roundtable: Administration Position on S652 (Telecom Reform Bill)
roundtable: Administration Position on S652 (Telecom Reform Bill)
Administration Position on S652 (Telecom Reform Bill)
W. Curtiss Priest (BMSLIB@mitvma.mit.edu)
Thu, 27 Apr 95 18:37:27 EDT
Message-Id: <9504272242.AA02990@a.cni.org>
Date: Thu, 27 Apr 95 18:37:27 EDT
From: "W. Curtiss Priest" <BMSLIB@mitvma.mit.edu>
Subject: Administration Position on S652 (Telecom Reform Bill)
To: Telecommunications Policy Roundtable <ROUNDTABLE@CNI.ORG>
Tom Kalil kindly informed me at the MIT forum on local access where
this piece was posted (4/19/95 on iitf.doc.gov gopher under 'Hot Offs')
the Press').
Thank you Tom and here it is --
Curtiss Priest
<bmslib@mitvma.mit.edu>
ADMINISTRATION CONCERNS REGARDING S. 652:
THE TELECOMMUNICATIONS COMPETITION
AND DEREGULATION ACT OF 1995
I. Introduction
The Administration takes this opportunity to comment
upon S. 652, the Telecommunications Competition and
Deregulation Act of 1995, as reported by the Senate Commerce
Committee.
The Administration believes that the key test for any
telecommunications reform measure is whether it helps the
American people. Legislation should provide benefits to
consumers, spur economic growth and innovation, promote
private sector investment in an advanced telecommunications
infrastructure, and create jobs. However, unleashing
monopolies before real competition exists could cause higher
prices for consumers and hinder competition. During the
transition, safeguards are needed to bring real competition
and all its benefits.
While significant portions of the bill are consistent
with these principles, in critical respects the bill does
too little to promote competition and too little to ensure
that consumers are not hurt by monopolistic behavior. The
Administration urges the Senate to amend the legislation to
ensure a truly competitive telecommunications marketplace by
addressing our major concerns with the bill as currently
drafted before Senate passage.
II. Cable Rate Regulation
The Administration is particularly concerned about
provisions in the Senate bill that could: (1) substantially
reduce Federal Communications Commission (FCC) oversight of
the rates for "cable programming services" charged by cable
systems not subject to effective competition; and (2)
significantly loosen the 1992 Cable Act's definition of
"effective competition." While some relief may be
appropriate for small and rural cable systems, the broader
changes that the bill would make could potentially have
serious adverse affects for cable subscribers.
Reduced Regulation of Cable Programming Services:
Section 204 of the bill would preclude FCC scrutiny of a
rate for cable programming services (commonly known as
"expanded basic services") unless that rate "substantially
exceeds the national average rate for comparable cable
programming services." This provision could result in cable
rates increases for a large number of consumers. In
addition, consumers of basic service could see many services
moved to the less regulated upper tiers. The provision
could also permit cable systems to escape regulation through
concerted increases in their expanded basic service rates.
Every rate increase by an individual cable system would
raise the nationwide average rate for expanded basic
services and, therefore, pave the way for subsequent rate
increases not only by that system but every other cable
system.
Redefinition of "Effective Competition": Section 204
of the Senate bill also would amend the Cable Act to declare
that a cable system faces "effective competition" if a local
exchange carrier (LEC) "offers video programming services
directly to subscribers" within the system's franchise area,
whether over a common carrier video platform or as a
conventional cable operator. This provision appears to
deregulate upon the merest potential of competition from the
LECs, without regard to whether or not such competition
really exists on any significant scale. If there are
legitimate concerns that the current multichannel competitor
test for "effective competition" is too stringent, that
provision should be changed in a way that still takes actual
subscribership to competing services into account.
III. Telco/Cable Provisions
Although the Administration strongly supports the
bill's repeal of the telco/cable crossownership restriction,
we are nonetheless concerned about the associated provisions
that would: (1) permit mergers and joint ventures between
telephone companies (telcos) and cable systems in the
telcos' local service areas; (2) give telcos the option of
providing video programming either via a common carrier
video platform or as a conventional cable system; and 3) not
require a separate subsidiary for video programming
services.
Absence of an Anti-Buyout Restriction: The Senate bill
would allow telephone companies to buy out local cable
companies in the telco's local service area. While telcos
and cable systems are potential competitors in the video
services market, technological change and aggressive plant
modernization have positioned cable operators to become
viable providers of local telephone service as well.
Permitting widespread mergers between telcos and cable
systems, therefore, could undermine this potential
competition in both the video and telephony markets before
it begins, potentially raising telephone and cable prices
paid by consumers. This movement to a "one-wire world"
potentially would leave antitrust litigation as the only
barrier to anti-competitive behavior.
For this reason, the Administration has consistently
advocated a strong ban on acquisitions and joint ventures
between telcos and cable systems in the telcos' local
service area, subject to a limited exception in rural areas
and authority for the FCC to review the ban after a certain
number of years.
Optional Provision of a Common Carrier Video Platform:
The Senate bill would allow telcos to provide video
programming services either on a common carrier video
dialtone (VDT) basis or as a conventional cable operator.
The Administration is concerned that, in the latter case,
telcos would not be required to provide common carrier VDT
facilities to unaffiliated programmers. A common carrier
VDT platform cannot be merely an option for telcos, but
rather should be a required aspect of their entry into the
video programming market. As long as telcos continue to
control the poles and conduits that cable companies need to
provide service, and as long as telcos remain regulated and
dominant providers of local telephone service, there is a
substantial risk that telcos may be able to gain an
unwarranted competitive advantage in the video services
market through discrimination and cross-subsidization.
Requiring telcos to provide common carrier VDT facilities to
unaffiliated programmers would ensure that programmers have
ample opportunities to market services directly to
subscribers, without having to go through a conduit-
controlling gatekeeper. This would foster additional
competition in the provision of video to the home, with the
concomitant benefits of lower prices, more programming
choices, and improved customer service.
Separate Subsidiaries for Video Programming: The bill
as currently drafted does not require that the Bell
Operating Companies (BOCs) establish a separate subsidiary
for video programming provided on a common carrier basis,
but instead relies on the BOCs not to cross subsidize
between the provision of video programming and
telecommunications services. Structural separation would be
a better approach to ensure detection of such cross-
subsidies.
IV. Local Competition/Interconnection Requirements
The Administration is concerned that the provisions for
interconnection may not set the stage for effective local
competition. With respect to both procedure and substance,
the bill
does not do enough to ensure that opportunities for local
competition will be available to all in a rapid timeframe.
Application of Interconnection Requirements: With
respect to interconnection, the bill defines the relevant
market -- for identifying an entity with market power
subject to the interconnection requirements -- to include
all providers of local telephone service, regardless of the
technology applied. As a result, wireless services would be
included, even if the price disparity between the two
technologies ensured that they did not compete for the same
customers. It would also include every provider of service
to discrete customer niches, even if that provider offers no
competition whatsoever for the vast majority of customers.
This is contrary to accepted principles of market
definition, as embodied in the 1992 Horizontal Merger
Guidelines of the Department of Justice and the Federal
Trade Commission. The bill's market definition, therefore,
could seriously understate the market share of an incumbent
LEC, and result in a failure to apply interconnection duties
to a carrier that does, in fact, possess market power.
Interconnection Agreement via Negotiation: In allowing
carriers to fulfill their duty to interconnect by
negotiating agreements with other carriers, the bill does
not ensure timely interconnection for competitors. Since
these negotiated agreements need not satisfy the list of
minimum standards outlined in section 251(b), and since a
State has very limited power to reject a negotiated
agreement, a BOC monopolist may be able to make use of its
vastly superior bargaining power, particularly since a sole
negotiated agreement may serve as a BOC ticket into the long
distance market in a given area. The strongest competitors,
therefore, may be the last to obtain interconnection
agreements.
Limits on Resale: The bill's provisions on resale
would allow a State to limit the resale of subsidized
universal service, allowing a company to sell services to
other carriers based on actual cost, exclusive of universal
service support. This would apparently be allowed even if
the first carrier keeps the revenues that provide such
universal service support, enabling a carrier to collect its
cost twice -- once from the carrier that purchases service
for resale, and once from the source of universal service
support. This provision should therefore be modified to
prevent such "double" collection.
Waivers for Local Carriers: Under certain conditions,
the FCC or a State may waive or modify the minimum
interconnection standards laid out in Section 251. There is
a problem, however, in how the bill defines carriers
eligible for such a waiver -- those "with fewer than 2% of
the Nation's subscriber lines installed in the aggregate
nationwide." The Administration believes that the 2% figure
is too large because, except for most of the BOCs and GTE,
almost every other provider of local exchange service in the
United States would potentially be eligible for an exemption from
the interconnection requirements of Section 251.
Rural Issues: The bill mandates that for interexchange
carriers which serve both rural and urban areas, rates must
be no more expensive in rural areas than in urban areas.
This may have several adverse effects on competition: 1) it
may discourage urban providers from expanding into rural
areas, limiting customer choice in those areas; and 2)
providers that are already in rural and urban areas will be
unable to lower urban rates to competitive levels because
they are tied to the same rate changes in the rural areas.
This provision may thus actually contribute to higher urban
rates instead of lower rural rates.
Also, Section 309 of the Committee bill would permit
States to restrict competitive entry in rural areas, unless
new entrants agree to serve an area comparable to the
incumbent's on similar terms and conditions. Such a
provision could severely hamper the growth of competition
and the resulting consumer benefits. The Administration
shares the Committee's concern that competition be
encouraged in a way that does not cause dislocations for
consumers, wherever they reside. We believe, however, that
the best way to address this concern is not by restricting
competition, but by adopting universal service policies, on
a competitively neutral basis, to protect those relatively
few consumers that may not fully benefit from competition.
The Potential for Price Squeezes: The bill provides
little protection against price squeezes by the BOCs, which
could significantly damage both local and long distance
competition. While a BOC subsidiary would be required to
"pay" or impute the cost of inputs obtained from its parent
company, the nominal amount it pays for these inputs is
relatively unimportant, since it is really just a transfer
payment from one part of the company to another. Thus the
BOC parent could inflate its rates for local service inputs
without causing any real harm to its long distance
affiliate. For competitors, however, such inflation could
be devastating. They would have to pay the BOC the inflated
prices for local service inputs, but they would be unable to
match the competitive retail rates offered by such a BOC,
since its costs are recovered elsewhere in the company. In
this way a BOC would have the capability to drive any
competitors from the market.
V. MFJ/Long-Distance Relief
The Administration believes that the bill may allow the
BOCs to enter the long distance market before there are real
opportunities for local competition and under circumstances
where entry might impede competition in adjacent and more
competitive markets. This could endanger competition and
could represent a lost opportunity to create appropriate
incentives to open monopolized markets. As currently
drafted, the bill relies on one principal safeguard -- the
public interest test as administered by the FCC; the
Department of Justice has no decision-making role to apply
its unwavering focus and expertise to facilitate the vital
transition from monopoly to competition.
Long-Distance Entry: The provisions in the Senate bill
on long distance entry may allow BOC entry before real
competitive opportunities exist in a given local market. To
obtain relief, a BOC need not enter into interconnection
arrangements with all, or even several, of its potential
competitors, and it need not reach agreement with any
significant competitor. It must show only that it has
entered into an interconnection agreement that satisfies the
"competitive checklist" in the bill. A BOC could negotiate
an agreement with one weak competitor that satisfied the
"competitive checklist," thereby obtaining long distance
entry a year or more before it enters into an
interconnection agreement with any serious competitor. It
is not required to show that real competitive opportunities
or actual competition exits.
While the bill moves toward requiring the BOCs to
fulfill both the important minimum interconnection
requirements set forth in section 251 and the partially
overlapping requirements of the "competitive checklist"
(section 255) in order to obtain long distance relief, BOC
entry could occur without satisfying the minimum
interconnection requirements of section 251. Section 251(c)
allows negotiation of interconnection agreements which do
not satisfy the minimum interconnection standards of section
251(b). Thus, the BOC could obtain long distance entry
without agreeing to interconnect at any technically feasible
point in the network, and without agreeing to provide
nondiscriminatory access to facilities and information
necessary for interoperability of the networks.
Department of Justice Role: Throughout this century,
the Department of Justice (DOJ) has played a major role in
promoting telecommunications competition. Particularly in
the last 25 years, the Department has developed, through
investigation, litigation and oversight of the AT&T
divestiture, deep knowledge and expertise in the area. This
has been reinforced by the Department's investigations with
respect to telecommunications mergers and other matters.
Given the Antitrust Division's expertise, the Department of
Justice should be assigned a decision-making role in the
process, rather than the consulting role that the bill
currently dictates. The Department should be required to
assess market facts and determine that entry could indeed
promote competition without endangering the progress already
achieved in enabling adjacent markets to become competitive.
This entry test could be applied at the same time and by the
same date as the FCC's more broadly focused entry test so as
to ensure no delay.
Immediate Out-of-Region Entry: Out-of-region service
is not defined in the bill; it is unclear whether long
distance service that originates out-of-region but
terminates in-region would be permitted. If service that
terminates in-region is included in the definition, then
there should be a separate subsidiary and other requirements
to guard against discrimination, especially since the BOCs
are permitted to provide out-of-region service before
implementing unbundling and interconnection. Also, some
services may technically originate out-of-region but are
more appropriately considered as in-region services.
Extending the Competitive Checklist: The bill prevents
the FCC from extending the terms of the competitive
checklist. This could pose a serious problem if it means
that the FCC must consider the checklist satisfied even if,
for example, the prices at which unbundled network elements
would be offered would not permit competition. A niche
carrier could accede to high prices in order to reach a
negotiated settlement and avoid protracted arbitration or
intervention, yet the resulting competitive conditions might
not be at all conducive to general competition throughout
the area in which the BOC wished to provide interLATA
service.
Equal Access for Wireless Carriers: The bill's
elimination of equal access requirements for wireless
carriers would result in severe harm to competition. The
bill would call into question the recent AT&T McCaw
settlement with DOJ, which demanded equal access in the
merger of AT&T and McCaw to avoid anticompetitive effects in
the cellular and interexchange markets. These protections
were intended to prevent AT&T, which has a very large market
share for cellular interexchange service, from obtaining
exclusive control over McCaw's cellular customers. The bill
would also undo the DOJ's proposal regarding equal access
requirements for the BOCs if they are permitted to enter the
interexchange market from their cellular operations.
VI. Preemption
The Administration believes that the bill should not
halt or roll back state efforts to open telecommunications
markets to competition. As currently drafted, however, the
bill does just that in important respects. In certain
markets, the bill would extend or preserve the BOCs' local
monopolies, delaying competition in these monopolized
markets until the BOCs enter the long distance market -- a
market which already provides consumers with some of the
benefits of competition. The Administration also believes
that the federal government should not dictate to the states
which form of telephone rate regulation is best to protect
state consumers under the different circumstances and levels
of competition that will develop in each state.
Rate Regulation: The Administration believes that
price caps, or similar forms of incentive regulation, may
often be superior to conventional rate-of-return regulation.
The FCC and the States should have the flexibility to
explore which forms of regulation would best serve consumers
in markets that are not yet fully competitive. States in
particular have been innovative in introducing competition
into the marketplace, while at the same time protecting
consumers, improving incentives for efficiency, and
encouraging the most effective deployment of the information
highway. Almost half of the States already use alternatives
to rate-of-return regulation. The Administration therefore
opposes the provision in the bill that would deprive the FCC
and the States of this flexibility.
IntraLATA Dialing Parity: The Senate bill bars States from
ordering intraLATA dialing parity until the resident
BOC has obtained long distance relief. This provision could
curtail competition in significant intraLATA toll markets
now monopolized or dominated by BOCs because several
progressive States (such as Minnesota, Michigan and New
York) are enhancing or are about to enhance competition in
these markets by requiring implementation of dialing parity.
By preempting State prerogatives, the bill would: 1) extend
monopoly control over these intraLATA toll call markets,
which would hurt consumers; 2) diminish rather than increase
the monopolists' incentives to open their markets to
competition as rapidly as possible; and 3) put significant
pressure on the FCC to approve BOC interLATA applications
regardless of other market conditions.
Joint Marketing: The bill bars most BOC competitors from
marketing long distance services together with resold local
service until the BOCs are permitted to offer long distance
service in-region. This may deter some competitors from
engaging in resale competition at all, and those who
choose to compete may charge higher prices to consumers as a
result. Several companies have been providing such service
for years to small and mid-size business customers; this
will hurt those providers and their customers. The
provision also could diminish the monopolists' incentives to
interconnect their local monopolies as quickly as possible
and may delay, until after long distance entry, resolution
of the considerable problems which may be involved in
reselling the BOCs' local service. The provision would
impede the efforts of many States to encourage "one-stop
shopping," and raises the probability that the FCC will be
under pressure to find the public interest test satisfied
regardless of market conditions. Finally, the bill imposes
upon companies lacking monopoly power in any telephone
market all of the costs and inefficiencies of separate
marketing, with no corresponding benefit to consumers.
Bars Court Review of State PUC Interconnection
Decisions: The bill bars State court review of PUC
interconnection agreements. While this may speed the
process, it vests tremendous power in State agencies that
may be understaffed and may lack the resources necessary to
make the many decisions required by the bill. Moreover, it
is unclear whether the bill permits FCC review in place of
court review, in what circumstances this might occur, and
whether FCC decisions would, in turn, be reviewable.
VII. Foreign Ownership
The current legislation fails to specify the Executive
Branch's role in determining whether Section 310(b) foreign
ownership restrictions should be lifted for a particular
country. The Administration feels strongly that the
legislation should explicitly take into account the
Executive Branch's broad statutory authority and expertise
for matters relating to U.S. trade, foreign relations,
foreign investments, antitrust policy, and national security
by ensuring that the FCC takes notice of and accords
deference to the policy determinations of the Executive
Branch when making its Section 310(b) determinations.
The legislation should also provide flexibility for the
U.S. government to consider, consistent with international
obligations, all competitive conditions in foreign markets.
The current legislation is too restrictive and should be
revised to allow the Executive Branch, in advising the FCC
on Section 310(b) matters, to look at the ability of U.S.-
owned carriers to supply telecommunications services in all
market segments in the foreign country and should include a
national interest exception. The Executive Branch also
needs flexibility to continue its ongoing bilateral and
multilateral consultations and negotiations to open overseas
telecommunications services markets. Therefore, the
legislation's "snapback" provision, which presents a
unilateral threat to remove negotiated benefits, should be
deleted. In addition, the bill should make clear that any
authority provided by the legislation be exercised in a
manner consistent with international obligations, including
most favored nation commitments.
VIII. Broadcasting
The Administration is concerned that the Senate bill
would allow greater concentration in the broadcast industry
and less rigorous and timely oversight of broadcast
licensees by the FCC. The provisions relaxing limits on
local and national ownership concentration and limiting
license review could impede competition and diversity of
voices by enabling existing owners to concentrate control
over expanding broadcast capacity.
Media Concentration: The Senate bill would allow for
greater concentration in the broadcast industry, and in the
media industry generally, by increasing from 25 to 35
percent the national audience one broadcast owner can reach,
and by removing the broadcast-cable crossownership ban. The
result could be greatly expanded media concentration at the
national and local levels. Such changes should be
considered by the FCC in the context of the coming expansion
of broadcast capacity through digital television. The
uncertain impact of the move to digital compression and
other technological advances argue for delaying any changes
in the multiple or local ownership rules pending further
study.
License Terms Extension: The Administration is
concerned that the Senate bill extends the term from five to
ten years for television licenses and from seven to ten
years for radio licenses. The bill also removes the
opportunity for "comparative review" at the end of a license
term. These provisions seriously weaken the FCC's ability
to enforce a broadcaster's obligation to provide service in
the public interest. In particular, the provisions deprive
the FCC of its traditional authority to consider
applications from competing entities who argue that they
will do a better job of serving the public.
Broadcast Flexibility: The Administration generally
agrees with the concept of providing broadcasters greater
spectrum flexibility although there are a number of issues
to be considered. For example, if the FCC awards a second
channel to existing broadcasters for development of advanced
television service, the Senate bill should require the
broadcasters to surrender one of their two licenses at the
end of an appropriate transition period.
IX. First Amendment and Law Enforcement Issues
The Administration shares the Committee's goal of
preventing obscenity from being widely transmitted over
networks. However, the legislation raises complex policy
issues that merit close examination prior to Congressional
action. These include the impact of additional regulation
on the development of the National Information
Infrastructure, the ability of industry to develop
technological solutions to the problems the legislation is
intended to address, the effect on First Amendment and
privacy considerations, and the increasingly global nature
of the infrastructure. The piecemeal approach taken in this
legislation is inadvisable. Instead, a comprehensive review
should be undertaken, including Congressional hearings.
By criminalizing the transmission of material outside
the scope of the legal definition of "obscenity," the
Amendment will be subject to First Amendment challenge.
Moreover, the Amendment creates certain new defenses to
prosecution that will hamper the ability of the Justice
Department to prosecute computer obscenity under current
statutes. For instance, it could expose to prosecution
online service providers who make a good faith effort to
keep their systems free from pornography, while providing
immunity to providers who knowingly carry pornography, but
make no effort to exercise editorial control.
Section 5 of the Amendment is unnecessary and could
have unintended consequences. In particular, the addition
of a new, undefined category of "digital" communications to
the wiretap statute would only cause confusion. In fact,
digital communications are already covered by the statute.
In addition, the section could have an unintended effect on
the standard of criminal liability, reaching into
communications not now covered because they do not evince a
reasonable expectation of privacy. This standard is in
itself shifting in the face of a continual erosion of that
expectation caused by emerging technologies. However, this
statute is not the place to raise or deal with this complex
issue, and the Section would only foster confusion and
unnecessary litigation.
X. Universal Service Issues
One of the main principles of the Administration's
National Information Infrastructure initiative is to
preserve and advance universal service to avoid creating a
society of information "haves" and "have nots." For this
reason, the Administration supports the goal of universal
service, including access for classrooms, libraries,
hospitals, and clinics to the National Information
Infrastructure, including in rural areas. Congress should
also consider adding appropriate language to the bill that
would prevent "redlining" in the provision of
telecommunications and information services.
_______________________________________________________________________________
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