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Testimony of Assistant Secretary Irving on the Communications Act of 1995

May 11, 1995

TESTIMONY OF LARRY IRVING
ASSISTANT SECRETARY FOR COMMUNICATIONS AND INFORMATION
U.S. DEPARTMENT OF COMMERCE

ON
H.R. 1555
"COMMUNICATIONS ACT OF 1995"

BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE,
COMMITTEE ON COMMERCE,
U.S. HOUSE OF REPRESENTATIVES

MAY 11, 1995


Mr. Chairman and Members of the Committee:

 

INTRODUCTION

Good morning. Thank you for this opportunity to testify before you today on the H.R. 1555, the "Communications Act of 1995."

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 could accelerate the development of a National Information Infrastructure (NII) for all Americans.

The key test for any telecommunications reform measure is whether it helps the American people. Legislation should provide benefits to consumers, spur economic growth and innovation, promote private sector investment in an advanced telecommunications infrastructure, and create jobs. As your Subcommittee is well aware, only competition -- not monopolies -- will enable us to achieve these goals. Competition will provide consumers with lower prices, higher quality, and greater choice.

The Administration would support telecommunications reform legislation that protects consumers from monopolistic practices and promotes maximum competition. H.R. 1555 as currently drafted, however, falls short of those goals. Instead, the bill prematurely deregulates cable systems, which still are monopolies in most communities, and would result in significant increases in cable rates for millions of Americans before real competition exists. In addition, the bill lifts restrictions on Bell Operating Company (BOC) entry into long distance and other markets without requiring a Justice Department assessment regarding the competitive impact of such entry.

The Administration supports a consensus process similar to the one followed last year in the House for achieving our mutual goal of telecommunications reform. We will continue to work with your Committee and the full Congress to ensure that telecommunications reform legislation promotes the advancement of a modern telecommunications and information infrastructure in a pro-competitive manner that benefits all Americans.

 

 

BENEFITS OF PRO-COMPETITIVE AND PRO-CONSUMER LEGISLATION

An advanced information infrastructure has the potential to improve everyday life for millions of people in this country. Telecommunications and information technologies are changing the way we work, educate our children, receive medical services, and communicate with our family and neighbors.

An example of the benefits of the NII is taking place in your home state of Texas, Mr. Chairman. My agency -- the National Telecommunications and Information Administration (NTIA) within the Department of Commerce -- is supporting a project there that will help the University of Texas at El Paso and a coalition of educational, health and human services, business, government, and philanthropic agencies develop widespread availability of advanced telecommunications and digital networks in southwest Texas. The goal is to promote the new business and cultural opportunities developing along the border area of Mexico and Southwest Texas due to the North American Free Trade Agreement.

This example is just one of the many public/private partnerships that are springing up to promote affordable access to advanced communications networks across the country. These projects will enable millions of U.S. citizens to have crucial information at their fingertips about educational options, business opportunities, health and medical choices, and similar resources.

The need to ensure affordable access to advanced communications networks for all Americans is what is at stake as the Administration and the Congress work together to reform this Nation's telecommunications policies. The issues that we will be discussing today go to the heart of the reforms that are needed.

The first is the need to achieve real competition in the telecommunications arena. The key to bringing down costs is competition -- bringing more players into the market. The more entities there are providing access to communications networks, the lower costs will be as these entities compete for customers. Well crafted legislation that reforms outdated regulatory structures and supports entry of new competitors will enhance competitiveness, stimulate innovation, lead to lower prices for consumers, and spur the creation of good, new jobs.

As this Subcommittee is well aware, Federal action has been a key factor in bringing competition to the telecommunications arena for many years. The Department of Justice's breakup in 1984 of the former AT&T telecommunications monopoly, for example, contributed to the decline in residential long distance rates of more than 50 percent over the past 10 years. Appropriately crafted Federal legislation could foster the same kind of competition today in local telephone and cable markets.

We also need to ensure that our telecommunications policies are fully responsive to the needs of all Americans. As Secretary of Commerce Ron 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.

For this reason, the Administration strongly supports the goal of universal service, including access for classrooms, libraries, hospitals, and clinics to the NII, including in rural areas. The Administration also supports efforts to prevent discrimination or "redlining" in the provision of telecommunications and information services, and the inclusion of all groups, including minority businesses, in the telecommunications field.

 

ADMINISTRATION VIEWS ON H.R. 1555

H.R. 1555 proposes reforms in key areas that the Administration agrees need to be addressed. These include promoting universal service generally as well as access to networks by individuals with disabilities; prompt lifting of the statutory ban on telephone companies providing video programming directly to subscribers (the telco-cable crossownership ban); requiring that telephone companies in most cases establish a video platform to provide video programming; authorizing the Federal Communications Committee (FCC) to prohibit discrimination on the basis of ethnicity, race, or income with respect to video platform service areas; and preempting state barriers to competition in local telephone service.

The Administration has strong reservations, however, about other provisions in H.R. 1555 that fail to ensure the development of real competition or to protect consumers. These include primarily: (1) provisions that deregulate cable rates before cable operators face any actual competition; (2) broad exemptions to the buyout restriction between telephone companies and cable operators; and (3) the absence of a strong role for the Department of Justice (DOJ) in assessing the competitive impact of Bell Operating Company (BOC) entry into the long distance market.

The Assistant Attorney General's testimony addresses the issue of DOJ's role as well as other competitive issues. Therefore, I would like to focus my remarks today on our concerns about cable rates and anti-competitive buyouts. I will also discuss other key concerns relating to the bill's video programming provisions as well as other bills pending before this Subcommittee that would make sweeping changes to current broadcast ownership and foreign ownership rules.

Premature Deregulation of Cable

The bill would amend the Cable Act to declare that a cable system faces "effective competition" when one of the following three conditions are met: 1) a common carrier has been authorized by the FCC to provide video dialtone service in the franchise area; 2) a common carrier has been authorized by the FCC or a franchise authority to provide video programming in the franchise area; or 3) the FCC has prescribed regulations relating to video platforms. Once the effective competition standard is met, cable programming services (commonly known as "expanded basic services") are deregulated as well as associated cable equipment, installations, and connection charges.

This provision would deregulate cable systems before they faced competition from a telephone company or anyone else for that matter. For example, the third prong deregulates cable upon the mere issuance by the FCC of its video platform regulations. This essentially provides for the deregulation of expanded basic rates for all cable systems in a maximum of 15 months from the date of the bill's enactment, since the bill requires the FCC to issue those regulations by that time.

The first two prongs base deregulation merely on whether a telephone company has been authorized to provide video dialtone or video programming, without requiring that the telephone company even begin to construct any facilities or offer any comparable video services to any subscribers. In addition, no consideration is given to the time required for the telephone company to deploy its system. Any delays in actually providing these services to customers would allow the incumbent cable provider to operate in a deregulated environment.

While couched as a redefinition of "effective competition," the plain intent of the new provisions is to deregulate cable programming services, in some cases before any real competition exists. In 15 months after the bill's enactment (or earlier if the regulations come out sooner), all cable operators would be deregulated whether or not they alone provide video programming in their franchise area. The bill thus permits cable monopolies to raise prices for consumers without the protection that would otherwise be provided by true competition.

The 1992 Cable Act already establishes a standard for determining when a competing multichannel video provider should be deemed to provide effective competition to an incumbent cable system. Specifically, to meet the effective competition standard under current law, providers must offer comparable programming to at least 50 percent of the homes in the cable franchise area and be subscribed to by at least 15 percent of households in the franchise area.

Under H.R. 1555, however, monopoly cable providers would be deemed to face effective competition months or possibly years before a telephone company offers any programming to subscribers. Bell Atlantic, for example, was authorized by the FCC to offer video dialtone service on a commercial basis in Dover Township, New Jersey in July 1994, but has not yet begun to offer service. Under the provisions of H.R. 1555, however, a monopoly cable operator offering service in the same area would have been completely deregulated the day the FCC authorized Bell Atlantic to offer video dialtone service -- possibly months or years before the telephone company's video dialtone service was up and running.

Moreover, there are no provisions in the bill to account for the possibility that a telephone company -- after receiving authorization -- might pull out of a particular area or put a hold on going forward for various reasons. In fact, by deregulating all cable systems upon the mere issuance by the FCC of video platform regulations, the bill completely disregards whether any telephone company or any other competitor enters any particular cable market.

The 1992 Cable Act was based on the sound principle that rate regulation will be eliminated in markets where there is effective competition. By inserting inadequate guidelines for effective competition, H.R. 1555 prematurely deregulates monopoly cable systems at the expense of consumers nationwide, potentially leading to dramatic rate increases for millions of consumers.

H.R. 1555 also provides that, upon enactment, small cable operators -- defined as those who serve less than 1 percent (i.e., approximately 600,000) of all cable subscribers in the country and whose gross revenues are less than $250 million annually -- would have their cable programming service rates deregulated as well as their basic service rates under certain circumstances. While appropriate relief should be crafted for small cable operators, the provisions in H.R. 1555 do not provide adequate protection for consumers.

The Administration agrees that the burdens faced by small cable operators should be minimized. For example, the FCC has adopted provisions over the past year granting rate relief to small cable systems, but based on a more narrow definition than that contained in the bill. If additional legislative relief is necessary, it should take into account the impact of small cable deregulation on consumers in rural and other areas.

Many small cable operators are the sole providers of multichannel video programming in rural areas and are likely to be bought out or enter joint ventures under the rural exception to the anti-buyout provision in H.R. 1555 (discussed later in the testimony). The combination of these two provisions, therefore, will leave consumers in rural areas with no protection either from rate regulation for cable programming services or from competition. Such consumers may thus be subject to immediate "rate shock" upon deregulation. Again, while we support appropriate relief for small cable systems, such relief must be balanced against the obligation to continue to protect consumers as well.

The deregulation of cable operators in the absence of a truly competitive marketplace is difficult to justify in view of the relevant facts. Cable rate regulation pursuant to the Cable Act of 1992 was prompted by extraordinary cable rate increases in the preceding years. According to surveys conducted by the General Accounting Office in 1989, 1990, and 1991, cable price increases were on the average three times the rate of inflation. In the three years after 1986, when widespread cable deregulation went into effect, 80 percent of subscribers for both the basic tier and the most popular tier of service saw their cable bills increase by more than 20 percent.

In contrast, the FCC estimates that as a result of the 1992 Cable Act, consumers have saved $2.8 billion through rate reductions as of December 1994. In addition, the upward trend in cable rates, which had been about three times the rate of inflation prior to the 1992 Cable Act, has now been limited to inflation plus a formula-based percentage profit for the cable operators.

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. We should not repeat that experience.

Although the cable industry claims that it has been severely hindered by excessive rate regulation, the facts suggest otherwise. According to industry analyst Paul Kagan Associates, Inc., multiple system operators' (MSO) stocks continue to outperform the Standard and Poor 500. Electronic Media, a major trade publication, noted that cable systems' operating margins generally increased over the past five years. In 1993, 14 new cable channels were launched. In 1994, 25 new channels were launched. Launch plans for 1995 include 63 new channels.

In addition, subscribership numbers demonstrate that cable is still the dominant provider of subscription-based video programming in the United States, and that other providers are far behind. In 1994, the number of subscribers to the top 100 MSOs grew by about 5 percent -- almost 3 million additional customers in one year -- adding to a base of approximately 60 million subscribers.

In contrast, direct broadcast satellite (DBS) has fewer than 1 million total customers; wireless cable about 600,000 customers; and C band home satellite dishes about 4 million customers. Telephone company provision of video dialtone (VDT) has not even started on a commercial basis.

According to the FCC, even if all the telephone company applications to provide VDT were approved, that would only cover about 10 percent of all households in the United States. Yet it is highly unlikely that even that percentage of households will have access to VDT within 15 months. According to FCC information, completion schedules for VDT facilities range from two to twenty years. For example, the FCC in February, 1995, granted Nynex's section 214 VDT application for Massachusetts, which proposes to ultimately pass 334,000 homes. However, according to the application's 15 year deployment schedule, only 106,500 homes, less than one third, would be passed by the end of year two (1997).

A better way must be found to balance the cable industry's desire for more pricing and service flexibility with the overriding need to protect consumers from excessive rate increases. The Administration has indicated its 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.

Broad Exceptions to the Anti-Buyout Restriction

The Administration commends the Subcommittee for recognizing that limits must be imposed on the ability of a telephone company to buy out a cable company in the telco's local service area. Allowing anti-competitive buyouts between telcos and cable operators would undermine the universally accepted objective of increased competition in both the video service and local telephone markets. Without an anti-buyout rule, one monopoly would merely be substituted for another. The lack of head-to-head competition would result in higher prices and less choice for consumers.

One of the bill's exceptions to the anti-buyout rule, however, applies when, in the aggregate, the area served by the purchased cable system does not exceed 10 percent of the households served by the telco, and the purchased system does not serve a franchise area with more than 35,000 inhabitants, or 50,000 if the system is unaffiliated with a contiguous system. This exception may be too broad.

Based on 1990 Census data, expanding the exception for rural and non-urban areas of 10,000 inhabitants or below to areas (both rural and urban) of up to 25,000 inhabitants, for example, potentially raises the percentage of the population covered by the exception from about 30 percent to approximately 54 percent, or about 140 million people. While the 10 percent limitation in the exception could bring this number down, the exception still could potentially deprive a large segment of the U.S. population of the benefits of competitive telecommunications and video service. In addition, the anti-buyout rule is too narrow in that it focuses only on telco buyouts of cable systems rather than on prohibiting buyouts between or among both entities.

The Administration has consistently recommended that Congress adopt a strong in-region anti-buyout restriction on acquisitions and joint ventures between telephone companies and cable systems, with a limited exception for rural areas -- for example, communities with a population under 10,000, since such areas might not be capable of supporting two wire-based competitors. The Administration supports giving the FCC authority to review the need for an anti-buyout provision after five years, taking into consideration the effect on competition, consumer welfare, and infrastructure investment.

Restricting anti-competitive buyouts at the outset will help promote the kind of facilities-based competition between telephone companies and cable operators that the American people deserve -- competition that has the potential to deliver substantial benefits to consumers and provide powerful incentives for private sector investment in advanced local infrastructure. Broad exceptions to the anti-buyout rule invites consolidation of power by multimedia monopolies and discourages critical competition in the video services and local telephone markets.

Video Programming Concerns

Concerns regarding concentration of ownership also are increasingly important where control over programming is allowed. Economists have long recognized the competitive problems that arise when a facility owner is allowed to become a content "gatekeeper," creating the potential for increased rates to consumers and discrimination in the choice of programming offered.

H.R. 1555 appears to recognize this problem by requiring telephone companies in most cases to offer video programming through a video platform that provides access to programmers on just, reasonable, and nondiscriminatory terms. The bill would also authorize the FCC to apply the bill's video platform requirements to cable operators that have installed switched, broadband video programming delivery systems, setting the stage for open cable systems as well.

The bill allows an exception to the video platform requirements, however, for "overbuilt" cable systems owned by telephone companies that do not utilize the telco's facilities or services in distributing video programming. Rather than allowing this exception, we think the better approach is to encourage open systems in the provision of video programming services by both telephone companies and cable operators. This would ensure that unaffiliated programmers have ample opportunities to market services directly to subscribers, with the related benefits of lower prices for consumers, more programming choices, and improved customer service.

In addition, under the bill, the requirement that telephone companies establish a separate affiliate to provide video programming sunsets in the year 2000. While the coming of the second millennium is in some respects daunting, in fact it will arrive in less than five years or approximately 235 weeks from now. Many telephone companies may be getting their video programming affiliates up and running at a time closer to the year 2000 than 1995.

We wholeheartedly agree with the Subcommittee that a separate affiliate requirement is needed for telephone companies providing video programming services. This requirement would decrease the incentive for telco providers to cross-subsidize between the provision of video programming and regulated telecommunications services. Rather than eliminating this important requirement in the year 2000, however, we recommend that the FCC be given the authority to review the provision at that time to determine whether it should be continued, discontinued, or modified. The FCC's determination should be based on public interest considerations, such as whether the requirement helps to ensure detection of cross-subsidies that could unfairly raise rates for consumers.

 

 

OTHER PROPOSALS

The concerns I raised above regarding the consolidation of power in the communications industry are compounded by other proposals that could significantly alter the shape of the communications industry. Tremendous changes are already taking place in the communications marketplace. Considering that the telecommunications and information industries represent more than nine percent of this Nation's Gross Domestic Product (GDP), the effect of the additional changes being proposed by other bills pending before the Subcommittee could be dramatic.

Well-crafted legislation is needed to eliminate archaic rules and old structures that hinder competition and innovation. The rush to radically alter the structure of the industry in a flash cut, however, could undermine the equally important goals of encouraging diversity of ownership, preserving localism in our Nation's media industries, and safeguarding against undue concentration of economic power.

Concentration of Ownership in the Mass Media Industry

In the broadcast area alone, for example, another bill -- H.R. 1556 -- would, all at the same time: 1) eliminate the FCC's national ownership limitations on the number of broadcast stations that can be owned by one company; 2) extend national audience reach limits for a commercial television broadcaster from 25 to 35 percent (for FCC determinations made within one year after enactment) or 50 percent thereafter; 3) provide an exception, where the FCC deems it appropriate, for a commercial television broadcaster to have a common ownership interest in VHF and UHF television stations in the same market; and 4) eliminate current cross-ownership restrictions on cable system owners from holding ownership interests in national television networks, a broadcasting station, and any other medium of mass communications, even in instances where these facilities also serve that cable owner's existing franchise area.

These provisions are in addition to those in H.R. 1555 that would extend the term of broadcast licenses while also limiting license review. Allowing all these ownership changes at once could increase the potential for existing communications and media owners to consolidate ownership control and discourage potential competitors from entering the market.

Under H.R. 1556, for example, the FCC would no longer have authority to proscribe the licensing of an unlimited number of radio stations to one broadcaster or to review the ensuing effects on competition or programming diversity that such a prohibition might produce. The bill would also allow a cable operator simultaneously to control two commercial television station networks. In addition, the bill appears to allow a cable operator simultaneously to control a commercial television station within its franchise area or control one television station network and a host of other forms of mass media communications facilities (e.g., direct broadcast service, wireless cable, low power television, SMATV), which might also serve its area of cable service.

Such a high degree of common control over mass media facilities could have devastating effects on competition and media diversity, especially now since the full complement of mass media providers and services has not yet entered the marketplace. The FCC is already gathering extensive data to determine whether certain broadcast and cable ownership provisions should be modified or eliminated. The uncertain impact of the move to digital compression and other technological advances, as well as the strong public policy in support of diversity in media programming, argue for deferring to the FCC's determinations in these matters to ensure that there is adequate opportunity to study the implications of these changes for the industry as a whole.

Changes in Foreign Ownership

Another bill -- H.R. 514 -- would repeal current restrictions on foreign ownership in broadcast, common carrier, and certain aeronautical radio station licenses, without requiring comparable treatment by other countries or review by any Federal agency. While the Administration agrees with the Subcommittee's interest in reexamining Section 310(b)'s foreign ownership restrictions to help foster open telecommunications markets worldwide, we feel strongly that these restrictions should only be lifted for countries that have also opened their telecommunications markets to U.S. companies.

In addition, a determination of whether this goal has been achieved for a particular country must be based on the advice of the appropriate Executive Branch agencies who have broad statutory authority and expertise in matters relating to U.S. national security, foreign relations, the interpretation of international agreements, and trade (as well as direct investment as it relates to international trade policy). The determination also should take into account the Executive Branch's views and decisions with respect to antitrust and telecommunications and information policies.

Moreover, the Administration would not move to lift the restriction with respect to broadcasting at this time. The Administration's position is based on the public interest responsibilities conferred on broadcasters, the editorial control and discretion they exercise over the content of broadcast transmissions, and the important role broadcasters play as the backbone of our Nation's emergency alert system, which is intended to alert the public to emergency information.

Holders of radio-based common carrier licenses, in contrast, typically control only the underlying facilities rather than the content of messages transmitted over those facilities. It is therefore not unreasonable to adopt different ownership rules for those distinct categories of licenses. Also, given the prevalence of government-owned broadcast stations in most major markets around the world, the current foreign ownership limitations for broadcast licenses under Section 310(b) are either more liberal or mirror foreign ownership rules in those markets where private ownership of broadcast stations is permitted.

In the FCC's recent Notice of Proposed Rulemaking on foreign entry into the U.S. market, the Commission requested, among other things, comments on whether new market entry rules should also apply to broadcast licenses. Although very few commenters addressed this issue, those who did noted that control of broadcast facilities may present separate security and content concerns than those raised by common carrier licenses.

 

 

CONCLUSION

Mr. Chairman, as you know, telecommunications reform legislation is a major undertaking. It is extremely important that we take this opportunity to "get it right," not only for the benefit of our own country, but also for other countries that are watching us as a possible model as they open their own telecommunications markets to greater competition.

While the Administration has serious concerns about H.R. 1555, I remain convinced that if we work together, Congress, the Administration, and many other interested parties can forge telecommunications reform legislation that promotes the objectives to which we are all committed -- competition, consumer welfare, investment, and reduced government regulation. Thank you again for the opportunity to testify, and I will be happy to answer any questions.