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.