Tennessee Appears to Be Leading Charge Into Information Age
What state do you think would be the most advanced in preparing its industry for the information age? California? Forget it. The correct answer may just be Tennessee.
The Tennessee Public Service Commission has pushed telephone companies in the state, South Central Bell and 26 others, to install the most advanced telecommunications technology under a 10-year program designed to attract and help business to be competitive.
The significance of the Tennessee Plan is that it’s accelerating the pace of change. “Essentially the plan calls for the earlier deployment of technology than currently projected by the local exchange companies,” says a study for the Public Service Commission.
That costs money. The PSC, which regulates phone rates, is directing the companies to lay out additional investment of $400 million over the life of the plan, $100 million in the first year. And it promises to allow the companies to recover the incremental costs, roughly 20 cents a month, in their rates. The commission’s real assumption is that the new equipment will increase profits, which the companies will then be allowed to retain.
It comes down to a political decision. The elected commissioners forgo a chance to give voters an immediate cut in phone rates in order to bring the state the latest in telecommunications capability.
The signal for the rest of the country, says William Davidson, head of Mesa Consulting--a Redondo Beach firm--is that the industrial edge these days lies in telecommunications. And Tennessee policy even suggests a way ahead for the seven Bell operating companies and all the other phone companies offering regional and local service around the nation.
The Tennessee commissioners’ aim was to bring advanced voice and data services to rural areas as well as urban in hopes of spreading industrial development, explains Frank Harris of the PSC. And it’s already paying off. Better telecommunications services have attracted Sears catalogue operations, employing 1,500 people, to the small towns of Gray and Boones Creek in northeast Tennessee.
Telecomm services have also helped the state’s main new industry, the automotive complexes that have grown up near Nashville with the Nissan and Saturn GM plants. Today’s auto plants demand advanced telecommunications for just-in-time inventories and computerized control of assembly lines.
And more than business benefits. Dr. James Hunt of the University of Tennessee Medical Center in Memphis uses new networks for remote training of nurses and physicians and anticipates greater benefits as the technology advances further to picture transmission.
Tennessee is ahead but not alone. The Nebraska Legislature five years ago deregulated pricing for new phone services, hoping to spur technology. And the policy worked, reports Roger Stuhrman, a spokesman for US West. Omaha has one of the nation’s most modern phone systems.
Other states, even those such as California and New York that like to think they’re up to date, have stuck to traditional rate regulation rather than using policy to encourage new phone services. Technology and industry are changing dramatically everywhere in the world, yet for most states it’s business as usual.
That’s too bad, you say--but why should it be up to regulators and politicians anyway? Why aren’t the private companies, especially the big regional Bell operating companies, rushing to upgrade their equipment and provide new services?
The weight of the past is one problem that the Bell companies’ many shareholders should be aware of. After the 1983 breakup, American Telephone & Telegraph--the old parent company-- wrote off billions of dollars worth of old equipment. The Baby Bells--Ameritech, Bell Atlantic, BellSouth, Nynex, Pacific Telesis, Southwestern Bell and US West--largely did not. Therefore, those companies have a lot of older equipment on their balance sheets, incurring low depreciation charges.
And that has consequences. The old equipment produces high cash profits and so discourages upgrading to new technology, while allowing the companies to pay high dividends. Bell stocks typically pay out 65% to 80% of annual earnings in dividends--but such policies may not continue very long.
The day is coming when the Bell companies will be challenged by local phone competitors offering new services. Then they will have to modernize quickly to compete. There will be writedowns of old equipment, “perhaps half of their billions of dollars in assets,” says consultant Davidson.
But the result will be to help the companies, not hurt them. The accounting writedowns won’t cost them cash, and afterward the companies’ return on shareholders’ equity--and perhaps their stock prices--could soar. They would become innovators on the edge of change.
And the nation would benefit--as Tennessee and Nebraska are showing today.
