Now pushing and shoving over details will start

The Clinton Administration plans to submit legislation to Congress in February that will establish new ground rules for telecommunications policy and regulation in the United States.

The plan, outlined by Vice President Al Gore in a speech to the National Academy of Television Arts and Sciences on January 11 in Los Angeles, closely parallels the specific changes to existing rules that are already on the table in the House and Senate, but departs from existing legislative proposals in terms of its all-encompassing approach to establishing a new broadband regulatory category.

GORE PROPOSES CHANGES TO EXISTING REGULATIONS

Most significantly, the Administration’s plan would permit the telephone and cable companies to enter each other’s businesses, lift long-distance service and manufacturing restrictions on the Bell operating companies and establish rules for defining and covering the costs of universal service.

Cross ownership. The cross-ownership restrictions of the 1984 Cable Act would be removed, which would mean phone companies could provide video services in their local areas. For the next five years telephone companies will still be prohibited from buying cable companies in their operating areas — except in rural areas that may not be able to support more than one carrier.

After five years, the ban on common ownership of cable and phone companies in the same area could be lifted. This is one piece of the plan we simply do not understand. Once you have gone to the expense of installing two competitive wired systems in an area, why would you ever permit them to be owned by the same company? Yes, there will probably be competition from DBS and wireless services. Yes, there will be open access guarantees (see below), but why reestablish any monopoly when you do not have to?

Opening the local exchange. Under the proposed legislation, telephone, cable, electric utility and other companies will be allowed to compete in the local phone business. All competitors will be able to interconnect their networks on “reasonable, non-discriminatory terms” with the local phone company facilities. So, for example, a cable operator will be allowed to connect into the local phone company’s switch.

The Administration appears to want to transfer most of the month-by-month, year-by-year policy decisions to the FCC.

Users will be able to take their phone numbers with them — to switch services without changing their phone number.

On the cable side, the Federal Communications Commission — which under the proposed plan will be given “broad powers to adapt (and reduce) regulations over time” — will be given a year to “impose non-discriminator access obligations on cable television systems, except when technology, costs and market conditions make it inappropriate.”

It is not clear what this means for a local analog cable system with limited channel capacity. It certainly means that new digital systems will be required to relinquish their “gatekeeper” functions and open access to additional program and service providers.

Long-distance service. Local phone companies will be allowed to enter the long-distance business — with some checks: The Administration will support the proposal embodied in the Brooks-Dingall bill, which will require approval from the Department of Justice and the FCC before local phone companies can enter the long-distance market. The purpose of these approvals is to “ensure competition and to protect consumers and local telephone rate payers against cross-subsidization and other potential abuses of monopoly power.”

Information services. As is also proposed in the Brooks-Dingall bill, the Administration wants phone companies to set up separate subsidiaries to provide information services. These would need to compete on an equal basis with other non-phone company entities offering similar services.

Manufacturing. The current ban that prohibits the RBOCs from research, development and manufacturing would be lifted (subject again to safeguards to prevent cross-subsidization and discriminatory practices).

A COMMON SET OF REGULATIONS FOR CABLE, TELCOS

Perhaps the most significant aspect of the Administration’s proposal is that telephone and cable companies would have the choice of remaining regulated under the existing Title II (telephone) or Title VI (cable) regulations, or electing to become “Title VII” companies and be governed by a new, common set of regulations that appear to remove the distinctions between them.

Short on details. The Administration has not given any details of what the rules might be for Title VII companies, except to indicate that the FCC will be given very broad latitude. In essence, the Administration appears to want to transfer most of the month-by-month, year-by-year policy decisions from the courts, Congress (and, to the extent possible, state and local regulators) to the Federal Communications Commission.

The FCC would be given the power, for example, to regulate rates when and where it deems that no effective competition exists, then to deregulate them as competition comes into play. New entrants that do not have significant market share would be free from rate regulation. The FCC would also set guidelines under which state and local agencies could regulate rates for services not subject to competition.

Potential pitfalls. The specifics of Title VII are clearly going to be all-important. Best case, Title VII could create unified communication rules and regulations, concentrate considerably more power and discretion in the hands of the FCC (which could greatly simplify the existing regulatory mess), and provide a flexible regime that can evolve over time as the market evolves.

However, the transition period could be a holy mess. Companies that are being asked to invest billions of dollars in new infrastructure, products and services may be very nervous about plunging ahead into a world in which the FCC has the authority to make up the rules as it goes along. There will have to be a very clear framework, complete with guidelines and objective criteria for deciding when — and how — the rules are going to change. Events will not, of course, follow a predictable plan. Revolutions are much too chaotic for that. So, the FCC is going to have to make adjustments as it goes along, but it is going to have to be extraordinarily careful to be as predictable and consistent as it possibly can.

Note, in particular, that until sufficient competition is established, Title VII companies (but not their fledgling competitors) will continue to be subject to regulation (including rate regulation) by the FCC and state and local agencies. As is clear from our discussion of telco initiatives in this issue (see p. 3), this is probably necessary. The telcos start from a position of too much power. However, this could easily make the interim regulatory structure even more complex and confused than it already is.

If we were a phone company or a cable company we would be pretty ambivalent about the legislation that is likely to emerge from the sketchy outline of Title VII presented thus far. On one hand, we would welcome a unified regulatory regime. On the other, there are still a lot of crucial details that are either left vague or delegated to the discretion of the FCC. Most important among these is any discussion of what criteria will be used to determine when there is enough competition to release Title VII companies from rate regulation.

THE CONTINUED PROMISE OF ‘UNIVERSAL SERVICE’

The question of “universal service” — guaranteed access for all citizens at low rates — may be the trickiest part of the whole initiative. Historically, universal service was part of a very clever deal struck at the time AT&T was being formed: In exchange for being granted a monopoly the phone company undertook to provide service to all customers — even those in poor and/or rural areas who would probably have to be serviced at a loss. Thus, the American concept of universal service has been inexorably bound up with the proposition that service would be provided by a regulated monopoly.

Now, we are proposing to replace monopoly with competition, but we still want to insist on universal service. The goal is noble. No one wants to see the United States degenerate further into a “have and have-not” culture. What is not at all clear is how we are going to insist on universal service in a two-wire competitive world. Who has to provide service to which customers? How will this be mandated? How will it be paid for? What level of service and equipment has to be provided?

Let the FCC decide — again. Gore’s answer is to let the FCC figure out how to do it: “The responsibility to design specific measures to achieve these aims will be delegated to the Federal Communications Commission. The basic goal is simple: There will be universal service; that definition will evolve as technology and the infrastructure advance; and the FCC will get the job done.”

Free access to schools and hospitals. As a starting point, Gore challenged the phone companies and cable companies to provide free connections to every school classroom, library, clinic and hospital by the year 2000. The day before, Bell Atlantic and TCI had promised to run wires to every public school in their combined service areas — all told, 25 percent of the public schools in the United States.

But running wires to schools will not be sufficient. We will have to wire the schools themselves. (Almost none of the public schools in the United States have telephone wires running to classrooms.) And we will have to provide a base level of services. It should not be difficult to convince companies to do this. What better way to make broadband interactive services indispensable to the next generation of citizens?

MUM’S THE WORD ON ISSUES OF PRIVACY

One issue that is completely ignored in the Administration’s white paper on the proposed plan, which was released at the same time as Gore’s speech, is the battle between government law enforcement/security agencies and computer civil libertarians over data encryption, privacy and security. Gore tipped the Administration’s hand on this with one throw-away line in his speech: “We’ll help law enforcement agencies thwart criminals and terrorists who might use advanced telecommunications to commit crimes.”

TAKING THE PULSE OF CABLE, TELCO INDUSTRIES

Industry reaction to Gore’s speech was generally muted, with most companies saying they couldn’t comment in detail until they knew more. Cable companies were especially reticent, with some industry insiders expressing fears that the Administration was willing to let telcos into content control without requiring that there first be significant competition in telephony.

Some telephone companies were also cautious. While praising the idea of giving telcos an option to go under Title VII regulations, Phil Quigley, president and CEO of Pacific Bell, said his and other companies “shouldn’t be held hostage” to past performance on issues of monopoly abuse. In a reference to the vagueness of the Administration’s proposal, he added, “I can assure you we’re going to explore whatever it is very closely.”

A new monopoly? While praising the Vice President for taking a “strong lead,” Richard McCormick, chairman and CEO of US West, said in a prepared statement, “There seems to be a certain bias that the old telephone monopoly still exists and those companies need to be handicapped in favor of new entrants.”

Ameritech offered the strongest support from telephone ranks. President and CEO Richard Notebaert said the Administration’s plan appeared to be “on the same page” with the regulatory initiative Ameritech filed with the FCC last year. But his comments reflected the confusion surrounding the meaning of Gore’s speech and the accompanying white paper issued by the White House.

Where McCormick saw a handicapping of telcos in favor of new entrants, Notebaert saw Gore’s comments as a “ringing endorsement” of Ameritech’s vision. “We are encouraged that the Administration has pledged to avoid letting existing regulatory structures impede or distort the evolution of the communications industry,” he said.

The devil is in the details. Which interpretations prove accurate will have a lot to do with the intense battles that will be fought as industry sectors negotiate with the Administration and lawmakers on the details in the months ahead. That so much remains unresolved suggests that the regulatory regime most likely to matter in the rollout of digital communications for some time to come is the video dial tone rules that were established under the Bush Administration.

Fred Dawson, Jonathan Seybold 

Both Vice President Gore’s speech and the “Background on the Administration’s Telecommunications Policy Reform Initiative” can be obtained electronically on the Internet at Publication@Whitehouse.gov or in hard copy by contacting the White House publication office at (202) 395-7332.