Pressler discussion draft divides and conquers--maybe

Apr 1st, 1995

Stephen N. Brown

Last year`s telecommunications-reform battle was not in vain. It was a learning experience about how political forces antagonistic to each other unite to destroy a reform effort that displeases too many of them too much. The knowledge acquired in the Senate has ended the united front. Like a skilled artisan cautiously splitting a diamond along its seams, Sen. Larry Pressler`s (R-South Dakota) draft of telecommunications reform legislation has split the forces that stopped last year`s effort. Caution is evident because the draft was released as a draft, and no one calls it a bill or even a proposed bill--not even in hushed voices. Its official title is the Telecommunications Competition and Deregulation Act of 1995. If it becomes law, those groups likely to benefit the most are regional Bell operating companies, state regulatory agencies, cable-TV companies, electric utilities and manufacturers. The interexchange companies will probably benefit the least.

No matter which way an eventual bill cuts, some industries and businesses are bound to lose market share. However, no one overtly opposes the draft, and everyone seems willing to work with it. A loss of market share is not the central issue to Jot Carpenter, vice president for government relations for the Telecommunications Industry Association. He says consumers are the determining factor, and the real purpose of any legislation "is to allow users of telecommunications services to do more tomorrow than they can today. ...If we don`t advance the ball to the point where we can give everybody the ability to send and receive two-way video, two-way interactive multimedia transmission, we`ve failed." That noble goal should be supported by advocates of door-to-door fiber-optic networks or fiber-to-the-curb networks. However, nobility-of-purpose will have to be quite strong for all players to allow the discussion draft to mature into a bill. Otherwise, their desire for more could derail reform.

The regional Bell operating companies, for example, get almost everything they want. With the draft`s current language, the companies can offer nationwide long-distance service beginning in 1998. In 1996, they can offer long-distance services that are incidental to such services as commercial mobile, information, and audio and video programming. The bill eliminates the cable and telephone company cross-ownership restriction. This is exactly what the RBOCs say they need to develop integrated networks that end the distinctions among local, long distance and video service. These are major breakthroughs that terminate the conditions imposed by Judge Harold Greene in the Modification of Final Judgment.

`Entry by a date certain`

This bodes well for the RBOCs, but they are not yet home-free. In the parlance of Washington, DC, the long-distance provision is known as "entry by a date certain," meaning the RBOCs can offer nationwide and intrastate long-distance service without having to explicitly prove there is demonstrable and viable competition in the local arena. Of course, the interexchange carriers oppose the "date-certain" provision. AT&T praised Pressler`s draft, but called for stronger "carrot and stick provisions so Bell companies move quickly to open their monopolies to competition." AT&T also said, "We strongly disagree with the draft`s emphasis on choosing a date certain for entry into long distance. ...An arbitrary date works against the objectives of the proposal, which is to ensure the breakup of the local monopoly." AT&T`s position suggests the bill is heavily weighted in the RBOCs` favor. James Cullen, Bell Atlantic`s vice chairman, doesn`t agree. He says, "While the draft guarantees long-distance entry into the local telephone market at a specific time, it remains unclear when we will be allowed to compete in long distance."

Cullen`s skepticism about the draft`s vagaries is justified. Brendan Clouston, chief executive at Denver-based Tele-Communications Inc., spoke to the Washington, DC, Metropolitan Cable Club, saying the cable, long-distance and telephone industries "are still far apart on fundamental legislative concepts." He suggests all barriers to communications markets be dropped two years after legislation is enacted, but wants local telephone companies` entry into video markets delayed until certain competitive conditions are met. That thought is reflected in Pressler`s draft, which stays the telephone companies` court victories regarding video dial-tone service. Long ago, the Federal Communications Commission ruled telephone companies may offer the service without acquiring a franchise or permit. The cable industry challenged this and filed a suit in the U.S. Court of Appeals. The court`s decision, noteworthy for its clarity, said, "We hold that the Commission [FCC] reasonably determined that neither a telephone company nor a customer-programmer engaged in the provision of video dial-tone service is subject to the franchise requirement of the Cable Act of 1984. ...The petitions for review are therefore denied." This was hailed as a major victory for local telephone companies; but what was won in court may be lost in Congress.

The telephone companies cannot offer video dial-tone for at least one year and perhaps longer, according to Pressler`s draft. Section 202 states, "The Commission may not take any action on any application...for authority to provide video dial-tone service until one year after the date of enactment of this Act." For those companies that already have FCC approval--Bell Atlantic, for instance--the bill says, "If the Commission has granted any authority requested with respect to video dial-tone service, in such an application received before the date of enactment of this Act, the authority granted may not be exercised until one year after such date." The mere presence of such language is enough to dissuade Bell companies from proceeding with their plans, lest they ruin their working relationship with the Senate Commerce Committee and its chairman, Sen. Pressler.

None of this gives the appearance of a completely level playing field between the Bell companies and the cable industry. By delaying the implementation of video dial-tone service and by simultaneously deregulating the cable business, Pressler`s draft constrains the local telephone companies. They have other worries, as well. Larry Clinton, executive director of government relations for the U.S. Telephone Association, says the draft expands the definition of universal service and "may allow a drift toward rate-of-return regulation rather than price-cap regulation," the regulatory method preferred by the industry. He says, "A whole range of issues needs clarification." The telephone companies are not getting the perfect deal and that may make it palatable to other parties--state regulatory authorities, electric utilities and manufacturers--who have their own needs.

The states vehemently opposed the Senate`s earlier reform bill, S1822, because it took away practically all their authority. Although Pressler`s draft still pre-empts the states and will not let them block the impact of the would-be bill, it grants them substantial authority. The states will resolve interconnection disputes between local exchange companies and other providers of information services and telecommunications. Unless it is overturned by a court, the state`s decision would be final. In S1822, such disputes were settled by the FCC. The states will have a stronger role in determining universal service requirements, and the FCC will have a diminished role. The states will also determine which providers within their jurisdictions are essential telecommunications carriers--again a stronger role for states and a weaker one for federal government. They are also the main regulatory authority that oversees the entry of electric utilities into telecommunications markets. Such oversight had been in the hands of the Securities and Exchange Commission, but its role will end. Pressler`s draft says "any utility may engage directly or indirectly in any activity whatsoever, wherever located, necessary to the provision of telecommunications services. ...The Securities and Exchange Commission shall have no jurisdiction." The classic worry about utilities is they would somehow use electric ratepayers to subsidize telecommunications investment. Pressler`s draft kicks the issue back to the states by saying, "Any public utility...subject to a state commission...shall not include in rates any cost associated with...the ownership or operation of a communications entity without the express approval of the State Commission."

Another important group, the non-Bell manufacturers, are treated well. For example, local carriers "shall allow for the integration of non-affiliated carriers` switches." Thus, the Bells cannot give their own equipment a preference when making supply decisions. TIA`s Carpenter suggests language be added to the draft`s manufacturing provisions to ensure non-discrimination in supply sources is self-enforced on the part of the Bells.

With all these players supporting the Pressler bill, there is no real chance for an alternative. Sen. Ernest Hollings (D-South Carolina) marched out his own version, but it was received well only by the interexchange carriers. AT&T said it "is very encouraged by both the substance and tone of the response from Sen. Hollings." Gary McBee, chairman of the Alliance for Competitive Communications, which represents the Bells, summarily dismissed Hollings` proposal: "This draft bill is not progress." This statement captures the waning influence of such once-powerful Democrat policymakers as Hollings in the Senate and Rep. Edward Markey (D-Massachusetts) in the House. But it may be too early to send them off into the sunset because there is one major player not yet accounted for--Vice President Al Gore. Few people are considering the influence of the vice president. What happens if he just says no to Pressler`s or any other Republican`s bill that fails to reflect any of his notions on national telecommunications policy? In this situation, a presidential veto is a real possibility. Perhaps the bill could be reintroduced in 1997, if Sen. Bob Dole (R-Kansas) were president, but that is a gamble Sen. Pressler may not want to make.

Stephen N. Brown specializes in market research and public policy toward new technology in the telecommunications industry. For more information, call (615) 399-1239.

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