DOC. LC 14.2: T 23/997 Order Code IB95067 CRS Issue Brief UNIVERSITY OF ILLINOIS LIBRARY AT URBANA CHAMPAIGN OAK STREET^ Telecommunications Regulatory Reform Updated April 16, 1997 Angele A. Gilroy Science Policy Research Division CRS Congressional Research Service • The Library of Congress h f'- ; 3 'IHU v n a p r j -i. ij; -HAPn J ‘lOHi.UI M0.'A';V.- ; m - jPLI' ' CONTENTS SUMMARY MOST RECENT DEVELOPMENTS BACKGROUND AND ANALYSIS The Need for Regulatory Reform Modification of the 1982 AT&T Consent Decree Telephone/Cable Crossownership The Cable Communications Policy Act of 1984 1982 AT&T Consent Decree Congressional Action — 104th Congress Senate Action House Action Conference and Floor Action Congressional Action -- 105th Congress The Telecommunications Act of 1996 General Policy Objectives Provisions 104th Congress Legislation FOR ADDITIONAL READING - IB95067 04-16-97 Telecommunications Regulatory Reform SUMMARY The melding of telecommunications, video, and computers is having an impact on telecommunications industry structure, as traditional telecommunications providers such as telephone and cable television companies expand their capabilities to become more generic multi-faceted "infor¬ mation providers." Digital technologies make it possible to distribute voice, data, and video on the same communications channel. Combined with new alternative telecommunications delivery systems, com¬ petition is developing in many markets previously considered to be monopolistic. Telecommunications market structures are responding through cable industry consoli¬ dations, telephone/cable alliances, wireless telecommunications mergers, and a variety of joint ventures. The 104th Congress has passed legisla¬ tion, the "Telecommunications Act of 1996," that will result in the establishment of a new regulatory framework to address this changing environment. The general policy objective of the 1996 Act is to open up markets to competition by removing unnec¬ essary regulatory barriers. Removal of such barriers, supporters claim, will permit competition to flourish and ultimately benefit the public interest. Some of the long-term benefits most often cited include: increased consumer choice; decreased con¬ sumer prices; increased efficiency; techno¬ logical advances; and increased investment in our developing information infrastruc¬ ture. Also as these markets transform and the benefits of competition develop it is assumed that the need for government regulation and oversight will diminish. Although the Act passed by over¬ whelming margins in both the House and Senate, the legislation is not without its detractors. Some Members of Congress expressed concerns that the Act is still too regulatory. They point to the numerous FCC rulemakings that the Act requires as well as the removal of earlier provisions such as those removing foreign ownership restrictions on telecommunications common carriers to support their claim. Perhaps of greater importance is the fact that the Act contains provisions that require new regu¬ lations for the television and computer industries. In addition, groups such as the American Civil Liberties Union have de¬ nounced the Act because of its provisions that restrict the free flow of certain types of information over the Internet. Two court suits challenging these provisions have resulted in lower court rulings declaring these provisions unconstitutional; the U.S. Supreme Court has agreed to review the case and oral arguments were held on March 19. Some major consumers groups have also opposed the legislation. Congressional efforts to establish a new regulatory framework to address the chang¬ ing telecommunications environment has resulted in the passage of the Telecommu¬ nications Act of 1996. The Administration voiced support for the measure and signed it into law on February 8, 1996 (P.L. 104- 104). Whether the Act will live up to its stated goals is yet to be determined. Much of the activity is now focused at the Federal Communications Commission and the states as they undertake the task of interpreting and implementing numerous provisions. Action is also taking place in the courts where provisions addressing Internet regu¬ lation, cable television content, and inter¬ connection are among those being chal¬ lenged. Finally, how the various players and consumers will react in the marketplace and how conditions will evolve in individual markets is still open to question. Congressional Research Service • The Library of Congress Digitized by the Internet Archive in 2019 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/telecommunicatioOOgilr IB95067 04-16-97 MOST RECENT DEVELOPMENTS Congressional efforts to establish a new regulatory framework to address the changing telecommunications environment has resulted in passage,in the 104th Congress, of the "Telecommunications Act of 1996" (P.L.104-104). Action has now shifted to the Federal Communications Commission, state regulatory bodies and the courts, as the task of interpreting and implementing numerous provisions is undertaken. Since passage of the 1996 Act, congressional activity has focused on monitoring FCC efforts to implement the numerous rulemakings required in the Act, as well as general oversight of the agency. The Senate Commerce Committee held oversight hearings on March 12 to examine FCC implementation of the universal service goals of the 1996 Act and access charge reform. Hearings to further explore universal service issues were held by the Senate Communications Subcommittee on March 19. The full Committee also held hearings, on April 10, to explore competition in the video marketplace and cable television rates, since passage of the 1996 Act. The courts have also become a focal point. A U.S. District Court (Philadelphia) has declared unconstitutional provisions relating to regulation of certain types of information on the Internet and issued a preliminary injunction blocking their enforcement; the U.S. Supreme Court accepted the case for review and oral argument was held on March 19; a decision is anticipated in June. The scrambling of selected cable television programming is also under court review. A U.S. District Court (Wilmington) upheld provisions contained in the 1996 Act requiring the scrambling, or time shifting, of "sexually explicit" cable programming. A temporary stay prohibiting FCC enforcement of these challenged provisions was lifted when the U.S. Supreme Court, in a March 24 decision, upheld the right to enforce the provisions while parties seek further court review. The FCC order implementing the interconnection provisions of the 1996 Act is also under legal challenge. Parts of the order have been stayed pending U.S. Appeals Court review; oral argument was held on January 17. A petition seeking U.S. Supreme Court review to overturn the stay was denied. BACKGROUND AND ANALYSIS The Need for Regulatory Reform The melding of telecommunications, video, and computers is having an impact on the telecommunications industry structure, as traditional telecommunications providers such as telephone and cable television companies expand their capabilities to become more generic multi-faceted "information providers." Digital technologies make it possible to distribute voice, data, and video on the same communications channel. Combined with new alternative telecommunications delivery systems, competition is developing in many markets previously considered to be monopolistic. Telecommunica¬ tions market structures are responding through cable industry consolidations, telephone/cable alliances, wireless telecommunications mergers, and a variety of joint ventures. This has created new and hybrid services and service providers that do not fit into traditional regulatory categories. Although the pace at which these trends develop is CRS-1 * IB95067 04-16-97 debatable, many observers believe they are inevitable. There is widespread agreement that much of our existing telecommunications regulatory policy is based on assumptions that are becoming obsolete — a classification system that treats the cable, broadcast, and telephone industries separately and a regulatory structure that largely precludes competition. This changing environment has brought pressure on policymakers to establish a new regulatory framework. While many agree that the existing regulatory structure needs revision, forming a consensus on how to create a new regulatory environment that acknowledges and fosters these competitive developments while protecting the public interest proved to be difficult. Congressional efforts to pass comprehensive telecommunications policy reform measures have had a long history culminating in the February 1st passage of the conference report on S. 652, the "Telecommunications Act of 1996." The signing of this measure by the President on February 8, 1996 (P.L.104- 104), resulted in the first major rewrite of the 1934 Communications Act in 60 years. The 1996 Act is an omnibus telecommunications reform measure that contains among its principle goals the opening up of telecommunications markets to competition through the removal of regulatory barriers. Two such barriers that were addressed are: 1982 consent decree line-of-business restrictions placed on the Bell operating companies, and telephone/cable crossownership restrictions. Modification of the 1982 AT&T Consent Decree The 1984 AT&T divestiture of the integrated Bell System occurred as the result of a negotiated settlement reached between AT&T and the U.S. Justice Department (DOJ) to settle a pending antitrust suit. The detailed structural and behavioral provisions to implement this settlement are contained in a 1982 divestiture accord, or consent decree, known as the Modification of Final Judgment, or MFJ. Included among the MFJ’s provisions were those that not only required divestiture of the 22 Bell operating companies (BOCs) by AT&T, but also imposed line-of-business restrictions on the BOCs. The post-divestiture BOCs, which were reconfigured along geographic lines into seven regional holding companies (RBOCs), were prohibited from entering the following three major lines of business: the manufacture of telecommuni¬ cations products, including customer premises equipment; the provision of information services; and the provision of inter-LATA or long distance services. Since the MFJ’s implementation, the BOCs continued to seek relief from the MFJ’s line of business restrictions. One of the three core line-of-business restrictions, the prohibition on BOC provision of information services, was removed through court challenge. Furthermore, U.S. district court judge Harold Greene, the judge who presided over the decree, granted numerous limited waivers (for selected purposes) under a procedure outlined in the MFJ. However, restrictions relating to the manufac¬ ture of telecommunications equipment and most interLATA services for landline customers remained in effect. On July 6, 1994, a number of the RBOCs filed a motion petitioning Judge Greene to vacate the MFJ on the grounds that it has been rendered obsolete. Many parties, including the long distance carriers, however, opposed this request. However, before Judge Greene ruled on this petition the Telecommunications Act of 1996 was enacted into law (P.L. 104-104). CRS-2 IB95067 04-16-97 The enactment of the Telecommunications Act of 1996 transfers most of the court’s oversight to the FCC and Judge Greene has stated that most if not all pending motions regarding the decree "have been rendered moot." On February 28, the DOJ and all seven RBOCs formally asked the U.S. district court in Washington to terminate the 1982 AT&T consent decree and on April 11, 1996, Judge Greene formally terminated the decree retroactive to February 8 — the date President Clinton signed the 1996 Act into law. Furthermore, the Act removes the two remaining line-of-business restrictions by permitting the BOCs, under certain terms and conditions, to manufacture equipment and enter the interLATA market. (See provisions discussed below.) Telephone/Cable Crossownership The changing market structure, and a series of federal court rulings that declared unconstitutional existing prohibitions on telephone company provision of video programming, placed pressure on policymakers to reassess the regulatory structure defining the telephone/cable relationship. In light of these and other events the restrictions on telephone company provision of video services were crumbling. Consequently policies that restricted telephone company participation in the video marketplace were reassessed by Congress in its rewrite of the telecommunications law. The Telecommunications Act of 1996 contains extensive provisions addressing the telephone/cable relationship and calls for the establishment of a new regulatory framework to address these issues. This framework provides for 4 different options for telephone company provision of video services: as an "open video system operator"; as a common carrier; as a traditional cable system operator; or as a "wireless" cable operator. There were two major sources of federal restrictions to telephone company entrance into cable television, both of which were addressed in the Telecommunications Act of 1996: provisions in the Cable Communications Policy Act of 1984 (P.L. 98-549); and the 1982 AT&T Consent Decree, or MFJ. The former applied to all exchange (local) telephone companies, the latter applied solely to the 22 exchange telephone companies that comprise the Bell System. The Cable Communications Policy Act of 1984. Section 613(b) of the 1984 Cable Act codified rules on telephone/cable crossownership implemented in 1970 by the Federal Communications Commission (FCC). These restrictions generally prohibited exchange telephone companies from providing video programming over their own systems, either directly or through an affiliate, to subscribers within their telephone service areas. However, while the law remained enforce, the FCC in 1992 did modify its rules to permit, but not require, local telephone companies to provide "video dialtone." Video dialtone, as conceived by the FCC, was an extension of the "carrier/user" relationship found in the dialtone concept presently offered for voice (telephone) service. Local telephone companies would provide the access highway so others could transmit a wide variety of video, as well as any future advanced telecommunications services, to their subscribers. There were numerous commercial video dialtone appli¬ cations filed at the FCC, a number of which have been approved to date. The Nation’s first commercially available video dialtone service, is being offered by Bell Atlantic in Dover Township, NJ. This 1992 FCC ruling, did loosen crossownership policies, however, the FCC does not have the power to repeal strictures embedded in law. CRS-3 . IB95067 04-16-97 In anticipation of increasing competition in the provision of voice and video services, telephone companies sought to move beyond the FCC’s video dialtone modifications to gain the right to control the content of the programming offered over their networks. The RBOCs and the other exchange telephone companies filed suits in federal court directly challenging the legality of the 1984 Cable Act’s ban on telephone company provision of video programming within their telephone service territories. All have found in the telephone companies’ favor stating that the statutory provision barring telephone companies from providing video programming directly to their telephone subscribers is unconstitutional. The U.S. Supreme Court has agreed to hear the case, however, the Justice Department filed a brief with the court claiming that the passage of the 1996 Act has rendered the case moot. Bell Atlantic, one of the RBOC’s, contested this claim, stating that this is not the case. However, the U.S. Supreme Court, in a February 27 decision, vacated and remanded the case to the U.S. Court of Appeals to consider the question of whether the passage of the 1996 Act renders this case moot. In light of the earlier court rulings, the FCC announced that, pending the outcome of any appeals, it would no longer enforce, for those telephone companies covered by those cases, the telephone/cable crossownership provisions contained in the Communica¬ tions Act that prohibit a telephone company from providing cable television service within its telephone service area. In response to that decision a number of telephone companies abandoned their plans to enter the video market through the video dialtone model and instead have entered the market as traditional cable television providers. The 1996 Act repeals the statutory ban contained in the 1984 Cable Act that prohibits telephone companies from providing video programming in their telephone service areas. It also terminates the FCC’s video dialtone rules and replaces them with a newly designed "open video system" option. Already authorized video dialtone systems (i.e., Bell Atlantic’s Dover, NJ system) are grandfathered; the FCC has determined that effective November 6, 1996, video dialtone operators have four options for continuing to provide service, as wireless cable, as a common carrier video provider, as a cable system, or as an open video system. (See provisions, below.) 1982 AT&T Consent Decree. In addition to the 1984 Cable Act’s crossownership restrictions, the BOCs were precluded from offering cable television service as the result of the MFJ’s interLATA restrictions. These limited BOC participation in cable service by: preventing the ownership and control of the satellite link needed to send and receive programming; and requiring a cable franchise service territory to correspond to the existing BOC telephone service territory. Therefore, even in the absence of the telephone/cable crossownership restrictions contained in the 1984 Cable Act, the BOCs remained subject to MFJ interLATA restrictions that constrained their full participation as video providers. However, the MFJ allows a BOC to petition for a waiver from these restrictions. Although obtaining a court-approved waiver can be a lengthy process, the RBOCs have used this process with significant success. A number of BOCs have received such waivers in conjunction with the purchase of cable systems outside of their telephone service territories. More importantly, in a March 16, 1995 decision, Judge Greene granted two RBOCs, Bell Atlantic and Pacific Telesis, requested waivers to permit them to carry video signals beyond their local calling areas, or LATAs. While Judge Greene did establish some restrictions in connection with these waivers, such as a separate CRS-4 IB95067 04-16-97 subsidiary requirement, these rulings further open the door for RBOC participation in video services. Since that decision similar waivers have been granted to the remaining five RBOCs. As previously mentioned, however, the enactment of the 1996 Act removes under certain terms and conditions, the interLATA line-of-business restriction. More importantly, the Act permits a BOC to provide incidental long distance services immediately upon enactment. Included among the definition of incidental services are those services related to the provision of cable television. Congressional Action -- 104th Congress The February 1 passage of the conference report on S. 652, the "Telecommunica¬ tions Act of 1996" represents the culmination of almost 20 years of congressional efforts to pass major legislation to reform the nation’s telecommunications regulatory structure. A detailed account of legislative action in the 104th Congress follows, below. Senate Action After circulation of a number of discussion drafts and holding of a series of hearings the Senate Commerce Committee passed (17-2) a draft telecommunications measure to rewrite existing telecommunications law. The measure was subsequently reported out as original bill S. 652 on March 30. S. 652 is a comprehensive telecommu¬ nications measure that would modify provisions in, and transfer control over, the MFJ, and set new ground rules for the entrance of competition in telecommunications markets. The overall focus of the bill is to preserve and redefine universal service goals, enhance competition through the removal and/or modification of existing laws and regulatory restrictions, establish a level playing field for competitors, ensure access to consumers and suppliers, and protect consumers from potential abuses. Although there was support regarding the overall focus and objectives in the bill controversy over selected provisions remained. This coupled with time limitations thwarted attempts to move S. 652 to the Senate floor before the spring recess. Although the measure was considered less regulatory than last year’s Senate bill, reflecting a bipartisan effort, some still expressed concerns that the measure was "too regulatory". On the other hand, other Members expressed concerns that some aspects of the bill were too deregulatory, citing in particular, the provisions relaxing cable rate regulation and the lack of DOJ analysis. The Senate Antitrust Subcommittee held hearings on May 3 to examine selected provisions. Much of the hearing focused on concerns over the need for an increased DOJ role in evaluating whether local markets are sufficiently open to competition to permit BOC entrance into long distance and the lack of provisions against in-region cable-telco mergers. Senate floor debate commenced on June 7. After a week of debate, the Senate, on June 15, passed (81-18) an amended version of S. 652. Administration officials, while supporting the overall objective of telecommunica¬ tions policy reform, voiced concern that the bill, as introduced, "could lead to large and CRS-5 IB95067 04-16-97 unnecessary increases in cable and telephone rates." Included among the major concerns cited by the Administration with regard to S. 652 prior to floor consideration were: the lack of DOJ review of BOC entry into the long distance market; the lack of restraints on cable-telco buyouts and joint ventures within the same service area (i.e., anti-buyout restrictions); the weakening of present cable rate regulations; and shortcomings contained in the decency provisions. Although the Administration stated that floor amendments incorporated into the Senate-passed S. 652, such as anti-buyout provisions, resulted in "important improvements" it appeared that further improvements were needed before Administration support was forthcoming. House Action House efforts to legislate a new regulatory policy for the telecommunications industry were centered in the House Commerce and Judiciary Committees. On May 3 the Commerce Committee introduced H.R. 1555, a broad-based telecommunications regulatory reform measure, which is similar in scope to S. 652. As in the case of S. 652, the Administration found fault with selected provisions contained in H.R. 1555, particularly its absence of DOJ participation and its inclusion of cable deregulation provisions. On May 2 the Judiciary Committee introduced H.R. 1528, a more targeted measure than H.R. 1555 in that largely dealt with antitrust issues relating to telecommunications regulatory reform through the modification of the terms and conditions in the MFJ. The measure also contained provisions relating to BOC participation in electronic publishing, alarm services, and incidental long distance services. The approach taken in H.R. 1528 was more in keeping with the Administration’s concerns, in that it provided a major role for DOJ review before a BOC can enter into presently restricted markets. Although the DOJ supported that aspect of H.R. 1528, it expressed concern over other aspects of the measure such as the market entry test. Judiciary Committee hearings focusing on antitrust issues were held on May 9 and the committee passed (29-1) an amended version of H.R. 1528 on May 18; the committee report (H.Rept. 104-203, part I) was filed on July 24. The Judiciary Committee, while keeping the basic framework of the measure intact, revised the antitrust standard contained in the bill making it more difficult for BOC entry into presently restricted markets. A series of hearings on H.R. 1555 were held by the Telecommunications Subcommittee on May 10-12, and the subcommittee agreed by voice vote to send the amended version of H.R. 1555 to the full committee on May 17. The vehicle for the subcommittee markup was a revised version of H.R. 1555 offered by subcommittee Chairman Fields that contained a number of modifications largely focusing on terms and conditions of entrance into the long distance market. Twelve amendments were added to the revised version prior to voice passage. The House Commerce Committee completed its markup of H.R. 1555 on May 25, passing the measure, with amendment, by a vote of 38-5. The committee report (H.Rept. 104-204, Part I) was filed on July 24. However, in response to a request from the House leadership to make the bill "more deregulatory," the measure underwent additional modification. House Commerce Committee Chairman Bliley approved the incorporation of a lengthy en bloc amendment containing more than 40 modifications to H.R. 1555. Some of the more controversial of these changes addressed the terms and conditions for BOC entry into long distance. CRS-6 _ IB95067 04-16-97 Included among these were those that: provide for a consultative role for the DOJ for BOC entrance into long distance and manufacturing; reduce the BOC long distance separate subsidiary requirement from 3 years to 18 months from authorization; reduce the timetable for the FCC to implement its rules for the competitive checklist, and subsequently the time frame for BOC petitions to enter the long distance market, from 18 months to 6 months (provisions regarding interim interLATA authority are deleted); modify the resale provisions to require a BOC to offer such services at "wholesale rates" instead of "economically feasible rates" to the reseller (wholesale rates are defined as retail less marketing, billing, collection and all other avoided costs); and modify the facilities based competitor provision, including removal of the phrase "telephone exchange service that is comparable in price, features, and scope". The RBOCs have expressed their support for these changes. The long distance industry strongly opposed them and, based on the incorporation of these changes, withdrew its support for H.R. 1555. Additional changes in the amendment include those that: require a BOC to establish a separate subsidiary for the manufacturing of equipment for the first 18 months and condition such entrance on the establishment of local competition throughout their service territories; exempt from the joint marketing provision all carriers which have in the aggregate less than 2 % of the access lines nationwide; lower the cable rate complaint threshold for FCC review from 5% of subscribers in a franchise area to 3%; and establish a Telecommunications Development Fund to provide access to capital for small businesses to enhance competition in the telecommunications industry. H.R. 1555 was the vehicle for House floor action on telecommunications reform and the House passed (305-117) the measure, as amended, on August 4. In addition to the above amendments that were passed en bloc as a "manager’s amendment" to H.R. 1555, five of seven additional amendments brought to the floor were also adopted. These five amendments dealt with: broadcast concentration and ownership; local government control over rights-of-way; obscenity and indecent material on computer networks; and amendments dealing with violence on television. Additional amendments dealing with cable rate and services regulation, and strengthening the role of the DOJ did not pass. The Administration expressed dissatisfaction with H.R. 1555 prior to its consideration on the House floor, threatening a possible veto if changes were not made. Although the Administration was pleased with the addition of an amendment dealing with media (i.e., television) ownership and television violence (V-chip), the Administra¬ tion continued to oppose the bill as passed by the House. In response to a request by Senator Hollings, President Clinton sent a letter enumerating "specific issues of concern" regarding pending telecommunications legislation. The concerns enumerated included: the need for a "test specifically designed to ensure that the Bell companies entering into long distance markets will not impede competition;" the absence of a "meaningful role for the DOJ in safeguarding competition before local telephone companies enter new markets;" premature deregulation of cable programming services and equipment rates, i.e., "before cable operators face real competition;" insufficient restraints, (i.e./'overly broad provisions") regarding in-region telco/cable buyouts; and consolidation of media ownership nationwide and in individual markets. President Clinton did, however, express support CRS-7 IB95067 04-16-97 for V-chip provisions as well as provisions contained in S. 652 giving preferential rates to schools, libraries and hospitals. Conference and Floor Action A total of 45 conferees, many only considering selected provisions, were appointed to reconcile differences between the two measures. The conference commenced on October 25. (A detailed side-by-side comparison of the provisions contained in these measures can be found in: U.S. Library of Congress. Congressional Research Service. Telecommunications Reform: Comparison of S. 652 and H.R. 1555 (104th Congress). CRS Report 95-1100 E, by Angele A. Gilroy and James K. Needles. Washington, 1995. 82 p.) In light of the Administration’s veto threat discussions were held with the White House and principal conferees on December 20. At the end of that meeting the White House announced that it could support the legislation as agreed to at that meeting. Some members expressed concern over the provisions agreed to with the Administration and the legislation appeared stalled. However, objections were over come and the conference committee filed the report on January 31. The House Rules Committee waived the 3-day rule providing an opportunity for consideration prior to the February recess. Both chambers considered the measure simultaneously on February 1. The House approved the measure 414-16 and the Senate followed shortly thereafter approving the measure 91-5. The President signed the measure into law (P.L. 104-104) on February 8, 1996. Since passage of the 1996 Act, activity in the 104th Congress focused on monitoring FCC efforts to implement the numerous rulemakings required in the 1996 Act, as well as general oversight of the agency. (For an update of FCC actions to implement the Act see the FCC’s web site http://www.fcc.gov). The Senate Commerce Committee held FCC oversight hearings on June 18 to examine FCC implementation of the 1996 Act. Similarly, the House Telecommunications Subcommittee held hearings on July 18, with the same focus. The Senate Judiciary Committee held a hearing on September 11 to review proposed telecommunications mergers in light of the changing regulatory and competitive environment. On August 2, Representatives Fields and Dingell introduced H.R. 3957, the FCC Modernization Act, a measure to reduce "unnecessary" regulation and streamline FCC operations. The House Telecommunications Subcommittee passed an amended version of the measure, by voice vote, on September 12. Included among the provisions added during markup were those that: prohibit FCC authority over "the content or other regulation of the Internet or other interactive computer services"; and give the FCC flexibility regarding foreign ownership by requiring the FCC to use a "public interest" standard when addressing foreign company ownership of a broadcast or common carrier (i.e., telephone company) radio license. The 104th Congress adjourned with no further action taken on the measure. Congressional Action - 105th Congress Activity in the 105th Congress has focused on oversight of FCC actions to implement the provisions contained in the 1996 Act. The Senate Commerce Committee held oversight hearings on March 12 to examine FCC implementation of the universal CRS-8 _ IB95067 04-16-97 service goals of the 1996 Act and access charge reform. Universal service issues were explored further in hearings held on March 19 by the Senate Communications Subcommittee. The Senate Commerce Committee also held hearings, on April 10, to examine competition in the video marketplace and cable television rates since the Act’s passage. Additional hearings by both chambers are anticipated as Members of Congress attempt to ensure that the goals of the 1996 Act are realized. (This issue brief is confined to the provisions contained in the 1996 Act relating to the regulation of the telecommunications sector. Congressional activity relating to other provisions such as V-chip, the television rating system, broadcasting, and indecency are beyond the scope of this issue brief.) The Telecommunications Act of 1996 Passage of the Telecommunications Act of 1996 (P.L. 104-104) represents the first major rewrite of our nation’s telecommunications policy since the passage of the 1934 Communications Act. Although there have been significant additions to the 1934 Act over its 60-year history much of the underlying framework has remained untouched. The 1996 Act redefines and recasts the 1934 Communications Act to address the relationship among the growing list of communications services and service providers. In doing so it establishes a single, comprehensive, blueprint for telecommunications policy which addresses our changing telecommunications/information environment. The 1996 Act attempts to develop a regulatory framework that will capture the benefits of competition while ensuring that the users and suppliers of a developing and diversified information industry will be protected from exploitative practices and abuse. General Policy Objectives The general policy objective of the 1996 Act is to open up markets to competition by removing unnecessary regulatory barriers. Included among the barriers addressed are: restrictions contained in the 1982 AT&T Consent Decree; telephone/cable crossownership restrictions; and broadcast ownership and media concentration restrictions. Removal of such barriers, supporters claim, will permit competition to flourish and ultimately benefit the public interest. Some of the long term benefits most often cited include: increased consumer choice; decreased consumer prices; increased efficiency; technological advances; and increased investment in our developing information infrastructure. Also as these markets transform and the benefits of competition develop it is assumed that the need for government regulation and oversight will diminish. However, while most support the long term goal of deregulation and competitive markets, most feel that some transition is needed to ensure a level playing field or protect consumers. That is, flash cut deregulation to open all markets to competition would not be in the public interest. Therefore, some policy guidelines and requirements were established for a transitional period until certain market conditions are met. It was the development of these transitional mechanisms that generated the most controversy. That is, what one may see as an unnecessary regulation and a barrier to competition, others may feel is a necessary requirement to protect nascent competitors and consumers. CRS-9 - IB95067 04-16-97 While the major policy objective of the 1996 Act is to open up markets to competition and decrease "unnecessary regulation" some members of Congress feel that the Act is too regulatory. They point to the numerous FCC rulemakings that the Act requires as well as the removal of earlier provisions such as those removing foreign ownership restrictions on telecommunications common carriers to support their claim. Perhaps of greater importance is the fact that the Act contains provisions that require new regulations for the television and computer industries. One calls for the rating of television programming and requires the installation of a V - chip inside television sets to permit users to screen out objectionable material such as violence. The other establishes criminal penalties for a variety of offenses over computer networks such as the dissemination of "indecent" material to minors. One of the major sections of the 1996 Act, those provisions dealing with the opening up of, and the interconnection to, the local telephone network by competitors has generated considerable controversy. The FCC in an August 1996 action, released its interconnection order, establishing guidelines to implement provisions dealing with interconnection to the local telephone network. Concern over interpretation of the federal versus the state role in implementing these provisions has resulted in a legal challenge of the FCC’s interconnection order. Numerous parties, including various local exchange carriers and selected state regulatory commissions, challenged these rules stating that the FCC overreached its authority. They petitioned the U.S. Appeals Court for a review and stay of the order. The U.S. Appeals Court, St. Louis, granted a stay of the major pricing provisions contained in the order, subject to court review. A petition filed by the FCC and selected industry representatives, requesting the U.S. Supreme Court to remove the stay imposed by the lower court was denied. As a result those provisions of the FCC order subject to the stay will remain in abeyance until the Appeals court makes its ruling. Oral argument was held before the Appeals Court on January 17, 1997. In addition those such as the American Civil Liberties Union (ACLU) have denounced the Act because its provisions restrict the free flow of certain types of information over the Internet. Provisions that prohibit indecency on the Internet are the subject of court challenge by a broad group of organizations including the ACLU and the American Library Association. The U.S. district court for the eastern district (Philadelphia), in a June 12 decision, declared these provisions unconstitutional, but issued an injunction prohibiting the enforcement of these challenged provisions. (A similar challenge filed in U.S. district court, N.Y.C., came to the same conclusion.) The U.S. Supreme Court, in a December 6, 1996 decision, agreed to review the Philadelphia case, and oral argument was held on March 19; a final decision is anticipated in June. Other provisions that require the scrambling, or time shifting, of "sexually explicit" cable programming channels were also challenged, but were upheld by the U.S. District Court, Wilmington. A temporary stay prohibiting FCC enforcement of these challenged provisions was lifted when the U.S. Supreme Court, in a March 24 decision, refused to grant a temporary injunction against the enforcement of the provisions while parties seek further court review. Some consumers groups also opposed the passage of the Act. The Consumer Federation of America and the Consumers Union issued a joint statement upon the bill’s passage stating that the legislation "does not do enough to stimulate competition.” They expressed concern over various provisions which they feel will lead to massive CRS-10 ' IB95067 04-16-97 mergers, result in cable and telephone rate increases for consumers, and increased concentration. Provisions In general the 1996 Act removes regulatory barriers so that telecommunications providers can enter each others markets. For example, it eliminates, with some requirements, many of the existing restrictions that presently prevent telephone companies and cable companies from competing. Present restrictions that ban telephone companies from providing video services are eliminated. Provisions also permit telephone companies to own cable systems in rural markets. The Act amends the Public Utility holding Company Act (PUHCA) to permit registered holding companies to enter into telecommunications, under certain terms and conditions, through a single purpose subsidiary known as an "exempt telecommunica¬ tions company." The Act removes restrictions that prevent competition in local telephone markets and requires local telephone companies to open up their networks to competitors (e.g., cable companies). Various rules are established to ensure interconnection to the network. The Act also removes the remaining line-of-business restrictions (manufacturing and long distance) imposed on the BOCs as a result of the 1982 Consent Decree. Certain conditions must be met, however, before this occurs. For example, a BOC must establish a separate subsidiary, for 3 years, for in-market long distance, and equipment manufacturing. BOC entrance into the long distance market within its service territory is dependent on the meeting of an extensive check list and the presence of a "facilities- based" competitor. The FCC must determine that the conditions are met and find that such entrance is in the "public interest." The DOJ is given a consultative role in this evaluation, with the FCC required to give "substantial weight" to the DOJ’s evaluation. BOC entrance into manufacturing is dependent on the granting of approval to enter the long distance market. The Act also loosens the regulation of cable system rates, removing most regulation beyond the basic tier, in 3 years, and immediately for small cable systems. Provisions also require the FCC to redefine universal service objectives to address the growing needs of the information age and ensure that we do not develop into a nation of information haves and have-nots. Special consideration is also established for the needs of schools, libraries, and rural health care providers. Broadcast station ownership limits are loosened and license renewal terms are modified and extended to 8 years. The Act requires television manufacturers to build in a V-chip to enable users to block out objectionable (e.g., violent or indecent) programming. The use of the chip is dependent on the establishment of a ratings system for programming. The industry is given 1 year to develop such a rating system. If this does not occur or it is deemed unacceptable, it falls to the FCC. CRS-11 - IB95067 04-16-97 The Act makes it a federal crime to intentionally distribute indecent material to minors over a computer network. The constitutionality of these provisions is presently under court challenge; enforcement of this section of the Act is under a temporary restraining order. (For a detailed listing of the provisions contained in the Telecommunications Act of 1996, see: Telecommunications Highlights. Congressional Quarterly weekly report, v. 54, February 17, 1996, pp. 406-420.) 104th Congress Legislation P.L. 104-104 Provides for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening up all telecommuni¬ cations markets to competition, and for other purposes. Reported (S.Rept. 104-23) as an original bill by Committee on Commerce March 30, 1995. Hearings held May 3 by Senate Judiciary Antitrust Subcommittee. Passed (81-18) Senate, as amended, June 15, 1995. Conference report, H.Rept. 104-458, filed January 31, 1996. Passed House (414- 16) February 1, 1996. Passed Senate (91-5) February 1, 1996. Signed into law February 8, 1996. FOR ADDITIONAL READING CRS Issue Brief CRS Issue Brief 95051. The national information infrastructure: The federal role , by Glenn McLoughlin. (Updated regularly) CRS Reports CRS Report 96-74 SPR. Advanced television: Radio frequency spectrum issues , by Richard M. Nunno. CRS Report 94-510 E. The American Telephone & Telegraph Company divestiture: Background , provisions, and restructuring , by Angele A. Gilroy. CRS Report 96-793 E. Broadcast Ownership Provisions Under the Telecommunications Act of 1996 and the Station Trading Market , by Bernevia M. McCalip and James R. Riehl. CRS Report 96-535 SPR. The Federal Communications Commission: What Role for the Future?, by Angele A. Gilroy and Marcia S. Smith. CRS Report 96-321 A. The Communications Decency Act of 1996, by Henry Cohen. CRS Report 95-53 SPR. The information superhighway: Status and congressional issues, by Marcia S. Smith and Glenn J. McLoughlin. CRS-12 IB95067 04-16-97 CRS Report 95-804 A. Obscenity: Constitutional principles and federal statutes, by Henry Cohen. CRS Report 96-223 SPR. The Telecommunications Act of 1996 (P.L. 104-104), by Angele A. Gilroy. CRS Report 95-1100 E. Telecommunications reform: Comparison of S. 652 and H.R. 1555 (104th Congress), by Angele A. Gilroy and James K. Needles. CRS Report 97-43 SPR. V-chip and TV ratings: Helping parents supervise their children’s television viewing, by Marcia S. Smith. CRS-13