Mr. Chairman and Members of the Subcommittee. Thank you for this opportunity to testify on implementation of the Telecommunications Act of 1996.
The message of the Telecommunications Act is that we are now committed to competition in all communications markets. Significantly, the Telecommunications Act also affirms the core principle of the Communications Act of 1934 -- that the FCC has an obligation to exercise its authority in furtherance of "the public interest, convenience and necessity." Implementation of the Act in a procompetitive and timely fashion is the FCC's principal task.
We have allocated our resources to address the deadlines that Congress established for us. I am pleased to report that as of this date we have succeeded in our "meet or beat" policy for each of the 29 statutory deadlines we have faced thus far, thanks in large measure to an extraordinarily hardworking staff.
While the Telecommunications Act charts a path to competition in all communications markets, the FCC and the states together have to write the procompetitive rules that will make the new law's promise of new investment, job growth, lower prices, and better service for consumers come true. We are burning the midnight oil to get those rules written. As former Representative and Member of this Subcommittee Tom Tauke observed last week, "[i]f the rest of the country had an opportunity to see how some of the people over [at the FCC] work, it would certainly challenge the average American's view of Washington bureaucrats."
Telecommunications Act Implementation Update
Implementation of the Telecommunications Act in a procompetitive and timely fashion is a prodigious analytical and factfinding undertaking. It is highly resource intensive. AT&T Corp. Chairman Bob Allen declared last month that AT&T has not sent its lawyers on vacation and is "already bird-dogging the FCC and the state regulatory commissions." The halls at the FCC do threaten to buckle under the weight of the advocates pressing their arguments about the meaning of the new law. Congress acknowledged the burdens we face when in the recently-enacted Contract With America Advancement Act of 1996 it exempted rules promulgated under the Telecommunications Act from the delays associated with congressional review of agency rulemaking provisions.
Even as Congress worked very hard to fine tune the language of the Act in advance of its enactment on February 8, 1996, the FCC worked on a self-imposed plan to restructure our personnel resources to deal with the task we knew would lie ahead. A delicate balance had to be reached to assure that our ongoing responsibilities would continue to be carried out during this period. We have hired talented attorneys and economists, on a temporary basis, to ensure that Telecommunications Act statutory deadlines will continue to be met.
We believe our cost-effective implementation plan in general is working. To date, we have taken a number of actions, including the completion of all items required since enactment. We have implemented the Act's cable reform provisions and modified the broadcast ownership rules, repealed video dialtone rules and Section 214 requirements for telephone company provision of video services, adopted initial rules for Open Video Systems and telephone number portability, relaxed the regulatory treatment for Bell Operating Companies (BOCs) that provide domestic out-of-region long-distance services, completed action on pending cable Area of Dominant Influence and must carry cases, reduced the filing frequency of ARMIS service quality reports, extended the time period for cable operators to file their annual equipment forms, terminated our inquiry into the imposition of equal access requirements on commercial mobile services (CMRS) providers, eliminated broadcast comparative license renewal procedures and hearings, amended our rules concerning silent broadcast stations, adopted cable television equipment cost aggregation rules, exempted Global Maritime Distress and Safety System-equipped vessels from the requirement to carry a radiotelegraph, adopted rules enabling manufacturers to self-authorize personal computer equipment, initiated an inquiry on identifying and eliminating market entry barriers for small businesses, adopted rules to implement the pay-per-call provisions of the 1996 Act, and formed the Telecommunications and Health Care Advisory Committee, which held its second meeting last week.
We have commenced rulemakings on interconnection requirements, universal service, the dispute resolution process for standards for telecommunications equipment, cable scrambling, preempting non-federal regulations that impair the use of over-the-air reception devices, extending broadcast license terms to eight years, deregulating large cargo and small passenger ship radio inspections, permitting unlicensed operation of domestic ship and aircraft radios, utility company entry into telecommunications markets, customer proprietary network information standards, and the Telecommunications Act's pay telephone provisions.
We have transferred over $5.9 million in interest from spectrum auction upfront payments to the Telecommunications Development Fund and appointed the Fund's Interim Chairman of the Board of Directors. We have granted the first eleven applications under the Act to allow public utility holding companies to enter telecommunications markets, and have announced that pursuant to the new Act cable programming service tier rate complaints are to be filed with local franchising authorities, rather than with the FCC.
We have undertaken a number of measures to speed the authorization of service, including asking for suggestions on forbearance; deleting certain FCC rules concerning consolidation, acquisition, or control of telephone companies; delegating the disposition of Instructional Television Fixed Service applications to the FCC's staff; expediting applications filed by silent broadcast stations; streamlining amateur radio examination procedures; and eliminating the 30-day public notice requirement for private microwave license applicants.
To facilitate participation in the implementation process by state and local governments, industry, and the public, we have held several forums on interconnection (including an economics forum on interconnection issues with top economists and the FCC's Chief Economist), on issues of particular concern to state and local governments, and on how to use the Internet to access information and communicate with the FCC. Prior to the release of our Notice of Proposed Rulemaking (NPRM) implementing the local competition provisions of Section 251 of the Act, FCC staff held numerous discussions with the BOCs, interexchange carriers (IXCs), new and prospective entrants, state commission staff, cable operators, consumer advocates, and other parties. Earlier this month we met jointly with the Department of Justice (DOJ) and the states to prepare for the anticipated wave of BOC applications for in-region long-distance. Last week we held a public forum to air views of industry and consumer groups on Section 271 implementation issues. Next Tuesday we will hold another economics forum on antitrust and economic issues involved in BOC interLATA entry. The Federal-State Joint Board on universal service has held three meetings. To monitor the outpouring of implementation-related items we have published a Telecommunications Act implementation schedule and reformatted the FCC's Daily Digest to assist the public in accessing such items. Attached for the record is a complete report on Telecommunications Act implementation (see Attachment).
The Telecommunications Act has added to our ongoing workload as well. The new law, for example, has unleashed a wave of communications media deals. The well-publicized mergers of Westinghouse/CBS and Disney/Cap Cities occurred in anticipation of passage of the Telecommunications Act. Since enactment of the new law, we have seen merger announcements by US West and Continental Cablevision, SBC and Pacific Telesis Group, Bell Atlantic and NYNEX, Westinghouse/CBS and Infinity Broadcasting, and others requiring FCC review.
The Telecommunications Act has also lit an explosion of broadcast station transactions. Since January 1, 1996, for example, our Mass Media Bureau has acted on over 2,100 assignment and transfer applications, an increase of 42% over the same period last year. Radio Business Report estimates that $10 billion in radio transactions alone have occurred since February 8, as compared with $5.6 billion worth of activity for all of 1995. Despite the increased volume, we have maintained our application speed of disposal goals.
We have also been inundated with inquiries and requests for information about the Telecommunications Act and its implementation from consumers, the media, and industry. To date, there have been more than 31,455 visits to our Internet information pages on the Telecommunications Act. Our implementation schedule alone has received over 5,130 hits, while our NPRM on interconnection requirements alone has received over 4,000 hits. Our Learnet page, which provides information on FCC proceedings that impact education, has received over 3,250 hits since it was launched. As the communications landscape becomes increasingly competitive, it is imperative that we review thoroughly and expeditiously regulated transactions, review required filings, and transmit our decisions and rulemaking proposals to a public that deserves timely access to information.
When the Telecommunications Act was passed I observed that the workload the bill would generate would require a huge commitment by FCC personnel and would stretch our resources to their limit. I also pledged a maximum effort by our employees. I stand by that pledge, which is backed by the early success of the implementation effort now well underway. Make no mistake about it, however, implementation of the Act has a significant resource impact on the FCC. The Congressional Budget Office estimated the legislation would cost $62 million for the FCC to implement over the next five years. Congress itself anticipated this impact in Section 710(a) of the Act, which authorizes appropriations for the FCC of such amounts as may be necessary to carry out these new responsibilities. I am gratified that the Appropriations Conference Committee agreed upon an increase in the FCC's FY 1996 level to $185.6 million, which is $10 million above the level we had been operating at previously. We are most appreciative.
As the Conference Agreement directs, the additional resources will cover costs associated with implementation of the Telecommunications Act. To meet the numerous short term deadlines required by the Act and while we transition to a competitive environment, it is necessary for the FCC to hire additional employees. These are one-year term appointments renewable up to four years. These term employees will work solely on implementation of the Act. Other items that will be funded include: additional funding to extend the hours of air conditioning/heating for the employees who are working overtime; contracts for clerical and paralegal temporary service workers to assist Telecommunications Act work production; and contracts for various studies and technical analyses on various aspects of Telecommunications Act implementation. We also have state personnel who "moved in" to work with our staff on multiple implementation items, including our local competition/Section 251 rulemaking and our universal service proceeding. We have also used the implementation resources Congress provided us to send our staff to regional meetings of the National Association of Regulatory Utility Commissioners and to bring state staff and commissioners to Washington for face-to-face discussions. These meetings provided important opportunities for our staff to meet with state staff who may be unable to visit the FCC.
Upcoming Fiscal Year
Last week, the House Appropriations Committee adopted an FCC appropriation of $185.6 million for FY 1997, a straight-line continuation of our current budget. Significantly, the Committee declined to provide any funding related to the cost of relocating the FCC headquarters into consolidated new office space at the Portals complex in Southwest Washington (for which $19 million was requested for FY 1997). Further, the FCC would be required to absorb $4.5 million in uncontrollable cost increases (e.g., inflationary increases in compensation and benefits, existing office space rental, mail, telephone costs, etc.) at current funding levels.
The proposed FY 1997 funding level simply does not provide adequate resources to reprogram the necessary funds to cover the costs of relocating the headquarters facility to its new location. Our dilemma is illustrated by the letter we received from the General Services Administration on July 8, 1996 requesting a Reimbursable Work Authorization in the amount of $7.5 million, of which $400,000 is due immediately, with the remainder due no later than the beginning of FY 1997. The FCC has no funds to provide for these and the other lease-mandated costs that would accrue this year and in subsequent fiscal years, including a rent increase for the Portals of $8.5 million per year above the amount we currently pay for the space we occupy.
Under the current circumstances, the FCC must seriously examine the dire possibility of ceasing any further participation in the project that entails expending FCC funds or committing the FCC to future expenditures. We see tangible benefits in consolidating our functions into one building (including the benefits of increased employee productivity, better service to the public, elimination of duplicative functions at numerous buildings, and enhanced security for FCC employees). We are committed to moving to the Portals. We think it would be good for the FCC and for the city. We are prepared to continue the process of effecting the move when Congress commits to providing the necessary funding or GSA comes up with an alternative method of funding. In that regard, I note that the Administration's proposal to increase FCC regulatory fees to cover the operations of the FCC would allow the relocation of the FCC to the Portals without an increase in Budget Authority over the FY 1996 level. But we cannot spend planning money we do not have. So what would you have us do?
The range of communications issues the FCC must address this year is not limited to implementation of the Telecommunications Act. We continue, for example, to work on the related proceedings that will be necessary to prepare for the eventual assignment of licenses for Advanced Television Services. We are also working to identify and address the needs of public safety spectrum users; to adopt rules for new subscription-based services and to carry out spectrum auctions; to continue to promote greater spectrum flexibility for CMRS licensees; to determine under what conditions non-U.S. satellite service providers should be permitted to serve the U.S. domestic market; to adopt service rules for satellite digital audio radio services; and to identify new spectrum and rule changes necessary to provide business opportunities for development of new unlicensed services, such as high-speed wireless access to the Internet.
We also remain committed to reducing regulatory burdens and continuing to make it easier to obtain authorizations of service. In February, for example, we issued a Notice of Inquiry seeking comment on how to further streamline our operations and improve our delivery of services; on how to reduce the burden of EEO reporting compliance on small broadcasters; on how our policies and rules governing interstate, domestic, and interexchange telecommunications services should be changed, consistent with the Telecommunications Act, to provide for a procompetitive, deregulatory national policy framework; on how to simplify and reduce common carrier reporting requirements; and on how to expedite even more the authorization process for personal computers and peripherals. In March, just six weeks after you gave us the authority, we exercised for the first time, the forbearance authority granted us by the Telecommunications Act, and proposed that non-dominant IXCs should no longer file tariffs. Absent the tariff requirement, long distance companies will be free to change prices or offer new services without first filing with the FCC. In May, in another exercise of Telecommunications Act-granted authority, we authorized manufacturers to self-authorize personal computer equipment based on tests conducted by private sector laboratories. The computer industry estimates that self-authorization will provide a savings of $250 million annually and will reduce the number of equipment authorizations from 7,500 to 3,500 annually. Last month, we issued new rules permitting cable operators to aggregate equipment and installation costs. These rules will simplify and streamline the cable rate regulation process and will facilitate development of broadband two-way infrastructure by allowing consumers to take advantage of technological advancements much quicker than they would otherwise. Last week, we approved the start of digital wireless cable services, an action that will further accelerate the ascent of wireless cable as a robust alternative to wired cable service.
We have also substantially improved our methods for processing and distributing information. We have already invited parties to file copies of their comments on diskette in major proceedings. This allowed us to have 100 percent of the initial comments filed on diskette in the Interconnection proceeding available online within one day of the end of the comment period. This meant that parties outside the Beltway could immediately have access to these comments with the same speed as a Washington lobbyist -- and without the expense of paying the FCC's copying contractor. On issues of particular interest to the Internet community, we have opened electronic mailboxes to receive informal comments, although our rules currently prevent us from accepting formal comments via e-mail. To correct that deficiency, last month we announced that we will soon begin a proceeding to eliminate outdated restrictions on electronic comment filing.
Our continued goal is to improve service to industry and the public by eliminating redundancy, reducing waste, privatizing where warranted, consolidating and automating for efficiency, and expanding the use of alternative rulemaking mechanisms. Congress has helped make all of these improvements possible by providing the resources necessary for FCC operations in Fiscal Year 1996.
Demonopolizing the Local Exchange
The Telecommunications Act reflects a bipartisan consensus that deregulating and introducing competition in America's largest monopolized markets offers numerous potential benefits for consumers, business users, communications companies, and the economy as a whole. In a few weeks we will publish rules for interconnection under Section 251 of the Act.
I believe last month's number portability item is a harbinger of the approach we should use for resale, unbundled elements, the pricing of those elements, and termination and transport. On number portability, state representatives were in on the final decisionmaking. The FCC set national uniform principles for how to price interim number portability and who should pay, but we rely on states to make individual decisions about the calculation of costs, the exact manner of cost recovery, and other crucial matters. This approach should work for the major issues in next month's interconnection order.
Our interconnection order will probably also need to provide fail-safe or default options for those states that do not have the resources to go through pricing proceedings by the end of November. These arbitrations will follow from the negotiations now going on. Because the duties imposed by Section 251 on the incumbent telephone companies are unnatural and difficult, it is easy to suppose that the incumbent local telephone companies would have some resistance to volunteering to give their competitors all the advantages that the law, in fact, provides AT&T, MCI, Sprint, and the other new entrants. In addition, no new entrant brings much to these negotiations that any BOC wants. Moreover, the IXCs and the other new entrants are seeking in the interconnection negotiations all the necessities of competing in a business they have for the most part not entered. It is therefore difficult for them to focus their negotiating demands when they do not yet have a meaningful presence in the local exchange market. Finally, AT&T, MCI and Sprint -- the Big Three -- know that the terms and conditions of their own interconnection agreements with the BOCs are highly relevant to any state, DOJ, or FCC consideration of the question of BOC entry into their long distance markets. We should not be surprised if that consideration tends to discourage the Big Three from seeking quick and easy, privately negotiated interconnection arrangements. This week, for example, AT&T and Bell Atlantic asked state regulators in Maryland, New Jersey, Pennsylvania, Virginia, and the District of Columbia to mediate their negotiations on pricing, branding, and interconnection elements of local service competition. Last month, Ameritech sought mediation in its negotiations with AT&T, while MCI asked the State of Illinois to mediate its talks with Ameritech.
At the state and federal level we would welcome the prospect of interconnection arrangements being struck between any of the Big Three and any BOC (or other large incumbent local exchange carrier) without government mediation, arbitration or indirect guidance via our section 251 rules. Surely in the hundreds of paragraphs of these arrangements there are many terms and conditions that cover ground that none of the parties could reasonably expect the state arbitrators or the FCC to write better than the private parties themselves can do. Realistically, however, it appears that the Big Three and the BOCs and other large incumbents will wait for the FCC's interconnection rules before pushing a conclusion of their negotiations. Voluntary agreements involving the Big Three now, of course, could help influence in a mighty way the contents of our decision. In most if not all of the jurisdictions where BOC long distance entry is at issue, however, negotiations will lead to arbitrations for the Big Three, and there may be no voluntary arrangements involving the Big Three any earlier than the very end of the arbitration period. Moreover, in many states by the end of November the arbitrators will in effect have written the rules of interconnection by making crucial decisions about material terms of the arrangements and by translating next month's Section 251 interconnection order into the explicit terms and conditions of the Big Three arrangements. Those arbitrated arrangements or agreements will be the blueprints for competition in the local exchange market, and will be, in effect, the most important words on the topic of competition written by government.
These arbitrations between the Big Three and the BOCs may be the most important factors in 1996 that foretell the prospects of local competition. First, the arrangements between the Big Three and the BOC in each state will have the greatest immediate effect on consumers. Certainly in 1997, MCI, AT&T and Sprint clearly will be the most aggressive, well-financed, brand-name-oriented, mass-marketing-skilled, new entrants that the residential local exchange market is likely to see. Second, it is primarily MCI, AT&T and Sprint whose customers today are the prime targets of the BOCs tomorrow. I think we all agree that MCI, AT&T and Sprint should have objectively fair interconnection arrangements in order to market against any BOC that seeks to enter the long distance market. It intuitively seems fair that these companies should have reciprocal opportunities to compete against each other. And third, the individual terms and conditions of each of the Big Three arrangements will be available by law for copying into the interconnection arrangements of each other or any new entrant. So the Big Three's arrangements will in effect define the so-called level playing field for all competitors. This "most-favored-nation" treatment is dictated by the new law, and it is good policy. "Most-favored nation" treatment gives a new entrant that lacked the resources to fight though an arbitration a fair interconnection arrangement. The alternative would be a "weak get weaker" policy that would be bad for competition.
Along with demonopolizing local telephone markets, one of the Telecommunications Act's great challenges is to reconcile our commitment to competition with our commitment to universal service. In fact, one of the FCC's and the states' toughest challenges is to figure out the relationship between universal service, access charge reform, and interconnection rules.
We can simultaneously promote competition and continue to ensure universal service, but we need to be innovative and develop new tools. Competition blunts many of our tried and true methods of promoting universal service and many of our tried and true methods also blunt competition. This suggests that we will need to have a system of explicit payments that targets the subsidy to the intended beneficiaries. The money to fund these subsidies must be raised, in a competitively neutral way, from all carriers. In this way, we will not create incentives to switch carriers just to avoid funding the subsidy.
Commenters have said existing universal service subsidies are $4 - $20 billion. While it is hard to estimate the size of the universal service pool that will be needed, the truth, as always, likely lies somewhere in the middle, probably around $12 billion for starters. The largest piece of that would likely be for high cost residential rate assistance. With respect to this high cost assistance, we ought to design a system that drives the subsidy levels down over time, through market-driven mechanisms. We can also create a universal service system that assures affordable service to all Americans, including every classroom in every school in the country, every library, and every rural health care facility.
BOC Entry into Long Distance
A third significant challenge under the Telecommunications Act will be the process of letting the BOCs out of the last vestiges of the Modification of Final Judgment and into the interLATA long distance marketplace. This is a reciprocal idea. BOCs get into the long distance markets currently occupied by the Big Three and others, and reciprocally, the long distance companies (and anyone else) get into local exchange. There are two fundamental economic, business, and antitrust problem with this reciprocal deal. First, the BOCs have close to 100 percent market share for residential customers, while no long distance company does. Second, the long distance companies need the BOCs to complete a call, whereas no BOC needs a long distance company to complete a local call. Nor will any BOC need a long distance company as an ally to go into the long distance market.
To demonstrate how the BOCs do not really need anything from AT&T, MCI or Sprint, we see that AT&T had to offer bulk long distance minutes to BellSouth recently for 1.5 cents a minute. The average long distance call goes for about 13 cents a minute. Backing out access that still leaves about 7 cents a minute margin for the retail price. Selling the long distance minute for 1.5 cents a minute wholesale means AT&T has to give up 5.5 cents of margin. That is a pretty good deal BellSouth struck. It could get this deal because there is a great deal of competition in the long distance market, even though consumers would like to see still more. The fact is that BellSouth does not need AT&T; it has other long distance providers to go to. But as of now, AT&T needs BellSouth to get access to the residential consumer in the BellSouth region.
Moreover, as long as the IXCs need to use BOC networks to complete a call, then the BOCs inevitably will be tempted to discriminate against any long distance competitor using the local network to enter the BOC's market. For example, in the event of outage, would a BOC be tempted to repair the network for the benefit of its own customers before taking care of the rival's customers who also suffered from the outage? I am not saying any BOC will succumb to temptation, but simply underscoring where the economic incentives lies. There is an inherent inequality in economic position between the IXCs and the BOCs we must address in order to achieve the reciprocal entry policy laid out by the new law.
We will give substantial weight to DOJ's analysis on the entry issue, as the law requires. The private parties will hang on DOJ's every word. It would be a lot easier for the private sector, the states, and the FCC to use DOJ's very valuable expertise if DOJ's analysis is grounded in specific facts. So everyone should welcome DOJ's statement to the states in Washington two weeks ago that they are looking to the states to help provide them with detailed facts about the local exchange market. Similarly, the states, in analyzing compliance with the Section 271 competitive checklist will be exploring whether the all-important arbitrations with the Big Three create enough actual and potential competition in the local exchange market to justify BOC entry in the long distance market.
At the FCC we are looking for the states to give us a full understanding of what's happening in the relevant markets in each state. We are hoping for a record from the states on all the entry-related issues that is replete with assertions by all parties, rebuttals if any, well supported findings of fact, and any and all conclusions the states wish to provide. This is what we must have in our record at the FCC to withstand judicial review of our entry decision. There is no reason to believe we can make this record better on our own in the limited 90-day period set by the law than any state can do as part of its verification of the checklist. In short, we need the states to be a sort of court of first impression for exploring the issues of BOC entry, including especially the prospects for entry into the BOC markets as a fair reciprocal move by long distance companies seeing their own customers at risk.
In addition to the foregoing, the Telecommunications Act calls upon us to resolve questions other than those specifically relating to demonopolization of the local telephone markets. Here are just a few examples. With respect to Telecommunications Act Section 207 concerning restrictions on over-the-air reception devices, does the Act preempt all local zoning regulations on over-the-air reception devices (including those designed for over-the-air reception of direct broadcast satellite service), or only unreasonable ones? Is the answer to this question affected by Section 205(b) of the Telecommunications Act, which gives the FCC exclusive jurisdiction to regulate the provision of direct-to-home satellite services?
Section 402 of the Telecommunications Act exempts carriers from section 214 requirement for "extensions of lines" but not for "construction." What constitutes an "extension" as opposed to "construction?"
In Section 702 of the Telecommunications act, what does "telecommunications service" mean in the context of the ban on using Customer Proprietary Network Information for purposes other than the telecommunications service from which it was derived?
The Telecommunications Act of 1996 creates a mechanism, whether through agreement or through arbitration, for connecting complex telecommunications networks plug to plug. As we work to write rules implementing the Act's local competition and other provisions, we will continue to be flexible, creative, reasonable, and open. We will also continue to work with our state and local colleagues, the industry, consumers, and this Subcommittee to fulfill the Act's promise of open and competitive markets and the benefits of communications for all Americans.