TESTIMONY OF LARRY IRVING ASSISTANT SECRETARY FOR COMMUNICATIONS AND INFORMATION U.S. DEPARTMENT OF COMMERCE ON TELECOMMUNICATIONS POLICY REFORM LEGISLATION BEFORE THE COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION UNITED STATES SENATE MARCH 2, 1995 Mr. Chairman and Members of the Committee: INTRODUCTION Good morning. Thank you for this opportunity to testify before you today on the issue of telecommunications policy reform. The Administration shares your interest in promoting the advancement of a modern telecommunications and information infrastructure in a procompetitive manner that benefits all Americans. Congress has the opportunity this year to enact legislation that will open all telecommunications markets to vigorous competition, produce clear, flexible, and limited government regulations to ensure that such competition is robust and fair, and link the introduction of new products and services to producer initiative and consumer demand. Such legislation, in short, can unleash the promise of the Information Superhighway for all Americans. The key test for any telecommunications reform measure is whether it helps the American people. Legislation should provide benefits to consumers and spur economic growth by ensuring competitive telecommunications markets. Competition will provide consumers with lower prices, higher quality, and greater choice. The continuing competitiveness of U.S. companies will create jobs as the telecommunications sector grows. Only competition -- not monopoly -- will enable us to achieve these goals. The Administration looks forward to working with you and your Committee to ensure that a complete, integrated set of telecommunications reform proposals moves forward. THE NEED FOR LEGISLATION An advanced information infrastructure will transform everyday life for every person in the United States in the near future. Projects are underway that are changing the way we work, educate our children, receive medical services, and interact with our family and neighbors. For example, in your home state of South Dakota, Mr. Chairman, the Rural Development Telecommunications Network is connecting 47 schools to networks and providing distance learning programs. It would be a mistake, however, simply to "let nature take its course" and allow change to proceed under the existing legal regime, whose underlying structure was established 60 years ago. This is true for three essential reasons. First, we need legislation to promote innovation and competition. Information transmission increasingly is the life blood of all our industries. Archaic rules or entrenched monopolies that inappropriately retard innovation by telecommunications firms are detrimental to the international competitiveness of the private sector, inhibiting industrial productivity and job creation. Legislation that reforms these outdated structures and supports entry of new competitors will enhance competitiveness and spur the creation of good new jobs. Second, the existing regulatory structure discourages private investment. It places artificial barriers on firms that, due to technological advances, are now in a position to be competitors. The regulatory structure has created an uneven playing field that favors some companies or industries over others. This, in turn, inappropriately skews the growth of industry sectors and retards the development of the National Information Infrastructure (NII). Accordingly, legislation is needed to eliminate such unwarranted regulatory disparities. Third, we need to be sure that our telecommunications policies are fully responsive to the needs of the American people as a whole, and, in particular, poorer and disadvantaged Americans. As Secretary of Commerce Ronald H. Brown has emphasized, we cannot "become a nation in which the new information age acts as a barrier, rather than a pathway, between Americans" -- a nation divided between the information rich and the information poor. Yet, while the universal provision of "plain old telephone service" has long been a national goal, the existing regulatory structure may not be sufficient to ensure that all Americans benefit from the broader range of information services that will become available under the NII. Accordingly, legislative reform is urgently needed to address this shortcoming. I will have more to say about the Administration's views on universal service. Several states have already adopted innovative regulatory reforms that seek to open up local competition. These states serve as models for the benefits that competition can bring to consumers. But we can't build a system one state at a time. We need a national vision and a national system. THE SENATE'S LEGISLATIVE REFORM PROPOSALS I would like to offer, as briefly as possible, the views of the Administration on the legislative reform proposals currently being discussed in the Senate. I commend the Committee for tackling these difficult issues. The draft bills propose reforms in many key areas that we agree need to be addressed. These include, for example, prompt lifting of the cable/telco crossownership ban, preempting state barriers to competition in local phone service, reexamining broadcast ownership and spectrum rules, and providing a process for reviewing the need for continuing regulation. We support these efforts and hope to have the opportunity to work with the Committee on the details of these proposals. This morning, I would like to focus my remarks on five areas: (1) local competition, (2) BOC entry into long distance and manufacturing, (3) universal service, (4) cable regulation, and (5) foreign ownership. Local Competition A critical area for reform is ensuring local competition. Your draft bill, Mr. Chairman, would permit the details of interconnection and unbundling -- implementation of which is crucial to the development of local exchange competition -- to be determined in negotiations between incumbent local exchange carriers and prospective entrants. While we share your goal of promoting local competition, while simultaneously minimizing government regulation, the Administration has concerns about how effective the negotiation process will be. And here, Mr. Chairman, experience is instructive. The local interconnection agreements that have been finalized to date are, in most cases, the fruit of difficult, contentious bargaining processes that have exceeded significantly the four-month period contemplated in your draft bill. The recently-announced agreement between NYNEX and Metropolitan Fiber Systems -- which some hail as an exemplar of the negotiation approach -- was two years in the making. In short, there are legitimate questions whether the proposed private negotiations -- even with a credible threat of government intervention -- are the best method for expeditiously facilitating completion of the interconnection/unbundling agreements essential to the growth of local exchange competition. In the five years since New York State first mandated local exchange interconnection, agreements have been finalized in a number of other states as well. These pacts provide strong evidence of the interconnection terms and conditions that are acceptable to both local exchange carriers and their potential competitors. The FCC, with assistance from the States, could use those agreements as the model for uniform, nationwide, minimum regulations concerning interconnection and unbundling. The Administration believes that nationwide regulations would have the clear advantage of informing local competitors everywhere of their basic rights and responsibilities. This would make it easier and quicker for new companies, particularly smaller ones, to enter the local exchange markets and deliver the benefits of competition to consumers. BOC Entry into Long Distance and Manufacturing In addition, Mr. Chairman, the negotiation approach to interconnection/unbundling in your draft bill will require incentives to ensure that parties negotiate in good faith. This brings me to another critical provision in your draft bill: the provision setting a date certain -- three years after enactment - - for elimination of the AT&T Consent Decree and guaranteed BOC entry into long distance and manufacturing. Assistant Attorney General Bingaman has ably outlined the Administration's reservations about that provision. I will add only this: a date certain will undoubtedly erode the BOCs' incentives to conduct and conclude interconnection negotiations expeditiously. Your draft bill recognizes this fact and attempts to mitigate the potential consequences by authorizing stiff penalties in the event that the BOCs do not comply fully with their interconnection/unbundling requirements. However, the very severity of those penalties may reduce the likelihood that they are ever imposed. More importantly, the threat of sanctions for bad conduct is, in general, a poor substitute for strong incentives for good conduct. As Assistant Attorney General Anne Bingaman has outlined, the better approach is to establish the preconditions for BOC entry, including a careful assessment by the Department of Justice of the state of competition in the local exchange market. The Administration will work with the Committee to develop an approach that meets this objective while giving the BOCs incentives to comply with their interconnection and unbundling obligations. Universal Service The Administration shares the Committee's recognition that implementation of new universal service policies for the information age is of profound public policy significance. We are pleased that both the Chairman's and Senator Hollings' proposals seek to ensure universal service. The Administration supports efforts to develop a new concept of universal service that will serve the information needs of the American people in the 21st century. Indeed, the full potential of the NII will not be realized unless all Americans who desire it have easy, affordable access to advanced communications and information services, regardless of income, disability, or location. We welcome the continued bipartisan Congressional support for universal service. A major concept on which all agree is the need to establish a Federal/State Joint Board to make recommendations to the FCC on both the evolving definitional and funding elements of universal service. There is also agreement on many of the principles that should form the basis for the FCC's and the Joint Board's efforts. These include: o providing quality services at just, reasonable, and affordable rates; o establishing a coordinated Federal and State universal service funding system administered by an independent, non-governmental entity; o requiring telecommunications services providers to contribute to the preservation and advancement of universal service on an equitable and nondiscriminatory basis; and o permitting consumers to exercise choice among telecommunications carriers. Such a broad framework of general principles can form the bedrock upon which the FCC and the states can establish universal service policies for the future. The Administration wishes to work closely with the Committee on this framework. We also hope to work with the Committee on legislative provisions to facilitate the connection of all our classrooms, libraries, hospitals and clinics to the NII by the year 2000. Universal access to the NII will promote U.S. competitiveness, create new jobs, and ensure that all citizens realize the benefits of the information revolution. We want to work with the Committee in exploring all possible methods of accomplishing this goal. Cable Television I would also like to address some concerns the Administration has with the draft bill with respect to the language that would eliminate government regulation of cable television rates beginning one year after enactment. Mr. Chairman, the Administration believes that this approach would not serve the public interest. The 1992 Cable Act rests on the sound principle that rate regulation will cease immediately in markets where there is effective competition. However, today fewer than 1 percent of households nationally have Direct Broadcast Satellite service and virtually none have a choice of wired video provider. Without the disciplining effects of such competition, deregulation will rarely, if ever, benefit consumers. And while it is true that competition in the video marketplace is increasing with the advent of Direct Broadcast Satellite service and the prospect of video dialtone, it remains to be seen whether and to what extent these potential competitors will become actual alternatives to entrenched cable systems. The years following passage of the 1984 Cable Act demonstrated the perils of deregulating on the promise of potential competition rather than the existence of actual competition. The Administration believes that we should not repeat that experience. That is not to say that changes to the 1992 Cable Act should not be made. I understand that the National Cable Television Association has proposed a number of amendments to that Act's definition of "effective competition," which would deregulate cable operators more quickly with the advent of competition in local markets. The Administration has indicated a willingness to work with Congress and industry to minimize the burden of government regulation without sacrificing cable subscribers. We will not, however, support deregulation of monopolies before the arrival of actual competition. As long as monopolies continue to exist, consumers must be protected. Foreign Ownership We also agree with the Committee's interest in reexamining Section 310(b) to help foster open telecommunications markets worldwide. As reflected in the Vice President's speech at the G-7 Conference, the Administration joins many in Congress who support lifting the Section 310(b) restrictions for countries that have also opened their telecommunications markets to U.S. companies. We suggest that a determination of whether this goal has been achieved for a particular country should be made by the President, based on the advice of the appropriate Executive Branch agencies. This would be an interim step until multilateral talks with other nations resulted in reciprocal agreements on access. Clearly, in revising Section 310(b), we must recognize that many countries are in the process of change, but progress will be varied among countries and will evolve over time. We do believe, however, that once a critical mass of countries with open telecommunications markets is achieved, the momentum and demand from both national and multinational companies, as well as global alliances, will create a powerful force to push the remaining countries toward competitive and open markets. We would not, however, move to lift the restriction with respect to broadcasting at this time. The Administration believes that we should not be too hasty in lifting restrictions on the amount of foreign influence over, or control of, broadcast licenses due to the editorial discretion of broadcasters over the content of the transmissions. The Administration thus welcomes the opportunity to work with the Congress to reform 310(b) to help achieve our mutual goals of continuing to open telecommunications markets around the globe to facilitate participation by U.S. companies. This will help boost economic growth, create jobs, and ensure that U.S. companies remain world leaders in the global telecommunications marketplace. CONCLUSION Mr. Chairman, let me close by reaffirming my central message. Both your reform proposal and that put forth by Senator Hollings have considerable merit. Although the Administration has concerns about specific provisions, there is also much with which we agree. I remain convinced that if we work together, Congress, the Administration, and the many other interested parties can forge telecommunications reform policy that promotes the objectives to which we are all committed -- competition, investment, consumer welfare, and reduced government regulation. Thank you again for the opportunity to testify, and I will be happy to answer any questions.