MS. DIANE REHMThanks for joining us. I'm Diane Rehm. For decades, the government has guaranteed every home access to a landline phone. But with the number of traditional phone users plummeting, the telecom industry is seeking to change the rules.

MS. DIANE REHMHere to talk about the future of the landline: Scott Cleland of The Precursor Group, a research firm for Fortune 500 companies, Gigi Sohn, president of the consumer group Public Knowledge, Betty Ann Kane, public service commission chair in Washington D.C., and, joining us from New York City, Craig Moffett, senior analyst at Sanford C. Bernstein, a financial research firm. I'll be interested to hear your comments and questions. Give us a call, 800-433-8850 or send us an email to drshow@wamu.org. Follow us on Facebook or Twitter. Good morning to all of you.

MS. GIGI SOHNGood morning.

MS. BETTY ANN KANEGood morning.

MR. SCOTT CLELANDGood morning.

REHMCraig Moffett, I'll start with you. Give us a sense of the numbers. Are we approaching the end of the landline?

MR. CRAIG MOFFETTWell, we -- it looks like we are. I mean, remember, we've been seeing for a long time the decline in traditional wired phone service, that is, what the industry calls access lines. What's changed is we're no longer just seeing the decline in access lines. Now, we're also seeing a decline in DSL, which is the broadband service offered by traditional phone companies.

MR. CRAIG MOFFETTAnd we're even seeing declines in the small and medium business services segment. And so, in effect, we've shifted from a period of decline of a product which was wired voice service, to now, the structural decline of the entire physical infrastructure. Copper is increasingly an obsolete technology.

REHMScott Cleland, give us a short primer on how these landlines work. What technologies are now replacing them?

CLELANDWell, the one that's being replaced is 1881 technology which is the copper wire network, and what is replacing them is basically digital or computer technology because that previous one was analog and electrical. And now we have basically a more fiber-optic or digital computer network. So it's a transition from the obsolete to the modern network.

REHMAnd to you, Gigi, the question of who still uses, who still needs these traditional landlines.

SOHNWell, I think that's a very important question because these landlines are relied upon oftentimes by rural customers, by the very poor. And it's interesting when Hurricane Sandy hit, the news reported how everybody was looking for pay phones because their wireless phones or their IP or Internet Protocol-enabled phones, as new digital technology Scott was talking about, didn't work.

SOHNSo my organization is in favor of this transition because we think it will really make the networks terrifically, you know, robust and terrifically dynamic. However, there's a 100-year social contract that has gone along with the copper voice network, and it's time to revisit that social contract. And that social contract said that telephone service need to be universally available, affordable and reliable. And we need to make sure that those and other values like competition and privacy and interconnection also take place in this new digital era.

REHMAnd, Betty Ann Kane, tell us about this long-standing law, how it came to be and whether you believe it's still important.

KANEYes. And I am also speaking on behalf somewhat of the National Association of Regulatory Utility Commissioners which the D.C. Public Utility Commission is a member in 51 states where there is a state role also in regulating and ending -- hoping to guarantee universal access. You know, when the phone service started, it was a monopoly. There was, in many cases, just one company stringing the wires, and they were guaranteed, and still are, absolute access to the public rights of way, also some other benefits.

KANEAnd in return for that, there was a quid pro quo that everyone had to be served. This was perceived, as it's still, as a good thing, voice connection, and now we're moving to Internet connection, IP connection. But there's a social contract there, and I think we need to make a distinction between the change in technology. And no one wants to stand in the way of new technology, better service, et cetera, and public policy as well as the public safety aspects of it, their reliability.

KANEThe fact that the copper network had a feature in it that meant even if the electricity went out, that this phone still worked and that is a concern with people not knowing, and there's consumer protection issues. States and federal government have shared responsibility in this area, and the National Association of Utility Regulations is concerned about a shift away from state role and the ability of states to have a role in protecting consumers.

REHMSo if this law were to go down and phone companies were no longer required to provide landlines, what would it mean?

KANEWell, what it would mean is that the consumer would be at the mercy of whatever the marketplace wanted to provide. There could be areas -- rural areas where, simply, it was too expensive or a company could say it's too expensive, and then they would simply not have service. There are places -- I was reading an article, a woman said she had to drive eight miles to get, you know, phones -- to get her cellphone to work and so absolutely depended on the landline, the copper line there.

KANEI just got an email -- I won't use her name -- but from a friend here in the District, during the last storm, said she still had her copper line. And she was the only one in the block. So everyone was coming over to use her phone for their emergency needs when service was out. I think it will mean also that -- or there's a concern that there would not be anyone that consumers could turn to for consumer protection, for billing issues, for quality of service issues if the role of the states in particular were taken out.

REHMGigi, do you agree with that?

SOHNAbsolutely. Here's the thing: The Communications Act, which is the law that governs all of our communications says, quite clearly, when something is a telecommunication service like your plain, old telephone service, the FCC can be the cop on the beat, can be the safety net to protect privacy, to protect consumers from, you know, billing problems, to make sure the hearing and the visually impaired are protected, to make sure that AT&T and Comcast, you know, networks connect with each other.

SOHNThe problem is that the FCC has decided that when it comes to more advanced digital broadband services that those rules don't apply. And what's happening right now is AT&T has actually asked the FCC to say that as we go to these IP voice networks, we don't want the rules to apply to us either. Now, here's the good news. They said it's good news. Scott will probably not think it is good news. But the FCC actually has to grant permission for AT&T and Verizon to get rid of its copper service.

SOHNSo there's an opportunity here, again, to revisit the social contract. And the thing that concerns me is the big telephone companies, AT&T and Verizon, have a history of making promises. We're going to upgrade our networks. We're going to deploy -- and state after state after state, it doesn't happen. So while we support the upgrade of these networks, nothing can be given to them in a way of regulatory relief until they keep the promises that they make.

REHMScott Cleland, how do you see it?

CLELANDWell, we need to look at the big picture here as this is transition that's been supported by four FCC chairmen over the last 14 years, starting with Democratic Chairman Kennard. And now I'd like to commend FCC Chairman Genachowski because he set the goal of moving all services to Internet Protocol by 2018. And that's necessary for being able to get the nation to be competitive globally, to allow the smart grid to develop, to do modern health care. So this is very important.

CLELANDAnd this is a continuation of 14 years of policy. It's a big transition. We also need to know we've already made this transition with wireless -- used to be an analog network -- and it took five years. Five years ago, they said, we're going to do it. And that occurred relatively seamlessly without a lot of problems. And so that's important to know. And so I think when people talk about the social contract, I think the big picture is people are not going to be left behind. This is about bringing -- they'll be brought forward to a more modern technology.

REHMBut now, what about the concerns that both Gigi and Betty Ann have raised, namely that rural areas may be left out, that the elderly -- those who don't use cellphones are not going to have good alternative and that there will not be accountability?

CLELANDWell, I think there will be accountability in the marketplace and with regulators because I imagine this transition is going to be thoughtful and can go forward.

REHMWhat about promises that aren't kept, however?

CLELANDWell, let's also put this in perspective. Remember, the copper network is a $200 billion infrastructure that was for 100 percent of people. Now, about 30 percent are still using it, and with the trends, it'll only be about 10 percent. So we have this $200 billion albatross that everybody's paying for that is -- that only a few people are using, and it creates a whole set of problems on the other side. The social contract and, you know, the elderly and others, those are important things to take -- important people to take care of, and I believe they will.

CLELANDBut the question is this transition is occurring. People are all knowing that it needs to occur. And what we're talking about is a few percent of the people that will -- either in rural areas or disadvantaged, they'll need to be taken care of like they were in the successful wireless transition that just occurred over the last five years. So this really isn't about leaving people behind. It's bringing people forward.

REHMScott Cleland, he's president of The Precursor Group, a research firm for Fortune 500 companies. Do join us, 800-433-8850. I've already got lots of messages from Facebook. And the phone lines are ringing, so we'll get to your calls as quickly as we can.

REHMAnd welcome back. In this hour, we're talking about the telecom industry and its interest in seeking to change the rules on landlines. I have a comment here from our website. This comment reads, "My wife and I continue to discuss the elimination of our landline. But with two children under the age of 10 in the home, we feel that removing the house phone could create a safety risk if there's an emergency and someone needs to dial 911. Plus, cellular phones have yet to match the quality of a landline." How do you respond to that, Craig Moffett?

MOFFETTWell, there is a little bit of truth to that. The traditional landline network, the copper network that we were discussing before has a big advantage in that it is powered. And so even in a blackout, for example, you will still have powering. Now, the wireless 911 service is actually -- is now quite reliable. We're in the process of regulatory proceedings around 911 texting services. So the 911 issues are catching up. But there are legitimately some advantages to wireline networks.

MOFFETTIronically, as you try to bring wireline networks into the future and you replace some of the copper with fiber optics, you lose some of the advantages that have historically been part of the wireline network. You may have very good quality. But, for example, you lose the advantage of it being self-powering during electrical blackout. So these are complicated issues.

MOFFETTI think Scott pointed to the fact before that we're now at just about 40 percent of U.S. households that have decided, like your listener, that it's time to drop the wireline phone and that the economics of supporting both the wireline and a wireless connection in the home don't make sense anymore. That still means 60 percent homes do have a wireline connection. But that number is dropping quite rapidly.

REHMWell, from the sound of this message, it doesn't seem as though this family is getting ready to drop its wireline very soon. Gigi.

SOHNSo I want to sort of demonstrate here taking on to what Craig just said why it's important to keep the safety net, why it's important to have the states and the FCC involved. So the FCC actually tried to mandate that wireless companies have emergency backup power for 24 hours. And that got struck down by a chord.

REHMIt didn't happen.

SOHNIt did not happen. And the carriers -- the wireless carriers were opposed to it. So this cannot be...

REHMAnd they want out is your point.

SOHNThey want out is my point.

REHMYeah.

SOHNAnd there you have, you know, Hurricane Sandy and people diving for, you know, pay phones, so that's why you need the safety net. That's why the social contract needs to be maintained. And that's why, frankly, you need to have competition. That's something that, you know, is really -- the fact that in a community, you might have a cable operator that's doing voiceover Internet and a telephone company, that's really not enough.

REHMIs that the issue here? Is it competition?

SOHNWell, competition accounts for a lot of things. It accounts for the price of cellphone service, which a lot of poor people cannot afford. It accounts for the fact that we don't have 100 percent deployment of a broadband, for example, everywhere. You know, it was mandated. The states mandated that everybody in every state had to have a basic, affordable and reliable phone service, this carrier of last resort. And that's what we do not want to ditch in the digital age.

REHMScott.

CLELANDWhat's...

MOFFETTBut can I just add something? Because, you know, while these are very real issues, I think this juxtaposition of competition and regulation is really at the heart of what we're talking about here. And if you go way back in history, there was a social contract that Gigi was describing between what we all used to know and love as Ma Bell that dates back to 1913 and what is now called the Kingsbury Commitment, where AT&T voluntarily entered into a social contract that amounted to being guaranteed a rate of return on its assets in response for assuming all of the social obligations.

MOFFETTAs a country, we moved beyond that in 1996 and decided that we were going to pursue a competition-based approached to the telecom sector. And we're sort of stuck halfway between now where we have a lot of the obligations that came along with the Kingsbury Commitment, but we don't have anymore the guarantee that companies are going to earn an acceptable return. So what we're struggling with now, and what I look at as an economist, is here we have this $200 billion copper asset that Scott was talking about that is no longer earning its cost of capital.

MOFFETTThat is, it is a money-losing asset economically, and yet we're demanding all of these things from it that simply aren't economically reasonable anymore to demand from what is essentially an obsolete asset. And we're still -- we're stuck halfway between the very real social requirements of what this network delivers and also the very real macroeconomics that say it's not reasonable to expect it to deliver those things. I mean, (unintelligible).

REHMOK. Now, let me read one more message from Facebook, and I think you'll identify with this, Betty Ann Kane. It says, "I live in the mountains of West Virginia. My cellphone is often useless here. My landline is my only reliable telephone service."

KANEAnd, yes, I think that's very typical, the kind of concern that state regulators have. I think there's another aspect to it too because it's not just a simple question of competition and the companies now wanting to kind of do things on their own without new regulation. There's something called the Universal Service Fund.

KANEAnd for years, and including now, customers all over the country are paying into, with the small fee on their phone bill, paying into this Universal Service Fund, which has been used and which was set up by the FCC for the purpose of guaranteeing that in places like West Virginia that there would be -- they subsidize phone service. So my consumer is the District paying $30 million into the Universal Service Fund every year. We get back 600,000 which support some discounts from low-income people.

KANENow, we're happy to pay for people in West Virginia, in the mountains, so that there's universal guaranteed access. But we're not willing to pay if the companies are not going -- if they're going to pull out and say, well, we still want the Universal Service Fund money. We want to do broadband. But we don't want to have to provide the service.

REHMHow do you respond to that, Craig Moffett?

MOFFETTWell, you know, that's a perfect example of the problem that we're in. The Universal Service Fund is part of the way that we pay for those services, but not all of it. And even the Universal Service Fund itself is facing some real challenges. You know, I think of it on a state-by-state basis. And for a long time, we had most of the states were net payers into the Universal Service Fund and some states, like West Virginia, where net payees.

MOFFETTIncreasingly, as the number of people using the copper wireline network declines and the remaining cost of the copper line -- copper wireline network are, therefore, spread across a smaller and smaller number of remaining customers, the cost rises higher and higher and more and more individual states tipped from being net payers into being net payees. Eventually, the problem is the Universal Service Fund has everyone taking out and no one paying in. And it becomes what is essentially simply a collection mechanism for trying to support an uneconomically supportable infrastructure.

REHMScott.

CLELANDYes. Let's put the -- this transition in perspective with the social contract and the economic contract. As Craig had mentioned, the economic contract was changed where we used to have, you know, a company that was having 100 percent of customers that then could fund and subsidize the ones that were very expensive and that needed subsidies.

CLELANDBut as that dynamic changes, and over the next few years it's going to go from 100 percent down to probably 10 percent of people that are paying there, the social contract needs to be modernized. People are not talking about abandoning people or abandoning that social contract.

REHMWell, what are you saying to that person living in West Virginia whose cellphone really doesn't work?

CLELANDWell, you have to look at this not through 1934 eyes or, you know, old technology eyes. There's all sorts of technologies that people can do. I mean, the whole reason we're moving to this is that the new -- modern technology is better. It can do more things. It can be more useful. Think about it. A voice -- a line only provides, in a disaster or this, a link to the outside world. But when you have broadband and you have that, you can also access information -- what do you -- what's happening with the weather.

REHMBut how do you pay for that?

CLELANDWell, you're going to need to modernize that social contract. A company that was having 100 percent of customers and only has 10 percent, it can't fund that anymore, and it's not -- the economic contract has been abrogated.

REHMBetty Ann...

CLELANDSo you need to modernize the social contract.

KANEActually, the companies are asking and the FCC is proposing that the Universal Service Fund be used for broadband. But they're not asking the broadband providers to contribute into it, so...

REHMHow can that be?

KANEWell, that's a good question.

REHMI don't get it. I don't get it.

KANEAnd there are a lot of policies there that actually the president of NARUC, of our organization, the new president, has set up a task force on federal, state to look at the federal and state rules in telecommunications, particularly on these issues of Universal Service Fund, on issues of consumer protection. I mean, my personal view is if they want to use the Universal Service Fund for broadband, then the broadband providers need to also pay in, so you don't get this situation where just the remaining landline customers and wireless people are paying in also.

REHMBy the way, Craig Moffett, are you on a landline or a cellphone?

MOFFETTI am indeed on a landline. And, in fact, predictively, when your producer called earlier, that's, as it always is, that's the first question they ask 'cause they want to make sure that the sound quality for a radio appearance is as good as you're going to get.

REHMSo what does that say to you about the quality of sound on cellphones?

MOFFETTI don't -- look, even if -- from an engineering perspective, the quality of cellphone sound is not as good as the quality of a wireline phone, and in technospeak, they use a different codec. And so there's no argument that the sound quality of a wired connection is -- isn't going to be better than the sound quality of a wireless connection. It generally will be. Again, I think the real challenge here, though, is we're staring at this economic paradox, which is we have chosen a competition construct which brings all kinds of benefits, but doesn't satisfy every single box of the social contract.

MOFFETTAnd what we're struggling with is we certainly can't guarantee that these companies that provide these services can get a rate of return anymore. That's the nature of putting them into a competitive environment. But by definition, if you can't guarantee a rate of return, you also can't simply require that they do things that are uneconomic to do. And...

REHMGigi, are we moving backwards or forwards?

SOHNWe could be moving forwards, but I do need to address this notion that we're somehow in this robust competitive environment. Craig talked about the 1996 Telecommunications Act, which worked for about 10 years. And I remember when people had a choice of 13 dial-up Internet access providers. We are not in that era anymore.

SOHNIf you're lucky these days, you have a choice of two broadband Internet access providers and two telephone companies. So we are not in the 1990s space, and the telephone companies still print money. Look, Verizon, in the third quarter of this year, made $29 billion, and they've had double-digit growth for the last three quarters. So cry me a river for the telephone companies that are printing money.

REHMAnd you're listening to "The Diane Rehm Show."

MOFFETTWell, let me stop you for a second...

REHMWhy are the Internet provider networks essentially unregulated, Betty Ann?

KANEThat's a result of the Telecom Act, '96 Telecom Act, somewhat passed by Congress, and how the FCC has interpreted which category in that act they fall into. Are they -- they have completed their information service, and therefore they don't get regulated in the way that they're allowed to regulate telecommunication services.

CLELANDOne thing I -- you know, we've been talking about the problems of the transition. I'd like to look at a different problem in the sense that obsolete technology -- you know, the cellphone, because we had a monopoly, was delayed for 33 years. It was invented in 1949. Internet packet switching was invented in 1969. It was delayed 25 years to commercialize. The PC modem that we all use was delayed 25 years to be broadly commercialized.

REHMBecause?

CLELANDBecause we had a monopoly system and didn't have competition that encouraged innovation, so broadband service was delayed 17 years because of that. So let's look at problems in context. This is not a perfect world. We are going through a transition. We've done it successfully wirelessly. There haven't been people left behind. These problems are solvable. We need to modernize this -- the social contract along with the modernization of the network and the modernization of competition.

REHMGigi.

SOHNI agree with Scott. I do think we need to do this transition. These new networks are more versatile. They're more dynamic. They're more cost-effective. However, what I fear, particularly with this request by AT&T at the FCC, is they are going to seek regulatory relief, sort of hold the transition hostage until they are basically unregulated. We cannot have that. I mean, Betty Ann was talking about, you know, how do we get to this place where broadband Internet access providers are almost completely unregulated?

SOHNAnd there are court cases everywhere trying to decide if the FCC has the power to protect consumers in the space. The FCC, in 2002, decided that Internet access was no longer a telecommunication service. It was instead an unregulated information service and basically divorced itself from having any authority. It's shocking because even the most deregulatory agencies don't give away its power to protect consumers.

REHMBetty Ann, talk about concerns about 911.

KANEWell, there's a number of concerns there. One is that the 911 centers themselves, the problems we've had recently in the metropolitan, not in the District, but in Maryland and Virginia, where the phone company, Verizon, is acting as the 911 sort of consolidator. All the calls go there, and then they go to the police station or the public-safety answering point. And there, it was a case of -- they were -- nobody was enforcing the rules, which required them to have backup generators, which required them to be tested, which required to make sure that they were happening.

KANEThat actually -- there were some FCC rules on that, and there were FCC rules that the 911 -- the landlines got to be 99.9 percent, you know, reliable and tested. And, again, if you get the phone companies, you know, as they want all of these "legacy requirements" taken away, there's not going to be anybody with the authority to enforce them.

REHMBetty Ann Kane, chair of the Public Service Commission in Washington, D.C. She also serves as chair of the National Regulatory Research Institute Board. Short break, right back.

REHMAnd welcome back. We're talking about the transition from landlines to cellphone use, what's happening around the country, what ATT and other companies would like to see happen. Let's go first to Lansing, Mich. and hear what Anthony has to say. Good morning. You're on the air.

ANTHONYGood morning, Diane. Thank you for taking my call.

REHMSure.

ANTHONYI'd like to preface by saying that I've had my personal cellphone number for over a decade now. I no longer live in the state where this cellphone number comes from, so consequently, my area code is different from the landlines that I'm surrounded by. And my question is two parts, one is sort of sociological and one is technical. On the technical side, for people who still have landlines, what happens to their bill in terms of long-distance calling when they're calling a cellphone that may be next door but has a different area code?

ANTHONYAnd then the sociological question, which may not actually be very relevant, is what happens when area codes are no long tied to a region? What happens on a sort of cultural identity? I know my cellphone number is 505, which is from New Mexico, and I remember growing up, we called New Mexico the 505. So what happens on a cultural level?

REHMBetty Ann.

KANEI can answer that. And actually, one of my other roles is chairman of the North American Numbering Council, and that is the group set up by the Federal Communications Commission working with states and the industry on handing out the area codes and the handing out of the numbers. And you're absolutely right there. There is more of a trend because of number portability.

KANENow, you could keep your number. Whether you switch to a cellphone, whether you switch to a different landline company, whether you switch back and forth, you can keep the whole number including the area code. And so that is an interesting question. I think people found that in campaigns and, you know, used to be able to go through the whole 202 code area code or the 203...

REHMSure.

KANE...and call everybody. And -- but in terms of the 911, one of the important things it was built in -- and again, it's another reason why you need regulation for public safety -- is that the wireless companies had to put in locational capability. So if I'm -- have my, you know, 804 area code cellphone but I happen to be in Montana -- and 804, I think, is Vermont -- there has -- there is a technology that's in that cellphone that allows the police station or whatever I'm calling to know not that it's an 804, Vermont number...

REHMI see.

KANE...but that it -- where I am.

REHMI see.

KANEAnd that was a very good example where, again, just to (unintelligible) little bit, the FCC had to step in and say this has to happen for public safety.

REHMAll right. To Cranston, R.I. Hi there, Ellie.

ELLIEHi, Diane. Thanks for taking my call.

REHMSure.

ELLIEI'm calling from -- I'm a senior citizen calling from a lifeline. Now, my lifeline is different from my next-door neighbor because mine is over copper, plugged into the wall. She converted to FiOS, Verizon FiOS. So when we had no power, she had no phone. Now, I'm calling from a portable which is plugged into a base. But when I lost my power, I had to go to my garage to use my, what I called landline. But I don't call it landline anymore because there's distinction.

ELLIEShe has a landline, too. Her phone is brought in by wires, but they're Verizon FiOS wires. They're fiber-optic wires. And so she -- when her power ran out and she had no way to recharge her phone, she had no phone service. So we need to make a distinction between what's connected in the home and how it's connected.

REHMScott.

CLELANDWell, the world has gotten more complicated since we had a phone network. In Hurricane Sandy, all of it -- a lot of it went out. What people don't realize is the copper, when it went down, because it's electrical, it gets wet, it doesn't work. Fiber-optics, in a flood, does. It's light-transmitting. So what people have now is they have multiple choices. They have four choices of wireless companies they can have. They can also have a cable landline. Twenty million Americans, roughly, have that, and that is a different kind of landline. So it isn't like the copper wire landline is the only phone service one can get.

REHMGigi.

CLELANDOne can get it from a cable company. We're the only country in the world that has a second landline infrastructure ubiquitously.

SOHNBut copper is built to 99.999 percent reliability, the five nines, OK? And I'm not saying that we should keep the copper, you know, legacy forever. But the point is, we have to try to get to that kind of reliability, and we have to ensure that there is a safety net to make sure that the woman who has FiOS, her neighbor, can use her landline in an emergency as well.

CLELANDAnd a really interesting historical fact, we were so obsessed with reliability, we designed many of our switching centers and the old public switch network to be nuclear-hardened in a nuclear war. Now, does anybody think we want to invest that kind of money in the future? Do we need five nines, 99999? Or do we need four nines, three nines, two nines or -- I mean, that is a discussion we need to have in a modern world.

REHMAll right. To Severn, Md. Shelly, you're on the air.

SHELLYHi, Diane Rehm.

REHMHi.

SHELLYThis has been a great conversation. And I guess most of the points that people have made about safety with children, reliability in a storm -- I would love to see the data that discusses how many copper wire landlines didn't function during Sandy to all of the other ones that we know did fail. I feel like this is a conversation where utility companies, whose CEOs are making lots and lots of money, are wanting -- upgrading and improving old infrastructure.

SHELLYAnd I feel like that topic is important. There are a lot of people out there who cannot afford $200 smartphones or even $30 smartphones plus the cost of the service to run them. And I feel like that gets skipped because those people are out there trying to survive.

REHMBetty Ann.

KANEYeah, I think that's a very good point. I mean, in the District, we have district-only basic service, which is like $10 or $12 a month plus all the taxes. Fees gets add on, but that's the basic and...

REHMSo no long distance or anything else?

KANENo long distance, no call waiting...

REHMYeah, exactly. Sure

KANEAnd if it's just the basic metropolitan area, you could call D.C. and the suburbs, it's about $12. We had a proceeding at the commission, and we determined there was no other competition for that service. There was nobody else even in this very sophisticated role -- urban city of 650,000 residents and many more business. There was nobody except the incumbent company that was offering a single-line basic service, plain vanilla service, for people who wanted it because that's all they use or they needed their alarm.

KANESo we maintain that to be regulated. If the kinds of petition that AT&T has filed at the FCC is successful, states like the District and other states would not be able to have a regulation like that in place saying that you have to provide a basic low-cost service as a customer choice.

REHMCraig Moffett.

MOFFETTWell, you know, I think the point is well-taken. We've done work that suggest that as much as 40 percent of the country has, after paying for food, shelter, transportation and healthcare, virtually nothing left in truly disposable income. And so the affordability concerns of communication services are an enormous challenge. And, you know, I think it speaks to this struggle that we all have when we put our public policy hats on in telecommunications of, on the one hand, these are for-profit services provided by for-profit enterprises.

MOFFETTAnd, on the other hand, we view them, quite rightly, as having very critical utility-like characteristics. And what we're struggling with is, as utilities, you know, the example was use of utilities before. In the wake of Hurricane Sandy, utilities will spend a tremendous amount of money to restore infrastructure. But make no mistake that consumers of that utility will end up paying for those services because the utilities will earn a rate of return on the assets that they get. The telephone companies don't work that way any more.

MOFFETTSo the telephone companies, you know, who said before that Verizon is making a tremendous amount of money, its wireline business actually doesn't make any money. Its wireline business, if you think about the return that they're getting on their investment, they're earning a less than 2 percent return on investment, and that money is costing them about 7 percent. So think about it as I'm borrowing money at 7 percent in order to reinvest it at 2 percent.

MOFFETTAnd we are insisting that they do more of that. Well, that's not a profitable thing to do. You can't require a company to continue to do that. And that's what we're struggling with, is we want to see these as public goods and as utility services, but on the other hand the economics aren't structured that way any more.

REHMGigi.

SOHNWell, they're making boat loads of money on their wireless service. And, look, telephone companies use public rights of way, whether it be, you know, the poles or the ground. If they're providing a wireless spectrum -- wireless service, they use the public airwaves or spectrum. These are all taxpayer-funded things. And, yes, they are kind of a hybrid. It's not the free market. It's a hybrid between being a public utility and being a private company, and along with it goes some public service and public obligations.

REHMAll right. To Thomas, who's here in Washington, D.C. I gather you are a telecom lawyer, Thomas.

THOMASI am, Diane. Good morning.

REHMGood morning.

THOMASI was hoping to focus a little bit on the business market actually. The discussion has been a terrific one, focusing on consumers. But part of AT&T's request to get out of regulation as it moves from the old technology to the new, includes a request, essentially, to get out of its obligation to share last-mile facilities with the entities that provide competitive business broadband services. And this represents a major shift in competition policy for this country and one that is, I think, pretty dangerous given...

REHMExplain what you mean by last-mile facilities.

THOMASSo these -- when a communication is sent to an end-user costumer over a wireline network, it traverses the wires all the way from the long haul to the actual customer location. The problem in public policy in the United States has been what do you do about the situation? And we have it all across the economy where an AT&T or a Verizon owns the only connection actually to the end-user. It's a monopoly in a lot of locations where there are business customers.

THOMASAnd the solution in the past that the FCC has had is, it has said, well, AT&T and Verizon, you need to share access to those last-mile facilities with competitive providers of business broadband services and we're going to regulate your rates. The thing is that regulation has only applied to the traditional technologies that AT&T rightly wants to get rid of in transition to the more modern technology. The question is when those regulations go away, what happens to competition in the business market?

REHMAnd that is the question. And you're listening to "The Diane Rehm Show." Betty Ann.

KANEYeah. Yes. A lot of the newer "competitive telephone companies" that came in states all across the country, particularly the business ones, didn't actually build their own facilities. They're essentially renting space on the incumbent facility, or they're only interconnecting at a certain point. And so the FCC and the states have ruled what's called interconnection agreements and resolving disputes. Most states can resolve those disputes under delegated authority.

KANEAnd again, there's a great concern if there is this total pre-emption of state regulation, if there is -- FCC getting out of the business of regulating that. You've got, you know, XYZ telephone company, which is a competitor, but it's using the big guys' facilities and there's a dispute. Who's going to see that competition remains fair in this level playing field if there is no role for the state?

REHMScott.

CLELANDWell, I think, once again, we're going through a transition. And when, you know, business companies that wanted to rent the old copper network, as that has become obsolete, their competitors have gone, like cable is invested in new fiber optic connections or new wireless backhaul. So the technology is there, and other competitors are investing in new technology to bypass and make obsolete of the copper. So this is a choice. I mean, competition is providing alternatives in most -- all of those business markets.

REHMGigi.

SOHNI share the caller's concern, but I want to make one point that Betty Ann raised. And that is in 23 states, laws have already been passed that disallow the states from protecting consumers when it comes to IP networks. So it's already happening. States' power to protect consumers is being taken away.

REHMAll right. And to you, Craig, finally, what's the future of companies like AT&T and Verizon? What are they going to look like in five or 10 years?

MOFFETTWell, the short answer is they're going to look a lot more wireless than today, and therefore, they'll look a little bit less wired. You know, what AT&T is asking for is not just the relaxation of regulation in parts of the country. It is asking for something that is much grander than that. It's asking for a permission to replace the wireline network in parts of the country with an entirely wireless network.

MOFFETTNow, entirely wireless is a bit of an oxymoron because, in fact, most wireless network or most of a wireless network is actually wires. But what they're saying is more profound than just regulatory. What they're saying is that from an economic and engineering point of view, the future is wireless, and that connection to the home isn't going to be via copper any more. In urban areas it may be via fiber optic, but, unfortunately, the economics don't support that in a lot of the country. And it's going to have to be wireless in a lot of the country instead.

REHMBetty Ann, I'll give you the last word.

KANEWell, let me quote out the president of NARUC. We recognized in setting up this task force that the telecommunication industry is an ever-changing one. There's going to always be new technology. But what we want to do is remain focused on the core function of states for protecting consumers and working out the right relationship between federal state.

REHMBetty Ann Kane, Craig Moffett, Gigi Sohn, Scott Cleland, thank you all so much.

SOHNThank you.

REHMAnd thanks for listening, all. I'm Diane Rehm.

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Susan Nabors, Rebecca Kaufman, Lisa Dunn and Jill Colgan. The engineer is Erin Stamper. Natalie Yuravlivker answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington, D.C. This is NPR.