B A Brief History of Telecommunications Regulation

A large legacy from past policy, dominated by telecommunications regulation, shapes the context for broadband policy. That legacy principally concerns regulation of wireline communications through common carriers, but it also includes regulation of cable, broadcasting, other wireless communications, and regulations applied to the Internet. The legacy’s salient features are briefly reviewed in this appendix.

THE LEGACY FROM PAST POLICY

Common Carriers (Telephony)

Local and long distance telephone companies operate as common carriers, which historically have had close regulatory scrutiny by both federal and state agencies. The history of common carriage is fundamental to the baseline for broadband deployment, because it shaped what exists today in the telephone infrastructure as well as expectations in numerous industries and locales about the nature of investment and competition in communications and information infrastructure.

A telecommunications “common carrier” is the term used to describe a provider of telecommunications transmission service that offers its service to the public for a fee and, in contrast to, for example, a television station owner or a cable television operator for most of its channels, does not control the content of the information transmitted by its facilities or services. Rather, the carrier’s customer controls the content and the destination of the transmission. Criminal or civil responsibility for the content



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Broadband Bringing Home the Bits B A Brief History of Telecommunications Regulation A large legacy from past policy, dominated by telecommunications regulation, shapes the context for broadband policy. That legacy principally concerns regulation of wireline communications through common carriers, but it also includes regulation of cable, broadcasting, other wireless communications, and regulations applied to the Internet. The legacy’s salient features are briefly reviewed in this appendix. THE LEGACY FROM PAST POLICY Common Carriers (Telephony) Local and long distance telephone companies operate as common carriers, which historically have had close regulatory scrutiny by both federal and state agencies. The history of common carriage is fundamental to the baseline for broadband deployment, because it shaped what exists today in the telephone infrastructure as well as expectations in numerous industries and locales about the nature of investment and competition in communications and information infrastructure. A telecommunications “common carrier” is the term used to describe a provider of telecommunications transmission service that offers its service to the public for a fee and, in contrast to, for example, a television station owner or a cable television operator for most of its channels, does not control the content of the information transmitted by its facilities or services. Rather, the carrier’s customer controls the content and the destination of the transmission. Criminal or civil responsibility for the content

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Broadband Bringing Home the Bits rests (for the most part) with the sender, not the carrier. For most of the 20th century, federal and state regulation of common carriers has been considered necessary because telecommunications services in any geographic area have been provided by a single carrier.1 Similar thinking and tactics have been applied to providers of other kinds of infrastructure regarded as utilities, such as electric power or water, and historically to transportation, including rail, toll roads, ferries, and the like. While policy goals are established through laws, regulatory agencies implement the laws through rulemaking. The Federal Communications Commission (FCC) regulates the interstate activities of such carriers,2 and state commissions regulate their intrastate activities.3 Rulemaking and other administrative proceedings follow a set of practices that involve issuing a notice of intent to act, solicitation of comments, and other formalities. These processes have given rise to a cadre of in-house and private-practice lawyers, economists, and lobbyists seeking to promote or discourage certain kinds of decisions by regulators. Depending on one’s perspective, these processes may reflect an open, fair process for implementing regulations or a drag on the telecommunications marketplace. Regulators were persuaded that local and long distance services were natural monopolies and, consequently, could be provided at the lowest cost through a single firm. Economic regulation, not competition, would constrain the prices and practices of the monopoly carriers. Under this regulatory regime, the Bell System provided local telephone service in virtually all urban areas and gradually extended its reach to many rural areas. Its long distance network interconnected Bell as well as subscribers of the remaining thousand-plus independent telephone companies (each a monopoly in its franchise territory), enabling any subscriber to call any other telephone subscriber. Over time, the Bell System became the envy of the world because of the breadth, price, and quality of its service offerings. 1   These monopolies were created initially by AT&T’s aggressive acquisition of independent telephone companies in the early 20th century. The regime emerged in the wake of the 1913 agreement between the Bell Telephone system and the U.S. Department of Justice, known as the Kingsbury Commitment. In return for certain concessions, Bell Telephone was permitted to retain the local telephone companies it had acquired since the turn of the century and to maintain its monopoly control over long distance. 2   Under Title II of the Communications Act of 1934, as amended. 3   Because AT&T and the independent local telephone companies were permitted to operate as government-protected monopolies, the prices and other terms and conditions of their service offerings were subject to close scrutiny by federal and state regulators to prevent the telephone companies from exercising their market power. If a call originates in one state and terminates in another state or foreign country, that service is subject to the FCC’s jurisdiction. If a call originates and terminates within the same city or within the same state, that service is subject to the state commission’s jurisdiction.

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Broadband Bringing Home the Bits In the last third of the 20th century, however, technological advances cast increasing doubt on the premise that telephone service, or at least certain aspects of it, should be provided on a monopoly basis. In the 1960s and 1970s, the FCC gradually relaxed regulation of telephone terminal equipment (e.g., telephone handsets, private branch exchanges), known as customer premises equipment (CPE).4 These actions spawned the emergence of an intensely competitive market for handsets, fax machines, private branch exchanges (PBXs), and other terminal equipment.5 In the 1970s and 1980s, the FCC followed a similar pattern of phased regulatory relaxation in the long distance market. The most significant event in the introduction of long distance competition involved an antitrust case spawned by such competition and AT&T’s response to it. In 1982, AT&T and the U.S. Department of Justice entered into a consent decree, known as the “Modified Final Judgment” (MFJ), that required AT&T to divest its local operating companies.6 By separating AT&T’s monopoly segments from its more competitive long distance operations, the decree went a long way toward opening the latter to facilities-based competition, because it eliminated the incentive of the local telephone companies to discriminate against MCI and other would-be AT&T competitors through their monopoly control over the local network. The decree removed one of AT&T’s most substantial competitive advantages by requiring the Bell Operating Companies to provide equal access to other long distance companies.7 As competition in the long distance industry matured, additional technical impediments were eliminated (such as the introduction of 800-number portability across long distance carriers) and new entrants began to make inroads into AT&T’s 4   Prior to the FCC’s action, telephone equipment was part of the service that the local telephone company provided to its customers. Indeed, customers were prohibited by the companies’ tariffs from attaching other equipment to the network. 5   In deregulating CPE, the FCC also preempted state commissions from continued regulation of that equipment. The FCC’s jurisdiction under the Communications Act of 1934, as amended, in the 1970s was limited to interstate services. The commission recognized, however, that, as a practical matter, it could not deregulate “interstate” CPE, since such equipment is used to place and receive both interstate and intrastate communications. Hence, it barred state agencies from continuing to regulate the provision of CPE in order to prevent such policies from frustrating the FCC’s national deregulation policy. See North Carolina Utils. Comm. v. FCC I. 6   See United States v. American Tel. & Tel. Co., 552 F. Supp. 131 (D.D.C. 1982), aff’d, 460 U.S. 1001 (1983). 7   The operating companies were required to modify their networks to enable a subscriber to these other providers also to use the “1+” prefix to obtain access. Prior to the implementation of this “equal access” requirement, subscribers of long distance companies other than AT&T were required to dial a seven-digit local number, then dial a multidigit personal identification number, and then dial the long distance number they were calling.

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Broadband Bringing Home the Bits market share, the FCC gradually relaxed price regulation of AT&T on a service-by-service basis.8 The latter half of the 1980s and first half of the 1990s were marked by the continued erosion of AT&T’s long distance dominance, as MCI, Sprint, and scores of other competitors gained significant inroads (although AT&T remains the largest provider). In light of these changes in the marketplace, the FCC gradually loosened its controls over different segments of AT&T’s long distance business, culminating in a 1995 decision that eliminated the remaining FCC price controls of AT&T’s basic residential services.9 Although AT&T remained subject to price regulation for more than a decade after it divested its Bell Operating Company subsidiaries, the prices of interstate services offered by new (and accordingly much smaller) providers of long distance, such as MCI, were not regulated.10 By the end of the 1990s, AT&T’s share of the long-distance market had slipped below 50 percent In the late 1980s, federal and state regulators also began to take the first steps toward opening local telecommunications markets to competition. Following several states such as New York and Illinois, the FCC adopted its Expanded Interconnection rules, which required incumbent telephone companies to interconnect their networks with new firms that wished to provide competing local transport services. These developments raise the possibility of shifts in state regulatory emphasis from retail rate regulation to wholesale enforcement.11 The enactment of the Telecommunications Act of 1996 marked the commencement of the most concerted effort by state and federal regula- 8   For example, when 800-number portability made it possible for an 800-number customer to switch long-distance carriers and retain its 800 number (e.g., 1-800-FLOWERS), the FCC removed its price regulation of AT&T’s 800 service offerings. 9   Because the FCC’s jurisdiction is limited to interstate services, it does not regulate the rates that local telephone companies charge for local and intrastate services (such as calls from Los Angeles to San Francisco). Local telephone companies, however, provide origination and termination service to interstate long distance companies. That is, the local telephone companies carry an interstate call from the originating end user to the interstate carrier’s switch, where it is placed on the long distance carrier’s network. Local telephone companies also carry calls from the long distance company’s switch to the called party’s premises. This origination and termination service is known as interstate access service and is subject to the FCC’s jurisdiction. 10   The FCC’s theory was that since the new entrants did not possess market power, there was no need to regulate their rates. If consumers were dissatisfied with an MCI offering, they could always take service from AT&T, whose rates were regulated. 11   Bob Rowe. 2000. “Implementing a Cooperative Federalist Approach to Telecom Policy.” Speech presented at Federalist Society, Washington, D.C., September 27.

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Broadband Bringing Home the Bits tors to dismantle the monopoly control over local telecommunications markets exercised by the Bell Operating Companies and other incumbent telephone companies. The results have yet fallen short of the quick movement to “deregulation” that some had hoped for. Armed with new statutory authority, the FCC and state regulatory commissions moved aggressively to require local incumbents to open their markets. Incumbent telephone companies, called ILECs (incumbent local exchange carriers) continue to have overwhelming market shares, particularly among residential customers, thanks to their initial monopoly position and scale and scope economies that are difficult to overcome. To help overcome these incumbent advantages, the Telecommunications Act of 1996 mandated that incumbents offer competitors (CLECs) access to unbundled network elements at reasonable rates. Because ILECs continue to control well over 90 percent of local market revenues and customers, they remain subject to comprehensive price regulation at both the federal and state level. CLECs, lacking market power, generally are not. In 1999, the FCC adopted rules for the gradual deregulation of the incumbent telephone companies’ provision of local service used for interstate communications. Prices should be deregulated when there was evidence that the incumbent could not exercise market power.12 Meanwhile, there has been horizontal consolidation among telephone companies plus vertical integration of such companies (e.g., Qwest acquired USWest; NYNEX merged with Bell Atlantic, which merged with GTE to become Verizon; SBC acquired Pacific Telesis and Ameritech; MCI merged with WorldCom, which also merged with UUNet; and AT&T acquired TCI and other cable interests). Thus, although the 1996 act eliminated legal barriers to entry in those states where they persisted, economic and technical barriers are eroding more slowly. Nevertheless, competitors have made inroads among business customers in urban markets. Against this backdrop, issues posed by open access in broadband have prompted FCC initiatives. Cable The regulatory regime governing cable television systems is entirely different from the common carrier scheme. It has a much shorter history, 12   What criteria should be applied remains a controversial subject. The incumbents have chafed at delays to their entry into long distance. Competitors to the ILECs have maintained that the criteria used by the FCC do not provide an accurate picture of the availability of alternative providers of local telecommunications services, and that the FCC blueprint would permit the incumbents to preserve their monopoly control over local markets by granting them substantial pricing flexibility when they continue to wield market power.

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Broadband Bringing Home the Bits and it reflects the fact that following its earliest days, when cable was used to provide television service in regions not reached by broadcast television, cable grew by providing an alternative to an existing entertainment and information service (broadcast television) and faced initial deployment challenges. Cable operators do not have to offer their transmission service to the public on a nondiscriminatory basis, unlike common carriers. Most important for understanding how regulation was approached, cable systems maintain considerable control over the content that is transmitted over their distribution facilities. Unlike common carriers, they have asserted First Amendment rights with regard to the content they carry, a status upheld by the courts. Cable operators generally are not required to offer access to their distribution system to enable other (unaffiliated) content providers to deliver their products to cable subscribers (major multiple system operators that vertically integrate content production and cable service are required to devote a portion of their system capacity to unaffiliated networks). Even without any mandate to do so, however, operators offer unaffiliated content channels for two reasons: (1) no single operator has enough high-quality content to fill all of its capacity, and (2) operators generally find that customer demand for these channels exists. Thus, almost every system carries CNN, which is an AOL Time Warner service, and ESPN, which is owned by Disney-ABC. In addition, cable operators, under certain circumstances, are required to offer access to providers of traditional video services under the so-called leased access provisions of Title VI of the Communications Act of 1934 (as amended). Also, there have been local content requirements through public, education, and government channel provisions of franchises. Nonetheless, the contrast between the relative freedom to control content and the obligations placed on common carriers—which gives rise to expectations of similar behavior in the future—is one genesis of today’s “open access” debate,13 discussed below. Cable television is subject to limited federal regulation. Under Title VI of the Communications Act of 1934 (as amended), the “basic tier” of services, encompassing mostly local television signals, is subject to rate regulation. Local authorities could regulate the price of the basic tier, pursuant to formulas prescribed by the FCC, unless “effective competition” existed, as defined by the Cable Act of 1992 (such price regulation expired in 1999). Cable television operators also are limited in their ability to expand horizontally and vertically with content providers. Devising, 13   Proponents of open access have argued, among other things, that when a cable system furnishes access to an Internet service provider, it is engaged in the provision of a common carrier service and, consequently, should be required with the same access obligations that characterize common carriage provided by telephone companies.

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  implementing, and enforcing regulations for the cable industry under the 1992 act was difficult and time-consuming. A major complication was that cable service, like broadband, is multifaceted and varies in capability from one service area to the next. In the end, it is not clear that the regulation accomplished much in the long run, with the exception of the rules that made cable network programming available to overbuild competitors and satellite services at “reasonable” prices, which spurred competition in video delivery. Cable systems are also subject to local regulation—through the franchise agreements that they execute with municipal, county, or, in a few cases, state authorities. These agreements typically run one or more decades and are a source of revenue for the municipalities that issue them. As franchise agreements have come up for renewal, the new capabilities of cable systems to deliver advanced video and data services have dominated the negotiations. As discussed in Chapter 4 in the report, a key development beginning in the 1990s was the progressive upgrading of cable plant to incorporate fiber (hybrid fiber coax), which increased system quality and capacity and more recently facilitated use of cable infrastructure for Internet access. However, cable operators are not under a legal obligation to upgrade their plant to be able to offer broadband, cable modem services. Further, if operators complete such an upgrade, they currently are not (as a class) required to make access to that transmission service available to unaffiliated providers of broadband services. Open access requirements (discussed in Chapter 5) have figured heavily in several franchise negotiations. Other elements arising in contemporary franchise negotiations include establishment of minimum data bandwidth and rights-of-way (such as joint trenching rules where there are multiple entrants). New considerations analogous to the traditional public, educational, and government (PEG) requirements include extensions to non-video services and making fiber available to local governments (and possibly for other customers).   Internet Fear of regulation has always haunted the Internet, although it is considered “unregulated.” Popular misunderstanding has even motivated the FCC to issue a fact sheet (last revised in January 1998) to dispel myths about charges and taxes it was alleged to have imposed or to be considering imposing on the Internet or its use.14 Since the late 1990s, FCC com- 14   Federal Communications Commission. 1998. “The FCC, Internet Service Providers, and Access Charges.” Available online at <http://www.fcc.gov/Bureaus/Common_Carrier/Factsheets/ispfact.html>.

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Broadband Bringing Home the Bits missioners and staff have written and spoken publicly about the benefits of the commission’s hands-off approach to the Internet.15 But the growth in public interest in the Internet and the businesses behind it continues to raise questions about prospects for government intervention, including regulation, whether direct or indirect. The historic interaction of regulation with the Internet was ad hoc, even unintended. Anecdotal evidence suggests that the Internet was not recognized as a phenomenon or concern by most regulators until the 1990s, when it became commercial, and those circumstances or actions that can be identified do not seem to have been framed with the Internet in mind.16 For example, a key enabler, in retrospect, was a series of FCC decisions that gave customers the right to attach approved devices directly to the network, which has allowed both ISPs and users to attach modems to their phone lines—a necessary precondition for dial-up access.17 Some observers also point to common carriage regulation as an important Internet enabler. Entry by ISPs has been facilitated by common carrier rules which mandate nondiscriminatory access and reasonable rates apply to both the dial-up lines used by individual customers and the telephone network dedicated lines used by many ISPs to connect points of presence to the Internet. Another enabler came in the 1980 second Computer Inquiry, when the FCC ruled that firms that use basic telecommunications services to provide an enhanced service of some kind (such as information delivery) are not engaged in the provision of a “basic” common carrier, telecommunications service (such as local telephone service). Rather, they are providing an “enhanced” service and, accordingly, are not subject to the direct jurisdiction of the FCC or state regulatory commissions. That decision served to nurture commercial value-added networks, bulletin boards, database services, and other data communications services in the 1970s 15   See, for example, Jason Oxman. 1999. “The FCC and the Unregulation of the Internet.” Office of Plans and Policy, Federal Communications Commission, Washington, D.C., July. Available online at <www.fcc.gov/bureaus/opp/working_papers/oppwp31.pdf>. 16   The early development of the Internet was motivated in part by a desire to find relief from the high costs of dedicated leased line services available from the regulated telecommunications industry of the 1960s, which constrained early applications of data communications for government and the research community. The prevailing telecommunications environment fed the interest and efforts of the researchers supported by the Defense Advanced Research Projects Agency, who both developed the early technology and were the first to benefit from the economies provided through packet-switching. 17   The certification scheme in 47 C.F.R. Part 68, adopted in the 1970s, enables firms to obtain FCC approval for devices that are attached to the network, permitting third parties to develop innovative communications equipment while ensuring that attachment of this equipment does not threaten the integrity of the network.

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Broadband Bringing Home the Bits and 1980s. These proved, in retrospect, to be training grounds for the more open Internet, as well as ISPs, in the 1990s. More recently, through Section 271 of the Telecommunications Act of 1996, the former Regional Bell Operating Companies are prohibited from offering interLATA services—which include both long distance telephony and Internet transmission services—in states in which they provide local telephone service, until they have satisfied certain market-opening requirements. As a result, while these companies may operate dial-up and broadband ISPs, customers must obtain connectivity to the rest of the Internet through a regional or national ISP operated by another company. Also, although virtually all Internet communications cross state lines, in 1997 the FCC affirmed18 an earlier ruling that the transmission between an end user’s premises and an enhanced service provider’s location in the same calling area would be treated as a local call, rather than as an interstate call, regardless of whether that transmission carries data, an e-mail message, or even (at least under certain circumstances) a voice call over the Internet.19 Finally, differences in inter-network traffic flows have fed debate over so-called reciprocal compensation, a subject of FCC inquiry in 2000-2001.20 The Telecommunications Act of 1966 had another consequence that has been important for the deployment of broadband Internet access. Because the act required the ILECs to unbundle their circuits to CLECs, a class of CLECs came into existence that offered data rather than voice over these circuits, by means of DSL technology. This investment in DSL by competitive providers seems to have spurred investment in DSL by ILECs, and thus to have driven the overall rate of DSL deployment. At the present time, the market downturn has put many of these competitive DSL providers in peril, but this should not cause one to dismiss the contribution of competition in this case. When incumbent telecommunications providers offer DSL, this service comes under the purview of the historical legacy of telecommunica- 18   Access Reform Order, FCC 97-158, adopted on May 7, 1997. 19   Precisely which voice transmissions might be subject to access charges is a delicate area. For example, the Federal Communications Commission indicated in a 1998 report to Congress that a handset call to an ISP that terminated at a handset in another state may be classified as a basic telecommunication service and hence be subject to access charges. 20   The concern is that different kinds of providers may terminate traffic out of proportion to that which they hand off—especially the relative burdens of dial-up Internet traffic. At present, more may be terminated on CLEC than ILEC networks, implying (at least to the ILECs) significant reciprocal compensation payments by ILECs to CLECs, but the nature of potential funds flows depends on actual dial-up use in the future, a subject of disagreement (“In ‘Recip Comp’ Debate, CLECs, Telcos Rely on Varying Projects for Dial-up Internet Traffic,” Telecommunications Reports, January 8, 2001, pp. 9-10).

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Broadband Bringing Home the Bits tions regulation. When an incumbent telecommunications provider sells an enhanced service (which is not regulated) over a “basic” service, the incumbent provider must provide the basic service to others. DSL is seen as a basic service. Thus, at the present time, the ILECs must unbundle their data services at two levels. They unbundle their physical loops so competitive DSL providers can implement DSL, and they unbundle their DSL service so competitive ISPs can sell Internet access over the incumbent’s DSL service. The history presented here, which illustrates indirect regulatory support for the Internet that has been largely inadvertent (at least until the late 1990s), unfolded without consideration of broadband. It focuses on the presence or absence of regulatory intervention into pricing and market entry. Broadband expands the potential space for intervention in at least two ways: First, it involves different kinds of industries and technologies providing Internet access under different regulatory regimes (e.g., some have expressed concern about the implications for ISP support of cable-based Internet access in contrast to common carriers). Second, distinguishing between information services and telecommunications carriers blurs when facilities owners integrate carrier and information service functions, as is being seen in at least cable- and satellite-based broadband offerings. PRESENT: THE 1996 ACT Much of the current policy framework relates to the Telecommunications Act of 1996, which was framed as a reform effort. Since its enactment and the unfolding of derivative activities, there is increasing awareness of what it does and does not accomplish. This piece of legislation, a major modification to the Communications Act of 1934, was shaped during the early to mid-1990s. The language of the act indicates that its primary goals are to promote competition and reduce regulation as a means of increasing growth in telecommunications services and reducing prices.21 It was enacted shortly after the 1995 commercialization of the Internet backbone and introduction of the browsers that helped to popularize the World Wide Web and before such technologies were widely used. Even though many of the key actors understood that sweeping change was on the horizon, full appreciation of the key role of the Internet did not exist, in society or in Washington. 21   The preamble calls it “An Act to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid growth of new telecommunications technologies.” Telecommunications Act of 1996, P.L. 104-104, 110 Stat. 56 (1996), Preamble.

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Broadband Bringing Home the Bits The Telecommunications Act of 1996 adjusted the relative roles of federal and state regulators, increasing that of the states. Whereas the Communications Act of 1934 preserved state authority over intrastate rates and services, the 1996 Act specified state roles in interconnection, incumbent telephone company long distance market entry, and promotion of advanced services. It sent mixed signals on federal preemption of state regulators, and it reinforced a kind of cooperative federalism.22 Most directly relevant to broadband, the Telecommunications Act of 1996 calls for the FCC and states to encourage deployment of advanced technologies for telecommunications to all Americans on a reasonable and timely basis. But what satisfies “advanced,” “all,” “reasonable,” and “timely”? The act, in support of service to “all” Americans, calls for access to advanced telecommunications and information services in rural and high-cost areas to be “reasonably comparable” to that in urban areas in terms of price and quality. This formulation is interesting because it joins unregulated information services with regulated telecommunications services; what that implies for policy approaches and their targets is unclear. Specific provisions of the act related to broadband are summarized in Box 5.1, Chapter 5. 24   Rowe, “Implementing a Cooperative Federalist Approach to Telecom Policy,” 2000.