U.S. House of Representatives

Committee on the Judiciary

Henry J. Hyde, Chairman www.house.gov/judiciary

For immediate release June 29, 1999

Contact: Michael Connolly/Terry Shawn (202) 225-2492

Judiciary to Take Up Antitrust and Broadband Access

Issues Facing the Future of Communication to be Discussed Wednesday

The hearing will begin at 10:00 a.m. in room 2141 of the Rayburn Building. The witnesses tentatively expected to testify are as follows:

- Honorable William Barr, Executive Vice-President

and General Counsel, GTE Corporation, Washington, D.C.

- Mr. George Vradenburg, Senior Vice President, America Online,

Dulles, Virginia

- Mr. Ken Wasch, President, Software and Information Industry

Association, Washington, D.C.

- Honorable Erik Sten, Commissioner of Public Works, City of Portland,

Portland, Oregon

- Mr. Scott Cleland, Managing Director, Legg Mason Precursor

Group, Washington, D.C.

- Mr. Mark Rosenblum, Vice President for Law, AT&T Corporation,

Basking Ridge, New Jersey

- Mr. Mike Salsbury, Executive Vice President and General Counsel,

MCI WorldCom, Washington, D.C.

- Mr. Tim Boggs, Senior Vice President for Public Policy, Time

Warner, Inc., Washington, D.C.

- Mr. John Windhausen, President, Association for Local

Telecommunications Services, Washington, D.C.

- Mr. Tod Jacobs, Senior Telecommunications Analyst, Sanford

C. Bernstein & Co., Inc., New York, New York

- Mr. Gene Kimmelman, Co-Director, Washington Office, Consumers

Union, Washington, D.C.

I. BACKGROUND

A. How We Got to the Telecommunications Act of 1996

1. History of Telephone Regulation until the Telecommunications Act of 1996

Before 1984, America had one dominant telephone company -- the American Telephone & Telegraph Company ("AT&T"). AT&T provided almost all local and long distance service throughout the United States, except that in some isolated areas independent phone companies provided local service. During the AT&T era, local service rates were kept artificially low, and the substantial differences in costs of providing local service in urban and rural areas were not reflected in local service rates. AT&T kept long distance rates, which were paid primarily by business, artificially high in order to subsidize low local rates. The policy, known as universal service, was that all Americans should have access to a telephone at an affordable rate regardless of the cost of providing the service. Because AT&T was one company, it was relatively easy to administer this system of subsidies.

In 1974, the Antitrust Division of the Department of Justice sued AT&T for violating the antitrust laws in a number of ways -- most importantly, not letting potential long distance competitors hook up to its local networks. In 1982, the parties settled the lawsuit, and Judge Harold Greene of the United States District Court for the District of Columbia entered a consent decree known as the Modification of Final Judgment or MFJ. United States v. American Telephone & Telegraph Company, 552 F.Supp. 131 (D.D.C. 1982), aff'd, 460 U.S. 1001 (1983). Beginning in 1984, the MFJ broke up AT&T into a new smaller AT&T, which was to provide long distance service in competition with other companies, and seven regional Bell operating companies ("RBOCs") - Ameritech, Bell Atlantic, BellSouth, Nynex, Pacific Telesis, Southwestern Bell (now known as SBC Communications), and US West. There was also one preexisting independent phone company, GTE Corporation, which was of a comparable size. These seven regional RBOCs were to provide local service where AT&T had previously been doing so.

At the time, the general consensus was that long distance service could be provided competitively, but that local service remained a natural monopoly. Based on that assumption, the MFJ prohibited the RBOCs from entering long distance service and other lines of business without prior court approval. The court's procedures under the MFJ required companies seeking that approval to negotiate with the Department of Justice before filing for the approval. As a practical matter, DOJ approval was required to get court approval.

In addition, policymakers wanted to maintain the universal service system. To do so, they required the long distance companies to pay "access charges" to the local companies for completing long distance calls. The local companies used these access charges to maintain low local rates in all geographical areas.

This system lasted from 1984 through 1996, when Congress passed the Telecommunications Act of 1996 (the "1996 Act"), Pub. L. No. 104-104. The Act set up a new statutory framework governing the industry and ended the MFJ. Under the Act, the RBOCs were to be allowed into long distance service within their region. However, they first had to open up their local networks to allow competitors to provide local service. The Act also required the FCC to set up a new process to deal with universal service issues. The details of the issues raised by these processes are too lengthy to address here.

Suffice it to say that local competition is progressing, albeit slowly. To date, no RBOC has gotten into long distance service within its region. RBOCs may provide long distance service outside their region, and some have done so. RBOCs may compete for local service outside their regions, and some have done so on a limited basis. Some RBOCs have also made efforts to get into other businesses like cable television.

2. History of Cable Regulation until the Telecommunications Act of 1996

Cable television first began to appear in this country in the late 1940s. In the early days, state and local governments made some attempts to regulate cable through a patchwork of laws, but there was no national policy. In 1984, Congress responded to numerous complaints that rates were too high and that local governments were making unreasonable demands on cable companies by passing the Cable Communications Policy Act (the "1984 Act"), Pub. L. No. 98-549. On its face, the 1984 Act allowed local governments to regulate rates if their local operator did not face effective competition. However, the FCC defined effective competition so broadly that the Act essentially deregulated most cable rates. The 1984 Act did little to encourage new entrants to build competing systems. In fact, it codified FCC rules prohibiting broadcasters and telephone companies from operating cable systems.

Eight years of experience with the 1984 Act led to mounting complaints. In 1992, Congress passed the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Act"), Pub. L. No. 102-385. At that time, the types of cable competition we see today were just beginning to emerge. Because of the relative lack of competition existing then, the 1992 Act reregulated cable rates. Local governments were allowed to regulate rates for the basic tier and for cable equipment. The FCC would regulate rates for the expanded basic tier (what most subscribers choose). Rates for premium channels like HBO and Cinemax were left unregulated. In addition, the FCC would regulate the rates for the basic tier and equipment if a local government chose not to do so. Rate regulation was to end if there was effective competition, which under the statute had a new, much narrower definition. The effect of the new definition was that almost all cable systems faced rate regulation.

The story of rate regulation by the FCC and the local governments under the 1992 Act is far too long and complicated to go into here. Suffice it to say that none of the parties to this experience has found it entirely satisfactory. The 1996 Act made some changes to the process of rate regulation under the 1992 Act, but it was not a major overhaul. The far more important substantive change was that it ended rate regulation of the expanded basic tier as of March 31, 1999. Since virtually everyone has the expanded basic tier, as a practical matter, this means that cable rates are now largely unregulated. This action reflects that underlying philosophy of the 1996 Act that the market was moving towards real competition. Another important part of the 1996 Act was to remove the prohibition on telephone companies getting into cable although few have done so.

B. How the World Changed After the Telecommunications Act of 1996

President Clinton signed the 1996 Act on February 8, 1996. At that time, the Internet was in its infancy, and it was barely mentioned in the 1996 Act. Most observers thought that the RBOCs would remain separate companies, that they would begin competing in long distance quickly, and that they might enter the cable business. By the same token, most observers thought that the long distance companies would remain separate companies, that they would begin competing in local service quickly, and that they probably would not enter the cable business. As for the cable companies, most observers thought that they would remain separate companies, that they might enter the telephone business, and that they would face substantial competition in the cable business from satellite companies and telephone companies. Hardly anyone thought of the Internet or other data traffic as an important part of the picture.

1. The Internet Changes Everything

In the three years since the 1996 Act was signed, the Internet has changed everything. At that time, it was a technological marvel that was just becoming available to ordinary people and was hardly used for commerce. Since then, it has become almost a necessity for ordinary people and a means for conducting a substantial and ever growing amount of commerce.

In 1996, data traffic was not a substantial portion of the long distance business. Estimates vary as to what the percentage was, but it was probably less than 10%. Today, it is probably more than 50%. The demand keeps exploding. As a result, being a carrier of voice (i.e. traditional telephone calls) has become relatively less important and being a carrier of data has become relatively more important.

As anyone who has used the Internet knows, it can be frustratingly slow depending on what technology one is using. The details of that technology are too complicated to get into in much detail here. The most important thing to know is that cable technology (known as broadband) is much faster than telephone technology and has more capacity. Telephone companies are upgrading their networks in many areas, but even this upgraded technology (known as Digital Subscriber Line or DSL) has limitations and is not as fast as cable technology. One easy way to think about this is to think of the two technologies as pipes and to remember that the cable pipe is much bigger than the telephone pipe. At the same time, that both of these technologies are getting better and faster, they are also becoming capable of carrying voice (i.e. telephone calls), video (i.e. cable programming), and data (i.e. Internet content) through the same pipe. This is what is referred to as "convergence" of the technologies.

2. Convergence Leads to Mergers

Most telecommunications companies, irrespective of whether they started as RBOCs, long distance companies, cable companies, or something else, now think that their future lies in being capable of providing a package of all of the "convergent" services on a global basis. Because getting into a new part of this business from scratch requires massive investment, many companies have decided to buy another company rather than build from scratch. That has led to a wave of mergers.

First, the RBOCs began to merge with each other. Bell Atlantic bought Nynex, and it is in the process of buying GTE. SBC bought Pacific Telesis, and it is in the process of buying Ameritech. Then, new competitors began to buy existing companies. WorldCom, a relatively new local competitor, bought MCI, one of the major long distance companies. Now, Global Crossing and Qwest, relatively new long distance competitors, are vying to buy USWest, an RBOC.

Finally, and most importantly for Wednesday's hearing, AT&T, the biggest of the old line long distance companies, has bought TCI and it is in the process of buying MediaOne. TCI and MediaOne are two of the largest cable companies in the nation. These mergers will give AT&T ownership of many cable lines going into American homes. (Again, estimates of the percentage vary depending on who is counting.) At the same time, Microsoft has purchased a stake in AT&T as part of an effort to accelerate the deployment of broadband services across the country. It is AT&T's newly predominant position that has led to much of the controversy that we will examine on Wednesday.

C. What the Debate is About

The debate on this issue revolves around two separate, but closely related issues: (1) whether those who do not own cable broadband lines will be able to access them on the same terms as those who do; and (2) whether the RBOCs will be able to transport data over long distance lines within their regions.

1. Cable Broadband Access

Proponents of H.R. 1686 and H.R. 1685 argue that cable broadband lines are, as a practical matter, an essential facility. (An essential facility is an antitrust term of art meaning a necessary means of doing business that cannot be practically reproduced by competitors.) Internet service providers (e.g. Erol's) and online service providers (e.g. America Online) cannot possibly reproduce the existing cable systems. Therefore, they argue that they should be granted access to those lines on the same terms that the owner of the lines grants to its own competing services. They maintain that this is the only way to preserve competition in the ISP and OSP markets. They raise the fear that a company like AT&T may eventually not only control the lines, but the content as well by striking preferential deals with content providers for space on their own OSP service.

Critics of the bills argue that government regulation of the cable broadband lines is not necessary. AT&T argues that its lines are open to all and that users can access any content provider through AT&T's @home service. They contend that those who have invested in the cable broadband lines should reap the benefits of their investments and that the bills would stifle the investment necessary to make these services available. They also argue that there are any number of alternative routes to reach the home including telephone, satellite, and wireless. They argue that simply because cable technology is faster than telephone it is not a separate market, but rather a gradation of the same market in which consumers can pick the speed that they need.

2. Long Distance Data by the RBOCs

Proponents of the bills argue that allowing the RBOCs into the long distance data market would increase competition in the market and help it meet the ever growing demand for long distance data capacity. They contend that the regulatory scheme set up by the 1996 Act is overly burdensome and that it discourages investment. They argue that it is slowing the deployment of the telephone DSL technology throughout the rural areas of the country. They believe that the Internet would grow faster without the regulation.

Critics of the bills say that the 1996 Act is working exactly as it was intended and that Congress should leave it alone. They argue that the long distance prohibition is the only thing motivating the RBOCs to open their local markets to competition as the 1996 Act envisioned. They believe that giving the RBOCs data relief would greatly undermine their incentives to open their networks and thereby slow the growth of local competition in telephone service. They believe that such a change would be disastrous for the new competitor local telephone companies.

D. Other Perspectives

1. Local Governments

Because cable broadband technology has made cable such an important part of the convergence issue, some local governments have hit upon the idea of using their power over cable franchises to impose regulations on cable companies providing cable broadband services. In one recent case, a federal district judge ruled that such regulations were legal and not preempted by federal law. AT&T Corp. v. City of Portland, 1999 U.S. Dist. Lexis 8223 (D. Ore. June 3, 1999). In other cities, local governments have rejected such regulations. See, e.g., Victory for Los Angeles Cable Providers, The New York Times, June 19, 1999, at C-2. Commissioner Sten, as well as other witnesses, will speak to this issue.

2. Federal Communications Commission

On June 15, 1999, FCC Chairman William Kennard gave a speech to the National Cable Television Association on this topic. In general, he argued from the perspective of the bill's opponents saying that no regulation of broadband was necessary. He also opposed regulations by local government franchising authorities. Chairman Kennard was invited to testify at Wednesday's hearing, but he indicated that he would be out of the country on that day.

II. SECTION BY SECTION ANALYSES

Section by section analyses of the two bills we will consider at Wednesday's hearing, H.R. 1686, the "Internet Freedom Act" and H.R. 1685, the "Internet Growth and Development Act of 1999," are set forth below.

A. H.R. 1686, the "Internet Freedom Act" - The Goodlatte Bill

Section 1 provides that this act may be cited as the "Internet Freedom Act."

Section 101 provides that in any civil action based on a claim under the Sherman Act, evidence that an incumbent local telephone company that has market power in the broadband service provider market has willfully and knowingly failed to provide conditioned unbundled local loops when economically reasonable and technically feasible, or restrains unreasonably the ability of a carrier to compete in its provision of broadband services over a local loop, is sufficient to establish a presumption of a violation of the Sherman Act.

Section 102 provides that in any civil action based on a claim under the Sherman Act, evidence that a broadband access transport provider that has market power in the broadband service provider market has offered access to an Internet service provider on terms and conditions less favorable to another ISP, or restrains unreasonably the ability of a service provider from competing is sufficient to establish a presumption of a violation of the Sherman Act.

Section 103 provides that it shall be unlawful for a broadband access transport provider to engage in unfair methods of competition or unfair or deceptive trade practices, the purpose or effect of which is to discriminate in favor of a service provider associated with that access transport provider or restrain unreasonably the ability of a service provider not affiliated with a broadband Internet access transport provider to compete in its provision of Internet services.

Section 104 would amend 18 U.S.C. § 1030 (which addresses criminal fraud in connection with computers) in several respects to address fraudulent unsolicited electronic mail. It would add to the substantive conduct prohibited by 18 U.S.C. § 1030(a) both the intentional and unauthorized sending of unsolicited E-mail that is known by the sender to contain information that falsely identifies the source or routing information of the E-mail, and the intentional sale or distribution of any computer program designed to conceal the source or routing information of such E-mail. It would subject those who commit such prohibited conduct to a criminal fine equal to $15,000 per violation or $10 per message per violation, whichever is greater, plus the actual monetary loss suffered by victims of the conduct. In addition, prohibited conduct that results in damage to a "protected computer" (as defined in 18 U.S.C. § 1030(e)(2)) would be punishable by a fine under Title 18 or by imprisonment for up to one year.

Section 105 sets forth definitions for "broadband," "broadband access transport provider," "service provider," "Internet," and "broadband service provider market."

Section 201 would add to Title VII of the Communications Act of 1934 a new section 715. Under the new subsection 715(a), all local exchange carriers would be required, within 180 days, to submit to the state commission (as defined in section 3(41) of the Communications Act of 1934) in each state in which they do business a plan to provide broadband telecommunications service as soon as such service is economically reasonable and technically feasible. Upon certification of the plan by the state commission, the carrier shall be obligated by the terms of the plan, but shall otherwise be able to provide broadband telecommunications service free of federal and state price regulation. Further, once a local exchange carrier is served by a competing provider of broadband telecommunications service, or once a carrier makes broadband telecommunications service available to 70 percent of the access lines in an exchange, the carrier shall no longer be bound by the terms of its plan in that exchange.

Under new subsection 715(b), an incumbent local exchange carrier's provision of broadband local telecommunications services that are otherwise subject to federal price regulation would not be subject to the requirements of sections 251(c)(3) (unbundled access) and 251(c)(4) (resale) of the Communications Act of 1934 in any state in which the carrier certifies to the state commission that, where technically feasible, it will provide conditioned local loops to other carriers within established time frames and at a reasonable price.

Section 202 would permit all companies, including Bell operating companies, to provide long distance data services by means of the Internet or any other network that employs Internet Protocol-based or other packet-switched technology. Section 202(a) would amend the definition of "interLATA service" in section 3(21) of the Communications Act of 1934 to exclude such data services from its scope. Section 202(b) would extend the long distance prohibition that applies to Bell operating companies under section 271 of the Communications Act of 1934 to voice telecommunications services via the Internet or any other packet-switched network.

B. H.R. 1685, the "Internet Growth and Development Act of 1999" - The Boucher Bill

Section 1 provides that this act may be cited as the "Internet Growth and Development Act of 1999."

Section 101 defines the terms "electronic commerce," "electronic means," "electronic authentication," and "electronic signature" as they are used in Title I.

Section 102(a) provides that if a contracting party's electronic signature is properly authenticated by a third party through the use of reliable means, that party may not repudiate the contract based upon the absence of his physical written signature. Section 102(b) provides that electronic records shall not be legally invalidated because of their electronic form. Section 102(c) provides that state laws consistent with this section are not preempted. Section 102(d) provides broad criteria for authenticating and proving electronic signatures.

Section 201 adds a new section 715 to the Communications Act of 1934. New section 715(a) provides that registered users of an e-mail service provider must follow that provider's privacy policy. New section 715(b) provides that senders of e-mail must follow the service provider's privacy policy. New section 715(c) provides that service providers are not required to have privacy policies. New section 715(d) clarifies that e-mail service providers shall not be treated as publishers of obscene material sent over their systems. New section 715(e) provides a civil remedy for service providers whose privacy policies are violated. The violator will be liable to the service provider for any actual loss it suffers or for liquidated damages in the amount of $50 for each electronic mail message initiated or delivered in violation of the policy, up to a maximum of $25,000 per day along with reasonable attorney's fees. New section 715(f) defines the terms "electronic mail advertisement," "unsolicited electronic mail advertisement," "electronic mail service provider," "initiation," and "registered user."

Section 301(a) requires that all web site operators post their information collection and use policies in a conspicuous manner so that web site users will be informed of the information which is collected and the use to which that information is put and have an opportunity to exit the web site without any information being collected if the visitor objects to that collection and use of information. Section 302(b) provides that the section will be enforced under section 5 of the Federal Trade Commission Act

Section 401 would permit all companies, including Bell operating companies, to provide long distance data services by means of the Internet or any other network that employs Internet Protocol-based or other packet-switched technology. Section 401(a) would amend the definition of "interLATA service" in section 3(21) of the Communications Act of 1934 to exclude such data services from its scope. Section 401(b) would extend the long distance prohibition that applies to Bell operating companies under section 271 of the Communications Act of 1934 to voice telecommunications services via the Internet or any other packet-switched network. Section 401 is identical to Section 202 of H.R. 1686.

Section 402 would add to Title VII of the Communications Act of 1934 a new section 716. Under the new subsection 716(a), all local exchange carriers would be required, within 180 days, to submit to the state commission (as defined in section 3(41) of the Communications Act of 1934) in each state in which they do business a plan to provide broadband telecommunications service as soon as such service is economically reasonable and technically feasible. Upon certification of the plan by the state commission, the carrier shall be obligated by the terms of the plan, but shall otherwise be able to provide broadband telecommunications service free of federal and state price regulation. Further, once a local exchange carrier is served by a competing provider of broadband telecommunications service, or once a carrier makes broadband telecommunications service available to 70 percent of the access lines in an exchange, the carrier shall no longer be bound by the terms of its plan in that exchange.

Under new subsection 716(b), an incumbent local exchange carrier's provision of broadband local telecommunications services that are otherwise subject to federal price regulation would not be subject to the requirements of sections 251(c)(3) (unbundled access) and 251(c)(4) (resale) of the Communications Act of 1934 in any state in which the carrier certifies to the state commission that, where technically feasible, it will provide conditioned local loops to other carriers within established time frames and at a reasonable price. Section 402 is identical to section 201 of H.R. 1686 except for the number of the new section.

Section 501 provides that in any civil action based on a claim under the Sherman Act, evidence that an incumbent local telephone company that has market power in the broadband service provider market has willfully and knowingly failed to provide conditioned unbundled local loops when economically reasonable and technically feasible, or restrains unreasonably the ability of a carrier to compete in its provision of broadband services over a local loop, is sufficient to establish a presumption of a violation of the Sherman Act. Section 501 is identical to section 101 of H.R. 1686.

Section 502 provides that in any civil action based on a claim under the Sherman Act, evidence that a broadband access transport provider that has market power in the broadband service provider market has offered access to an Internet service provider on terms and conditions less favorable to another ISP, or restrains unreasonably the ability of a service provider from competing is sufficient to establish a presumption of a violation of the Sherman Act. Section 502 is identical to section 102 of H.R. 1686.

Section 503 provides that it shall be unlawful for a broadband access transport provider to engage in unfair methods of competition or unfair or deceptive trade practices, the purpose or effect of which is to discriminate in favor of a service provider associated with that access transport provider or restrain unreasonably the ability of a service provider not affiliated with a broadband Internet access transport provider to compete in its provision of Internet services. Section 503 is identical to section 103 of H.R. 1686.

Section 504 would amend 18 U.S.C. § 1030 (which addresses criminal fraud in connection with computers) in several respects to address fraudulent unsolicited electronic mail. It would add to the substantive conduct prohibited by 18 U.S.C. § 1030(a) both the intentional and unauthorized sending of unsolicited E-mail that is known by the sender to contain information that falsely identifies the source or routing information of the E-mail, and the intentional sale or distribution of any computer program designed to conceal the source or routing information of such E-mail. It would subject those who commit such prohibited conduct to a criminal fine equal to $15,000 per violation or $10 per message per violation, whichever is greater, plus the actual monetary loss suffered by victims of the conduct. In addition, prohibited conduct that results in damage to a "protected computer" (as defined in 18 U.S.C. § 1030(e)(2)) would be punishable by a fine under Title 18 or by imprisonment for up to one year. Section 504 is identical to section 104 of H.R. 1686.

Section 505 sets forth definitions for "broadband," "broadband access transport provider," "service provider," "Internet," and "broadband service provider market." Section 505 is identical to section 105 of H.R. 1686.

Copies of H.R. 1686 and H.R. 1685, as well as the available testimony for Wednesday's hearing, are attached.