Privatizing the Alaska Communications SystemFootnote ⁵

Calling long-distance was expensive and chancy for Alaskans into the late 1960s. (A three-minute call from Anchorage to Washington, D.C., was $7.00 and the service was unreliable.) Telecommunications service is of course a “final good” for residential users and an “intermediate good” for commercial users. We believed that advances in this sector would be very beneficial to economic activity in the state, both directly and indirectly.

At that time (1965), the U.S. Air Force owned the long-distance telephone and telegraph system, having inherited it from the Army, which built it for defense purposes in the early 1900s. ACS, besides serving the civilian community, had an especially important military role as an early warning system in Cold War days. The civilian portion of the system suffered from lack of modernization because military needs took budget priority. Indeed, many rural communities had no telephone service at all, or only intermittent marine ship-to-shore phones.

The time was ripe for privatizing this government-owned enterprise. The Air Force was willing to get out of the telephone and telegraph business and reassign its ACS personnel. The Federal Communications Commission (FCC) was prepared to add Alaska to its interstate regulatory jurisdiction. The State of Alaska and its municipalities recognized the major addition to the tax base that acquisition by a private buyer would entail. Business and residential telephone subscribers were eager for modernized reliable services that would be more widely available and more reasonably priced.

Our analysis indicated that ACS would be a profitable enterprise under private ownership and contribute to our development goals, if disposition was adroitly designed. There was substantial pent-up demand for telephone service by any measure—phones per household, penetration rates, usage patterns, significant price elasticities, and desired special features available elsewhere. Accordingly, in 1967, working with the Pentagon and Congress and in cooperation with the governor’s office, we crafted legislation authorizing the sale of ACS into the private sector.

Central to the legislation, we felt, was an innovative provision intended to maximize the chance for a longer-term public-interest outcome. We would require a bidding process that (1) would establish a single “upset price” for the assets, which all bidders had to meet, and (2) bidding would be based on how much new investment in the system would be made and how much the carrier would lower telephone rates to customers. The winning bid, then, would be determined not on price, but rather on the “best” combination of improved service and lower charges. As might be imagined, the Treasury Department was less enthusiastic about the concept (of not getting “top dollar”), but ultimately acquiesced.Footnote ⁶ The beauty of doing it this way is that it allowed future Alaska telephone subscribers to pay prices lower than would be the case if the ACS had been “auctioned off to the highest bidder,” the winning company having to recoup its higher-cost investment in higher tariffs under traditional public utility regulation. In November 1967, Congress gave approval to sell ACS.Footnote ⁷ Half a dozen bids were received, and a year later RCA bought it for $29 million and began its Alaska operations.Footnote ⁸

The Disposition of the Dutch Harbor Naval Base

The World War II submarine base at Dutch Harbor, Alaska, had been surplus property for many years. Opportunities for economic development in the Aleutians were always scarce, and the prospect of conducting a disposal of these facilities—docks, housing, and land—in a way that would improve the lives of the Aleut population there and provide for greater long-term economic activity through private operations seemed like a good idea. One obstacle was that when federal government property is surplused, the procedure to dispose of it includes all other sister agencies having first crack at claiming it, a temptation that is little resisted in cautious bureaucracies. In this case it was arranged that such claims would not be made, allowing for a creative disposition. Our intervention involved designing a sale of some of the docking and storehouse facilities to large reputable fish and seafood companies, while giving access to other shore facilities to local fisherman, turning over the base housing to local families, and auctioning off the available acreage in parcels small enough that individuals could acquire them.

The intent of course was for this irregular but balanced disposition of federal assets to make a beneficial dent (more income, employment, induced private investment, better housing, and an expanded tax role) in a region of Alaska where economic success stories are hard to come by.

The Alaska Native Land Claims Settlement Act

After statehood in 1958, a significant brake on Alaska’s economic development was the legal vacuum that had existed for a hundred years as to the exact status of Native claims to ownership of the land. The U.S. purchase of Alaska from Russia by treaty in 1867 contained language recognizing aboriginal rights to use and occupy the land, but it left to future congressional determination the resolution of their claimed ownership rights. Over time, occasional court cases arose, but the issue became really salient only when a confluence of forces pushed it to the forefront.Footnote ⁹ These were (1) the fact of statehood; (2) oil industry interest in investing only where clear title to the discovery lands existed; (3) non-Native Alaskans anxious to get on with orderly (or even disorderly) development of the state; (4) a newfound political unity among the Eskimo, Indian, and Aleut population; (5) national environmental groups worrying about what might happen to the pristine wilderness and the outstanding fish and wildlife habitats; and (6) a heightened awareness nationally of the need to advance social justice for the disadvantaged citizenry reflected in a willingness of the federal government to tackle such an issue.

In this context, the FFC undertook a project that turned out to play an important role in getting Congress to begin to act. Senator Henry Jackson (D-Wash.) held field hearings in Alaska and requested the chairman of the FFC, Joseph H. FitzGerald, to prepare two reports. One report became the most comprehensive, objective, and definitive study of Native Alaska. It was entitled Alaska Natives and the Land and contained (in chapter 7) “A Framework for Decision.”Footnote ¹⁰ It served the crucial purpose of being the document that all the parties, especially the Senate and House jurisdictional committees, could point to and declare conclusively that “the Alaska Native land claims issue is ready for resolution.” The second was “A Report on a Proposed Legislative Settlement.”Footnote ¹¹ It was clear that the endless litigation would go nowhere and a high-order political solution would be the best course available. In a personal ironic twist, I had become the legislative assistant to Senator Mike Gravel by the time the Native claims legislation was being drafted and thus had the opportunity to participate in policymaking on the matter successively in both the executive branch and on the Senate staff.

My reading of the motivations and guiding principles held by the FFC, the Alaska delegation, and those of us on the congressional staff in shaping the legislation (S. 1830 and H.R. 10362) was the following:

• • The settlement should be “more than fair” to the Native people. The final combination of 40 million acres of land and $962 million seemed fair and generous. To keep out of the sticky business of determining who was an eligible Native, the government essentially let the Alaska Native organizations decide. (Their criterion was one-fourth Native blood.)

• • The settlement should be a once-and-for-all ending of the land claims issue. It specifically “extinguished” all the claims that Natives had, but wisely did not diminish any existing obligations that federal agencies had for the welfare of Native citizens.

• • The settlement, while inherently racially based, should point toward minimizing “racialness” over time. This is to say that features of normalization, such as establishing corporations requiring administrative and managerial skills in their running, making Natives financial shareholders with the ability (after twenty years) to alienate one’s title (the opposite of traditional perpetual wardship status), and ending various protections, were a conscious part of the design of the settlement.

• • The settlement, while emphasizing the prospect of economic development, should have substantial environmental safeguards that would balance the federal national interest with the immediate aspirations of the Natives and state. Alaska lands and activities permitted thereon (and thereunder, like mining) should not be “locked up,” but neither should there be a “land grab” of unseemly proportions. The U.S. Secretary of the Interior would continue to have major responsibilities in Alaska. Relatedly, the orderly selection of land promised under the Statehood Act (frozen during the period) should be resumed, an outcome of great interest to the state.

• • The settlement should include a formal mechanism that would generally continue the federal/state collaborative efforts of the FFC, but with particular focus on longer-term land-use planning. We inserted in the legislation a provision establishing such a planning commission with no regulatory or enforcement functions, but with important advisory responsibilities. This helped keep environmental and conservation groups solidly behind the legislation.

AIM, APS, and Alaska–Japan Economic Relations

We established three research initiatives that were intended to better understand the fundamentals of Alaska. Perhaps the most inventive was the creation of the first Aggregate Income Model for Alaska, an econometric model that estimated the state’s Gross Product and its composition.Footnote ¹² The model was constructed with two main functions in mind: forecasting and policy analysis. For the former, the model allowed predicting future values for consumption, income, or employment on a quarterly basis for up to six quarters. For the latter, it allowed “feeding in” a selected change—say, the level of government spending—and observing the impact as an experimental exercise. Unexpectedly, soon after its completion, the model was put to the test with the Fairbanks flood disaster. We applied the analysis to the policy question, How large could the spending response be without merely dissipating the stimulus on local inflation (that is, what was the absorptive capacity of the Fairbanks economy)? According to the model, looking five quarters out, the boundaries for the “proper” level of response were $15 million to $30 million. While we focused on short-term effects, by altering the structural relationships of the model we could also evaluate longer-term growth policies.

The second project was to arrange for the Federal Power Commission (now the FERC) to conduct a study of the state’s power resources and prospects. The result was The Alaska Power Survey of 1969, which became the base document for subsequent electric power development in the state. The FPC had only recently published The National Power Survey of 1967, but it had inexplicably omitted Alaska.

The third research product was a detailed analysis of Alaska’s economic relations with its biggest foreign trading partner, Japan. The key export sectors were fisheries and forest products (especially wood pulp), petroleum products (especially natural gas), and potentially the minerals and tourism industries. We reasoned that with its geopolitical position on the North Pacific Rim, Alaska was a natural for becoming a major player there with Japan as a focal point. Further, Japan and Alaska seemed a classic case of economic complementarity: Alaska had the natural resources that Japan needed, and Japan had the large population and sophisticated industrial economy that Alaska lacked. The goal was to strengthen and elaborate on the commercial ties between the two. Accordingly, we arranged for and broadly oversaw a study by the University of Alaska’s Institute of Social and Economic Research (ISER), funded by the U.S. Department of Commerce.Footnote ¹³

And Several Proposals That Didn’t Fly

I have discussed the rationale for the policies that were actually launched. Of course a number of other efforts emerged from the same set of motivations and policy perspectives on our part that never got off the ground. To round out this retrospective, I identify six:

1. 1. We felt that phasing out the Cost-of-Living Allowance (COLA) for governmental employees in Alaska would lessen the inflationary pressure on price levels, help normalize the state, reduce agency budgets, and eliminate an unnecessary employment locational incentive. Although the Bureau of the Budget was favorable to the idea, the Alaska congressional delegation was not. Nothing happened.

2. 2. Changing the eligibility for use of the Public Health Service hospitals in Alaska from an ethnically based one (Natives only) to an income-based criterion (those who could not afford care) seemed a sensible updating of federal policy. Not surprisingly, the Native population was opposed to the idea, as were various political factions. So nothing happened.

3. 3. Allowing bank competition, both interstate (say, the Bank of Seattle) and international (say, the Bank of Tokyo), would provide additional lines of credit, modern bank products and procedures, and perhaps lower costs. There was little legislative (or banking commissioner) interest at the time in breaking the near-monopolies of intrastate banks in Alaska.

4. 4. We failed to convince the three federal regulatory agencies that oversee transportation—the Civil Aeronautics Board, the Interstate Commerce Commission, and the Federal Maritime Commission—to make Alaska an experiment in real intermodal transport-coordinated regulation. Given the importance of transportation to the state, I felt this was a feasible goal as well as an unusual opportunity associated with the “benefits of coming last.”Footnote ¹⁴ Bureaucratic resistance, however, doomed this idea for real interagency cooperation.

5. 5. Persuading the Atomic Energy Commission and its contractors to hire Natives in the building of the underground nuclear testing facility in the Aleutians at Amchitka seemed plausible. After all, much of the task involved site clearance and ordinary construction work. However, labor union agreements supposedly were too great an obstacle to overcome for success here.

6. 6. We attempted to persuade the Alaska government to grant long term tax exemptions very sparingly—if at all. Rarely is such an idea effective in attracting and retaining industry, surely for giant corporations whose locational decisions are made on other grounds and for whom preferential treatment of this kind harms an already-thin tax base. However, governors’ offices and state legislatures, in Alaska as elsewhere, considered the offering of tax concessions for businesses nearly irresistible, and many were granted.Footnote ¹⁵