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

                               ON
              TELECOMMUNICATIONS REFORM LEGISLATION

BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE

                COMMITTEE ON ENERGY AND COMMERCE
                    HOUSE OF REPRESENTATIVES

                        JANUARY 27, 1994

Mr. Chairman and Members of the Subcommittee:

INTRODUCTION

Good morning. Thank you for this opportunity to testify before you today on issues related to the development of a national telecommunications and information infrastructure -- and, specifically, on Administration legislative proposals to promote the advancement of this infrastructure in a procompetitive manner that benefits all Americans. I am pleased to join Assistant Attorney General Bingaman, who will focus on the Administration's reform proposals bearing on the AT&T consent decree. I will discuss more generally the changes in the competitive landscape that make the passage of telecommunications legislation this year a top Administration priority, and, in the context of that discussion, highlight the key elements of the Administration's proposals.

Vice President Gore and Secretary Brown unveiled the Administration's National Information Infrastructure (NII) initiative in September of last year, setting forth an agenda for a public-private partnership to help bring about this revolution.

This includes support for innovative applications that will use the NII, improving access to government information, protecting individual privacy and intellectual property rights, and the passage of telecommunications legislation -- the subject of today's hearing.

Before proceeding further, let me underscore, Mr. Chairman, the profound debt of gratitude the Administration owes you and Congressman Fields and other Members of this Subcommittee for seizing the initiative in developing H.R. 3636. Our proposals for reform of telecommunications regulations, particularly the telephone-cable television company crossownership restriction, interconnection and equal access requirements, local telecommunications service competition, and universal service requirements, substantially build upon your trail-blazing, bipartisan work product. The Administration also wishes to salute the creative bipartisan legislative initiative to revamp the AT&T Consent Decree undertaken by Chairmen Dingell and Brooks. The thoughtful legislative initiatives undertaken by Senators Hollings, Inouye, and Danforth, among others, also merit recognition. We have closely studied all these proposals and they have influenced our thinking as we developed an Administration legislative initiative. Aspects of our set of legislative proposals, which I will touch on today, also build in large part upon the foundation they have established. The Administration looks forward to working closely with Congress to arrive at a final telecommunications legislative product this year.

In working with Congress, the Administration will seek to ensure that a complete, integrated telecommunications set of reform proposals moves forward. The meritorious reform ideas embodied in different bills currently before Congress complement each other. A comprehensive, far-reaching overhaul of our telecommunications regulatory system is badly needed. Failure to take such an approach could also, perversely, distort competition between firms most affected by regulatory changes and other firms whose operations largely escaped regulatory revamping. The Administration will consult and cooperate closely with Congress to ensure that an integrated legislative approach succeeds.

THE NEED FOR LEGISLATION

There is a national consensus that an advanced information infrastructure will transform everyday life for every person in the United States in the near future. We have all heard of countless examples of how broadband, interactive communications will connect and empower all people in this country. Vice President Al Gore recently said that the word "revolution" by no means overstates the changes ahead.

The newspapers bring us daily examples of the ways in which the development of the NII will revolutionize American life.

The January 19 Washington Post reported how interactive dial-up computer network services allowed individuals to communicate with friends and relatives in the Los Angeles area immediately after last week's disastrous earthquake, and to spread vital news to other interested subscribers within a matter of minutes.
On January 19, Secretary of Health and Human Resources Shalala announced a contract that will provide by the end of this decade for the electronic payment of nearly all of the $1 billion annual Medicare bills.
InterPractice Systems, a joint venture of Harvard Community Health Plan in Boston and Electronic Data Systems, has placed terminals in the homes of heavy users of health care, such as the elderly, pregnant women, and families with young children, so that these users can access health care information 24 hours a day in a form that aids decision making.
The Texas Education Network serves over 25,000 educators and is making the resources of the Internet available to classrooms, so that students in small school districts can access NASA and leave messages for the astronauts, browse around in libraries larger than they will ever be able to visit, and discuss world ecology with students in countries around the world, among other things.

These and countless other examples attest to the rapid rate at which the American public is entering the information age.

It would be a mistake, however, simply to "let nature take its course" and allow change to proceed under the existing legal regime, whose underlying structure was established 60 years ago.

This is true for three essential reasons.

First, in an increasingly competitive world trade environment -- which will become even more open with the implementation of NAFTA and the GATT Uruguay Round -- we simply must ensure that our telecommunications capabilities remain the best in the world. Because information transmission increasingly is the life's blood of all our industries, archaic rules that inappropriately retard innovation by telecommunications firms have a negative impact on the international competitiveness of the private sector in general by inhibiting industrial productivity and job creation. Legislation that lifts these outdated structures will enhance competitiveness and spur the creation of good new jobs.

Second, the existing regulatory structure has been altered on an ad hoc basis over six decades to meet perceived problems of the moment. This has created an uneven playing field that artificially favors some competitors over others, and that in some instances unnecessarily discourages investment and risktaking. These effects, in turn, inappropriately skew the growth of industry sectors and retard the development of the NII itself.

Accordingly, legislation is needed to eliminate these unwarranted regulatory disparities.

Third, we need to be sure that our telecommunications policies are fully responsive to the needs of the American people as a whole, and, in particular, poorer and disadvantaged Americans. As Secretary Brown stressed on January 5, 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.

Yet, while the universal provision of "plain old telephone service" has long been a national goal, the existing regulatory structure may not be sufficient to ensure that all Americans benefit from the broader range of information services that will become available under the NII. Accordingly, legislative reform is urgently needed to address this shortcoming. I will have more to say about the Administration's views on universal service below.

THE ADMINISTRATION'S PROPOSALS

The Administration, as promised last fall, has prepared a set of legislative proposals setting forth the principles under which we believe the advanced infrastructure should operate. As I have already indicated, these proposals further the visions set forth in House and Senate legislative initiatives. We are also building upon innovative regulatory reforms and other dramatic steps taken by various states, and we intend to work closely with the states in promoting an advanced telecommunications and information infrastructure. Together we can encourage competition, infrastructure modernization, and advanced NII applications in health care, education, and government services.

Underlying the Administration's set of proposals are five fundamental principles that Vice President Gore and Secretary Brown have outlined. These principles are:

Encouraging private investment in the NII;
Promoting and protecting competition;
Providing open access to the NII by consumers and service providers;
Preserving and advancing universal service to avoid creating a society of information "haves" and "have nots";
Ensuring flexibility so that the newly-adopted regulatory framework can keep pace with the rapid technological and market changes that pervade the telecommunications and information industries.

ENCOURAGING PRIVATE INVESTMENT AND PROMOTING COMPETITION

The Administration believes it is time to act decisively to lift the artificial regulatory boundaries that separate telecommunications and information industries and markets.

Those clear, stable boundaries served us well in the past.

They enabled regulators to establish separate regulatory regimes for firms in different industries. They also prompted regulators to address the threat of anticompetitive conduct on the part of some telecommunications firms by barring them from certain industries and markets.

Technological and market changes are now blurring these boundaries beyond recognition, if not erasing them entirely. As Vice President Gore emphasized on January 11, we are moving away from a world where technologically valid regulatory distinctions may be made among local telephone, long distance telephone, cable, and other purveyors of information transmission. Digital technology enables virtually all types of information, including voice, video, and data, to be represented and transmitted as "bits" -- the ones and zeros of computer code. Thus, rules which artificially distinguish among different types of "bit transmitters" based on old historical understandings will no longer serve a socially useful purpose. Accordingly, regulatory change is necessary to fully realize the benefits of private investment and greater competition in the information infrastructure. Regulatory policies predicated on the old boundaries can harm consumers by impeding competition and discouraging private investment in networks and services. The Administration is therefore committed to removing unnecessary and artificial barriers to participation by private firms in all communications markets, while making sure that consumers remain protected and interconnected. These reforms are necessary in order for people in the United States to "win" the information revolution as soon as possible.

To this end, the Administration supports the initiation by the Federal Communications Commission (FCC) of a review of current broadcast policies. Broadcasters remain the principal source of free, universally available electronic information in the United States, and it is important to ensure full participation by that industry in the NII.

CABLE TELEVISION-TELEPHONE COMPANY CROSS-OWNERSHIP

The Administration strongly supports most of the major provisions on telephone-cable television company crossownership in H.R. 3636. Mr. Chairman, you, Mr. Fields, and other cosponsors of this bill are to be commended for your insightful, carefully-crafted approach to the telephone-cable crossownership issue. While the Administration's initiative in this area does differ in certain respects from H.R. 3636, it is in line with the overall philosophy and general approach outlined in H.R. 3636.

The Administration supports repeal of the current cable television-telephone company cross-ownership restriction in the 1984 Cable Act. We believe that telephone companies should be allowed to provide video services in their local exchange areas, subject to effective safeguards to protect consumers and competition. The Administration is proposing two critical safeguards.

First, consistent with the approach of H.R. 3636, telephone companies will be required to make channel capacity available to unaffiliated video program providers on a nondiscriminatory basis, while providing video programming through separate affiliates. This requirement should create market opportunities for competing providers of video services, thereby reducing prices and expanding the diversity of programming and services available to television viewers.

Second, the Administration proposes to prohibit telephone companies from acquiring cable systems located in the companies' local exchange areas for at least five years. This will deter premature and potentially anticompetitive mergers between telephone companies and their most likely competitors, existing cable companies. The Administration proposal allows fewer exemptions of telephone company buyouts of cable firms than H.R. 3636. However, telephone companies operating in rural areas will be exempted, because these markets may be unable to support more than one carrier.

The need for this second safeguard may wane in the coming years as markets change, so the Administration has added to it a flexible element. We propose to authorize the FCC to begin proceedings that could allow such acquisitions five years after the date of legislative enactment, if certain conditions, to be established by the Commission, are met. An example of such a condition might be the presence of sufficient competition in the telephone company's service area in the delivery of telephone or cable services.

Of course, any telephone company/cable system acquisition would be subject to the antitrust laws in the same manner as an acquisition in any other industry.

The Administration's proposals on the "video platform" are similar to those in H.R. 3636, except that the Administration's proposal makes clear that the platform will be subject to all requirements of Title II, not simply the requirement that rates be nondiscriminatory, as H.R. 3636 appears to contemplate. The Administration proposal also requires a carrier to afford nondiscriminatory access to the video platform whenever it offers video programming.

LOCAL TELECOMMUNICATIONS SERVICES

The Administration's proposals regarding local competition in telecommunications services bear much similarity to H.R. 3636.

The Administration owes a debt of gratitude to the framers of H.R. 3636 for their creative and thoughtful approach to these issues. The most notable difference is that the Administration's approach identifies general obligations and leaves to the FCC (and in some cases, the states) the task of prescribing details.

The Administration supports removal of those barriers preventing competition in the provision of local telecommunications services. Competition has already generated substantial benefits for consumers in a host of communications and information service markets. For example, the varieties of customer premises equipment have expanded dramatically since deregulation. In addition, the price of interstate long distance telephone service for the average residential user has declined more than fifty percent in real terms since 1984, due to competition and regulatory reform. At the same time, the infrastructure used to provide long distance services has been substantially upgraded. There are now four digital, fiber-based national networks serving the United States, and many more interconnected regional networks. Consumers will realize similar benefits in service innovation, declining prices, and infrastructure enhancement from the expansion of competition in the local telephone service market. Such competition will reduce the ability of any telephone company to harm competition and consumers through monopoly control and will encourage investment and innovation in the "on and off ramps" of the NII.

The early history of local telephone service demonstrates the benefits of such competition. The Bell Company originally marketed telephone service as a high priced business service that, with few exceptions, was not offered outside of major cities or to residential customers. When competitors were able to enter local services markets after the Bell Company's patents expired in 1893-1894, a large number of entrepreneurs began offering telephone service, first in areas unserved by Bell and then in direct competition with the Bell system. Bell responded by rapidly building out its own system, and soon in most major cities consumers and businesses had a choice of telephone companies. In 1906, 57 percent of the communities with more than 5,000 people were served by two or more local telephone companies. By 1907, non-Bell companies served more than half -- 51 percent -- of the telephone customers in the country. During this period, prices for services fell dramatically, while at the same time "infrastructure" investment soared.

In 1920, at the close of the "first" competitive era, there were some 13.4 million telephones in the United States, or one telephone for every eight of the nation's 105.7 million people.

At the rate the number of telephones was growing prior to competition, there would have been fewer than one million telephones in the United States by 1920. Moreover, 55 percent of all telephone subscribers were residential customers, and more than 30 percent of all farm households had telephones. Thus, competition proved to be a powerful engine in serving what we now call universal service goals -- that is, making advanced telecommunications technology widely available to the American people at affordable prices. Unfortunately, competing systems were not interconnected, leading to public dissatisfaction eventually addressed by government establishment of franchised monopolies for telephone service. Had government intervened instead by establishing interconnection obligations among competing carriers, we might have had local competition for the last 100 years. The Administration's local competition proposal I am about to describe demonstrates that we have learned from this historical lesson.

Current policies regarding interconnection, service bundling, and specific barriers erected by individual states inhibit competition -- and the low prices, service choices, and other benefits such competition brings to consumers. The Administration proposes to ensure that competing providers have the opportunity to interconnect their networks to local telephone company facilities on reasonable, nondiscriminatory terms. Local telephone companies will also be required to unbundle their service offerings whenever technically feasible and economically reasonable, so that alternative providers can offer similar services using a combination of, for example, telephone companyprovided switching and their own transmission facilities.

Finally, in order to ensure a consistent, procompetitive environment for telecommunications services, the Administration proposes to preempt state entry barriers and rate regulation of new entrants and other providers found by the FCC to lack market power.

Competition in local telecommunications markets should generally lower prices and increase innovation in the services offered users. Nevertheless, we are aware of concerns that repricing of some local services may result in rate increases in some cases in an increasingly competitive environment.

Accordingly, in order to guard against any possible "rate shock" for users, the FCC and state regulators will be directed, in implementing network interconnection and unbundling, to prevent undue rate increases for any class or group of ratepayers.

MODIFIED FINAL JUDGMENT (MFJ) RESTRICTIONS

The Modified Final Judgment (MFJ) in the AT&T Consent Decree helped unleash an era of competition and innovation that brought low prices and new service choices for consumers. In short, it has been a tremendous success. The Administration acknowledges the great public service the judiciary has performed in overseeing the breakup of that monopoly. But twelve years have passed since the basic framework of the MFJ was established, and it has been over ten years since the breakup took place.

Technologies and markets are changing rapidly. A judicial decree may at some point soon become a barrier to a more comprehensive, far-reaching approach to an advanced information infrastructure.

Reform of the MFJ goes hand-in-glove with opening up local competition, which I described above. The development of fullfledged competition in local telecommunications services will alleviate the competitive concerns that prompted the strictures placed by the MFJ on the activities of the Regional Bell Operating Companies (RBOCs). Thus, comprehensive legislative procedures for loosening the MFJ restrictions as competition develops are appropriate. Implementation of these procedures in the wake of enhanced local competition will allow the RBOCs to compete in markets for goods and services now closed to them.

This will further enhance innovation in the American economy and benefit consumers.

Assistant Attorney General Bingaman will address the MFJ reform provisions. I wish to note, however, that while Assistant Attorney General Bingaman will describe the Administration's position, the Departments of Commerce and Justice have worked together closely in developing the Administration's position in this area. This position represents not only the joint efforts of our two Departments, but also the work of others in the Administration who have joined in this policy initiative.

OPEN ACCESS AND PROGRAMMING DIVERSITY

The public benefits of the information revolution would be severely diminished without a wide range of diverse programming.

An advanced information infrastructure, to be truly useful, must offer a potpourri of educational material, health information, home and business services, entertainment, and other programming matter, both passive and interactive. Barriers to open access and widespread availability of programming serve only to harm users.

The Administration's set of legislative proposals would further the goals of promoting a diversity of programming and open access to distribution of this programming. Specifically, the Administration proposes that the FCC, one year after enactment, promulgate rules that would establish nondiscriminatory access obligations on cable television systems, except when technology, costs, and market conditions make it inappropriate.

ENSURING REGULATORY FLEXIBILITY AND FAIRNESS

As barriers to an advanced information infrastructure fall, the regulatory regime must adapt to the changing environment. In the rapidly changing telecommunications and information industries, the only certainty is uncertainty. A new regulatory framework is required that will stand the test of time, without the need for continual upheaval in the nation's overall approach to telecommunications and information policy. At the same time, similarly situated services should be subject to the same regulatory requirements.

In order to advance these principles, the Administration proposes to allow the FCC to reduce regulation for telecommunications carriers that lack market power. This socalled "forbearance" authority will ensure that unnecessary government regulation -- however well-intentioned -- does not harm users of the infrastructure, or impede competitive entry, investment, and the introduction of new services.

TITLE VII SERVICES

A new kind of communications service provider will soon emerge, one that offers broadband, interactive, switched, digital transmission services to homes, offices, schools, hospitals, and other places. Firms offering these services face the potential of being regulated under two different parts of the Communications Act -- Title II, which regulates common carriers, and Title VI, which regulates cable communications. These firms could also be subject to regulation at the state level for the intrastate component of their Title II services and at the local level for their Title VI services. This will create a needlessly overlapping and complex regulatory environment.

The nation needs a flexible, adaptable regulatory regime that encourages the competitive provision of the broadband, interactive, switched, digital transmission services that will enable the American people to enjoy the full benefits of the information age. The Administration therefore proposes a new Title VII to the Communications Act that will encourage firms to provide these services.

The Administration's proposal will provide the FCC with broad regulatory flexibility while maintaining key public policy goals, including open access, interconnection, and interoperability requirements, and obligations to support universal service. Rate regulation of Title VII services would occur only when the FCC finds that a firm has market power in offering those services. State regulation of the intrastate components of such services would be subject to varying degrees of federal oversight, depending on the service.

Firms would elect to be regulated under the new framework, provided that they meet threshold criteria established by the legislation. The FCC would be authorized to tailor regulation of Title VII firms in light of changing competitive conditions.

UNIVERSAL SERVICE

A revolution is not complete without extending its benefits to everyone. "Universal service," that is, the widespread availability of basic telephone service at affordable rates, has been a bedrock principle of U.S. telecommunications policy for many years, and helped provide equal opportunities for all people in the United States to communicate. This principle should be expanded to the advanced infrastructure of the future.

The Administration is committed to developing a new concept of universal service that will serve the information needs of the American people in the 21st century. Indeed, the full potential of the NII will not be realized unless all Americans who desire it have easy, affordable access to advanced communications and information services, regardless of income, disability, or location. In a January 5 speech, Secretary Brown challenged the private sector "to expand universal service to the National Information Infrastructure." He pointed out that promotion of universal service advances American competitiveness, stating:

"Just as progressive businesses have increasingly recognized that their fate is tied to education and good schools, so the businesses that will take advantage of the new information marketplace must realize that our national future is dependent on our national competitiveness -- on ensuring that no talent goes to waste."

In crafting its universal service provisions, the Administration was greatly inspired by -- and borrowed in large part from -- the approach to universal service taken by H.R. 3636. Mr. Chairman, once again, the Administration is indebted to the outstanding work by you, Mr. Fields, and the cosponsors of H.R. 3636 in developing a universal service concept for the new information age.

The Administration recognizes that crafting a new, meaningful, and practical definition of universal service will require flexibility, foresight, and the balancing of diverse interests. Given these circumstances, our set of legislative proposals will establish several overarching guidelines and charge the expert agencies -- the FCC and the state regulatory commissions -- with establishing the details.

Specifically, the Administration proposes to:

Make the preservation and advancement of "universal service" an explicit objective of the Communications Act. The concept, which has evolved over time, is not specifically described in the Act. The "universal service" goal should be codified in order to provide the FCC and the states with a sound legal basis to address these issues as they apply to advanced telecommunications services.
Charge the FCC and the states with continuing responsibility to review the definition of universal service to meet changing technological, economic, and societal circumstances.
Establish a Federal/State Joint Board to make recommendations concerning FCC and state action on the fundamental elements of universal service. In its deliberations, the Joint Board must gather input from nongovernmental organizations.
Oblige those who provide telecommunications services to contribute to the preservation and advancement of universal service. However, the FCC, in consultation with the states, would be authorized to permit "sliding scale" contributions (for example, to avoid burdening small providers and new entrants), or "in-kind" contributions in lieu of cash payments.

In addition, it is an Administration goal that, by the year 2000, all of the classrooms, libraries, hospitals, and clinics in the United States will be connected to the NII. To help attain that goal, the Administration proposes that the National Telecommunications and Information Administration of the U.S. Department of Commerce conduct an annual nation-wide survey of the availability of advanced telecommunications services to those locations and report on its findings. Moreover, the Administration proposes that the FCC be directed to commence an inquiry and, subsequently, a rulemaking proceeding to ensure, to the extent feasible, the availability of advanced telecommunications to school classrooms, health care institutions, and libraries. The FCC would consider the tariffing of preferential rates for interstate services to such locations, and ensure that standards are in place to permit uniform interconnection to the NII.

Implementation of new universal service policies for the information age is of profound public policy significance. It will empower individuals and thereby complement the Administration's efforts to advance health care, educational, and welfare reform. For example, it will enable disabled people and members of poor families to obtain health care or job training information that enhances the quality of their daily lives. It will give students in remote rural areas the ability to "attend" classes interactively in distant locations that they cannot access today, thus better preparing them for higher education -- and for the jobs of the future. It will allow rural health care providers to render better service to their patients through consultations with specialists at research hospitals. It will allow welfare recipients to consult more frequently with social service agencies and be made aware of educational or training opportunities that can prepare them for steady jobs. It will enrich the lives of shut-ins by providing them with a wider variety of news and cultural programming. It will, in short, contribute to the public welfare by affording large groups of citizens new opportunities to realize the American dream.

As the examples outlined above suggest, the new universal service for the information age will help advance the Administration's goals of health, welfare, and education reform by enabling chronically disadvantaged individuals to improve their quality of health care and education. In short, an expanded universal service concept for the information age complements the Administration's broad domestic policy goals.

The Administration's universal service proposal adopts a broad framework of general principles, leaving specific implementation details to the FCC, to permit governmental flexibility in this rapidly changing industry. It does include provisions that bear similarity to H.R. 3636, such as use of a Joint Board and requiring contributions from service providers.

The Administration also includes FCC consultation with the Department of Commerce on universal service, which, as I have said, is a high priority for the Administration.

NTIA is working proactively to advance the universal service agenda by holding hearings in a variety of locations on the desirable scope and attributes of new universal service offerings. An initial hearing was held on December 16 in New Mexico. A Los Angeles hearing scheduled for January 20 was postponed due to the earthquake and will be held in February.

Other hearings will be held over the coming months. We anticipate that these hearings will provide valuable information on the universal service needs of various groups and the means by which universal service goals can best be advanced.

CONCLUSION

In conclusion, enactment of telecommunications reform legislation will promote the development of the NII in a flexible, procompetitive fashion that creates incentives for desirable investment, economic growth, and the wide-scale availability to all Americans of new, highly valued information services. In developing its telecommunications reform proposals, the Administration has benefited from the bipartisan spadework undertaken by Congress. The Administration looks forward to close collaboration with Congress to enact a set of legislative proposals that achieves these desired ends. This concludes my testimony. I would be pleased to respond to any questions you may have.