, satellite relays, and cellular
technology, competition in the telephone industry may improve
efficiency, saving the public money while expanding the types of
services available.

Effective regulation has always addressed the issues at hand.
In the present situation, there is fierce market competition and
radically advanced technologies. To replace the antiquated base
rate of return regulation, we need new, effective regulation that will
do the following:

• First, it must ensure that competition in the
   telecommunications market takes place on a level playing
   field.

• Second, it must continue to guarantee that basic telephone
   service remains affordable.

• Third, it must encourage local telephone companies to
   reinvest their profits in a statewide fiber-optic information
   superhighway.

As regulatory policy keeps pace with the telecommunications
industry, Missourians can look forward to enjoying telecommunications
services that will revolutionize the way we
communicate with each other — and with the world.

Back to Resume

Back to Main Page