The Telecommunications Act of 1996
 

Richard E. Wiley*

The Telecommunications Reform Act of 1996 represents the first comprehensive overhaul of our nation's communications laws in more than 60 years. The Act is expected to transform our communications landscape by eliminating regulatory barriers and encouraging competition in nearly every sector. It is also likely to have a profound effect on the Federal Communications Commission ("FCC"). The legislation's deregulatory measures, as well as the heavy administrative workload required to implement them, already have the agency significantly rethinking and revamping a number of its existing procedures.

The original Communications Act, passed in 1934, was enacted at a time when communications technologies were quite distinct and addressed different consumer needs. Accordingly, both the statute and its implementing regulatory scheme were designed to compartmentalize the various sectors of the telecommunications industry. But as technology evolved, the potential for competition became more apparent. In the last several decades, the FCC has tried to ease or eliminate anachronistic restrictions, but the confines of the agency's statutory authority have been a limiting factor in this regard.

Elimination of Barriers to Competition

The new Act begins to address the realities of today's converging marketplace by eliminating barriers that inhibit or preclude the entry of new competitors into various industry sectors. Most notably, the statute removes restrictions contained in the 1982 AT&T Consent Decree that have prevented the local Bell Operating Companies ("BOCs") from providing long distance telephone service and from engaging in certain other prohibited lines of business such as manufacturing and electronic publishing. That decree envisioned a competitive long distance telephone market (and, indeed there are over 500 interexchange carriers or "IXCs" today -- most notably, AT&T, MCI and Sprint) and a monopoly local telephone industry, with the BOCs largely foreclosed from entering other businesses dependent on that monopoly.

With the passage of the new Act, the BOCs can provide long distance telephone service outside of their regions almost immediately, either directly or via joint ventures with other carriers. Thus, they may pose a significant competitive threat to the IXCs. Conversely, the major long distance carriers are in a position to attack the BOCs' core local markets almost without regulatory strictures. The ultimate goal of both sets of carriers is clear: to provide integrated long distance and local telephone offerings to the public, and especially to large business customers. This "one-stop shopping" service generally has not been available since the break-up of AT&T in 1982.

The BOCs, however, face significant hurdles in entering the interexchange telephone market within their own regions. Because of continuing government concerns that they would use their positions in the local telephone exchange to disadvantage competitors (the same thinking inherent in the BOC line-of-business restrictions contained in the 1982 AT&T Consent Decree), the legislation requires as a prerequisite to BOC in-region long distance entry that their own local markets first be opened to competition. The Act attempts to ensure this policy through two means: conditioning entry on a BOC's implementation of a so-called "competitive checklist" (designed to ensure that other service providers can obtain nondiscriminatory access and interconnection to the BOCs' local facilities) and preempting state restrictions that prohibit other entities from providing local telephone service. All this is likely to hold up BOC in-region entry into long distance for a year or more. And meanwhile, the major IXCs will be attempting to establish strong toe-holds in the integrated phone service business.

Video Service Competition

The Act also eliminates the ban on telephone company provision of video service, authorizing a telephone company to provide service as a traditional cable operator or through an "open video system" (in which two-thirds of channel capacity must be available to other programmers on a common carrier-like basis). However, in order to ensure the competitive benefits of two wires to the home -- telephone and cable -- the legislation generally prohibits a telephone company from acquiring a cable operation (or vice-versa) in the same market. Given the huge expense involved in upgrading both the telephone and cable plants to carry advanced video offerings of the future (e.g., home shopping and banking, interactive games and educational programs, high definition television, etc.), it remains to be seen whether the government's two-wire strategy will prove to be economically realistic in the long run. However, our policymakers are all too aware of their inability in the past to regulate effectively powerful monopoly providers like AT&T and the BOCs. Thus, infrastructure competition is again the key policy imperative.

In order to further promote vigorous rivalry in the video marketplace, the Act also provides for the elimination of cable rate regulation (except for basic broadcast service) three years after enactment, or sooner upon the development of competition. This action effectively reverses much of the heavily regulatory 1992 Cable Act and its equally extensive FCC implementation. However, among the limitations that will remain are the important "program access" requirements which have made cable's popular offerings -- like CNN, HBO, and MTV -- available to its multichannel competitors: Direct Broadcast Service ("DBS") operators (like Hughes' Direct TV and Hubbard's USSB) and so-called "wireless cable." As a result, cable is facing real competition today, even before the potential entry of the telephone companies into the video business.

One other video provider -- the venerable over-the-air broadcasting service -- is also a beneficiary of the deregulatory provisions of the new statute. And this, in my view, seems appropriate given broadcasting's status as a "free" (advertising-supported) one-channel service competing increasingly against largely subscription-supported, multi-channel video operations (like cable and DBS). The Act substantially liberalizes restrictions on the number of broadcast stations that any one entity can own by eliminating all national radio limits and relaxing the national audience cap in TV ownership. That cap had limited television station owners from reaching more than 25% of the national TV audience. The new law raises the cap to 35% -- a distinct advantage for the major networks and other large station groups.

The legislation also eases restrictions on radio ownership within the same local area (allowing a single licensee to acquire as many as eight stations in large markets). However, to the disappointment of major television companies, Congress largely left the local TV ownership regulations in place pending further FCC determinations. Moreover, the agency's rules prohibiting cross-ownership in any market of newspaper and broadcasting properties, cable and television operations and, to some extent, even radio and television stations remain in effect for now. Nevertheless, the Act at least removes most of the statutory impediments to eliminating these latter restrictions, and also directs the Commission to review all of its remaining broadcast ownership rules on a regular basis.

Spectrum Flexibility

Additionally, the new statute affords TV operators flexibility to use the spectrum assigned to them for certain non-broadcasting services. However, this flexibility would be available only if the FCC decides to grant broadcasters a second channel to facilitate their transition to advanced digital television (including high definition TV which involves a quantum leap forward in picture quality and sound). In the weeks immediately prior to the Act's passage, Senator Dole and others on Capitol Hill raised concerns about the fiscal wisdom of giving (or loaning) television licensees additional frequencies that otherwise might be subjected to auctioning. To facilitate enactment of the legislation, the Commission agreed not to assign such spectrum until Congress resolved whether and how it should be made available. Meanwhile, the FCC is deciding whether to establish a new digital broadcasting standard for the country, based on the recommendations of its industry Advisory Committee on Advanced Television Service (a committee that, throughout its eight year life span, I was privileged to chair). The existing N.T.S.C. Standard, to which all TV receivers must be manufactured, was set back in 1941.

Content Regulation

Despite its generally deregulatory tone, the legislation contains several provisions that would permit government regulation of content. For example, the Act requires most new TV sets to be equipped with a so-called "V-chip" that can be programmed by parents to block violent or sexually explicit programming. The legislation requires the television industry to establish a system for rating such programming, although the FCC is permitted to intercede if it is dissatisfied with the industry's efforts. In addition, the Act would prohibit any person from sending patently offensive communications to a minor via a computer or from making such communications generally available on the Internet. Serious First Amendment concerns have been raised about both of these provisions. Indeed, a broad range of civil liberties groups led by the ACLU already have sought (and received) an injunction against the Internet measures. Anticipating such challenges, the legislation provides for expedited judicial review of some of these content-based provisions.

Effects on Consumers

Through the Act's provisions to open up telecommunications markets and stimulate competition, its drafters hope that the public ultimately will enjoy the benefits of lower rates and more service choices. However, in the short term, what the consumers may face is primarily confusion. Many new carriers (some resulting from industry mergers and strategic alliances that seem certain to occur) will be attempting to provide them with service. Thus, many new rate and discount packages will be offered to subscribers -- probably over the telephone during the dinner hour and, undoubtedly, through myriad radio and television advertisements.

Despite these annoyances (as some may see them), the opportunity will be available soon for "one-stop shopping" -- that is, service from an integrated long distance and local telephone carrier. It remains to be seen whether the public prefers a single telephone bill from a single company but my own guess is that the answer will be in the affirmative. Additionally, as discussed, subscribers also are certain to have numerous video choices, both in terms of service providers and program packages. The proverbial "500 channel" universe would seem to be on the near-term horizon of cable, DBS and, soon, telephone operations. In all, at least for business and residential consumers who are willing to spend the time and effort to understand all of the options available, the telecommunications future should be both diverse and attractive.

FCC Implementation

The sweeping regulatory changes embodied by the new law will require extensive revisions to the FCC's rules and regulations. The Commission itself has estimated that implementation will necessitate more than 80 different proceedings, covering some 40 separate issues. Given its limited resources, there has been considerable speculation as to how the agency will accomplish these tasks in the expedited time frame required by the legislation, while still meeting its existing responsibilities.

The Act provides some guidance to the FCC in this regard. It specifically eliminates Commission oversight in certain areas by deleting various licensee requirements. The legislation also generally directs the agency to forbear from regulating telecommunications carriers or services where such regulation is no longer necessary to protect the public interest. Additionally, it authorizes the FCC to privatize certain functions, such as the certification and testing of radio and computer equipment and field inspections of radio facilities.

The FCC itself has already taken steps to reduce remaining oversight functions and to conserve limited resources. Within days of the legislation's enactment, the Commission initiated an inquiry as to how best to simplify agency processes and improve its delivery of services. FCC officials also have met with industry representatives to discuss strategies for expediting the rulemaking process and other requirements. A number of proposals to streamline the Commission's administrative procedures have been considered — e.g., submission of draft orders (similar to the practice of U.S. District Courts); significantly shorter pleading periods; a policy against extensions of time; the filing of summarized arguments; expansion of the scope of interpretative rules (not subject to Administrative Procedure Act ("APA") notice and comment requirements); and a much tougher stance on frivolous filings.

Conclusion

The 1996 Act is unquestionably a watershed event. It will contribute greatly to shaping the future of telecommunications in this country, clearly one of the most dynamic sectors of our society and economy. Only time can tell whether this massive legislation will succeed as well as its 1934 predecessor did for so long. But given the rapid pace of advancing communications technology, a law whose twin objectives are increased competition and lessened government regulation would appear to be the right solution at the right time.

* Dick Wiley practices in Washington, D.C. with Wiley, Rein & Fielding. He is a former Chairman of the FCC.

   

2001 The Federalist Society