Remarks of Assistant Secretary Irving at the National Association of State Utility Consumer Advocates' Washington Telecommunications Conference

The New Telecom Landscape: In Search of Consumer Benefits
Washington, DC
February 10, 1998

The National Association of State Utility Consumer Advocates'
Washington Telecommunications Conference

"The New Telecom Landscape: In Search of Consumer Benefits"

 

 
Remarks by Larry Irving
Assistant Secretary for Communications and Information
National Telecommunications and Information Administration
Department of Commerce

 

 
Washington, D.C.
February 10, 1998
[as prepared]

 


With the arrival of the second anniversary of the Telecommunications Act of 1996, we begin to reflect on what has changed, and what hasn't, over the last two years. We continue to be pushed forward by new technologies -- digital subscriber line technology, RealAudio and RealVideo, cable modems, wireless fiber technology, and broad spectrum package radio technology, just to name a few. Technology is helping to bring us more competition and more choices for consumers.
 

The FCC has also attempted to put in place a set of rules that promote competition and benefit consumers in a rapidly changing industry. It has tackled the big three - interconnection, access charges, and universal service. It has met some resistance, most notably by incumbents who are losing their monopoly status.
 

In this new telecom landscape, we search for consumer benefits. And, yes, we do find some. First, consumers have more choice. According to the FCC, the number of long distance carriers has more than tripled since the break-up of the Bell System in 1984. During the same period, the dominant toll provider's nationwide market share plummeted from 90 percent to less than 50 percent. Demand for interstate toll calling surged, with switched access minutes rising by 180 percent. And why not? Because of competition and rate re-balancing, residential users have enjoyed substantial reductions in the price of interstate calling. The annual CPI for interstate toll calls declined nine times since the AT&T divestiture occurred 14 years ago. AT&T's basic schedule rates for direct-dial interstate calls dropped 30 percent during the interval, and many can attest that discount calling plans feature sizable savings over schedule prices. Compare that trend to the cost of a new car, a new house, or a college degree.
 

A look at telephone penetration -- the most widely-used barometer of a nation's ability to make calls -- yields more good news for the country as a whole. Today, the overall U.S. penetration stands at about 94 percent; in 1984, it was more than two percentage points less with almost 19 percent fewer households. For the first time since the Bell break-up, as many as eight States have penetration rates of 96 percent or more; Nebraska and Pennsylvania surpass 97 percent.
 

At the same time, advanced technology has diffused widely in the public switched network: today, most switches are digital, Signaling System 7 has brought faster call set-up to many, and high-capacity and low-maintenance fiber optic links dominate inter-office transmissions. Sorry, but you'll have to go to a museum to find hand-crank phones and soon even party lines.
 

Do you enjoy mobility? You are not alone. Since December 1984, the number of cellular subscribers has grown fivefold, while the average monthly bill -- spurred by price reductions -- has dropped by more than half. From December 1995 to June 1997, the number of cellular and PCS subscribers grew from 33.7 million to 48.7 million; and the average monthly phone bill during this time dropped from $51.00 to $43.86. In 1997, average cellular prices dropped 25 percent in markets where PCS firms began service.
 

Are you part of the Net Generation? For $20 a month, your PC and modem can bring you a treasure trove of information and capabilities attainable not so long ago solely by think tanks and universities. Today, almost 50 million Americans surf the Net, compared with 900,000 scientists and researchers five years ago. And 116 million Americans are projected to be connected to the Internet by the year 2002. Today, there are more than 500,000 Web sites, compared with 140 three years ago. Three years ago, no one predicted that "real audio" would be audio to the Net in '95 or video to the Net in '96, or that in '97 "RealNetwork" would for the first time deliver audio and video to broadcast-size audiences over the Net.
 

Are Consumer Benefits Coming to Local Telephone Markets?
 

Now is the time to open the last monopoly market -- we need choice for local telephone service. For example, average monthly local telephone rates (including minimum connection charges) for residences have increased 18 percent, on average, since 1984. During the post-divestiture era, the annual CPI for all local charges rose 13 out of 14 years. Local markets continue to be dominated by the incumbent local exchange carriers, which captured about 99 percent of all local service revenues in 1996.
 

Since the passage of the Act, however, competitive local exchange companies (CLECs) have emerged as a discrete industry segment. CLECs now account for about 2.6 percent of all local telephone revenues. The top ten CLECs have switches in 132 cities in 33 states, nearly all of which have been installed since passage of the Act. CLECs tripled their customer lines in 1997 to about 1.5 million. Publicly-traded CLECs have raised $14 billion in capital since passage of the Act, and their total market capitalization is $20 billion. And there is clearly some momentum here. Indeed, according to Standard and Poor's, total CLEC financing from January 26 through February 4 - just a week - was slightly over $1 billion - $1.228 billion to be exact.
 

As residential consumers know, however, the level of choice and competition is quite low as compared to business consumers. Clearly, much greater efforts need to be made in the residential telephone market.
 

Good news is on the horizon. As reported in yesterday's USA Today, half of the 20 million households living in big apartment buildings and other clustered communities will have a choice of local telephone service providers within the next two years.
 

Where do we go from here? How do we encourage greater competition and find more consumer benefits?
 

Much of the work requires a new federal-state relationship. There may not be a single blueprint for introducing competition into local exchange markets. The Administration applauds the FCC's commitment to work intensively with State regulatory commissions as the Commission grapples with the challenges before it. As part of the FCC's and the States' 1998 agendas, NTIA believes that the following two common carrier issues merit top billing: local competition and universal service.
 

Local Competition
 

Although the United States Court of Appeals for the Eighth Circuit invalidated the Commission's pricing rules for interconnection, unbundled network elements (UNEs), and resold services, the court upheld many other parts of the Commission's Interconnection Order, such as the Commission's interpretation of the statutory standards for determining where interconnection must be permitted and what network elements must be unbundled, as well as the Commission's classification of operations support systems (OSS), operators services, and vertical switching features as UNEs. Thus, the interconnection order will continue to guide negotiating parties and State commissions as they fashion reasonable and procompetitive interconnection agreements.
 

One part of the court's order, however, may threaten the growth of local competition. Specifically, the court ruled that the 1996 Act does not create a duty on the part of local exchange carriers to recombine the network elements that they make available to competing carriers. Unless prospective entrants are able to combine such elements quickly and at reasonable costs, the result may be to foreclose unbundled network elements as a viable entry strategy. Some State commissions have attempted to rectify this situation by concluding that State law requires that LECs recombine unbundled network elements at a reasonable charge. I applaud those decisions and encourage Federal and State regulators to explore ways to ensure that competitors can enter the market using unbundled network elements.
 

The Commission required LECs to provide prospective competitors with access to the LECs' OSS functions on the same terms and conditions as the LECs make such functions available to themselves or their customers. The Commission rightly concluded that "competitors' ability to provide service successfully would be significantly impaired if they did not have access to incumbent LECs' operations support systems functions." Parity of access can not be assured, however, without (1) performance standards and performance measures with which to gauge the LECs' compliance with their obligations and (2) technical standards to ensure efficient and seamless communication between the LECs' OSS and those of competitors. NTIA believes that the Commission should grant the petitions filed by LCI International and the Competitive Telecommunications Association and institute a rulemaking to address these OSS issues.
 

The FCC should be commended for its work, under very tight deadlines, in reviewing BOC applications to offer interLATA services. I believe that the Commission's decisions to date have been both reasonable and consistent with the statute. However, there is much to be said for greater cooperation between regulators and the industry in clarifying the rules of the road. I am therefore encouraged that the FCC has established a process by which those consultations can take place. It is important to remember, however, the ultimate goal of section 271 -- to ensure that the local telecommunications market is truly open to meaningful competitive entry before the BOCs are allowed into the long distance market.
 

Universal Service
 

In its May 8 Universal Service Order, the Commission adopted a new Federal rules for protecting and advancing universal service. That decision is tribute to the ability of Federal and State regulators to address the many difficult issues surrounding universal service in a cooperative and collaborative manner. Although the Commission's order establishes many aspects of a sound national universal service plan, challenges remain. First and foremost, the Commission must devise a mechanism for providing Federal universal support for subscribers living in rural and high cost areas. The task here is to fashion a high cost program that preserves affordable rates in rural areas and accommodates the needs and interests of high and low cost States. In this regard, a working group of the NARUC Communications Committee has drafted a high cost proposal that deserves careful study. The Commission should also continue to study the feasibility of using competitive bidding both to establish the amount of support needed in specific high cost areas and to designate the carrier that will responsible for providing the Federally-defined universal service package in those areas.
 

Second, the Commission should move expeditiously to implement its program for supporting the provision of telecommunications services to our nation's schools and libraries. Because applications for funding will likely exceed the monies available, we have urge the Commission to ensure so far as possible that support is directed to the institutions most in need of assistance.
 

Finally, Federal and State regulators must continue to work closely together on universal service issues. Bear in mind that the Universal Service Order established the share of the total costs of preserving universal service that will be collected and disbursed via Federal support mechanisms. State commissions will have to develop programs consistent with the Federal plan to generate the balance of the subsidies needed. As that process evolves, the Commission and the States should coordinate their universal service initiatives so that sufficient monies are gathered to ensure affordable service for all subscribers that wish telephone service and to prevent double recovery of costs by serving carriers.
 

Access by all Americans to telecom services continues to be one of NTIA's highest priorities. In two weeks - February 24-27 - NTIA will co-host a conference here in Washington that will address how we can ensure access for our traditionally underserved communities.
 

Will We Continue to Hear a Multiplicity of Voices?
 

Let me turn in the remaining time to media issues . . . In the wake of the passage of the Telecom Act of 1996, a wave of consolidations swept through the radio, television, and cable industries. While increases in concentration, joint ventures, and the stitching together of other financial bonds among once independent players may not necessarily yield results that are harmful to consumers, this result is certainly a possibility. We must ask some critical questions: What effect does media concentration have on the maintenance of a multiplicity of voices and viewpoints? Does media concentration damage diversity and hobble competition?
 

There have been a number of developments that raise red flags for anyone concerned about the vitality of a robust marketplace of ideas and access to mass media in America.
 

Increased Concentration
 

We need to pay attention to the growth of concentrated market power in the television and radio markets. A record $13.8 billion has been spent in radio station ownership transactions since January 1, 1997, according to a survey by BIA Cos. The dollar figure of sales is up 19 percent from same months of 1996. Major dealers in 1997 have been Capstar, with an acquisition of 266 stations for $2.8 billion; Chancellor Media, which has a deal pending for $5.4 billion for 113 stations; Clear Channel, with its purchase of 69 stations; and CBS Radio, which more than doubled its station holdings with Westinghouse's agreement to buy American Radio Systems (ARS) for $1.6 billion plus assumption of $1-billion debt, adding 98 stations, giving CBS total of 175.
 

Minority Ownership
 

In 1993, the California Institute of Technology released a study indicating a statistically significant relationship positive between minority broadcast ownership and programming responsive to minority community. NTIA has been collecting data on minority ownership of radio stations since 1990. Our report -- 1997 Minority Commercial Broadcast Ownership Report -- released this past August documents an overall decline in real terms. Our survey found that minorities now own 322 of our nation's 11,475 commercial broadcast stations, down from 350 last year, representing 2.8 percent of total commercial ownership -- falling from 3.1 percent in 1996. Moreover, the loss of 28 stations happened when the overall number of commercial broadcasting stations was increasing by 63 stations.
 

The specific racial breakdown is as follows: Black ownership represents 1.7 percent; Hispanic ownership represents 1.05 percent, Asian ownership represents .03 percent and Native American ownership represents .04 percent. The only category that showed an increase from last year was the total number of Hispanic-owned stations, which went up from 115 to 120 stations due to an increase in the number AM radio stations owned by Hispanics.
 

I wish I could say that this year's numbers appear to be an aberration. Unfortunately, a five-year comparison reveals that over the past five years, the total number of commercial stations has grown by 641, but that minority ownership totals have declined -- minorities own 8 fewer stations today than in 1992.
 

NTIA found that minorities are buying AM stations -- the number of minorities owning AM stations only went down by 1. It is the FM stations that are losing their minority owners. FM stations decreased by 27. NTIA also found that minorities are buying are buying low-power, less profitable stations. This is a potential problem, as these are the stations that fall victim to the economic whims and downturns of the marketplace.
 

The decline in Black ownership can be ascribed in part to the sale of US Radio, the largest Black-owned broadcast company in the U.S. to Clear Channel Communications. NTIA also believes that the under representation of minority owners bears a direct relationship to a lack of access to investment capital, and the lack of legislation and policy initiatives that promote minority ownership.
 

Conclusion
 

Two years later, we are on the road to competition. Transitions are difficult times, and consumers as well as companies are going to experience bumps in the road. But the Administration believes that the Act has set up a framework that will bring true competition and consumer benefits. We must stay the course. Thank you.