The 1996 Telecommunications Act was supposed to push telephone companies into a new round of competition for consumer dollars. It never did.
Now, after three years and a series of setbacks, Congress is trying to get communications reform back on track.
New congressional hearings and a handful of associated bills are taking aim at the Federal Communications Commission and the way it has handled the 1996 legislation. Critics say the FCC has misinterpreted the act and has actually slowed the entry of new players into the telco arena, rather than encouraging competition as originally envisioned.
None of the bills
on the agenda addresses the immediate decline of consumer phone rates. But the issues being discussed will ultimately help determine how much power government has to control the actions of the big telecommunications companies.
This week, a Senate antitrust and competition subcommittee will tackle the proposed Baby Bell mergers that have been born in part by deregulation. Sen. Mike Dewine (R-Ohio), who will introduce legislation to reduce the time taken by the FCC in reviewing such mergers, will lead the hearings.
And next month, Sen. John McCain (R-Arizona) is expected to launch a series of hearings on the FCC's budget, effectively putting the agency's decisions on telecommunications competition under a microscope.
These various Beltway efforts are the work of a bipartisan group of legislators who say the FCC has warped the spirit of the original Telecommunications Act. The renewed congressional action follows a series of court decisions that have strengthened the FCC's position, potentially giving it more power to push for residential competition.
"We gave the FCC a tremendous amount of discretion," said Jack Fields, a former GOP representative who helped lead the law through the House. "Now we have had the FCC acting not as a backstop but as a deterrent to competition. That to me completely voids the intent of the act."
Shifting legal lines
The bill originally was intended to jump-start competition in the corporate and consumers telephone market. Under the three-year-old telecom law, Baby Bells would be allowed into the long distance business, as long as they let other firms compete in the local phone market.
The law has been mired in litigation almost since it was enacted, and the resulting uncertainty over how to interpret the law has slowed the march toward competition. But a series of recent rulings by the Supreme Court has settled some critical outstanding issues.
"[These legal decisions] are a very big turning point," said Reed Hundt, the former Federal Communications Commission chairman who guided the agency through the Act's early days. "It's called starting over."
In late January, the court overturned most of a federal judge's ruling that had questioned the FCC's ability to set local pricing rules for the regional Bell telephone companies.
This earlier ruling had undermined the agency's ability to dictate how companies would allow competitors access to their vast network of existing phone lines. By returning this power to the FCC, the agency now has more muscle to enforce its decisions across the country, many observers said.
"The biggest single problem with the Telecommunications Act had been judicial interference," said Hundt, who is now a partner with Benchmark Capital. "The courts refused to allow us to have a national system, condemning us to a balkanized system with different rules in different states."
"The FCC now must enforce its pricing rules," Hundt added. "If the FCC stays the course, competition will develop over the course of this year."
Just last week, the commission approved the merger between '="" rel="nofollow" class="c-regularLink" target="_blank">AT&T and Tele-Communications Incorporated. Some analysts say that deal, which is slated to bring cable-based local phone service to most TCI territories by the end of next year, holds out the best hope for fufilling the act's goal of genuine local competition.
Others are less optimistic, saying real competition at the consumer level isn't likely for several years, until the cable companies are able to offer cheap, local dial-tone service through their television service lines.
Nevertheless, despite the years of legal uncertainty, the act already has prompted the beginnings of dramatic shifts in the telecommunications market.
On the local level, scores of competing phone companies have sprung up to take advantage of new rules forcing the Bells to lease pieces of their network at wholesale rates to competitors.
According to the FCC, these
competing local carriers--which range from tiny start-ups to long distance giants such as AT&T and MCI WorldCom--have installed or leased close to 5.1 million access lines across the country. Revenue numbers for the industry as a whole near $5.7 billion for 1998 alone.
While this is still just a tiny fraction of the $100 billion local phone market, the companies--like ICG Communications, Covad Communications, and others--have invested heavily in new infrastructure, raising more than $20 billion altogether from Wall Street in the last three years.
These companies have made substantial inroads into the high-profit business market. But they have left the consumer market, where profit margins are often thin or nonexistent, almost untouched.
Enter the "digital divide"
Consumer groups call this the "digital divide," saying that the Telecommunications Act brought price cuts only for corporate customers and other high-volume telecommunications users, while ordinary users subsidize massive infrastructure investments in data and other high-end services.
A study released early this month by the Consumers Union and the Consumers Federation of America found that local rates had remained at 1996 levels and that only a handful of residential consumers had a choice for their local phone service. Meanwhile, cable rates had risen 21 percent, and in-state long distance calls had risen by an average of 10 percent.
"Policymakers should quit pretending competition is around the bend and instead do something to block inappropriate price hikes," said Gene Kimmelman, co-director of the Consumers Union Washington office, and a co-author of the study.
The road ahead
The next few months will prove to be some of the most critical in the Telecommunication Act's history.
Buoyed by the recent Supreme Court rulings, the FCC is scheduled to make new rules governing the Baby Bells' high-speed data business and approve or block mergers among four of the biggest local phone companies.
But the FCC will constantly have the threat of the congressional hearings in the background as it reviews these merger issues, marring its new freedom granted by the Supreme Court.
Although some of the early critics of the FCC had advocated reopening the act this year to speed competition for consumers, most legislators say they have more modest goals now.
"While the act is not perfect, we have seen some expansion of services, and I think more is possible," Sen. Conrad Burns (R-Montana) said in a recent statement to the press. "It will serve no one's interest to go through the old debates again. It will only deflect blame away from the FCC's shoddy implementation of the act."
Burns and others do say they plan to expand and clarify the law with new legislation. He plans to introduce a bill providing new incentives for companies to roll out high-speed data networks in rural areas. Dewine will proceed with his bill on telecommunications mergers, and McCain will be joined by Reps. Billy Tauzin (R-Louisiana) and John Dingell (D-Michigan) in possible attempts to scale back the FCC's rulemaking power.
"We did not anticipate the FCC misinterpreting or ignoring congressional intent," former GOP representative Fields said. "I think what you're going to see this session is Congress looking at the Federal Communications Commission as an agency that is not necessarily in sync with what is happening in telecommunications."
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