TESTIMONY OF LARRY IRVING ASSISTANT SECRETARY FOR COMMUNICATIONS AND INFORMATION U.S. DEPARTMENT OF COMMERCE ON S. 1822 THE COMMUNICATIONS ACT OF 1994 BEFORE THE SUBCOMMITTEE ON ANTITRUST, MONOPOLIES, AND BUSINESS RIGHTS COMMITTEE ON THE JUDICIARY UNITED STATES SENATE SEPTEMBER 20, 1994 Mr. Chairman and Members of the Subcommittee: INTRODUCTION Good morning. Thank you for this opportunity to testify before you today on S. 1822, legislation that will promote the advancement of the national telecommunications and information infrastructure. I am pleased to join Assistant Attorney General Bingaman, who will focus on the Administration's views on aspects of S. 1822 bearing on the AT&T consent decree. I will discuss more generally the need to pass telecommunications reform legislation this year and highlight other key elements of the Administration's views on the bill. The Administration appreciates the efforts of the Chairman and other members of the Senate Judiciary Committee to closely examine S. 1822. This bill, along with the House telecommunications reform bill, H.R. 3626, will help lay the groundwork for making better communications services available at lower prices to all Americans and will help ensure a leadership role for the United States in a worldwide information revolution. The Administration is pleased by the bi-partisan nature of the legislation and will continue to work closely with Congress to arrive at a final legislative product this year. THE NEED FOR LEGISLATION One year ago this month, Vice President Gore and Secretary Brown unveiled the Administration's National Information Infrastructure (NII) initiative, setting forth an agenda for a public-private partnership to help bring the benefits of an advanced information infrastructure to all Americans. Last week, the Administration released a report fully highlighting the progress made on the NII initiative. For example, the Commerce Department, with the National Telecommunications and Information Administration (NTIA) in a leadership role, teamed up with other government agencies to conduct hearings across the country this year to address universal telecommunications service issues. NTIA issued a Notice of Inquiry on these issues last week to obtain further public input. In addition, NTIA plans to award $26 million in matching grants in October for information infrastructure projects that will help institutions such as schools, hospitals, and libraries better use telecommunications and information technologies to deliver their critical services to the American public. Efforts such as these will promote the advancement of the NII, which will in turn spur economic growth and create jobs for Americans. The telecommunications and information industries account for almost $1 out of every $10 spent in the United States. Telecommunications and information businesses support jobs for more than 4.6 million Americans. The Council of Economic Advisors has concluded that legislative and regulatory reforms that will increase competition in telecommunications markets, as recommended by the Administration, could add more than $100 billion to our Gross Domestic Product over the next decade, and add 500,000 new jobs by the end of 1996. The NII will not fulfill its potential to benefit all Americans, however, if it continues to develop under a legal regime that was developed in the 1930's. Sixty years ago, even the wisest of experts could not have accurately predicted what our communications needs would be today. The Communications Act of 1934 served us well for many years, but it is ready for comprehensive revision, and Congress should act this year to change it. The Administration believes it is time to act decisively to lift the artificial regulatory boundaries that separate telecommunications and information industries and markets. This is true for three key reasons. First, U.S. telecommunications capabilities must remain the best in the world in order for our nation to succeed in an increasingly competitive world trade environment, which will become even more open with the implementation of NAFTA and the GATT Uruguay Round. The Los Angeles Times reported in July that telecommunications is now the world's largest economic sector, with strategic importance surpassing oil or steel. We cannot afford to settle for anything less than being number one. Archaic rules that inappropriately retard innovation by telecommunications firms have a negative impact on the international competitiveness of the private sector in general by inhibiting industrial productivity and job creation. Legislation is necessary to reform regulatory structures that impede development of our telecommunications capabilities. Second, the existing regulatory structure has been altered on an ad hoc basis over six decades to meet perceived problems of the moment. This has created an uneven playing field that artificially favors some competitors over others and in some instances unnecessarily discourages investment and risk-taking. These effects, in turn, inappropriately skew the growth of industry sectors and retard the development of the NII itself. The judicial process is already addressing some of these problems in a piecemeal fashion, but legislation is needed to resolve these issues in a comprehensive way. Third, we need to be sure that our telecommunications policies are fully responsive to the needs of the American people as a whole, and, in particular, poor and disadvantaged Americans. We cannot afford to become a nation divided between the information rich and the information poor. There is much to accomplish. While some Americans order home-delivered pizza for dinner by modem, five million homes in the United States do not even have a telephone, according to the U.S. Census Bureau. Less than three percent of public libraries offer access to the Internet. We must do better. The existing regulatory structure may not be sufficient to ensure that all Americans have the opportunity to benefit from the broad range of services that will become available under the NII. We must address these shortcomings through legislative action. THE ADMINISTRATION'S PRINCIPLES Only through passage of telecommunications reform legislation can we enhance the development of the competition that is necessary for the NII to achieve its full potential. Earlier this year, the Administration prepared a set of legislative proposals setting forth the principles under which we believe the advanced infrastructure should operate. These proposals furthered the visions set forth in House and Senate legislative initiatives. We are continuing to advocate the principles underlying these proposals as the legislative process unfolds. These principles are: * Encouraging private investment in the NII; * Promoting and protecting competition; * Providing open access to the NII by consumers and service providers; * Preserving and advancing universal service; and * Ensuring flexibility so that the newly-adopted regulatory framework can keep pace with the rapid technological and market changes that pervade the telecommunications and information industries. In large part, S. 1822 addresses the legislative principles set forth by the Administration. The bill proposes to reform the telecommunications industry in a way that will encourage competition, infrastructure modernization, and advanced NII applications in health care, education, and government services. The Administration has some concerns about the legislation, however, which I will address at this time. AREAS OF CONCERN Anti-Buyout Provisions S. 1822 would generally bar acquisitions by telephone companies of cable systems, and vice versa, and joint ventures between them. It would, however, permit such arrangements in communities with as many as 50,000 people. The bill would also permit waivers by the FCC in certain "failing firm"-type circumstances. The Administration believes an anti-buyout restriction is necessary to establish competition, and exceptions to this restriction should be limited to rural areas (that is, areas with less than 10,000 people). We believe that direct competition between telephone companies and cable companies has the potential to deliver substantial benefits to the American consumer and provide a powerful incentive for private sector investment in advanced local infrastructure. Permitting widespread mergers between telephone companies and cable companies in the same operating areas would kill off any likelihood of such competition and place these substantial benefits in jeopardy. On the other hand, we recognize that inflexible restrictions could prove counterproductive over time, especially in an industry changing as rapidly as telecommunications. So the Administration also supports authorizing the Federal Communications Commission (FCC) to modify or eliminate the restriction after five years, if such action would serve the public interest. The exceptions to the anti-buyout restriction in S. 1822 are both over- and under-inclusive compared to the Administration's approach. They are over-inclusive because they would exempt too many communities from the restriction. It appears that the 50,000 population exemption, as defined in S. 1822, could encompass 90 million Americans, based on the 1990 Census. Without the protection of anti-buyout provisions, these people may not receive the benefits of competitive telecommunications services. The exceptions are also under-inclusive because they would limit FCC waivers to "failing firm"-type situations, rather than give the FCC authority, as the Administration proposes, to modify or eliminate the anti-buyout restriction after five years based on public interest grounds, including the effects of such action on competition, consumer welfare, and infrastructure investment. Of course, any telephone company/cable system acquisition will be subject to antitrust laws in the same manner as acquisitions in any industry. LEC Entry Into Video Programming In general, S. 1822 would allow local exchange companies, or LECs, to provide video programming in their local service areas only after a number of requirements related to competition, interconnection, universal service, and other areas have been met, possibly causing delays of approximately three to seven years. However, an amendment adopted at the committee mark-up of S. 1822 would provide immediate relief for two and, by the time of enactment, possibly more Bell Operating Companies. In a related area, S. 1822 removes entry barriers into the local telephone market one year after enactment. The Administration supports immediate removal of entry barriers to both the telephone and cable markets as critical and complementary components of a pro-competitive policy that will promote investment in advanced local infrastructure. The Administration also believes that LECs' provision of video programming should be subject to compliance with structural separation and establishment of a common carrier "video platform." Under a video platform, telephone companies would be required to make channel capacity available to unaffiliated video program providers on a nondiscriminatory basis, while providing video programming through separate affiliates. The Senate bill's amendment permitting immediate LEC entry into video programming for only some Bell Companies, however, is troubling. There is little policy basis for permitting some telephone companies into the cable business immediately, while leaving the rest of the industry to wait for three, five, or perhaps more years before they can offer the very same services in their areas. This is not just a matter of competitive equity. The cable television market, like the local telephone market, is today largely monopolized, and we want to promote these two providers of local infrastructure to compete with one another. This language seems to invite extensive and time-consuming litigation, followed in all likelihood by a series of piecemeal judicial rulings and disparate treatment of similar situations across the country. The better approach would be to allow all telephone companies to enter the cable market immediately, and vice versa, or one year after enactment, when barriers to local telephone competition are lifted under S. 1822 as currently drafted, subject to the Administration's proposed safeguards. State and Local Issues The Administration is aware that a coalition of state and local officials are considering proposing specific amendments to S. 1822 that would, among other things, preserve a state role in such areas as universal service and the regulation of telecommunications service providers, as well as ensure state and local involvement in public rights- of-way issues. State and local governments have been instrumental leaders in developing the nation's telecommunications infrastructure. In many cases, they have paved the way for the information superhighway. The nation will benefit from the regulatory expertise state public utility commissions and local governments will provide in the pursuit of telecommunications reform legislation. The Administration shares many of the concerns expressed by state and local officials and will continue to work with these groups, industry and Congress to help resolve them. CONCLUSION In conclusion, the Administration stands ready to continue working with the Congress to address these and other concerns in the telecommunications reform legislation. The need to iron out details does not diminish our enthusiasm for this legislation, because the benefits for the American public are so immense. We are committed to passage of this legislation, because only through telecommunications legislative reform will our vision for the future of the NII reach its full potential. A new regulatory regime will promote the development of the NII in a flexible, procompetitive fashion that creates incentives for desirable investment, economic growth, and the wide- scale availability to all Americans of new, highly valued information services. The Administration looks forward to continued collaboration with Congress to enact legislation that achieves these desired ends. This concludes my testimony. I would be pleased to respond to any questions you may have.