The Telecommunications Act of 1996

The goal of the framers of the Telecommunications Act of 1996, passed in February of that year, was to promote uniform local telephone competition. A key proviso of the Telecommunications Act of 1996 is that it takes away from each state the capability to approve competition in local telecommunications. It also outlines a procedure for local telephone companies to expand their operations into manufacturing and inter-LATA, in-region and out-of-region, telecommunications. They are not required to form a separate subsidiary to sell out-of-region long distance, electronic publishing and alarm monitoring services.

The Act redefines the responsibilities of the state public utility commissions versus those of the Federal Communications Commission. Essentially, it is up to the states to approve rates for local calling and resale and interconnection of Bell services to competitors based on federal guidelines.

The Telecommunications Act of 1996:

• Permitted RBOCs to sell in-region long distance after completing a 14-point checklist of how they would offer connection into local calling for long distance companies such as AT&T. The 14-point checklist was designed to prove that there were alternative sources for local competitive calling.

• Freed interexchange carriers, CAPs, cable companies, wireless service operators, broadcasters and gas and electric utility companies to sell local telephone services.

• Required local telephone companies to offer resale of and interconnection to local services to the above entities.

• Authorized local telephone companies to sell cable services, television services, equipment and out-of-state long distance from outside their region.

• Raised the limit on the number of TV stations networks could own and phased out cable TV rate regulation.

• Promised carriers reimbursable discounts to schools, health care institutions and libraries in rural areas for access to advanced telecommunications services.

• Allowed RBOCs to manufacture goods through separate subsidiaries after they receive permission to sell in-region long distance services.

Major Features of the Act

The Telecommunications Act of 1996 outlined provisions by which competitors were to be allowed to lease and resell portions of incumbent telephone company networks so they could compete without installing brand new infrastructure in cities and metropolitan areas. Parts of the Act apply also to cable TV providers and broadcasters.

Bell Company Entry into Inter-LATA Services—State-by-State Approval by the FCC

The Bells are not allowed to sell long distance within their regions until the FCC is satisfied that their networks, on a state-by-state basis, are open to competition. Before FCC permission can be granted, each state's public utility commission must approve the Bell Operating Company's application. The FCC with feedback from the Justice Department on a state-by-state basis grants final permission for the Bell companies to sell in-region long distance. Approval is based upon agreements reached with competing carriers and the items on the 14-point checklist. The agreement must be with a facilities-based carrier that uses predominately its own switches and cabling for carrying customers' calls, unless no facilities-based carrier has requested interconnection.

Interconnection—Making Bell Resources Available to Competitors

Incumbent local exchange carriers must supply the following to all state public utilities carriers:

• Resale— All telecommunications services it supplies to its retail customers should be available to competitive carriers.

  The wholesale price for resale of call transport and termination of calls must be at cost. No provisions of profit for incumbent LECs are built into this ruling.

  Note that the interconnection, as opposed to resale, of unbundled elements of LEC facilities does include a provision for profits.

• Number portability— Telephone number portability is spelled out by the FCC such that customers can keep their telephone number if they change vendors.

• Dialing parity— Equal access is the ability of customers to preselect their telephone company for local toll calls. Dialing parity applies as well as to operator services, directory assistance and directory listings and should include no unreasonable dialing delays. Dialing parity eliminates the requirement of dialing a carrier access code, 101-XXXX. Prior to the Telecommunications Act, equal access applied only to out-of-region toll calls carried by interexchange carriers. Equal access requires that competing local exchange carriers connect their central offices to each other. These connections are required so that a customer on vendor A's network can call a customer on vendor B's network. Billing arrangements and agreements also are needed for vendor A to bill vendor B for terminating vendor A's call. Databases in the network must be maintained so that the local telephone company knows that telephone number 555-1234 belongs to vendor A and telephone number 555-6666 belongs to vendor B (see Figure 3.5).

  Figure 3.5. Connections between central offices to achieve equal access.

  

• Access to rights-of-way, including poles— Utilities must provide nondiscriminatory rates to cable TV companies and telecommunications carriers other than incumbent local exchange carriers (LECs). If a utility uses its own poles, ducts and rights-of-way to provide telecommunications services, it must charge its own entity the same rate it charges other carriers.

• Reciprocal compensation— Telecommunications carriers must establish reciprocal compensation arrangements for the transport and termination of each other's local calls.

• Unbundled access— Incumbent local exchange carriers are required to provide unbundled network elements such that requesting carriers can combine these elements to provide telecommunications services.

• Collocation— The incumbent carrier should allow physical collocation of competitive equipment at the incumbent's premise for access to unbundled network features.

The 14-Point Checklist—RBOCs' Requirements Before They Are Allowed to Sell In-Region Long Distance

The 14-point checklist is designed to ensure that the RBOCs open their networks to competition before they are allowed to sell in-region inter-LATA long distance services. All of the following items must be agreed to with competitors on a state-by-state basis before the Bells are granted approval to sell in-region inter-LATA long distance:

Interconnection Agreements—A Timetable

The Act includes a timetable during which the state commissions must rule on interconnection agreements between incumbent local Bell companies and competitors. These agreements are subject to approval by the state public utility commission. Either party in the negotiations may request that the state utility mediate the agreement.

Universal Service Fund—Affordability and Availability

Every interstate carrier, cell phone and paging company must contribute 6.8% of their long distance and international calling revenue to a fund for universal service. State commissions may also create funds for universal service. The universal service fund was originally set at $2.25 billion annually. The FCC reduced it to $1.9 billion under pressure from carriers and some lawmakers. The universal fund program is known as the E-rate.

The purpose of the fund is to provide people in rural, insular and high-cost-to-reach areas, as well as poor consumers, access to advanced and interexchange telecommunication services at reasonably comparable rates charged for similar services in urban areas. This provision applies to schools, health care providers and libraries. In 2000, subsidies were extended to Native American reservations where only 70% of the population has telephones versus 97% of the United States population as a whole.

Cream-Skimming and Universal Service—Concentrating on Profitable Markets

CLECs generally concentrate their initial sales efforts in highly populated metropolitan areas. This concept is known as “cream-skimming.” Cream is skimmed from lucrative markets such as downtown New York City, where one fiber run has access to thousands of customers in a single skyscraper. There is more potential for profit when an investment in new technology reaches thousands of potential customers in a small area. In a rural area, one fiber run may reach only ten customers.

The desire by the federal government to ensure that telephone service be provided to rural, possibly unprofitable regions is one reason telephone service is regulated. The Bell system has, since the early 1900s, promised to supply universal, affordable, basic “dial tone” in exchange for a monopoly. One consideration in opening up local calling areas to competition is to ensure the continuation of affordable services to poor and rural sections of the country. Telephone providers that only run services to high-profit areas can potentially set their prices lower than Bell Operating Companies, which sell telephone services in locations where operating profits are low and expenses are high.

Prohibitions Against Slamming

The Act expressly forbids any carrier from submitting or changing a subscriber's telephone exchange provider without authorization by the subscriber. State commissions are allowed to enforce these procedures in regard to intrastate services. A carrier that slams a customer, that is, makes an unauthorized change, is liable to the previous carrier for all fees paid by the slammed customer. WorldCom in June of 2000 was fined $3.5 million for slamming.

Manufacturing by Bell Operating Companies—Concurrent with Approval for In-Region Long Distance

The Bell companies are allowed to manufacture and sell equipment once they are allowed entry into inter-LATA toll calling. However, they are not allowed to jointly manufacture equipment with a Bell company with whom they are not affiliated. They may, however, collaborate with a manufacturer on the design of equipment prior to their approval to manufacture equipment.

Electronic Publishing by Bell Operating Companies

The RBOCs are allowed into electronic publishing through a separate subsidiary or in a joint venture that is less than 50%-owned by a Bell company. Electronic publishing is defined as providing or disseminating a variety of news, sports and informational material. Basic exchange services cannot be used to disseminate this material. These rules applied until the year 2000.

Broadcast Services—Relaxed Rules

Rules on radio and TV station ownership were relaxed. The Act removes the limit of one radio and one television station an individual organization can own. In addition, it allows one party to own both a broadcast and cable TV system. It also eases the rules on renewal of broadcast licenses.

Cable Services—Deregulation of Rates

The Act allows cable TV rates to be deregulated once effective competition in the serving area exists. Effective competition is defined as the offering of comparable video programming by a local exchange carrier or its affiliate. Premium services were deregulated on March 31, 1999.

Video Programming Services—Opening Cable TV to Competition

Exchange carriers are allowed to offer video programming and are not required to make capacity on their system available to competitors on a nondiscriminatory basis.

Congress hoped that this provision would encourage competition in the cable TV industry. It opened cable companies' drop wires, the wire from the pole to a residence, to joint use by cable competitors. New cable companies need only lay new cable down the street. They do not have to provide cable to each building. Competitors are allowed to operate as Open Video Systems (OVSs) without obtaining franchises from each community in which they wish to offer cable TV and cable modem service. Local communities, however, are allowed to charge OVS operators a percentage of their cable revenues.

In addition to the above, the following rules apply to video programming services:

• Cross ownership of more than 10% of cable TV and local exchange carriers is prohibited.

• Local exchange carriers that offer video programming are required to set aside channels for other companies' programming.

• LECs need to obtain FCC certificates to operate.

Broadcasting Obscenity and Violence

Regulations on pornography and indecent material available on the Internet were added as an amendment to the Act. The amendment was called the Communications Decency Act. However, it were found unconstitutional by the Supreme Court on June 12, 1996 because it denied First Amendment, freedom of speech rights. Congress passed subsequent laws, including the Children's Internet Protection Act (CIPA) and the Neighborhood Internet Protection Act (NIPA). It mandated that schools and libraries provide filters on Internet-connected computers to prevent children from accessing obscenities and pornography from the Internet. The Acts prohibited any school not complying with these regulations from receiving funds from the Universal Service Fund, discussed previously. The Supreme Court will review these Acts.

Rural Telephone Companies Exemption from Interconnect and Resale

The interconnection and resale rules intended to promote competition do not apply to rural telephone companies with fewer than 50,000 access lines. Ten percent of the U.S. population is in these territories. Small local exchange carriers with more than 50,000 access lines can apply to their state public utility commission for exemptions to these rules if they feel the rules impose a financial hardship.