Remarks of
FCC Commissioner Susan Ness
before the
California Cable Television Association

Anaheim California

November 30, 1994

Going Forward Toward Competition

Thank you for that kind introduction. It is a pleasure again to attend a cable convention, to see the new technology and to have a chance to talk with as many of you as possible about your industry and about your vision for telecommunications. I am looking forward to my tour of the CableNET '94 exhibit this afternoon.

Some of you know me from my prior experience as a media lender. In that role, I lent to both cable companies and programmers, large and small, as well as to other communications companies.

Naturally, I bring to the role of regulator my experience and familiarity with the cable industry. I know that yours is an industry of entrepreneurs willing to take risks. I want to see that spirit preserved. Cable has brought us some of our most innovative educational and public affairs programming. Cable brought us C-Span and 24-hours- a-day news programming -- to name a few.

I've been told that Cable in the Classroom reaches over 35 million students and provides hundreds of hours per month of educational, commercial-free, programming into classrooms. As a mother, I am particularly pleased and impressed with the Critical Viewing Workshops offered by Cable in the Classroom, where students are taught to be critical viewers of television, to analyze and question what they see, rather than to passively accept what is presented.

As a former lender, I understand the practical business needs of your industry -- the need for certainty in the rules, for simple, flexible regulation that you can understand and that your lenders can understand, and for sensitivity to the problems of "one size fits all" regulation.

I have had the opportunity to call upon this experience very recently, as the FCC adopted two decisions that are critical to your industry -- the "going forward" rules and the video dialtone reconsideration order. During our deliberations, I or my staff - - Mary McManus and Jim Casserly -- met several times with your Association and many of its members. I appreciated the detailed information which you presented at our meetings.

Today, I would like to share with you the reasons why I supported these decisions.

First, the two orders must be seen in the larger context -- where telecommunications markets are today and where we are trying to go.

Your industry, like the telephone industry, is preparing to undergo a radical transformation, a transition to a competitive market that promises both opportunity and risk. This year's theme for the Western Cable Show -- "Fasten Your Seatbelts" -- is right on target.

When there is competition -- in both the provision of video programming as well as telephony -- the Commission's role, by statute and by our own design, will be diminished. For now, we want to facilitate robust competition in both of those markets.

But significant obstacles to real, viable competition remain. The removal of barriers to entry at the state level is needed to launch full local exchange competition. Some states, such as New York, have made considerable progress in promoting local competition. I would like to see many more taking that approach and the Commission must do what it can to encourage it.

The Commission's ability to promote full competition is also constrained by the cable/telephone cross-ownership prohibition, notwithstanding a recent series of district court decisions -- and now a Circuit Court ruling -- finding that prohibition to be unconstitutional.

What is the role of the FCC during this tumultuous ride to competition?

"Juggler" may be the closest analogy. Picture five commissioners, up on a stage, trying to keep any number of balls in the air at one time. Our audience is the public. If we slip up, if we drop a ball, the public doesn't get what they came for and what they deserve.

The balls we are juggling are our goals. One such goal is competition. In the course of this transition period, our actions must not impede progress toward full competition. We should not unfairly disadvantage any competitor. And we should not give a regulatory "leg up" to any one player in the market.

We want to encourage investment -- another ball in the air. Both telephone companies and cable companies promise to be significant players in the development of the National Information Infrastructure, the NII. By some estimates, our telecommunications and information sector already represents 12% of our national economy and is growing rapidly. We want our telecommunications systems to be the best in the world, and to reap the benefits of leadership in a global community.

By promoting competition, we will benefit consumers. Competition will bring multiple providers competing for customers based on price, quality, and innovative service choices.

Similarly, increased investment offers the promise that consumers will see improved facilities, both at work and at home, offering services that will contribute to our education, our health, and our leisure.

Any decision the Commission makes must provide the incentives needed to encourage the transition to competition and protect the public interest along that path.

This makes the decisionmaking process one of the most challenging and rewarding parts of a Commissioner's job. In every instance, we start by listening. On these two decisions, in particular, we held countless meetings with industry representatives, cable operators, programmers, telephone companies, state and local regulators and consumer groups. I conducted a "mini-debate" in my office on video dialtone with representatives of NCTA and Bell Atlantic. The point-counterpoint sharpened my understanding of the complex issues in VDT. We're using this technique in other proceedings where we think it will be helpful.

In analyzing the issues presented, it was necessary to keep our eyes on several balls simultaneously: Will our decision enhance competition and encourage investment? Will our rules be overburdensome, confusing? What have we done to protect consumers, to provide them with choice in price and service?

The going forward rules and the video dialtone order represent two critical pieces of the puzzle as the Commission attempts to manage the transition to competition. We made some very difficult decisions in arriving at these results. For video dialtone in particular, many hard decisions lie ahead. We are not giving anyone carte blanche. Our audience won't allow it. But I believe our actions reflect our continuing commitment to promote competition and protect the interests of consumers.

Going Forward

Turning to the decisions themselves, let me start by acknowledging that the delay in issuing our going forward rules created an unacceptable level of uncertainty, for operators and programmers. Many of you have made sure that I know that. It is a fair criticism.

But now the rules are out and I believe they represent not only a workable solution but a better product for the delay, allowing both the industry and the FCC to move on. Let me tell you why.

First, I am convinced that the New Product Tier mirrors the entrepreneurial spirit characteristic of the cable industry. All signs are that Wall Street has voiced its approval as well and that the market is responding positively.

New Product Tiers will give cable operators freedom -- freedom to design innovative programming packages that will attract subscribers and reward operators.

Operators may group popular programming, also offered on their regulated tiers, with brand new program channels to create packages that will be attractive to consumers. For example, "news junkies" may have the option of buying a package of CNN, political talk shows and news programs. Or a New Product Tier may be structured as a tier of "a la carte" offerings, permitting consumers to choose some or all of the services offered, priced at the operator's discretion.

The rules for New Product Tiers are simple to follow.

Because New Product Tiers will be offered side by side with price regulated tiers, and compete with them for the consumer's dollar, market pressure -- not government regulation -- will influence the pricing of New Product Tier offerings.

And consumers will benefit from the additional choices New Product Tiers will provide.

Some companies, such as Discovery, have already announced the rollout of new channels next year. Others will unveil their new offerings at this show. This is precisely the kind of innovative entrepreneurial spirit that, in my experience, this industry has always reflected.

The Commission recognizes that many cable systems lack addressability or have only limited additional capacity. The New Product Tier may be of little value in the near-term for these systems. For that reason, the "going forward" order also provides ample incentive for operators to add new services to invigorate existing regulated tiers.

Some in your industry have objected that this formula does not provide enough incentive. I disagree. And the reason should be as important to you as it is to the Commission: the consumer -- your customers.

In voting on the going forward rules, I was mindful that there will be upward pressure on cable rates every year, from inflation and regulatory and programming cost pass- throughs, in addition to any increases we permit for new channels. Consumers won't care what the source of the rate increase is; they will care how it affects their pocketbooks. The increases will not be inconsequential.

The reality is that, where New Product Tiers are not available, subscribers to regulated tiers have no choice but to pay the higher price attributable to new programming, inflation and pass-throughs or drop cable service -- "take it or leave it."

Competition from alternative video delivery sources will, in time, change this and allow us to end regulation of cable rates. But we're not there yet.

Given our responsibility to consumers, I think our rules provide as much flexibility to operators as we can reasonably allow.

I emphasize that the amounts permitted by our formula are the maximum increases allowable; operators can charge less and they can add more than 6 to 7 channels. Sensitivity to consumer demands will become increasingly important to you as your industry competes with the telephone industry. You are going to find yourselves competing with companies that enjoy an astoundingly high customer satisfaction rate -- over 90%! NCTA's efforts to inaugurate a new consumer responsiveness plan are laudable -- and very timely. It will be counterproductive to all of us if our going forward initiative results in a new wave of consumer anger over rate hikes.

At this point, I wish I could tell you that our going forward order also reflects the Commission's recognition that "one size fits all" regulations may impose obligations on small systems that, given their size, are inappropriate or unduly burdensome. But, in my view, we dropped the ball here. I appreciate that small systems, which represent the majority of cable systems, are working with high capital costs and a limited customer base. As a result, these systems must recover from a smaller base the fixed costs of any additional headend equipment. Our intent was to address this problem, but I don't think our going forward order achieved that goal. I will be looking for a way to modify our decision and to do so expeditiously manner.

The going forward rules provide the cable industry with a strong financial incentive to upgrade systems and to offer new, innovative services. But there may still be loose ends to tie up. We must be as diligent in encouraging investment in cable's infrastructure as we are in encouraging telephone investment. To the extent that our going forward rules fail to do so, we want to know about it and address it. The basic ratepayer -- for either regulated telephone or cable service -- should not pay any more of the costs of an upgrade than the benefit that ratepayer receives from the investment. In fact, it has been argued that, if ratepayers pay for some portion of the cost of an upgrade, they should also benefit from any cost savings that result from the upgrade. These arguments undoubtedly will be part of our debate.

Video Dialtone

Let me now turn to the video dialtone Reconsideration Order. Everyone here already knows the "big picture" perspective on video dialtone (VDT), so I'll review the facts quickly.

The original VDT Order was adopted in 1992. Approximately two dozen petitions for reconsideration were submitted. We have some thirty pending Section 214 VDT applications, with five to six trials up and running. The first commercial application was approved in July, although the tariff has not yet been filed.

Our reconsideration order was adopted in October and released earlier this month. With three new Commissioners, we needed to revisit all aspects of the agency's earlier decision.

The Commission's order concluded that the principal goals of VDT remain valid. VDT will create competition in the delivery of video programming, thereby eliminating the need for regulation of cable rates. Again, our goal is to avoid unfair competition and to maximize the opportunity for sustainable two-wire competition.

We expect the authority to provide VDT will stimulate investment by telephone companies in the national telecommunications infrastructure. Our hope is that this investment will result in a state-of-the-art telecommunications network with broadband facilities extending to businesses, libraries, schools and homes.

And finally, VDT should, over the long term, expand consumer choice in programming and encourage the development of new services by telephone companies.

Thus, the goals for VDT -- competition, investment, diversity -- create the same incentives for the telephone industry that we sought to create for the cable industry with our going forward rules. We faced many of the same constraints in achieving our goals, including shared federal/state regulatory authority and the cable-telephone company cross-ownership ban. As I noted earlier, at the time we ruled, there were four district court decisions finding that prohibition unconstitutional. Now we have a circuit court ruling that telcos have a constitutional right to provide video programming directly to subscribers in their service areas. The Commission staff is studying how the decision affects VDT. In my view, we may need to initiate a rulemaking proceeding to allow parties to comment on this issue .

As with the going forward rules, the Commission must not ignore its audience. It is critical that the deployment of VDT not result in adverse impacts on telephone ratepayers. Until there is competition in telephony, the telephone subscriber cannot walk away from basic telephone service. We can be no less sensitive to the "take it or leave it" position of telephone subscribers than we are to cable subscribers.

Let me highlight what I consider to be some of the major issues addressed in the video dialtone order.

First, we adjusted the balance in federal and state jurisdiction from the original VDT order. We emphasized that states have the authority to disallow from local telephone rates any VDT-related costs that do not meet the state's rate standards. Thus states can prevent intrastate ratepayers from subsidizing the deployment of VDT.

Second, we rejected the anchor programmer proposal of some of the larger telephone companies. In my view, that proposal would have allowed telephone companies to provide service indistinguishable from cable service. It circumvented the regulatory framework of Title VI. In reality, it would have destroyed the common carrier construct that is central to our determination that VDT is in the public interest.

We also imposed reporting requirements, triggered when capacity problems arise, and sought further comment on ideas like "will carry".

Third, cost allocation. We spent considerable time on this issue and had a lot of debate. It is a complex area and one that will be challenging to implement. We did not believe that a single formula could responsibly be adopted in the rulemaking. But our order establishes our overarching policy: any additional expense attributable to a telephone company's decision to provide video service must be charged against the telco's video business. Telephone ratepayers will not pay for the cost of video services.

Fourth, our VDT order states that our analysis of a Section 214 application to provide video dialtone service can consider "the extent to which the state in which the service is proposed authorizes competition for local exchange services." As I mentioned, the state barriers to entry that presently exist pose a significant obstacle for competition. Our decision to analyze local exchange competition in connection with Section 214 applications recognizes the need to have video and telephone competition and our desire to push these along in tandem.

Finally, redlining. Concerns about redlining were not addressed in our VDT reconsideration order, in large part because the pleadings were just filed this summer. But we intend to give it careful review. I expect to see action from the Commission in the first quarter of 1995.

The Commission believes that video dialtone can promote competition in video transport and programming and encourage innovation and investment. We want to see it succeed.

Similarly, we believe that our going forward rules will provide cable operators with incentives to increase programming diversity and to invest in their systems, to compete with telephone companies and others. We want to see them succeed.

The Commission is striving for fair treatment of all interests: telephone companies, cable operators, programmers, state and local authorities, and consumers.

That's a lot of balls to keep in the air -- but we'll keep juggling.

Thank you.