OVERVIEW OF THE TELECOMMUNICATIONS ACT OF 1996
On February 1, 1996, after months of negotiations and political wrangling, Congress overwhelming passed the Telecommunications Act of 1996 (the "Act"). The Act is the first comprehensive rewrite of the Communications Act of 1934, and dramatically changes the ground rules for competition and regulation in virtually all sectors of the communications industry, from local and long-distance telephone services, to cable television, broadcasting and equipment manufacturing. President Clinton signed the Act on February 8, 1996, and its provisions become effective immediately.
The Telecommunications Act is a watershed event in the development of the United States communications industry. For decades, communications policy -- including ownership and service restrictions that maintained protected monopolies at both the state and federal levels -- has been set largely by the Federal Communications Commission ("FCC"), state public utility commissions ("PUCs"), and the federal courts' enforcement of the 1984 antitrust consent decree that dismantled the Bell System. Major strides have been made, particularly in relaxing federal regulation and in ensuring fair competition in the long-distance telephone market, but the ambiguity inherent in enforcing a 62-year old statute has led to legal uncertainty and conflicting interpretations. With the Act, Congress has reasserted primacy in setting U.S. communications policy, and has set a course that clearly adopts competition as the basic charter for alll telecommunications markets.
The Act's provisions fall into five major areas:
- Telephone Service
- Telecommunications Equipment Manufacturing
- Cable Television
- Radio and Television Broadcasting
- The Internet and Online Computer Services
In each of these, cross-market entry barriers have been eliminated, concentration and merger rules relaxed, and massive new implementation obligations placed on the FCC and state regulators. In some areas, particularly television violence and "indecent" on-line communications, Congress acted more to promote its current views of appropriate social and moral behavior than to unleash competitive market forces.
Highlights
Telephone Service. The Act overrules all state restrictions on competition in local and long-distance telephone service. The Baby Bells are freed to provide long-distance service outside their regions immediately, and inside their regions once completing a series of steps to remove entry bariers for local telephone competition. New "universal service" rules continue subsidization of telephone service for rural and low-income subscribers, and assist schools, libraries and other public institutions in becoming connected to sophisticated telecommunications services. The antitrust consent decrees are repealed, but their requirements for "equal access" ("1+" dialing) to all long-distance carriers are maintained.
Telecommnications Equipment Manufacturing. The Act allows the Baby Bells to manufacture telephone equipment once the FCC approves their application for out-of-region long-distance. Nondiscrimination requirements, restrictions on joint manufacturing ventures and the role of the Bellcore, the Baby Bells' research entity, in setting standards, and a requirement that the FCC promulgate rules making telephone equipment accessible by people with disabilities are also included.
Cable Television. The Act substantially relaxes the rules governing cable television systems under the 1992 Cable Act. Rate regulation requirements will be removed in three years (March 31, 1999) on all cable services except the "basic tier" that includes over-the-air channels and public and educational channels. Telephone companies are permitted to offer either cable television services or to carry video programming for other entities via "open video systems." Pricing freedom is available sooner for cable television companies that face competition from local telephone companies offering "comparable" video services over telephone facilities. Cable systems in small communities will enjoy immediate rate deregulation. All cable systems are required to scramble sexually explicit adult programming. Cable set-top boxes will be sold at retail, and the FCC is restricted from affecting computer network services in designing cable equipment rules.
Radio and Television Broadcasting. The Act relaxes the FCC's media concentration rules by allowing any single company or network to own TV stations that reach as many as 35 percent of the nation's televison households (the curent limit is 25 percent). The FCC would be required to consider changing other limits on ownership in a single community. Networks would for the first time be allowed to own cable television systems, but no network could acquire another network. All nationwide limits on radio station ownership are repealed, but local limits on concentration are maintained, although relaxed. Television broadcasters would be allowed "spectrum flexibility" to use additional frequencies for high-definition television or other purposes, but would have to return any additional spectrum allocated by the FCC and possibly pay auction fees. Television equipment manufacturers are required to equip all new TVs with a so-called "V-chip" ("V" for violence) allowing parental blocking of violent, sexually explicit or indecent programming. Ratings boards would decide which shows receive a "violent" rating, unless the industry establishes a "voluntary" rayings system, but there is no mandate broadcasters to televise the signals used by the V-Chip.
The Internet and Online Computer Services. In a subpart called the "Communications Decency Act of 1996," the Act creates criminal penalties for the "knowing" transmission over the Internet of material considered "indecent to minors." These provisions also make it a crime to make any computer network transmission with the intent to "annoy" or "harass" the recipient, and extend a criminal ban on discussing abortion devices and procedures to computer network communications. Commercial on-line services that engage in voluntary blocking are protected from prosecution. Provisions declaring that the FCC has no jurisdiction to regulate the Internet were deleted during consideration by the Conference Committee.
Summary of the Act
Telephone Service
The Act declares invalid ("preempts") all state rules that restrict entry or limit competition in telephone service, both local and long-distance. It dismantles the AT&T and GTE antitrust consent decress, including their controversial prohibitions on entry by the Bell Operating Companies ("BOCs") -- the so-called "Baby Bells" -- into the interLATA telephone market. (LATAs, or "Local Access and Transport Areas," are regional areas, similar to area codes, that divided the local and long-distance telephone markets under the AT&T consent decree.) Competitive safeguards, known as "separate affiliates" and a prohibition of cross-subsidization, are required to protect against anticompetitive behavior by local telephone companies.
The essential trade-off in the Act is that the BOCs and GTE will be permitted to offer interLATA service once they have taken steps to remove entry barriers to competition for local exchange service, i.e., local telephone service. The Act requires the BOCs to implement a series of reforms known as the "competitive checklist" in order to qualify for providing long-distance service outside their regions. It also requires all local exchange carriers ("LECs") to interconnect with new entrants, "unbundle" their networks and allow "resale" by competitors, provide "number portability" so customers can keep their phone numbers when switching local providers, and other steps to promote an effectively competitive local exhange market. Although the FCC has an increased role in defining the minimum thresholds of these obligations -- and judging whether BOCs have met the checklist requirements in order to offer interLATA services -- state PUCs are charged with a major responsibility in implementing local telephone competition. (See our Summary of Local Exchange Competition Issues for more on this subject.)
The Act substantially changes the rules governing "universal telephone service," a concept implicit in the 1934 Communications Act but subject to widely varying interpretations by federal and state regulators. The Act defines universal service as an "evolving" level of telecommunications services that takes into account technolgical changes, and delineates principles to be applied in setting of FCC policies designed to promote universal service, including quality and rate reasonableness, access to advanced services, access in rural and high-cost areas, nondiscriminatory and competitively neutral support mechanisms, and special access for schools, hospitals and libraries. All telecommunications companies are requited to provide services to schools, hospitals and libraries, on bona fide request, at rates "reasonably comparable" to urban rates and at a discount from standard prices.
Telecommunications Equipment Manufacturing
The Act repeals the current prohibitions of the AT&T consent decree precluding the BOCs from manufacturing telecommunications equipment and customer premises equipment ("CPE"). It requires BOCs to perform all equipment and CPE manufacturing activities in "separate affiliates," creates nondiscrimination safeguards for BOC manufacturing and equipment procurement, and establishes restrictions against cross-subsidization to be audited and enforced by the FCC. Technical information and standards must be made available to all BOC competitors, and Bellcore is prohibited from engaging in manufacturing and required to comply with due process in its standards-setting activities. Manufacturing is permitted once the FCC approves a BOC's application for interLATA authority outside its region. The separate affiliates requirement sunsets three years after BOC manufacturing is approved by the FCC. Under the Act, BOCs are also permitted to engage in "electronic publishing," subject to similar separate affiliate requirements and restrictions against joint marketing of local telephone and electronic publishing services.
Cable Television
In 1992, Congress passed an Act, over the veto of President Bush, that repealed the 1984 deregulation of cable television and subjected cable systems to rate regulation and a host of other FCC-enforced obligations. The 1996 Telecommunications Act, in turn, repeals many of the major provisions of the 1992 Act. On rate regulation, current FCC rules capping cable service rates will be repealed in three years, except for the "basic tier" of cable programming. Price caps are repealed for "small" cable operators (less than $25 million annual revenues) immediately or for any cable system once it faces "effective competition" from a LEC providing "comparable" video programming services.
Accordingly, the Act repeals the FCC's "telco-cable cross-ownership" restrictions. LECs are authorized to offer video services either by distributing programming as a cable televison system or by establishing an "open video system" for transport of video programming on a common carrier basis. State and local regulation of telecommunications services provided by cable systems is prohibited. "Navigation devices," including but not limited to cable TV set-top boxes, must be made competitively available on an unbundled basis, although the FCC is required to protect programming security and is not authorized to set technical standards for set-top boxes. The FCC is also required to conduct a rulemaking on the availability of close-captioned programming for the hearing-impaired. In setting cable equipment compatibility rules, the FCC is directed to preserve competition for home automation communications and computer network services by establishing minimal technical standards.
Radio and Television Broadcasting
The broadcasting provisions of the Act engendered a great deal of political debate and, in December 1995, a standoff between House Republicans and the Senate managers of the Act -- Sen. Larry Pressler and Sen. Ernest Hollings -- that almost derailed the entire legislation. The final Act is a compromise in which media concentration limits are relaxed, but not eliminated, and broadcasters are allowed to use new spectrum for advanced television services (High Definition TV) as a temporary "loan" on the condition that the frequencies be purchased or returned once the transition to digital television broadcasting is completed. These "spectrum flexibility" provisions were also opposed by Sen. Robert Dole, who succesfully secured a commitment from FCC Chairman Reed Hundt not to award spectrum for HDTV purposes until Congress holds hearings in the Spring on the issue of whether the networks should be required to purchase the spectrum at a government auction.
The media concentration limits under the Act permit any one company to own television stations reaching up to 35% of the national television audience. (The curent limit is 25 percent.) The FCC would be required to consider changing other limits on ownership in a single community. Television broadcast networks would for the first time be allowed to own cable television systems, but no network could acquire another network. All nationwide limits on radio station ownership are repealed, but local limits on concentration (8 commercial radio stations in a market with 45 or more stations) are amended and maintained. Local television stations will be permitted to have "dual" network affiliations. Terms of broadcast licenses are extended and renewal procedures relaxed.
A provision originating in the House, where Rep. Ed Markey forced a floor amendment to the communications bill reported by the Republican-controlled Commerce Committee, requires all television manufacturers to equip TV sets with a "parental control device," the so-called V-Chip. A "voluntary" system of ratings for broadcast and cable television programming is preferred, but the FCC is required to prescribe, with advice and recommendations from an advisory panel, a "ratings code" for television programming "that contains sexual, violent or other indecent material" if such a voluntary ratings system is not created by industry within one year.
The Internet and Online Computer Services
The Act's provisions on "indecent" Internet and computer network communications, known as the "Communications Decency Act of 1996," are frightening to on-line enthusiasts and a blessed relief to conservative religious activists. The ACLU and a coalition of other civil liberties groups filed suit to enjoin the Act's indeceny sections within minutes of President Clinton's signing of the bill. (The lawsuit will be subject to expedited judicial review under the Act.) While there is ample precedent for statutory and FCC prohibitions against broadcasting of indecent material during hours when children may be in the audience, the constitutional issues associated with the 1996 Telecom Act are of a qualitatively different character.
The Act creates criminal penalties for anyone who "knowingly" transmits obscene materials on "an interactive computer service," which is defined specifically to include Internet access providers. It also criminalizes the intentional transmission of:
"any comment, request, suggestion, proposal, image, or other communication which is obscene, lewd, lascivious, filthy, or indecent, with intent to annoy, abuse, threaten or harass another person," or "any comment, request, suggestion, proposal, image, or other communication which is obscene or indecent, knowing the recipient of the communication is under 18 years of age, regardless of whether the maker of such communication . . . initiated the communication."
In addition, in an "anti-flame" provision, the Act makes it a crime to "repeatedly initiate communication . . . solely to harass any person." Content providers are offered a defense to the minors/indecency violations if they have taken "good faith, reasonable, effective and appropriate actions" to restrict or prevent access by minors. "Good samaritan" blocking of information that content providers or users find objectionable (on a purely subjective basis) is legalized, thus overturning a well-known case finding Prodigy liable for civil damages on account of a forum posting that defamed a company on the ground that Prodigy engaged in selective blocking of postings.
In a compromise that attracted little press attention, the Conference Committee deleted a provision of the House bill, sponsored by Reps. Rick White and Chris Cox and former Rep. (now Senator) Ron Wyden, that would have expressly precluded the FCC from having "any jurisdiction or authority to regulate the Internet." Whether or not the FCC will take this change as implicit encouragement to engage in pricing or service regulation of the Internet -- for instance, of Internet telephony applications -- is unknown, although the FCC professes to have no intention of engaging in Internet regulation.
Miscellaneous Provisions
All BOCs except Ameritech, which previously won the right to provide burglar alarm monitoring services from the federal court overseeing the AT&T consent decree, are prohibited from entering the alarm monitoring business for five years. The FCC is required to fashion a plan for compensating pay telephone owners for long-distance calls placed from payphones. The FCC is granted exclusive jurisdiction over Direct Broadcast Satellite services, and is authorized to "forebear" from tariff and rate regulation of competitive telecommunications companies without market power. (This provision reverses a recent U.S. Supreme Court ruling and restores the FCC-created "competitive carrier" rules that had been in place since 1982.) The FCC also is required to conduct a biennial review of its regulations and repeal any regulations that it finds are "no longer necessary in the public interest as the result of meaningful economic competition between providers of services."