Communications Law and Regulation


This summary outlines many of the basic issues confronting communications law practitioners today.

Historical Background

Although we think of this as the information age, the legal and regulatory issues that communications lawyers face today have been around for a long time. One of the first "information superhighway" bills was introduced in Congress in 1853 -- a proposal to commit public funds to the creation of a transcontinental subterranean telegraph. In the first House Report on the bill, there is an extended discussion of the purported benefits that will flow from this project, but then there is a call for government "encouragement" (i.e., funding) for the project. One might wonder why government funding is needed if the project will be so valuable. And what are the implications of such funding? Is it, in fact, that the "benefits" really are not worth very much, or is this just an excuse for the government to get its hands on the project? As we well know today, government assistance for a project usually also comes with government regulation of the field.

The Senate Report on the 1853 legislation is equally interesting. That report trumpets the social benefits that will result from enhanced transcontinental communications. But it is fair to ask whether there is not a perverse facet of communications advances that was overlooked by the Senate in 1853. Are families closer now than they were then? "Telephony," after all is from the Greek for "far speaking." Maybe, in fact, rather than bringing people together, the ability to communicate over larger distances encourages social fragmentation and isolation. These kinds questions continue to reverberate throughout telecommunications law and policy.

Modern telecommunications policy really begins on April 15, 1912. If that date sounds familiar, it was the date on which a large passenger ship of some renown struck an iceberg off the coast of Greenland. Although most people have since viewed the story of the Titanic disaster as a parable about mankind's efforts to conquer nature with technology and the ultimate futility of those efforts, Congress in 1912 viewed the story as a parable of the bad things that can happen when technology develops faster than regulation. For, in fact, the emergency signal broadcast by the wireless operators on-board the ship was received by a Marconi telegraph station in Newfoundland, but as the news broke, amateur radio operators up and down the East coast of the United States filled the airwaves with radio noise that prevented the distress signal from being relayed promptly.

The result was that Congress passed the Radio Act of 1912, which was its first foray into radio regulation. In the 1912 Act, the government, for the first time, seized control of the spectrum and assumed the responsibility for allocating the spectrum among various uses and users.

To understand the impact of the 1912 Act, a brief aside about the development of the wireless radio is required. When G.M. Marconi invented the radio in 1895, he contemplated applications that essentially were wireless telegraphs, i.e., point-to-point wireless communications. The first use of the wireless on ships was not until 1906, barely six years before the Titanic disaster, and it was not until the 1920s that broadcast radio -- what we think of as commercial radio today -- became popular. After that time, the use of radio as a wireless telegraph or telephone all but disappeared, not to be reborn until the 1980s with the widespread deployment of cellular telephone systems. Today, of course, we have come full circle and many communications applications are going wireless, from LANs, to telephones, to baby monitors.

So why the dark-ages of wireless telephony between 1920 and 1980? Simply put, "the wireless" lost the technological race of the day. While the rapid development of radio was underway, telephone switches and the vacuum tube amplifier, which made long-distance telephone possible, also were being developed so that fast, reliable landline telephone service became much more commonplace in the late teens and early twenties. As this happened, those who had backed the development of radio recognized that radio's great advantage over telephone was neither in quality, reliability, nor range, but in radio's ability to broadcast. Thus, in 1920, Westinghouse inaugurated the nation's first true radio station, KDKA in Pittsburgh.

It wasn't until the recent developments in cellular and digital technology that true wireless telephony has had much of a chance to compete with landline telephone networks. But recognize that when Congress passed the 1912 Act, it did not even include an allocation for true commercial broadcast services. Congress was still thinking of wireless telegraphy. The moral of this part of the story is that no matter what the regulators think, technology and the market tend to dictate winners and losers in communications.

Another feature of the 1912 Act to consider is the notion that the government controls the radio spectrum. Why? Does the government own the land beneath our feet? The air we breath? The sound waves generated by our voices? Yet, today government control of the spectrum is taken as a given.

By 1927, the regulatory regime established in 1912 proved inadequate for the task and Congress entered the field again by passing the Radio Act of 1927. The 1927 Act was pivotal and still has ramifications today. First it created an agency that was the predecessor to the current FCC. In true Washington fashion, the original legislation provided that the agency would last for only one year, after which communications regulation would revert to the Commerce Department. Of course, the successor Commission to that one year agency remains with us today. As Congressman Byrnes said at the time, "the nearest approach to immortality on earth is a government Bureau."

Second, The 1927 Act articulated for the first time the "public interest" standard for licensing. That is, the plan was to give away the spectrum and, in exchange for the privilege of using federal spectrum resources, the licensee was required to "serve the public interest." To this day people are still trying to figure out what that means.

The real danger, of course, lies not in the uncertainty of the standard, but in what it requires the government to do in applying the standard. Herbert Hoover, who was Secretary of Commerce at the time said, "it becomes of primary public interest to say who is to do the broadcasting, under what circumstances, and with what type of material." And one of the principal draftsmen of the 1927 Act, Senator Clarence Dill said of the government's regulation of the broadcast spectrum , "Uncle Sam should not only police this new beat, he should see to it that no one uses it who does not promise to be good and well-behaved." Today this strikes us as somewhat totalitarian, but how can the Government avoid making these kinds of judgments if it requires licensees to broadcast in the public interest?

In fact, the Federal Radio Commission in exercising its new regulatory authority under the 1927 Act was quite selective -- it favored large established broadcasters and those that aired programming of which it approved. For example, the FRC admonished stations playing phonograph records because it believed that such stations did not give the public anything it could not receive elsewhere. Worse, the FRC put the squeeze on stations stations that had an editorial viewpoint with which it disagreed (e.g., socialist and labor stations). Fortunately, the FRC was not long for the world. In 1934 Congress remade the whole scheme by replacing the FRC with the FCC, and the 1927 Act with the Communications Act of 1934, which was not again overhauled until the Telecommunications Act of 1996.

Introduction to the FCC

The FCC is an "independent agency" made up of five Commissioners who are appointed by the President and confirmed by Congress. Two Commissioners are Republicans and two are Democrats. The Chairman, who has one vote on Commission items, but who functionally controls the agenda and operations of the FCC, is from the President's party.

The FCC has bureaus that track the substantive areas of FCC jurisdiction, including: the Common Carrier Bureau, Wireless Telecommunications Bureau, Cable Services Bureau, Mass Media Bureau, and International Bureau. The bureau in which any particular matter will be handled normally is determined by reference to the delivery technology used. Traditional wireline carriers are regulated by the Common Carrier Bureau under Title II of the Communications Act, which involves all of the common carrier aspects that one would expect -- regulation of entry, rates, and terms of service. The theory traditionally was that telephone is a "natural monopoly",; i.e., that there are natural efficiencies from allowing a single firm to provide the service. And like other "natural monopolies," assuming there really is such an animal, the answer was to give telephone companies a de jure monopoly and then regulate them closely.

Broadcasters are regulated by the Mass Media Buruea, which, under Title III of the Communications Act, focuses on licensing in the "public interest." Wireless telecommunications services, e.g., cellular carriers, also are regulated under Title III, but they fall under the purview of the Wireless Telecommunications Bureau, and cable systems are regulated, under Title VI of the Communications Act, by the Cable Services Bureau.

Because of "technological convergence," the distinctions between services based on the delivery technology used are breaking down. Today there are some firms that act like broadcasters, mostly, but transmit by wire, e.g., cable television, and there are companies that act like common carriers, but transmit on radio, e.g., cellular and PCS carriers. This convergence has has begun to undermine any coherence that ever existed in the FCC's regulatory structure.

A second source of tension relates to the statutory jurisdiction of the FCC. The Communications Act purports to restrict the FCC to the regulation of "interstate and foreign communications by wire or radio," while denying it any "jurisdiction with respect to intrastate communication service." This so-called "reverse preemption" feature has created persistent jurisdictional tension because one cannot easily cabin communications within the categories of interstate or intrastate services.

Indeed it is odd to think that a service whose purpose is to transcend geographic boundaries can be regulated by separate authorities based upon the supposed geographic location of the service. The result of this jurisdictional split in the Communications Act has been a series of some of the most complex federal preemption cases decided. And, as the basic telecommunications network evolves from circuit-switched to packet-switched systems, the problem of defining services as either interstate or intrastate promises to become even more intractable.

The 1996 Act was intended to deal in part with the first set of problems created by technological convergence, but it expressly did not deal with the reverse preemption issue. That is, the Act took great strides toward ending what some have called "legal balkanization," treating similar technologies differently -- but it did not end the "federalist balkanization." Naturally, some of the most significant legal issues that have arisen since the passage of the 1996 Act have involved this second set of issues. Although there have been significant efforts of firms to cross technological borders since the Act, the FCC's efforts to regulate and control those trans-technology border crossings have been, and are being, challenged, mostly successfully, in courts throughout the country.

FCC Functions

The combination of the substantive legislation in telecommunications -- the Communications Act of 1934 -- and the Administrative Procedures Act, as well as a history of court cases over the years dealing with FCC procedures all have combined to create a settled set of requirements governing the agency's actions in two basic types of situations -- licensing and other decisions, in which the rights of specific individuals or companies are adjudicated, and rulemaking proceedings, in which broad policies and rules of general applicability are established.
Licensing & Adjudication
As to licensing decisions and complaint proceedings, the law requires that the FCC conduct itself as if it were a court of law: care is taken in determining who can be a party to the proceeding, i.e., who has a specific interest that may be affected by the decision, all proceedings must have a written record, and notice of a proceeding and an opportunity to be heard must be afforded to each party.

For example, when a party files an application for authority -- whether for a radio license or authority to operate as an international common carrier -- the FCC gives public notice of the filing of the application and anyone whose interests may be affected by a grant or denial of that application has the opportunity to file in opposition or support of the application. After a proceeding, the losing party may seek review of the FCC's decision in a Federal appeals court. The reviewing court will determine if the FCC's action was procedurally sound and based on reason.

General rulemaking
As to rulemakings, the procedures can be more loose, e.g., not all comments and proceedings must be have a written record, but, at a minimum, there must be public notice provided in advance of agency action and interested parties must have an opportunity to participate in the proceeding.

In a rulemaking situation -- adopting technical standards for satellites, for example -- the FCC gives public notice that it is considering adopting or changing a rule and, within a specified time period, any interested person may file comments with the FCC. Here too, one can seek court review of the FCC action, but the scope of the court's review is much more limited than in a licensing case, that is the FCC is given much wider discretion.

Spectrum Management At The FCC

The Communications Act of 1934, as amended, is the legal basis for management of that portion of the radio spectrum that is not earmarked for use by the Federal government. The reason for spectrum management, however, preceded the 1934 Act. Indeed, the FCC itself results from the need to establish spectrum management at the federal level. Prior to the creation of the FCC's predecessor agency, the Federal Radio Commission, conflicting uses of the spectrum created interference among various radio users. In 1927, the Congress established the Federal Radio Commission and directed it to bring order out of the chaos by giving it the power to assign frequencies, classify stations, and prescribe service areas -- all with the goal of reducing interference and making the spectrum resource generally usable. These powers were transferred to the FCC by the 1934 Act.

The 1934 Act empowers the FCC to control all use of the radio spectrum other than Federal government use. The Act imposes requirements for licensing of stations for a limited period of time and in the public convenience, interest and necessity. No one is authorized to acquire a property interest in radio frequencies. Indeed, the entire thrust of Title III of the Communications Act deals with spectrum management and proceeds from an assumption that the radio spectrum is a scarce resource that must be shared by all users and closely managed by the FCC in order to maximize its availability and use.

In fulfilling its function, the FCC exercises the authority given to it by the Congress to decide what radio frequencies or what portions of the spectrum will be used for what purposes and by what users. The decision-making occurs in decreasing levels of abstraction. The first, and most abstract, level is the supra-national process in which countries -- acting under the auspices of the International Telecommunications Union -- make decisions on how to share the spectrum resource without causing interference across their borders. The FCC shares responsibility for participating in this international process with the Departments of State and Commerce. The decisions reached in the international process are reflected in international agreements, which have the force of law in the United States once the Senate has ratified the agreement. Pursuant to these understandings, the FCC and Federal government spectrum managers determine, at the second general level of spectrum allocations decisions, what frequencies will be used for Federal government purposes and what frequencies will be used for all other purposes.

Once it has the particular block of spectrum under its jurisdiction, the FCC employs two kinds of procedures to determine uses and users of the spectrum. In the first, and broader, procedure, the FCC uses its quasi-legislative, or rulemaking, authority in the so-called "block" allocation system to determine the amount of spectrum needed for a specific communications service and then allocates a block of frequencies for use by that service nationwide.

At the last, and most specific, decisional, level the FCC decides which user will get which piece of allocated frequency. At this point, the FCC switches procedure and leaves rulemaking behind in favor of the application process, which draws upon the FCC's adjudicatory powers. In the case of multiple applications, conflicting proposals now are resolved by competitive bidding.

To the extent that deregulation has had much effect on spectrum management, it has been with respect to the last level of decision-making down on the spectrum management chain: the assignment or use of a particular piece of spectrum to a particular user or for a particular purpose. It is here that the FCC has been successful in using marketplace or other non-traditional regulatory mechanisms for determining which of the number of potential users actually will get a particular piece of spectrum.

The FCC also has tried to inject other marketplace mechanisms into the spectrum management process. These efforts, however, have rarely proceeded beyond the proposal stage, because of concerns that the 1934 Act does not give the FCC much leeway to improvise in this regard, and also because of the sheer complexity of changing the system. Spectrum management at the FCC, therefore, has been largely untouched by the deregulation that has characterized much of the FCC's activity for the past ten years. Today, if Airfone wants frequencies for an air-to-ground telephone service or Apple wants frequencies for a new data communications radio service, it goes through a process that looks much as it did forty years ago.

Under this procedure, the party needing the spectrum files a petition for rulemaking with the FCC, asking the FCC to initiate a rulemaking proceeding to allocate frequencies for the proposed purpose. It is not required that the petitioner first obtain an experimental authorization under Part 5 of the FCC Rules, although a number of petitioners have done so voluntarily.

The FCC places the petition for rulemaking on public notice and invites comments from interested members of the public. Those actually filing comments usually fall into five categories: those from whom frequencies would be taken to satisfy the proposed need; those in adjacent or nearby portions of the spectrum who are concerned about potential interference from the proposed use; those who, like the petitioner, are contending for the same or related frequencies for their own needs; actual or potential business competitors of the petitioner who have no desire to see him obtain frequencies to develop a better mouse trap; and, finally, those members of the public or industry groups who would benefit from the proposed use of the frequencies. Accordingly, most of the comments filed on petitions for rulemaking oppose the petition. It is extremely rare that the proponents outweigh the opponents in volume and often the only proponent is the petitioner.

In terms of timing, it usually takes the Commission at least six to nine months to act on a relatively non-controversial petition for rulemaking. Petitions that involve complex issues or inflamed passions can take a good deal longer. If the FCC denies the petition for rulemaking, the petitioner has the right to seek court review, but this right is usually illusory, since the agency has broad discretion as to whether it will initiate a rulemaking. The courts of appeal are unlikely to overturn an FCC decision declining to initiate a rulemaking unless the Commission has engaged in procedural irregularities.

If the FCC decides to initiate a rulemaking proceeding in response to the petition, it usually takes no less than nine months for even the most dispute-free rulemaking proposals. Naturally, the heavily contested rulemakings can go on for several years, while conflicting studies and analyses, as well as conflicting interests, are sorted out and the dispute is resolved.

In addition, unless the FCC resolves related issues regarding technical standards, measurement techniques, and licensing criteria at the same time that it concludes the rulemaking, these additional items will take more time before any one can use the frequencies. Of course, even after all these matters are resolved, individual applicants must then come forward to apply for the frequencies and submit themselves to whatever selection process the FCC has created. And, depending on the process, additional months or years can pass before the original proponent gets the opportunity to benefit from the initiative that it took at the outset.

The ever-present potential for Congress to become involved in spectrum management adds a significant degree of uncertainty to a process that is even otherwise highly unpredictable. The role the Congress can play in spectrum management vis-a-vis the Executive Branch (NTIA) and the independent agency (FCC) varies according to which party is in power in the House, Senate, and the White House. The perception of radio spectrum issues as arcane and highly technical has resulted, until recently, in Congress not being significantly involved in any comprehensive way. Because the Congress gets involved in only a limited number of issues, the extent and manner to which it addresses spectrum management is often determined by the interests of specific members of Congress or their constituent interest groups.

Naturally, the Congress has formal legislative responsibility for spectrum management issues, which it exercises largely through its oversight and appropriations functions regarding the agencies -- FCC and NTIA -- that actually are engaged in spectrum management. Congress also has the final say with respect to international spectrum allocations, which, as noted above, are set out in treaties that require ratification by the Senate. In addition to its formal legislative responsibilities, the Congress exercises significant informal influence over the spectrum management process, as discussed below.

Two congressional committees in particular have responsibility for telecommunications issues, and thus exercise the most continuing informal involvement in spectrum issues. These are the Senate Commerce Committee, and especially its Communications Subcommittee, and the House Energy and Commerce Committee, in particular the Telecommunications and Finance Subcommittee. The Appropriations Committees of both House and Senate, of course, have control of FCC funding legislation and thus also influence its spectrum management process. As with any issue of regulatory action, there are any number of ways that Congress can express its wishes on spectrum management, in addition to proposing legislation. Most commonly, it can call FCC or NTIA officials to testify at congressional hearings, and informally question the agency through letters and phone calls. In this regard, Congress has a number of its own "think tanks" that can provide information or support for a Representative's or Senators' questions or proposals on spectrum issues, including the General Accounting Office (GAO) and the Office of Technology Assessment (OTA).

An indirect method of spectrum management is the Congress' legislation on user fees that are imposed by the FCC on those who apply for and use radio frequencies. Influence in this regard is shared with the Administration's Office of Management and Budget and the Congressional Budget Office. The fees obviously have an effect on economic incentives to use the spectrum, and in that way, constitute an important element of spectrum management. By its ability to exempt certain groups, such as amateur radio and public safety users, Congress can endorse or refute certain spectrum management policies of the FCC.

Congress, of course, is most responsive to political and constituent interests, and one of the strongest groups in the spectrum area has been the television broadcasters, who occupy large portions of the available spectrum. The broadcasters were successful, for example, in defeating value-based fees for spectrum use, despite a ravenous budgetary hunger for them. The amateur radio operators, or "hams," also zealously protect their spectrum, and have the political advantage of numbering among their group constituents in every congressional district, as well as many members of Congress themselves.

Case Studies

The discussion below deals with case studies drawn from the FCC's spectrum management process in which spectrum has been required for new technologies, products, or services as proposed by inventors, entrepreneurs, and the R & D departments of larger companies. In each example, an individual or a company has developed an idea for a new product or service that requires use of the radio spectrum. In each instance, there were no immediately available frequencies to use for the purpose. The FCC had not, in its block allocations process, allocated frequencies for the particular contemplated use or even a closely related use for which frequencies were assigned and could be adapted. To the contrary, the spectrum deemed usable for the purposes contemplated in the examples below were fully occupied by radio services, as determined by the FCC in its various rulemaking actions.

THE LOJACK STORY: GOVERNMENT FREQUENCIES

The LoJack Corporation of Massachusetts ("LoJack") needed a frequency, a standard 25 KHz channel, for its newly-developed stolen vehicle recovery system. The LoJack System consists of a radio transmitter-receiver unit that is hidden in motor vehicles; a tracking device mounted in police vehicles; and a computerized network of radio transmitters by which the law enforcement agencies signal the LoJack Unit to begin transmitting when a LoJack Unit-equipped vehicle is reported stolen. Upon receiving this signal, the unit begins transmitting its unique reply code, and police vehicles with direction-finding receivers within range of the transmitting LoJack Unit are able to track and locate the stolen vehicle.

There were a number of practical and technical constraints on LoJack as to where in the radio spectrum it could find a usable frequency for its system. Given the fact that the basic function is radio-location in heavily built-up urban areas, LoJack could not use a frequency too high in the spectrum because of multipath problems. Also, because LoJack relies on transmissions over a wide area from a low power device small enough to be hidden on a vehicle, the ideal frequency again would have to be fairly low in the radio spectrum -- certainly under 1000 MHz. The final constraint dictating the lower ranges of the spectrum was, as a consumer item, the cost of producing the LoJack unit must be low.

After a, not surprisingly, unsuccessful search for a non-government frequency below 500 MHz, LoJack approached the Federal Bureau of Investigation for assistance in finding a frequency. The FBI staff conducted an informal survey of the federal government's frequencies, and recommended frequency 173.075 MHz as the best choice for LoJack, largely because that frequency borders TV Channel 7 (174 to 180 MHz), which makes traditional federal government land mobile radio uses difficult to accommodate without the danger of interference to Channel 7. As a result, this frequency was not heavily used by the federal government.

In 1984, LoJack and the Massachusetts state police began to use 173.075 MHz to demonstrate the LoJack System. Formal approval was necessary from the federal Interdepartment Radio Advisory Committee (IRAC), administered by the National Telecommunications and Information Administration (NTIA), under the Department of Commerce, which controls all federal government frequencies.

After about a year of technical tests, LoJack had established the efficacy of the system and wanted to see if there was a consumer market for the technology. At this point, the federal government people did not want to be responsible for a market test and suggested that a market test be administered by the FCC. Therefore, on October 18, 1985, LoJack and the Massachusetts state police filed joint applications for an experimental authorization, to include a market test. LoJack's application covered the transmissions from and the marketing of the in-car mobile LoJack units, and the state's application covered the base station transmitters. Anticipating possible broadcaster opposition because of the proximity of the frequency to Channel 7, included with the initial application was an extensive engineering test report showing that there was no significant risk of interference to Channel 7.

Since a government frequency was involved, the FCC's Office of Engineering and Technology ("OET") forwarded the experimental application to NTIA for its approval. In a February 21, 1986 letter, NTIA "agreed in principle" with the proposed use. The NTIA letter went on to suggest that the Commission explore accommodating permanent use on a nongovernmental frequency. Because the OET staff did not want to authorize another market test on delegated authority, the applications had to go to the full Commission. On March 12, 1986, the Commission approved the grant.

Three days after the Public Notice of the grant, the Channel 7 licensee in Boston, WNEV-TV, petitioned for reconsideration of the Commission's order, claiming potential adverse impact from the LoJack System's operation. The Association of Maximum Service Telecasters (AMST), a trade association of TV broadcasters, also petitioned for reconsideration, submitting its own engineering report to support the claim of potential interference. After further pleadings, including late comments by the National Association of Broadcasters (NAB) and various other broadcasters supporting reconsideration, the Commission denied the petitions in October 1986.

Although LoJack had its market test, the test bed was not entirely a bed of roses. The FCC and NTIA are understandably wary of market tests. They expose a new technology or service application to the public without many of the consumer and regulatory safeguards that would apply in regular operation. The government wants to be sure that the public will not be "stuck" with bad products and services and will not bear the risk if the FCC withdraws or does not renew the authorization. Therefore, LoJack had an obligation to give stringent notices, warnings, and caveats to its customers regarding the risks involved in buying the LoJack product. This obviously was a barrier to sales and, therefore, skewed the market test results, and LoJack, to overcome customer resistance, offered a money-back guaranty to all its customers, if the FCC were to withdraw the authorization. LoJack donated the base stations and tracking units to the Massachusetts police, in order to overcome their own resistance to buying products that were subject to such risks.

Another disadvantage to the market test resulted from the government's concern that, once the technology was in the marketplace, the horse was out of the barn and the government's hands would be effectively tied if it decided to pull LoJack back from the public. As a result, although LoJack requested market test authority for a larger area than Massachusetts, the authority that was granted was strictly confined to Massachusetts.

While the FCC mitigated the worst effects of the geographical limitation by granting many special temporary authorizations (STA) to demonstrate the LoJack system for short periods of time outside of Massachusetts, there was a great reluctance to extend the market test outside of Massachusetts. This situation eventually led to LoJack's filing its petition for rulemaking to go operational by obtaining a regular assignment of 173.075 MHz.

Thus, on March 31, 1988, LoJack petitioned the FCC for a notice of proposed rulemaking (NPRM) to allocate frequency 173.075 MHz permanently for stolen vehicle recovery system use across the country, with state and local law enforcement agencies to be the licensees, along with continued use by the federal government. Given both the technical success and consumer acceptance of LoJack, numerous public safety officials from Massachusetts and other states wrote to support the petition. However, in May 1988, the FBI advised that it would not support a permanent authorization of use of 173.075 MHz. Only two broadcaster groups opposed the petition, basically restating the possible Channel 7 interference argument.

The FCC again referred the Petition to NTIA and NTIA in turn consulted IRAC. Despite the FBI's opposition, NTIA advised the FCC that it supported the sharing of 173.075 MHz with state and local law enforcement agencies for purposes of stolen vehicle recovery systems. The FCC issued a proposal for rulemaking on December 12, 1988, and adopted the proposed rules at the end of September 1989 -- five years after the first technical tests were started in Massachusetts.

SPREAD SPECTRUM: A TALE OF TWO COMPANIES

In June 1981, the FCC adopted a Notice of Inquiry ("NOI") to gather information on spread spectrum modulation. While originally developed for military applications, the Commission had been interested in determining whether spread spectrum modulation offered the potential for civilian use in a number of the radio services under the Commission's jurisdiction. Spread spectrum works by transmitting an information signal and combining it with a noise-like signal of much larger bandwidth to generate a combined wideband signal. At the receiver, the code used to spread the signal over the wide bandwidth is decoded and made intelligible. Spread spectrum services are highly resistant to interference and because they can operate at low power levels, pose little threat of interference to other, more conventional radio services.

In the NOI, the FCC stated that it was interested in the use of spread spectrum techniques to overlay new radio services on existing radio services. In effect, by using such techniques, the Commission would be creating additional frequencies for a wide variety of new services and, of course, would be making much more efficient use of the radio spectrum that would be overlaid with spread spectrum modulation.

The spread spectrum NOI was most unusual in that it was initiated by the Commission rather than by a private petitioner. Moreover, the Commission had before it a number of studies regarding spread spectrum, some of which had been initiated and underwritten by the FCC: studies by NTIA and by the MITRE Corporation. In addition, the FCC had available a number of Department of Defense and other studies regarding military applications of spread spectrum. In short, because of the studies, the FCC was not fully dependent on information regarding spread spectrum that would be provided by the private parties that participated in the proceeding.

Prior to the time that the FCC initiated this NOI, the Hewlett-Packard Company ("HP") had been developing and experimenting with, pursuant to an FCC Part 5 experimental authorization, a new wireless data terminal. The terminals, which were intended to be installed on movable robots, fixed computers, and automated assembly and transportation equipment, were designed to be used inside factories and warehouses for data collection and related purposes. HP believed that spread spectrum modulation had unique advantages in factory and warehouse settings, where multipath interference problems are common. HP had developed a prototype and had been operating in an experimental environment on frequencies in the 2500-2650 MHz band, which at that time was assigned exclusively to Instructional Television Fixed Services uses. HP had concluded that spread spectrum data systems could feasibly coexist with other conventional modulation uses of the radio spectrum.

As a result, HP welcomed the FCC NOI and participated fully and actively in the proceeding that ensued. HP did not, however, proceed to develop its mobile data terminal technology, since the Commission, in the NOI, had stated that the present FCC rules implicitly forbade the use of some spread spectrum technologies. Moreover, the very existence of the NOI cast some uncertainty over what would be allowable in the future regarding power limits and other standards for spread spectrum. HP waited for the outcome of the proceeding.

Four years after the NOI was adopted, the FCC issued a further Notice of Inquiry and Notice of Proposed Rulemaking, and then, a year later, issued its First Report and Order in the proceeding. In summarizing the First Report and Order, the Commission noted that many of the parties participating in the proceeding were concerned that implementation of spread spectrum techniques "might cause unacceptable interference to existing services unless its development was restricted to low powered, limited range applications and that the allowable frequencies and powers were carefully chosen."

The Commission, reacting to such fears, took only very limited action on spread spectrum. It allowed spread spectrum for some police surveillance operations and, under Part 15 of its rules (governing low-powered unlicensed operations, e.g., baby monitors and cordless telephones), authorized spread spectrum overlay in certain of the Part 15 and industrial, scientific, and medical ("ISM") bands. The portion of the ISM frequencies near the C-Band satellite up-link frequencies were not included because of concerns about possible interference from spread spectrum overlays. Spread spectrum system maximum power output was limited to 1 watt, which is considerably below the power limits the Commission originally proposed.

Unfortunately, as Hewlett-Packard had advised the FCC, the power limits were too low to permit development of the HP wireless data terminal. As a result, HP suggested that wireless data terminals be licensed, at adequate power levels, in the private radio services. HP also urged the FCC to allow for spread spectrum on carrier current radio systems. The First Report and Order merely noted that the two HP suggestions seem to be promising and they would be considered in the future.

What happened to an FCC proceeding that began on such a promising note? An FCC Public Notice, issued to clarify its decision in the spread spectrum proceeding, conceded that "the Report and Order adopted rules on a much less ambitious scale than was discussed in the Notice of Proposed Rulemaking." The Commission cited "concern both inside and outside of the Commission" as the reason it took a more conservative approach in its rules. The Commission explained that its staff had not had much experience with spread spectrum techniques and that the Commission was convinced that it would be difficult to detect and correct any interference that might be caused by spread spectrum modulation.

Apparently, the Commission simply was overwhelmed with the task of attempting to innovate in the face of opposition from so many elements of the industries that the Commission regulates. Without strong outside proponents for spread spectrum techniques, there was not a sufficient consensus for spread spectrum and, by itself, the Commission could not sustain any momentum for innovation.

About the time that Hewlett-Packard was beginning to test spread spectrum techniques for its wireless data terminals another California company -- Equatorial Communications -- was introducing its first product: a two-foot diameter satellite receive earth station for nationwide data distribution services via satellite. Equatorial was a start-up company, built with venture capital seed money. It got into business to serve the market need for low-cost, thin-route satellite data networks. While others addressed the problems of communicating data between large computers, Equatorial set out to make it economical for single remote computer terminals or telex machines to receive data at affordable prices. The market that Equatorial carved out for itself required low-cost user premise earth stations that were very small, easily installable, low powered, and very reliable. Equatorial's two-foot earth station, however, was quite susceptible to adjacent satellite interference, as well as terrestrial interference, in the C-Band environment in which it operated.

In order to achieve all of its operational requirements and produce an earth station that was highly resistant to interference, Equatorial turned to spread spectrum modulation techniques. Equatorial itself undertook the research and development programs to implement low cost spread spectrum techniques, in which much of the complexity is embodied in microprocessor software rather than expensive special purpose hardware. Equatorial's founders took advantage of the fact that satellites, unlike terrestrial microwave, is power-limited not bandwidth limited. The spectrum reserved for domestic satellites by the FCC allowed for wide bandwidth and relatively low power. Equatorial did not believe that the FCC rules implicitly forbade the use of spread spectrum techniques and the FCC's domestic satellite branch staff agreed.

The result was that, by 1985, when the FCC's First Report and Order in the spread spectrum proceeding had virtually doomed the HP wireless data terminal and other innovations, Equatorial had become a successful public company and was approximately doubling in size annually.

The FCC's decade of grappling with spread spectrum technology came to a fitting end in 1989, when it proposed significant liberalization of the Part 15 rules to permit a much broader use of spread spectrum. A mere ten months later, the new, liberalized rules were adopted. This represented a positive, and long overdue, step in the right direction. The Commission stated that "Part 15 spread spectrum technologies offer important new opportunities for developing new short range communications capabilities."

CASE STUDY CONCLUSIONS

It is easy to criticize the FCC's process. For one thing, it simply takes too long. Particularly at a time when the U.S. must be more competitive in world markets, we should not be sending a message to inventors, entrepreneurs, and research and development labs to avoid new technologies and services that depend on FCC spectrum approvals. It is very difficult, if not impossible, to quantify lost opportunities and benefits derived from inventions that might have been brought to market but for the barriers created by regulatory delays and uncertainties. One cannot help think, however, that the cost is substantial and is probably increasing.

The deeper concern is not the time consumed by the process; that is a problem that is relatively easy to cure, even in the age of budget deficits, by shifting staff and other resources to this battlefield. The main concern is with the nature of the decision-making process with respect to this aspect of spectrum management. It is a decision-making process that is afflicted with the worst features of both rulemaking proceedings and bureaucracy.

Rulemaking proceedings, like the legislative proceedings they are intended to reflect, are intensely political; not in the sense of partisan politics -- although that too is sometimes present -- but political in the sense that the decisions are interest-group, consensus-driven. What is the decision that is likely to satisfy most of the contending forces that care about the outcome of a proceeding? That is the essential question of the legislative process. In the FCC spectrum rulemaking context, that question, understandably, takes a long time to answer -- to sort out the contenders and arrive at a least objectionable result. When, as noted above, most of those participating in the proceeding are opposed to a change in spectrum allocation, the odds are against the innovator and the entrepreneur.

This effect is compounded by the second factor working against the decision-making process -- the fact that it is bureaucratic decision-making. The natural tendency of bureaucracy too is to seek consensus, avoid controversy, and prefer the steady state of the status quo to bold innovation. Thus, both the legislative nature and the bureaucratic nature of the FCC's spectrum management decision-making creates results like the spread spectrum rulemaking.

There are probably those who subscribe to the Darwinian school of spectrum management and believe that the five or six year regulatory birthing process leads to a survival-of-the-fittest result. That is, the new product or service must prove itself by running the regulatory gauntlet before it is worthy of getting its own piece of the spectrum.

Although this philosophy has some superficial appeal, it should be rejected because there is, in fact, little relationship between the qualities that lead to success in the regulatory arena and those that lead to success in the marketplace or have a broader social utility. Once one is prepared to accept the fact that an extended regulatory proceeding does not itself serve some goal of spectrum management, one has to ask if it serves a useful purpose and, if not, is there a better way to make spectrum available for new technologies and services.

One "better way" that is often discussed is to eliminate altogether the regulatory element from the spectrum management decision-making process and rely instead on efficiencies of the marketplace. After all, we do not use a regulatory process to allocate most of our resources in our economic system. Spectrum, say the proponents of the marketplace approach, is just like land. Once we define its boundaries and perhaps, engage in a little zoning to reflect societal values, we can allow spectrum to be bought, sold, auctioned, acquired by inheritance just like real property. Then we would not have to worry about time delays, industrio-political consensuses, or bureaucrats getting in the way of spectrum use. If one wants a frequency, buy it.

Because of its simplicity and because of the success that we have had in placing greater reliance on the marketplace and the efficiencies wrought by competition, there is a strong temptation to join the ranks of those who propose the marketplace solution. The question must be asked, however, how would innovators and entrepreneurs get access to frequencies. If the answer is, "pay money and buy their way in," we will be creating an arena in which many, if not most, of the innovators will not be able to play. If you need the same frequency on a national basis, to achieve economies of scale, and you need frequencies below 1 or 2 GHz, you cannot afford to buy your way into spectrum reallocation. The resource is too scarce, the demand is too great, and the entrenched users would set the price too high for most new entrants. How many hundreds of millions of dollars would it cost to buy every TV channel 13 in the U.S.? How much would it cost even to buy 1 MHz?

This is not to say that marketplace techniques have no place in the process, particularly when it comes to resolving interference disputes, or paying someone to change frequencies, or for determining secondary uses of spectrum assigned for certain purposes. It simply illustrates that a pure marketplace approach is unworkable for the basic spectrum allocation decisions.

And even if it were workable, it is unlikely, as a practical matter, that a sufficient political consensus can be developed to switch from our present spectrum management methods to a pure marketplace approach. We have seen how difficult it is to achieve political consensus on relatively self-contained spectrum reallocation issues: how much more difficult would it be to conclude that ultimate rulemaking to adopt the pure marketplace approach? How much would you make existing users pay for what they already have or would you give them squatters' rights and make others pay to get them off their land? And, in our spectrum marketplace, would we allow the Federal Government to have squatters' rights or should the Defense Department have to buy spectrum just as it has to buy fighter planes and paper?

Having rejected both utopian solutions of an infallible bureaucracy and a pure marketplace, can the spectrum allocation decision-making process, as it affects innovators and entrepreneurs, be improved? Probably. First, and most importantly, high-level policy makers have to care about it. They do not do so now. If they did, we would not have the process we now have. Second, the process must be more information-based rather than squeaky-wheel based. The FCC holds petitioners and commentators in rulemaking proceedings to a fairly low standard when it comes to studies and analyses either for or against a proposed spectrum reallocation. Experiments should be mandatory and hard data should be collected and analyzed. The FCC itself should conduct studies and analysis, so that it is not the captive of someone else's conclusions. The FCC should draw more on the analytical resources of NTIA and the Department of Commerce. The decisional process itself need not be forced into the inappropriate rulemaking mold, with its largely illusory procedural protections. The FCC and other government agency staffs should take a much more direct and activist role in working with the proponents of change, as well as with the established users, in determining the factual content of the positions and issues under consideration.

Moving toward a more information-based process may seem as utopian to some as the infallible bureaucracy or the pure marketplace models. But it is not pie-in-the-sky to expect that the scientific aspect of spectrum allocation decisions should be treated on a scientific basis rather than purely on a legal or political basis. The FDA can do so; the EPA can do so; the Surgeon General can do so. The FCC can do so too. p>

Federal Common Carrier Regulation

Under the Communications Act, the FCC generally has jurisdiction over interstate and international communications, while the states generally have jurisdiction over intrastate communications. In several areas, however -- particularly when dual jurisdiction is impracticable or when state policies could interfere with federal policies -- state law has been preempted and the FCC has exclusive regulatory jurisdiction.

Telecommunications services can be classified as either basic or enhanced. Enhanced services are unregulated. Basic services, depending on the nature of the services and the manner in which they are offered, are either common carrier services or private carrier services. For the most part, the FCC and the states do regulate common carrier services, but do not regulate private carrier services. Both common carriers and private carriers, but not enhanced service providers, are required to contribute to funds that are used to support universal service.

Basic vs. Enhanced Services

The FCC and state regulatory bodies divide telecommunications services into two categories: "basic" and "enhanced" services. Enhanced (or "value added") services employ computer processing to act on the protocol and/or other aspects of the subscriber's information; to provide a subscriber with additional, different, or restructured, information; or to permit subscriber interaction with stored information. Data processing, voice-mail, electronic mail, voice and fax store-and-forward, and Internet services are all examples of enhanced services.

Basic services involve the provision of "pure transmission capability over a communications path that is virtually transparent in terms of its interaction with customer-supplied information." In essence, basic services simply open a transmission path for the customer between two or more points. A subset of basic services includes "adjunct to basic services," which are services that appear to fall within the literal terms of the enhanced service definition, but which merely facilitate the establishment of a basic transmission path without altering the fundamental characteristics of the information delivered.

If a carrier makes its facilities available to transport enhanced services, it is regulated as a carrier, not an enhanced services provider. Internet service providers, therefore, are considered enhanced. Telephone companies that furnish the link between a customer's computer and an ISP's facilities, on the other hand, are common carriers.

Some services are hybrid in nature, combining basic transport with enhanced features. For example, when a value added network operator enhances transport facilities it obtains from a carrier by adding protocol conversion and other features in order to provide packet switched services, the FCC will consider the entire service to be enhanced. If a facilities-based carrier provides such services, on the other hand, the FCC will deem only the enhancements themselves to be enhanced services, and will regulate the basic transport separately as either, as the case may be, private carriage or common carriage.

The FCC does not regulate enhanced services; under the FCC's rules, companies are free to provide enhanced services on whatever terms and conditions they choose. Similarly, the states regulate intrastate enhanced services either lightly or not at all. Thus, to the extent that an entity provides only enhanced services, it will face little or no regulation within the United States.

Regulation of Basic Services: Private vs. Common Carriage

"Basic" services are further subdivided into two categories: those offered on a "private carrier" basis and those offered on a "common carrier" basis. Generally speaking, a common carrier is one that holds itself out indiscriminately to serve the public. In contrast, private carriers make individualized decisions in the context of each service offering, negotiating with users and tailoring services to meet individual users' needs. In a late 1995 decision that is subject to further review, however, the FCC's Common Carrier Bureau held that it would require AT&T to provide its frame relay services on a common carrier basis, notwithstanding the fact that such services frequently have been provided through customer-specific contractual arrangements.

The FCC does not regulate entry or rates for private interstate services. Similarly, most states do not regulate entry or rates for private intrastate services.

Common carrier services generally are subject to two kinds of regulation: initial "entry" approvals and ongoing regulatory obligations. The burdensomeness of these requirements will depend on the geographic scope of the offerings, the specific services being offered, and whether service is provided on a facilities-based or a non-facilities-based (i.e., resale) basis.

Initial regulatory approvals.
Common carrier entry into the U.S. interstate and international telecommunications markets is governed by Section 214 of the Communications Act, which requires FCC approval prior to carrier entry under certain circumstances. The FCC has granted "blanket" Section 214 authority for virtually all interstate telecommunications services that are provided by non-dominant carriers (i.e., carriers lacking market power). In general, therefore, and with the exception of the incumbent local exchange telephone companies, common carriers need not apply to the FCC for authority to provide interstate telecommunications service.

Entities seeking to provide international common carrier services, however, are required to obtain "Section 214" authority from the FCC prior to initiating service. If an applicant for a Section 214 authorization is "affiliated" with a foreign carrier having market power in a destination market, then more stringent processing procedures will apply to its application, and the applicant will be subject to dominant carrier regulation for traffic between the United States and the market or markets in which the affiliated foreign carrier has market power.

Section 214 authorizations are subject to a condition that the holder of the authorization not accept any special concessions from a foreign carrier with respect to any U.S. international route. "Special concessions" are defined to include any exclusive arrangement with a foreign carrier affecting traffic or revenue flows to or from the United States. The FCC will, however, permit special concessions with foreign carriers that lack market power in the relevant market on the foreign end of a U.S. international route. There is a rebuttable presumption that a foreign carrier having a less than 50% market share in a relevant market does not have market power.

Most states require some form of certification for carriers seeking to provide intrastate common carrier services.

Ongoing regulatory obligations
Under the Communications Act and the laws of most or all of the states, common carriers must furnish services upon reasonable request; may not unjustly or unreasonably discriminate between like customers for like services; must maintain tariffs specifying their rates and terms of service; and must charge just, reasonable (often cost-based), and non-discriminatory rates.

In addition, in most jurisdictions common carriers are subject to at least some regulatory review or approval before they may construct new facilities or remove existing facilities from service. The FCC and many of the states, however, have either forborne from applying some or all of these regulations to carriers lacking market power or have otherwise streamlined the regulation of some or all carriers.

For instance, there is only limited FCC regulation of interstate services provided by non-dominant carriers. In general, non-dominant carriers must tariff their rates, but they may file their tariffs with little, if any, cost justification and these tariffs become effective on very little notice. Further, non-dominant carriers are subject to minimal ongoing reporting requirements. Indeed, the FCC adopted a decision forbearing from applying the requirement that non-dominant interstate common carriers maintain tariffs for their services, but the decision has been stayed pending court review. Interstate common carriers must, however, contribute to funds that are used to subsidize universal service, telecommunications relay services, and to administer the "North American Numbering Plan." With the exception of contributions to universal service funds, these contributions are relatively nominal.

Universal Service Charges
The 1996 Act requires every "telecommunications carrier that provides interstate telecommunications services [to] contribute, on an equitable and nondiscriminatory basis, to specific, predicable, and sufficient mechanisms established by the Commission to preserve and advance universal service." "Telecommunications services" is defined in the statute as the "offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used."

Further, Section 254(d) provides the FCC with permissive authority to impose contribution obligations on any provider of "interstate telecommunications," including providers that are not telecommunications carriers. "Telecommunications" is defined as "the transmission between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information as sent and received."

In implementing the 1996 Act, the FCC determined first that, consistent with the Congressional mandate, all "telecommunications carriers" (i.e., common carriers) that provide interstate telecommunications services must contribute to universal service support mechanisms. Further, however, for reasons of "competitive neutrality," the FCC concluded that service providers that "offer services to others for a fee on an non-common carrier basis [should] contribute to the support mechanisms."

As a result, both common carriers and non-common carriers are required to contribute to universal service support on the basis of their end-user telecommunications revenues. Revenues derived from services provided to resellers are not to be included in the contribution base. In addition, revenues derived from providing information services are exempt. At present, service providers are required to pay approximately 5% of their end user revenues to the universal service administrator.

The 1996 Act also authorizes the states to adopt regulations that are "not inconsistent with the Commission's rules" and that "preserve and advance universal service." The states are in the process of developing their own universal service plans.

Regulation of Local Telecommunications Services

Background. The 1996 Act changed dramatically the local telecommunications markets. A short history of the local and long distance telephone markets therefore is necessary to put the 1996 Act changes into perspective.

The local telephone exchange once was dominated by a single entity - AT&T. On January 1, 1984, by order of a federal court, AT&T was divested of its local telephone business. AT&T's local exchange business was divided among seven spin-off companies known as the regional bell operating companies ("RBOCs") or, more commonly, the baby bells. Since 1984, the baby bells have held a monopoly over local telephone service in their respective regions. This monopoly is a function, primarily, of state and local laws which prohibit competition in local telephony. The theory has always been that, because of the high fixed costs and need to provide uniform service, local telephone service is a natural monopoly that states should regulate and protect.

In the meantime, AT&T, which retained its interexchange (long distance) business, continued to dominate long distance service. AT&T's market share has been slowly but steadily declining, however, as other facilities-based long distance carriers (WorldCom-MCI and Sprint) and numerous resellers gain market share. Recently, because of the erosion of AT&T's long distance market share, the FCC declared AT&T non-dominant in its market. Although there has been no federal prohibition on competition in this market generally, the baby bells were forbidden from providing long distance telephone service by the terms of the AT&T consent decree.

Thus, by January 1, 1996, there were two distinct telephone markets, each with its own set of "dominant" players (even if not dominant in the strict FCC sense). The 1996 Act was intended to change this situation by the simple device of removing the competitive barriers to competition between AT&T and its prodigal children, the baby bells.

Although simple in theory, the implementation proved more complex and contentious than anticipated. AT&T, and the other long distance carriers that the baby bells control bottleneck facilities in each of their regions with which they can discriminate in price or service against unaffiliated long distance carriers. Thus, the argument goes, Congress should not allow the baby bells to compete in the long distance market, at least not "in- region," until there are competitive local exchange carriers so that the baby bells do not control the "last mile" access to the customer.

Conversely, the baby bells have maintained that the local exchange is vulnerable to competitive entry once regulatory barriers are lifted because new entrants can attack the market piecemeal. Worse yet, according to the baby bells, new entrants will be able to "cherry pick" in the local exchange market by building facilities and providing service to the least-cost customers from whom the highest profits are realized. The 1996 Act attempts to address both concerns.

First, with regard to entrance by the baby bells into the long distance markets, the 1996 Act attempts to protect long distance carriers. As noted above, the primary concern is "in-region," where the baby bells have bottleneck control over local exchange access to the end users. Thus, the 1996 Act allows the baby bells immediately to compete in "out-of-region" long distance services. In addition, the 1996 Act provides that a baby bell can provide long distance services in-region if it is subject to adequate competition in the local exchange.

The 1996 Act provides a detailed "competitive checklist" against which to measure new entrants into the local exchange to determine whether they provide such competition. Because, at least initially, new competitors will have to rely on the baby bells to provide many of the service elements that they will require to compete as providers of local telephone service, this "competitive checklist" is focused on factors relating to the network interconnection that a baby bell makes available to the new entrants. So far, only one baby bell has satisfied this standard.

The 1996 Act also provides a groundwork for local interconnection agreements, although they are intended to be privately negotiated whenever possible. To effectuate interconnection agreements between the baby bells and their new competitors, the 1996 Act divides local exchange participants into three groups: Incumbent local exchange carriers ("ILECs"), which primarily are the baby bells, competitive local exchange carriers ("CLECs"), and telecommunications carriers. The interconnection obligations become increasingly stringent as you move from telecommunications carriers up the ladder to ILECs.

Telecommunications carriers have only two duties: (1) to the extent that they are facilities based, they must interconnect their facilities to those of other telecommunications carriers and (2) they must not install network features that would thwart access or interconnection by other carriers. CLECs have a few additional responsibilities, including the duty to provide telecommunications services on a wholesale basis if requested, number portability to the extent technically feasible, and access to their rights-of-way to competitors. ILECs, finally, face the most rigorous requirements under the 1996 Act. ILECs must, in addition to the above, provide interconnection to their network at any technically feasible point, allow for collocation (physical in most cases) of competitors' facilities to their own, and allow competitors to purchase network elements on an unbundled basis.

In short, the bargain struck in the 1996 Act is that the baby bells are required to open their networks to competitors and, once they have done so, they may begin to provide "in-region" interexchange service. Of course, requiring the baby bells to open their networks was only half the battle. The primary barrier to local competition has historically been the states themselves. Thus, the 1996 also includes provisions preempting most state authority to prohibit local telephony competition.

But what of the baby bells' claim that competitors will seek to provide services only to low-cost customers and that the baby bells will be required to provide service to the high-cost customers marginalizing both the high-cost customers and the baby bell? The 1996 Act addresses this issue by vastly expanding previous FCC efforts to promote "universal service."

The premises underlying universal service are simple and relatively uncontroversial: everyone benefits if everyone else is on the network. It does one no good to have a telephone if the person that one is trying to reach does not have a telephone. Moreover, there is a social justice element to universal service. Access to basic telecommunications services is viewed as a necessity. Lack of such access can undermine the very American notion of upward mobility.

Paying for universal service also has traditionally been relatively simple. In a world of regulated monopolies, it is easy to require, as a condition of its monopoly, that the incumbent provide service to all segments of society. Also, as a regulated monopoly, it is relatively easy to spread the cost of universal service among all rate payers. As it turns out, for reasons that are beyond the scope of this summary, the local and long distance cost structures have been such that long distance customers have been bearing most of the burden of subsidizing universal service.

In any event, all of this changes now that competition is to be introduced into the market. There no longer will be a guarantee to any competitor that it will have the customers to support universal service subsidies and there no longer will be a monopolist dependent upon the states for protection of its monopoly. Thus, the only way to keep universal service support flowing is to require all market participants to contribute a pro rata share of the pie.

The difficulties arise in defining who the market participants are and how to calculate their pro rata shares. As discussed above, the 1996 Act takes an extremely broad brush approach regarding the identification of contributors. As a result, companies that never in the past have considered themselves to be telecommunications companies now find themselves subject to the FCC's universal service program.

The FCC's implementation of the 1996 Act. Under the 1996 Act, the FCC and the states have been directed to facilitate entry into the local exchange services market by a wide variety of service providers. The 1996 Act also gave the FCC much broader regulatory jurisdiction vis a vis the state telecommunications regulators in order to achieve the new national policy of local competition, and outlawed all state and local regulatory barriers to entry into the local exchange markets.

In implementing the competition enhancing aspects of the 1996 Act, the FCC has made it clear that it envisions three, complementary paths to competitive entry into the local exchange market:

1) CLECs may construct new local exchange facilities to provide their own local exchange service. The FCC has required ILECs to interconnect the competitors' facilities to their networks so that calls of either the ILEC or the CLEC may be originated or completed on the others' network. Further, the FCC established rules pertaining to the "technically feasible" points at which ILECs are required to provide interconnection, and mandated a particular minimum set of technically feasible points of interconnection.

2) CLECs may use "unbundled" elements of an ILEC's network facilities and services, combined with their own facilities and services, to provide a complete package of services. Pursuant to the Commission's revised UNE Order, the following network elements must be unbundled and provided to requesting competitive carriers on a nondiscriminatory basis:

  • Local Loops: ILECs must offer unbundled access to local loops, including high-capacity lines, xDSL-capable loops, dark fiber and ILEC inside wiring.

  • Subloops: ILECs must offer unbundled access to subloops, or portions of the loop, at any accessible point.

  • Local Circuit Switching: However, the Commission carved out an exception in the densest parts of the country's top 50 markets for customers with four or more lines. The Commission, however, placed a condition on this exception holding the ILECs would have to provide competitors with access to their enhanced loops ("EELs") to be freed of the switching requirements in these markets.

  • Network Interface Device ("NID"): ILECs must offer unbundled access to NIDs.

  • Interoffice Transmission Facilities: With limited exceptions, ILECs must offer unbundled access to dedicated interoffice transmission facilities, or transport, including dark fiber. In addition, where unbundled local circuit switching is provided, unbundled access to shared transport must also be offered.

  • Signaling and Call-Related Databases: ILECs must offer unbundled access to call-related databases and signaling links/transfer points both in conjunction with unbundled switching and on a stand-alone basis.

  • Operation Support Systems: ILECs must offer unbundled access to their operation support systems, including pre-ordering, ordering, provisioning, maintenance and repair, and billing functions supported by an incumbent's databases and information.

ILECs must provide nondiscriminatory access to these network elements on a unbundled basis at any technically feasible point on rates, terms and conditions that are just, reasonable and nondiscriminatory. The FCC also concluded that the 1996 Act permits interexchange carriers and other requesting telecommunications carriers to purchase unbundled elements for the purpose of offering exchange access services or for the purpose of providing exchange access services to themselves in order to provide interexchange services to consumers.

3) CLECs may resell the ILEC's local exchange service and construct none of their own facilities. ILECs are required to remove unreasonable restrictions on resale. The FCC also adopted regulations intended to remove what it perceived to be economic barriers to entry and to "level the playing field." The same FCC pricing rules apply to interconnection, unbundled network elements and collocation. Prices are to be based on the Total Element Long Run Incremental Cost ("TELRIC") directly attributable to the network element (which includes a reasonable return on investment) and a reasonable allocation of forward-looking joint and common costs. The TELRIC methodology specifically excludes, however, embedded (or historical) costs, opportunity costs and universal service subsidies.

Moreover, the FCC gave the CLECs certain interconnection and "good faith" bargaining rights vis a vis the ILECs, as well as providing an arbitration process (to be administered by the states), if negotiations fail. ILECs and requesting telecommunications carriers have the duty to negotiate interconnection agreements in good faith. The FCC decided that certain acts or practices constitute a per se failure to negotiate in good faith, including: (1) an actual refusal by an ILEC to negotiate; (2) conditioning negotiations on a carrier first obtaining state certification; or (3) a refusal to include in an interconnection agreement a provision that permits the agreement to be amended in the future to take into account changes in FCC or state rules.

If carriers can agree on the prices of interconnection and unbundled elements voluntarily, such agreements will be submitted directly to the states for approval. If not, state commissions are charged with setting those prices in accordance with methodological principles set forth by the FCC. Because not every state will have the resources to implement the FCC's "forward-looking, long-run, incremental cost-based pricing methodology" in time for this fall's arbitration proceedings, the FCC established default proxies to be used until such pricing methodology could be adopted and applied.

Regulation of International Interconnected Services

For purposes of FCC regulation, there are three pertinent categories of international services that are interconnected to the PSTN: (1) public switched services; (2) private lines that are interconnected to the PSTN for the benefit of the end user; and (3) private lines that are interconnected to the PSTN for the purpose of reselling the private lines as public switched services. The principal standards that apply to these categories of service are as follows.

Public Switched Services

International service providers must secure Section 214 common carrier authority in order to provide public switched services. In traditional arrangements for international public switched services, the U.S. carrier has a correspondent relationship with a foreign carrier.

The FCC's international settlements policy applies to those traditional accounting arrangements for public switched services. Under this policy, a U.S. carrier must engage in an "accounting" with a foreign correspondent for its public switched traffic, using the accounting rate that is already in effect for service between the United States and the foreign correspondent's home territory, and the U.S. carrier and its foreign correspondent must divide the accounting rate equally. In addition, under the "proportionate return" element of the international settlements policy, a foreign carrier must allocate return traffic among its corresponding U.S. carriers in direct proportion to the amounts of traffic that the U.S. carriers have delivered traffic to the foreign carrier.

Recently, the FCC has concluded that it will not apply the international settlements policy for settlement arrangements between U.S. carriers and foreign telecommunications carriers that lack market power, and for all settlement arrangements on routes where U.S. carriers are able to terminate at least 50 percent of their U.S. billed traffic in the foreign market at rates that are at least 25 percent below the applicable benchmark settlement rate. For all other correspondent arrangements, the international settlements policy remains in effect.

Private Lines Interconnected for the Benefit of End Users

International service providers may interconnect private lines to the PSTN for its customer's own purposes. The interconnection may be made at the customer's premises or at a carrier's switch. Although these services are connected to the PSTN, the FCC regulates them in the same manner as non-interconnected private lines. Accordingly, the services may be provided on a non-common carrier basis, assuming they are not offered indifferently to the public, and the services may be offered on an "end-to-end" basis, with no requirement for a foreign correspondent, accounting, or proportionate return.

The FCC considers use to be for "the customer's own purposes" if a customer may use its interconnected private line to conduct its business or to enable persons desiring to transact business with the private line customer to reach the customer. However, the private line may not be used to give access to the general public to persons other than the customer.

For example, private lines may be used to establish a private network that would connect the facilities of a multinational company to one another and to the PSTN. The company's employees then could use the private network to communicate with one another; could make business calls to third parties; and could receive business calls from third parties. If the company were a hotel chain, however, it could not use the private network to furnish telephone service to its guests, because that would enable someone other than the customer itself (i.e., the customer's guests) to communicate with the general public.

Reselling Private Lines as Public Switched Services

Special rules apply when a carrier uses a private line to connect a U.S. customer to the PSTN in another country, thereby bypassing the traditional accounting relationship for terminating international traffic. Private lines may be used to provide public switched services between, but only directly between, the United States and WTO countries, if the FCC has made an "equivalency finding" (a determination that U.S. carriers have equivalent opportunities in the foreign country to resell private lines for the purpose of providing public switched services) or determined that at least 50% of the settled U.S.-billed traffic between the United States and the country involved is at or below the FCC's benchmark settlement rate for the country.

In the case of services between the United States and non-WTO countries, the FCC must have made an equivalency finding and determined that 50% of U.S.-billed traffic between the United States and that country is at or below the FCC's benchmark settlement rate for the country.

In addition to providing public switched service directly between the United States and those countries satisfying the principles outlined above (the "hub countries"), the private lines may be used to provide public switched services between the United States and any other country by employing "switched hubbing," using a hub country as a point of transit for calls to or from points beyond. In the case of U.S.-outbound service, switched hubbing means routing traffic over a carrier's authorized U.S. international private lines to a hub country, and then forwarding the traffic to a third, non-hub country by taking at published rates and reselling the international message telephone service of a carrier in the hub country. In the case of U.S.-inbound service, switched hubbing means taking traffic that has been routed to a hub country as part of the international message telephone service traffic flow and terminating the traffic on a private line between the hub country and the United States.

Federal Cable Regulation Cable television began as what was known as community antenna television (CATV). For remote towns that could not get an adequate over-the-air signal, a CATV operator would set up a microwave link to a nearby city, bring the programming that was being broadcast over-the-air in the nearby city to the microwave station in the more remote town, and feed that signal to subscribers in the town off coaxial cable running through the community. Evenutally, the microwave facilities were abandoned in favor of dedicated headends that brought in satellite programming directly to the community. This openned the door to the big change, which was when programmers, e.g., HBO, began developing special programming for these CATV subscribers. At that moment, cable services became something more than a mere extension of broadcast service.

From a regulatory perspective, these systems started out as passive antenna systems and the only federal communications regulation applicable to them was on the microwave link. Later, however, the FCC attempted, oddly enough, to regulate the content of the programming on cable systems in order to protect broadcast television. The FCC's fear was that pay television (cable) would siphon off all of the good programming from free TV. The Communiocations Act at the time had no Title VI, so the FCC attempted to regulate cable systems pursuant to its "ancillary" authority under Section 4(i) of the Communications Act. Given that these were closed systems ? there was no broadcast involved ? the FCC' claim to authority at that time was extremely weak and, as one might expect, the FCC's rules limiting the programming to be carried on CATV systems were challenged and struck down by a federal court of appeals.

Shortly thereafter, in 1984, Congress gave the FCC express authority to regulate cable service by adding Title VI to the Communications Act. Title VI was amended only a few years later in the Cable Act of 1992, and it has been amended since then. The important features of current federal cable regulation are outlined below.

First, the 1984 Act created what is, in effect, a franchise renewal expectancy. As a matter of fact, it is almost unheard of in the United States for a franchise to be lost involuntarily.

Second, the 1984 and 1992 Acts combined to eliminate most rate regulation for cable systems that are deemed to be subject to "effective competition." Although the standard for what constitutes "effective competition" was eased somewhat in the 1996 Act, few cable systems so far have been released from rate regulation. For those systems that remain subject to rate regulation, so-called "basic-tier" programming rates are regulated by local franchising authorities.

Third, cable operators are subject to a "must-carry" obligation that requires them to retransmit local broadcast stations. This requirement has, since its inception, been controlversial and it is again as the FCC considers how the must-carry rules will apply in a digital environment. Local broadcast stations also have "retransmission consent" rights ? cable systems may not retransmit local broadcast signals without the consent of the broadcaster. In the vast majority of cases, broadcasters have given their consent in exchange for non-cash rights, e.g., that the cable system will carry an affiliated programming service.

Fourth, in the 1992 Act, Congress added the "program access" provisions in Section 628 of the Communications Act. Section 628 provides that cable operators may not engage in unfair or anticompetitive practices in connection with the sale of programming, programmers may not discriminate in price, terms or conditions in connection with the sale of programming, and ? although Congress created a mechanism pursuant to which the FCC can determine that a particular agreement is in the public interest ? most exclusive licensing agreements between programmers and cable systems executed after June 1, 1990, or renewed after Oct. 5, 1992, are prohibited. Unfortunately, Congress built into its program access rules two easily exploitable loopholes: the program access proscriptions apply only to programming sold by vertically-integrated programming vendors (i.e., those that are in some sense owned by cable operators); and they apply only to satellite-delivered programming.

Fifth, cable systems are subject to federal leased-access requirements. Under these rules, cable systems must make a certain percentage of their activated channels available to non-affiliated programming services that will lease the channel from the cable operator. Although these rules were intended to enhance programing diversity, they have had little effect on the nature or quality of programming on most cable systems. Simiarlarly, cable systems are required to make a certain number of public, educational and government ("PEG") channels available, essentially free of charge.

Thus, cable systems remain subject to a variety of federal regulations both of the programming they provide and their rates. As other technologies for the delivery of video programming become available on a widespread basis, however, it may be that cable services will be one of the first areas that the FCC will abandon. Once there are meaningful alternatives to cable in the market, the justification for continue regulation in this area will be extremely weak

CONCLUSION

The summary provided above outlines many of the basic issues confronting communications law practicioners today. It is by no means a comprehensive statement of the law and it should not be used as a substitute for legal advice, general or specific. Questions regarding the application of communications laws and regulations in particular factual contexts should be directed to a licensed attorney specializing in communications law.

PROTECTING CUSTOMER PRIVACY

The Telecommunications Act of 1996 created a new set of rules to govern carriers' use of subscriber information. There are three categories of customer information, each of which is regulated differently: individually identifiable "customer proprietary network information" ("CPNI"); "aggregate customer information"; and "subscriber list information."

A. Definitions

1. CPNI

CPNI is (i) information that relates to a customer's quantity, technical configuration, type, destination, and amount of use of a telecommunications service, that is made available to the carrier solely by virtue of the carrier-customer relationship; and (ii) information contained in customer bills for exchange or toll service. CPNI includes, for example, information about whom, where, when, and for how long a customer calls and the type of services subscribed to by the customer. Information derived from the provision of a non-telecommunications service (e.g., an information service or customer premises equipment - "CPE") is not CPNI and its use is not restricted by the 1996 Act.

2. Aggregate Customer Information

Aggregate customer information is collective data that relates to a group or category of services or customers, from which individual customer identities and characteristics have been removed.

3. Subscriber List Information

Subscriber list information is information that a carrier has published in a directory format, which identifies the names of subscribers and such subscribers' telephone numbers, addresses, or primary advertising classifications, or any combination thereof.

B. Permitted Uses - The FCC's Implementing Rules

1. CPNI

The FCC's adopted CPNI rules that permitted carriers to use CPNI:

  • to initiate, render, bill, and collect for telecommunications services;
  • to protect the carrier's rights or property and to prevent fraudulent, abusive, or unlawful use of services;
  • to provide inbound telemarketing, referral, or administrative services to a customer, if the customer initiated the call and the CPNI may be used only for the duration of the call and only if the customer approves; and
  • to "win-back" customers.

Further, the FCC's rules permitted a carrier that receives or obtains individually identifiable CPNI by virtue of its provision of a telecommunications service to use that information only (i) as required by law, (ii) with the customer's approval, or (iii) in its provision of the telecommunications service from which the information was derived or of services necessary to, or used in, the provision of such telecommunications service. The FCC interpreted the third category as allowing carriers to use a customer's individually identifiable CPNI to market any related or additional offering that falls within the customer's existing set of services (i.e., local, long distance, or commercial mobile radio service).

2. Aggregate Customer Information

Carriers may use aggregate customer information for any purpose without customer approval. However, if a local exchange carrier ("LEC") uses aggregate customer information other than for one of the purposes for which it would be allowed to use CPNI, it must make the information available to other carriers and persons upon reasonable request and on reasonable and nondiscriminatory terms and conditions.

3. Subscriber List Information

The use of subscriber list information is not restricted by the 1996 Act. A LEC, however, must provide this information to third parties on request, on a timely and unbundled basis, and under nondiscriminatory terms and conditions, for the purpose of publishing a directory in any format, presumably including electronic directories.

C. The FCC's CPNI Rules are Vacated By a Federal Court.

The United States Court of Appeals for the 10th Circuit vacated the FCC's rules implementing the CPNI provisions of the 1996 Act. The court concluded that the FCC failed to "adequately consider the constitutional ramifications" of its CPNI regulations. Assuming that the FCC can address the court's concerns, it is likely that the FCC will adopt new CPNI regulations that will be similar to those described above. In the meantime, the statutory restrictions remain in force.