Session Six:
Wireline Carriers--Policy and Law III

Lecture Notes

Accompanying Slides

Wireline Carriers--Policy and Law III

The Telecommunications Act of 1996

The Telecommunications Act of 1996 ended an acrimonious debate among AT&T and the RBOCs. Since divestiture’s implementation in 1984, the RBOCs aggressively sought entry into the three areas which the MFJ had denied them, long distance, manufacturing, and "information services", then understood to mean some form of electronic yellow pages. During the period up to the election of 1994, democrats had controlled the committees in the House of Representatives. The Commerce Committee, chaired by John Dingell of Michigan, had generally sought to pass legislation supporting the RBOC position. AT&T and the other long distance carriers, manufacturers, and information service providers (notably Prodigy and Cox Communications) opposed the passage of such legislation. Their allies on the House Judiciary Committee, led by then-chair Jack Brooks of Texas, sought a version of legislation more strongly tied to the Department of Justice and antitrust concerns. The issue remained largely a stalemate.

But when Republicans gained control of the House of Representatives in early 1995, they made an important rule change. Whereas the Democrats had required legislation to go to all committees having some jurisdiction, the Republicans changed the House rules to provide that a bill would henceforth go to only one committee. Telecommunications was to go to the Commerce committee, and the Republican majority was eager to pass a pro-competition bill at he earliest opportunity. The various carriers entered into a series of negotiations, largely brokered by the Congress, to develop a bill that all could live with. This industry-agreed bill became the Telecommunications Act of 1996.

The essence of the bill is to provide the basis for entry by the RBOCs into the three areas they had been excluded from. The "carrot" which the long distance industry was to receive was the opportunity to enter the local exchange business on the same terms as the Bell companies. Existing and new carriers would have positive obligations to perform in order to qualify for admission in the new market areas. New terms were created, and the role of the FCC altered. The slides outline the details of the Act, the obligations and opportunities of carriers, and the role of the FCC.

Basically, the FCC gained the authority to "forebear" from regulation when, in its expert opinion, the general need of competition and of the public interest would be better served by the FCC not becoming involved. This power, which contrasted dramatically with the Commission’s earlier obligation to provide uniform regulation and enforcement, created far more flexible regulatory arrangements than in the past.

The bill created the terms "ILEC", or Incumbent Local Exchange Carrier, to refer to the Bell or other company who held the local monopoly. The term Competitive Local Exchange Carrier or "CLEC" replaced the term Competitive Access Provider or "CAP" which had been used to describe companies like Metro Fiber Systems. CLECS were expected to be able to enter local exchange markets without discriminatory treatment by the RBOC. Some other issues were included in the act, including protection for burglar alarm companies (mostly "Mom n Pop" firms with strong lobbying clout), a federal preemption for satellite dishes so that they would no longer be regulated by municipalities and homeowners’ associations, and the end of Morse code for ships at sea (the coast guard no longer monitored Morse transmissions, having shifted to voice).

Almost immediately, the affected parties began a race to the courthouse to obtain injunctions against enforcement of the Act. Southwestern Bell obtained a restraining order in Missouri courts preventing the long distance companies from entering local markets. The order demanded that companies obtain a certificate of "convenience and necessity" from state authorities before entering the local exchange market.

The implementation of the Act placed on hold, two things immediately began to occur. First, the Act missed the technology of the Internet, much as Divestiture has missed the impact of personal computers. Second, the large companies immediately began a major effort to position themselves strategically with new technologies for entering the rapidly expanding telecommunications business. Mergers and acquisitions became the order of the day, as the large companies became even larger, buying market share in their core businesses, expanding service territory, and investing in new technology.

The merger frenzy began for AT&T with the acquisition of McCaw Cellular. The Bell Labs had invented cellular telephony prior to divestiture. But AT&T had given the revenue and the technology away to the RBOCs with divestiture. Now, in 1995, AT&T needed access to the residence—through "the last mile" if it was to compete in the local exchange market. The purchase of McCaw gave AT&T an opportunity to buy an existing successful company in that niche and, more important, to get the licenses it needed to provide service in the local markets. There are some 400 local license areas in the U.S. for cellular, and, to date, no one has a license to serve them all. Generally, the local RBOC holds one and an out of territory RBOC, often doing business as Cellular One, holds the other primary license. An increase in the number of licenses to 4 for each market area improved competition. AT&T increased its holdings and its technological options for entering local markets with its cable company merger, TCI.

The RBOCs were not to be outdone. The first merger was between Pacific Telesis and Southwestern Bell, which then took the name SBC. Nynex and BellAtlantic quickly followed. This past week, the merger of SBC and Ameritech was finalized. These mergers and purchases, as well as the pending acquisition of GTE by BellAtlantic, provides the LECs with more volume and a larger "footprint", or market service area. BellAtlantic’s purchase of GTE provides not only a national area, but includes a considerable number of high growth areas in Florida, Texas, Georgia, and California.

The mergers of LDDS and Worldcom, followed by the MCI-Worldcom merger and the now pending acquisition of Sprint by MCI round out the major mergers to date. MCI also bought controlling interest in Metricom, the wireless modem provider with the "Ricochet" system. By purchasing this technology, MCI began to obtain a wireless access for the local market.

The merger and acquisition mania seems to show little sign of abating. Coupled with the tremendous buildout of fiberoptic line going on nationally, the increase in satellite communications capability, and the invention of such new technologies as satellite light wave, the nation’s capacity will be extremely high, and seems to presage a potential within another decade to provide sufficient bandwidth for full motion video, as well as voice and data. The construction currently going on in Northern Virginia by BellAtlantic includes cable sheafs of 18 cables, each containing 80 pairs of light guide. Contrast this with the AT&T transcontinental backbone, which is a single line of 80 pairs. And the backbone currently uses only two fibers—one eastbound and one westbound.

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