[This article, written by an NTIA staff member, was published by Global Communications Interactive '98]

The United States Telecommunications Act of 1996

This act will significantly affect all players in the telecommunications industry. The first major legislative change since the original 1934 Act lays out a new regulatory landscape for the Information Age. By Joseph L. Gattuso.(*)

When President Clinton signed the Telecommunications Act of 1996 ("the Act" or "the 1996 Act" )(1) into law on February 8, 1996, it represented the beginning of a new era in telecommunications regulation in the United States. As the most extensive and significant change in the basic U.S. law governing communications since the Communications Act of 1934 ("the 1934 Act"),(2) the new Act's passage represented a bipartisan consensus that advances in technology, as well as the success of regulatory models based on competition rather than monopoly, called for major changes in the regulation of telecommunications.

This law reflects a new thinking that service providers should not be limited by artificial and now antique regulatory categories, but should be permitted to compete with each other in a robust marketplace that contains many diverse participants. Moreover, the Act evidences a renewed government commitment to making sure that all citizens have access to advanced communications services at affordable prices through its "universal service" provisions, even as competitive markets for telecommunications services expand.

The law was immediately hailed as a landmark and the beginning of a new era of innovation, investment, and inclusion. As President Clinton said when he signed the bill:

This law is truly revolutionary legislation that will bring the future to our doorstep. . . . This historic legislation in my way of thinking really embodies what we ought to be about as a country and what we ought to be about in this city. It clearly enables the age of possibility in America to expand to include more Americans. It will create many, many high-wage jobs. It will provide for more information and more entertainment to virtually every American home. It embodies our best values by supporting . . . market reforms . . . as well as the V-chip. And it brings us together, and it was passed by people coming together.(3)
Prior to passage of this new Act, U.S. federal and state laws and a judicially established consent decree allowed some competition for certain services, most notably among long distance carriers. Universal service for basic telephony was a national objective, but one developed and shaped through federal and state regulations and case law. The goal of universal service was referred to only in general terms in the Communications Act of 1934, the nation's basic telecommunications statute.

The Telecommunications Act of 1996 among other things: i) opens up competition by local telephone companies, long distance providers, and cable companies with each other; and ii) reconfirms the U.S. commitment to universal service -- in part by helping connect all school classrooms, libraries, and hospitals to the information superhighway by the end of this decade. Additional provisions include those giving families control of the television programming that comes into their homes through the use of "V-Chip" technology, and prevent undue concentration in television and radio ownership so that a diversity of voices and viewpoints can continue to flourish, through modified ownership limits.

The response in telecommunications markets was seen immediately after the new Act was signed into law. Four of the seven Bell regional holding companies announced proposed mergers: Bell Atlantic acquired NYNEX, and SBC acquired Pacific Telesis. The passage of time brought more mergers among the Bell companies and other local carriers -- Bell Atlantic/GTE and SBC/Ameritech are among those pending -- and among other leading U.S. firms, such as AT&T and the video cable giant, TCI. The merger wave shows no signs of abating.

Some of these transactions are directly attributable to regulatory changes effected by the 1996 Act. Others are more likely a reflection of firms attempts to prepare themselves for the more competitive market environment that will be spawned by full implementation of the 1996 Act, the increasing convergence of services and markets, and the continuing globalization of economic markets.

Mergers, however, were only the earliest and most visible industry developments following passage of the Act. The larger and more long term effects will come over time as the many provisions of the Act are implemented. These effects may defy prediction. For example, some observers early on expected cable television firms to lead the way to local competition through upgrades in their networks, but activity in this area has been spare. To the surprise of some, wireless firms have moved quickly to develop "wireless local loop" and other wireless technologies that compete with traditional wireline telephony in urban as well as rural markets.

The U.S. Federal Communications Commission (FCC), working with state governments, was immersed in the process of promulgating regulations required to implement the provisions of the Act. The FCC has focused its attention on a triad of implementation issues -- those involving interconnection, access, and Universal Service. Since passage of the Act, the FCC has seen its interconnection and Universal Service orders challenged successfully in the U.S. courts, and its access rules upheld.

Ultimately, however, it is not the law and government agencies that will bring new telecommunications and information services to the public. That is the job of private industry. The law will help shape a competitive arena open to all providers and provide safeguards to ensure the fairness of that competition.

The Telecommunications Act of 1996 is an extensive document that affects a large number of telecommunications sectors. The committee print of the law runs well over one hundred pages. This short article will review and summarize the more significant of those provisions, describing how they change existing law and the status of their implementation as of the time this article was written. A complete review of all of the law's provisions in a short article is not practical and the reader would be advised to refer to more lengthy analyses.(4)

Scope and Content of the New Law

One common misperception is that the 1996 Act completely supplanted the foundational law of communications in the United States, the Communications Act of 1934. Despite the new Act's length and breadth, most of 1934 Act remains in full force and effect. For example, there were essentially no changes to the 1934 Act's "Title I" provisions, which established and still govern the operations of the FCC, and relatively few changes to those provisions of "Title III," which govern broadcasting. The Act did, however, make extensive revisions to the "Title II" provisions regarding common carriers and repealed the judicial 1982 AT&T consent decree (often referred to as the "modification of final judgment" or "MFJ") that effectuated the breakup of AT&T's Bell System.(5) Furthermore, it made a host of other changes to existing law and adds new provisions regarding, among other things, broadcasting, cable television, and the Internet.

Promoting Local Exchange Competition

To promote competition for local telephone service, the Act contains provisions to encourage competitors to provide local service.(6) No state or local government may prohibit any entity from providing telecommunications services.(7) Although prior law imposed a general interconnection duty on common carriers, the Act now requires local telephone companies: 1) to interconnect their network facilities with the networks of competing telecommunications carriers(8) at "any technically feasible point and on just, reasonable, and non-discriminatory terms"; 2) to unbundle their services into their constituent network elements and make those elements available to competing telecommunications carriers on just, reasonable, and non-discriminatory terms, and 3) to provide for resale of any of their retail services to other telecommunications carriers at a reasonable discount to consumers.

The act requires that local exchange carriers' interconnection, unbundling and resale obligations be made via negotiated agreements with other carriers. Interconnection agreements negotiated between a local exchange carrier and other telecommunications carriers must be approved by a state within the Act's deadlines. If a state fails to take action, the FCC can assume the responsibilities of the state. If the parties cannot agree, state regulatory commissions may arbitrate and resolve disputed issues.

The FCC adopted regulations on 8 August 1996 to implement these provisions, but the rules concerning the pricing of interconnection and unbundled network elements were challenged in court by local telephone companies and state regulatory commissions. Eventually, the court reviewing these matters rejected the FCC's regulations, holding that the 1996 Act authorizes the governments of the various states through their regulatory commissions -- and not the FCC -- to determine the prices for interconnection, unbundled network elements, and resold services, in cases where the parties cannot agree. The U.S. Supreme Court will review the lower court decision in October, 1998. Meanwhile, private parties have continued to negotiate interconnection agreements (subject to state commission review). Moreover, many state commissions have adopted the FCC's pricing rules in setting rates for interconnection, unbundled network elements, and resold services.

Unleashing Local Exchange Carriers into New Markets

The 1982 AT&T consent decree was the culmination of an anti-trust court action pursued by the U.S. Government against monopolistic practices of the Bell System. The consent decree, agreed to by the Government and AT&T, required AT&T to spin-off its affiliated Bell operating companies, which were put under the ownership and control of seven regional holding companies. However, because of concerns over the possibility of discriminatory practices or improper cross-subsidization between regulated and unregulated markets, the decree barred the Bell companies from certain lines of business, most notably long distance service.(9)

The new Act contains provisions to allow local exchange carriers into other markets, but subject to regulatory constraints:

Long Distance.(10) A Bell company may apply to the FCC for authorization to provide in-region long distance services if it has entered into an approved interconnection agreement and meets the requirements of a "competitive checklist" and other requirements in the Act. The FCC may approve the authorization if the company meets these requirements and the authorization is in the public interest. The company must provide such service through a separate affiliate for three years after enactment. The company may also, upon enactment, provide out-of-region and incidental long distance services, as well as already authorized long distance services. Nevertheless, although Bell companies have requested that FCC authorization to provide long distance services originating within a state, the FCC has yet to find that any Bell company has met the requirements above.

Video Services (Cable Television)(11) The Act gives telephone companies the option of providing video programming on a common carrier basis or as a conventional cable television operator. If it chooses the former, the telephone company will face less regulation but will also have to comply with FCC regulations requiring what the Act refers to as "open video systems." The Act generally bars, with certain exceptions including most rural areas, acquisitions by telephone companies of more than a 10 percent interest in cable operators (and vice versa) and joint ventures between telephone companies and cable systems serving the same areas.

There has been little development in this area since passage of the Act in 1996. Despite early optimism, open video systems have not materialized. Companies such as Time Warner and Pacific Telesis (now part of SBC) have discontinued their market trials of open video systems.

Universal Service

The goal of universal service, that is, the availability of basic communications services to the public at just, reasonable, and affordable rates, has been a significant cornerstone of U.S. communications policy at the federal and state levels for over 50 years.(12) The Act makes this goal explicit for the first time in the national law and requires the federal government, through the FCC, to work with states to make changes to the definition (14)

Because universal service is an objective of the various state governments as well as the federal government, the Act directed the FCC to institute a Federal-State Joint Board to develop recommendations on defining and funding universal service, and enumerates several principles (such as nature of access, service quality, and affordable rates) to guide the deliberations. The Joint Board issued a wide-ranging "Recommended Decision" in late 1996, that the FCC in May, 1997 adopted in large part.

The FCC's action reflects new thinking on Universal Service in the United States. The new Universal Service includes support for high-cost areas, low income households, and for the first time, key institutions in education and health care that otherwise might not be able to meaningfully participate in the information age.

Of great importance to the Clinton Administration, the Act seeks to ensure that schools and libraries (and -- to a lesser extent -- rural health care facilities) become connected to the national information infrastructure (NII) through preferential rates for services as defined by the FCC. This program, popularly called the "E-Rate," is intended to provide basic communications as well as Internet connections to classrooms throughout the country. Upon request, all telecommunications carriers must provide discounted service to schools (kindergarten through twelfth grade), libraries, and rural and non-profit health care facilities, at preferential rates. The Act directs funding of this program to be by telecommunications providers. The FCC has capped funding at $2.25 billion.

Recently, the E-rate program was challenged as an unprecedented extension of the Universal Service concept. Legislation is being considered in Congress to significantly modify the current FCC program by replacing it with a new NTIA grant program which would become subject to the annual appropriations process. The likely funding source would be through some portion of the existing 3% excise tax. Nevertheless, as of the time this article was written the program is scheduled to begin disbursements by the Fall of 1998.

Broadcast Services

The law as it existed prior to passage of the new Act contained certain restrictions on the ownership of broadcast stations in order to protect localism and the diversity of voices reaching people through the media. The new Act contains provisions that loosen those restrictions. The Act eliminates a national ownership cap for radio stations that the FCC had established and modifies local radio ownership limits.(15) The Act increases the national audience reach for television station ownership to 35 percent from 25 percent.(16) In addition, the Act requires the FCC to conduct a rulemaking to determine whether local television ownership limitations should be modified or eliminated. Further, the Act eliminates the FCC's network-cable cross ownership rule and the statutory broadcast station-cable cross ownership restriction, but retains the FCC's regulatory broadcast-cable and broadcast-newspaper ownership bans. The Act extends radio and television license terms to eight years and loosens rules on license renewal, eliminating the need for comparative hearing in most cases. The FCC is currently conducting a rulemaking on these issues.

The Act also affects the licensing of advanced next generation television service ("ATV"; also referred to, depending on context as, "digital television (DTV)" or "high-definition television (HDTV)"). Although the Act did not mandate the FCC to limit eligibility for ATV licenses to existing television broadcasters, it strongly encouraged the FCC to do so. This language essentially precluded the use of an open auction to select ATV licensees other than existing broadcasters. The FCC has now begun to award ATV licenses, with service to begin in the Fall of 1998. Congressional action in 1997 requires that broadcasters surrender their existing "analog" licenses by 2002, unless a large portion of the viewing public does not have digital television by then.

Another provision of the Act gives the ATV licensees the flexibility to use their spectrum for services other than ATV broadcasting -- such as non-broadcast services. A licensee that for any such service receives a fee or other compensation must in turn pay a fee to the FCC based on the market value of the spectrum used for these "pay" services.(17)

Obscenity and Violence

Services provided via the Internet and other computer networks are generally not subject to broadcast or telecommunications regulations. The 1996 Act, however, contained provisions generally known as the Communications Decency Act, which in part criminalized the transmission or making available of obscene or indecent material over the Internet under some circumstances. It provided certain "good faith" defenses for on-line services and users. Nevertheless, provisions of the Communications Decency Act were successfully challenged in the courts as a violation of the right to freedom of speech under the First Amendment to the United States Constitution. The Supreme Court struck down that portion of the Act that criminalized material "harmful to minors," which is a test of indecency, although it let stand the provisions against obscene materials. There is now more focus on self-regulation and user control rather than heavy government regulation, as an effective way to deal with offensive content or content considered inappropriate for children.

To address violence on television and to give viewers greater control over the television programming they receive, the Act required television manufacturers, within two years of enactment, to include blocking technology (the "V-chip") in all television sets. The Act encouraged the broadcast and cable industries to create a voluntary rating system within one year, which it did. Currently, all major networks with the exception of one display ratings for their programming. The ratings system is similar
to that developed and used for many years by the motion picture industry. When V-chip technology is incorporated into television receivers, the use of ratings would remain voluntary, but any rating must be sent electronically. The V-chip, like the self-regulation of the internet, is a way to let users decide what information they will receive or not receive.

Conclusion

The Telecommunications Act of 1996 was a historic change in the basic U.S. law governing communications. The new law is expected to bring radical changes to the provision of services to the public, as competition for these services develops among all telecommunications providers. At the same time, the law takes steps to ensure that advanced telecommunications services are available to all citizens, as part of the policy of universal service. The FCC and the states, as the regulatory bodies, implement the law.

In the almost three years since the law was passed, some people have questioned whether the law was a success or a failure. Critics express disappointment that extensive competition did not come or come quickly enough, and that the most visible effects were the many mergers of industry giants. Others, however, see in the corporate realignments an entirely new telecommunications industry. Despite almost three years having gone by, it is still too early to tell whether mergers and other developments represent a good or bad trend. The future, perhaps, may not be as simple as local vs. long distance telephony service, or telephony vs. cable, but instead be in end-to-end services through companies with competing technologies. Ultimately, the services brought to the public will depend on the providers of those services and their success in the marketplace.


Endnotes

    (*) Deputy Associate Administrator, National Telecommunications and Information Administration (NTIA), U.S. Department of Commerce, Room 4725, Washington, D.C. 20230 (email: jgattuso@ntia.doc.gov; URL: http://www.ntia.doc.gov). NTIA serves as the President's principal adviser on telecommunications policies. The views expressed herein are those of the author and not necessarily those of NTIA or the United States Government. The author wishes to express his thanks to colleagues Tim Sloan, Kelly Levy, and Jim McConnaughey, graduate student intern Douglas Everette, and to Luis Sanz, 1997 Fulbright Scholar visiting NTIA from the Government of Spain, for their contributions, suggestions and insights.

  1. Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified throughout Title 47 of the United States Code ('47 U.S.C.').
  2. Communications Act of 1934, 48 Stat. 1064, codified throughout 47 U.S.C.
  3. President William J. Clinton, Remarks by the President at the Signing Ceremony for the Telecommunications Act Conference Report (Feb. 8, 1996) [Transcript available at the White House World Wide Web Site, http://www.whitehouse.gov /WH/EOP/OP/telecom/release.html.]
  4. For a critique of the act, see, e.g., Thomas G. Krattenmaker, The Telecommunications Act of 1996, 49 Fed. Comm. Law Journal 1 (1997). A more extensive collection of material regarding the Act and its history can be found in Leon T. Knauer, Ronald K. Machtley, and Thomas M. Lynch, Eds., Telecommunications Act Handbook: A Complete Reference for Business, Government Institutes, Inc. (1996).
  5. See, e.g., 47 U.S.C. 153 (3); United States v. Western Electric Co., Inc., 797 F.2d 1082 (D.C. Cir. 1986); National Telecommunications and Information Administration, U.S. Dep't of Commerce, Spec. Pub. No. 91-26, The NTIA Infrastructure Report (Oct. 1991); Knauer, Machtley and Lynch, supra note 4, at 18.
  6. See generally, 47 U.S.C. 251, 252. Certain exceptions from these requirements are allowed for rural local exchange carriers and those with fewer than two percent of the Nation's subscriber lines.
  7. 47 U.S.C. 253. Limited, non-discriminatory exceptions to this rule are allowed for certain State and local government activities related to public rights-of-way, consumer protection, and other similar issues.
  8. Under the act, the term 'telecommunications carrier' is defined broadly to mean 'any provider of telecommunications services, except that such term does not include aggregators of telecommunications services (citation omitted).' 47 U.S.C. 153(44).
  9. See supra note 5.
  10. See 47 U.S.C. 271, 272.
  11. See 47 U.S.C. 571 through 573.
  12. Section 1 of the 1934 Act stated a National policy 'to make available, so far as possible, to all the people of the United States, a rapid, efficient, nationwide, and world-wide . . . communication service with adequate facilities at reasonable charges.' (47 U.S.C. 151). The process of fulfiling the universal service obligation has involved the expansion of telephone service into unserved areas and the maintenance of local rates at affordable levels. Government policies have played an important role in this process both through direct assistance, such as loan programmes, and regulatory policies that have provided subsidies for certain services (e.g., residential local exchange), areas of the country (e.g., high cost), and recently, subscribers (e.g., low income). For a history of universal service policy in the United States, see, e.g., The NTIA Infrastructure Report, or Knauer, Machtley and Lynch, both supra note 4.
  13. See 47 U.S.C. 254.
  14. See 47 U.S.C. 255.
  15. See Act, 202(a), modifying 47 C.F.R. 73.3555, and 202(b).
  16. See Act, 202 (c) through (i).
  17. See 47 U.S.C. 336.