OTHER POSSIBLE REFORMS

Because these matters are now pending before the FCC, we must await the FCC's resolution of these issues--as well as experience based on such resolution--before Congress can reasonably be expected to return to this critical area.84

Other matters, too, hinge on future developments. As cable enters the telecommunications area, Congress correctly proposes both to remove barriers to such entry and to promote it actively through effective interconnection, open network architecture (unbundling of the local telco's network functions, including the essential local loop), resale, local number portability, and so on.85 These possibilities prompt a serious question, namely, should cable be regulated in three jurisdictions: by the FCC, state commissions, and local franchising authorities? If the local authority were restricted to issues of public safety and convenience arising from use of the streets (with the utility assessment referred to in footnote 80), cable regulation would parallel telco regulation, and cable would be regulated at the federal and state levels. Indeed, returning to the administration's proposed Title VII may be the wisest course, (see footnote 10), which would empower the FCC, when it finds that the switched, interactive broadband network has gained significant penetration and faces effective competition, to forbear from rate regulation and to preempt any such activity by states. Treatment of these issues, however, will be governed by future technological and market developments.

Finally, with respect to access, an interesting provision of the House bill, H.R. 3636, 103rd Congress, would authorize the FCC to require that when cable offers a switched broadband service, it must afford open, nondiscriminatory access. This provision would supersede the requirements of section 612 for leased commercial access by opening up the entire capacity of the cable system and making the system serve all comers indifferently, as a common carrier must today. This sound policy raises an interesting constitutional issue under both the Fifth Amendment and the third element of O'Brien. The provision itself does not seem narrowly tailored to afford access, because the 10 to 15 percent requirement and the common carrier availability of the telco would accomplish that. If its purpose is to avoid disparate treatment of cable and telco, however, the question arises as to whether that is sufficient constitutional justification for so drastically changing the settled status of private investment.86

Telco Video Content Provision

This paper has considered near-term congressional reforms that are needed for several aspects of the burgeoning video industry. A single major provision governs the area of telco video, the portion of the 1984 Cable Act barring telco provision of cable television service in the area in which the telco operates. As the FCC observed in its 1990 report, this provision is obviously poor policy.87 Four district courts have already found this policy unconstitutional as violative of the third element of O'Brien, and suits are pending in other courts that will doubtless reach the same conclusion.88 The consensus of Congress is that the restriction must be repealed, although no agreement has been reached so far on the conditions to be attached to telco entry. Here also, discussing reform would be premature, until the congressional process and the FCC proceedings dealing with the issues of preventing improper cross-subsidization, cost allocation, and so on, have concluded.

One critically important unsettled aspect of the issue deserves brief comment here because of its relationship to the principles stated at the beginning of this paper, that is, whether the telco should be treated as a common carrier or as a cable television system. On the one hand, there is the principle that similar entities should be treated similarly to the extent possible; on the other hand, there is the Associated Press principle of diversity of sources of information. In any conflict, the latter is more important and should dominate.

In the 103rd Congress, the bills in both houses afforded the telco an option: if the telco did not use its local exchange facilities for video programming distribution, it would then be treated as a cable system and would come under the cable regulatory scheme. If the telco did make use of local exchange facilities for video programming distribution, it would be required to afford a common carrier video platform to all comers.89 This policy, if adopted, would thus fail to assure that at least one entity, the telco, would afford nondiscriminatory access to all information providers--one of the fundamental principles of the administration's National Information Infrastructure (NII) initiative.

The FCC 1990 Cable Report explains in paragraphs 121 to 123 the dire First Amendment consequences of adopting the cable model. In 1985 NBC sought to enter the general cable news market as a competitor to Cable News Network (CNN). When TCI, the largest cable operator, refused to let NBC compete with CNN, NBC was forced to develop CNBC, a consumer news and business channel. NBC did gain carriage, but as its chairman testified, "a number of large Multiple Spectrum Owners (MSOs) insisted as a condition of carriage that CNBC not become a general news service in direct competition with CNN, which is owned in part by TCI, Time Warner, Viacom, and other MSOs."90

Last year, in the context of a retransmission consent situation, CBS tried to get MSO acceptance for a competing news channel and ran into a stone wall. At a recent conference, Rupert Murdoch, chairman of the News Corporation, stated: "I would have liked to start a news channel, but [TCI President John] Malone and [Time Warner Chairman] Gerald Levin would not give me the time of day."91 In an interview in the same magazine a week later Murdoch said:

There are at least four companies, perhaps five, that would like to start a 24-hour news channel. The only one that's made a serious effort has been CNBC. It is now getting distribution, but it had to limit itself to business news. They were very limited, and still are. But so long as they can't be sure of distribution, they're never going to get the chief executives or the chairmen of those companies to take the risk and make that investment.92

Surely as we move into the 21st century Congress will opt for at least one regulatory model that ensures access to all providers, namely, the common carrier model.93 Today, any information provider can start a newsletter and send it out through the mail or fax it over the telco's narrowband facilities, and the market will determine its success or failure. In the future, video publishing should be strongly encouraged. Thus, Congress should require the telco to serve as a common carrier by fulfilling its essential obligation to afford nondiscriminatory access. If the telco meets that obligation, and only if it does this, it should be permitted to provide its own content material through a separate subsidiary. If, in turn, regulatory disparity arises between cable and telco, the overriding First Amendment gains will be ample reward.

Perhaps a future abundance of broadband delivery modes will make governmental concern about open, nondiscriminatory access for all information providers unnecessary. Now, however, policy must be developed for the near-term, foreseeable future.

Spectrum Auctions and Children's Television Programming

One other matter involving congressional policy could have a large impact on children's educational television programming and, even more important, on the contribution that the NII could make to children's education.

After its wasteful policy in the 1980s of eschewing spectrum auctions, which is estimated to have deprived the government of at least $49 billions in the cellular area alone, Congress has allowed the auction process to be used for authorizations in the area of personal communications services (PCS) and similar spectrum allocations. Congress did so because of its urgent need to raise revenues in the face of budget deficits, and has allocated $10 billion from the PCS auction to close a budgetary gap. Experts in the field now estimate that the PCS auction will raise considerably more than $10 billion, perhaps as much as $16 billion.94

These sums come directly from the telecommunications sector. While the lion's share of revenues (for example, the $10 billion) should be used for sound budgetary purposes, Congress should consider using some of the money to promote the public interest in the telecommunications sector. One obvious and excellent way to do so is to provide adequate funding for the Ready to Learn Channel, the National Endowment for Children's Education Television, and the CPB to produce children's educational television programming. The sums needed to accomplish this are not inordinate, and the undertaking is a worthy one in light of the role that television plays in the lives of young children.

The National Information Infrastructure and Education

The administration's NII initiative is aimed not just at efficiency and jobs, but also at the quality of life. An educated citizenry is the basis of a democratic society, and education permits full participation in economic life. The administration and Congress now recognize that for those who are in school today and for those who will be entering school tomorrow, high technology and its related information services must contribute to the educational process, for example, through distance learning or linking schools or classrooms to databases. This is commendable. What is not commendable however, is the apparent tendency to try to accomplish this goal by means of flawed and inadequate approaches.

At a Senate hearing this summer, Secretary of Education Richard W. Riley stressed the importance of linking schools to the information highway, to which Senator Ernest F. Hollings, Chairman of the Senate Commerce Committee, raised the question of how to pay for such a linkage.95 The proposed answer is to impose a massive subsidy scheme on all telecommunications carriers in a competitively neutral fashion. The bills in the 103rd Congress provided for granting universal service funds to public institutions such as schools or giving such institutions preferential rates. The House bill further required that the FCC, to the extent that it is economically feasible, adopt rules that enhance the availability of advanced telecommunications services to educational institutions, health-care institutions, and public libraries by the year 2000.96

However commendable the purpose of these approaches, they are bound to be inadequate. First, the amount of funds needed to do the job is staggering, as FCC Commissioner Rachelle B. Chong recently pointed out.97 Preferential rates or incremental costing simply will not accomplish much. The added burden on the universal service fund would be immense, adding billions to the telecommunications subsidy scheme.

For example, estimating that on average linking a school effectively to the NII would take $100,000 (for equipment, telecommunications connections, and teacher training), with 120,000 public schools, linking all the public schools would cost $120 billion, or $12 billion a year for ten years. Considering that the ill-fated Star Wars Program budgeted $4 to $6 billion a year just for research and development, $12 billion a year to put our children on the NII does not seem so out of line. However, a telecommunications subsidy cannot and should not be expected to meet such a burden.

There is no "free lunch" here. The carriers will shift any subsidies imposed on them to the rate payers, meaning all of us. The sole reason why the administration and Congress chose this flawed and inadequate subsidy scheme is that it is off-budget taxation.

Proceeding in this fashion has major disadvantages, however. First, trying to carry out what is essentially an educational program through telecommunications regulation is wrong. The FCC does not have the expertise to plan and execute such a program. The demand side of the equation--the education establishment at the federal, state, and local levels--should do the planning, in close consultation with the telecommunications agencies and entities. Such planning must be thorough and on-going, and should include application testing and teacher training. Second, it must be funded adequately so that education institutions and libraries are gradually linked. Annual service costs, including not just telecommunications charges but the costs of maintaining and upgrading equipment, must be met with sufficient public funding and/or through shared fees for service usage, such as the plan proposed by the nonprofit Community and Learning Information Network. To fund this effort by taxing the telecommunications industry would be to repeat the mistake of the cable blue-sky franchising period of the 1970s, where networks to link public institutions were promised, but even when built were largely wasted expenditures, because the proposals represented a flawed governmental franchising process rather than a serious, carefully reasoned undertaking.

As noted, funds can be obtained from the telecommunications sector, but they should come from the auction of the PCS spectrum this December, specifically from the excess over $10 billion (e.g., $6 billion or whatever the final figure is). This excess, other than the relatively small amount allocated to the goals cited earlier, should go to an NII Educational Endowment Fund, to be administered by an independent commission made up of representatives of the education and telecommunications communities. These funds could be used to initiate a large demonstration program that would start putting schools in each state on the NII. In this way each state would have enough activity to demonstrate the effective use of the funds, and we could make a meaningful start to bringing our education system into the 21st century. The endowment's funds could be augmented by similar allocations of monies obtained from future auctions, and individual schools would be able to maintain their systems by charging fees for sharing their service with government and industry to reduce training and professional education costs. Further, the endowment could gain funding, on a federal or state-by-state basis, through other schemes that make use of subsidies stemming from the telecommunications system that do not distort the new competitive milieu.98

The above approach is based on an assumption--that there will be an excess over the budgetary estimated commitment. If that is mistaken, then some small percentage (e.g., 10 percent) should be used to initiate the NII Educational Endowment Fund.

The fundamental reason for using the excess spectrum proceeds in this fashion is the vital need to ensure that the NII makes a full and effective contribution to education. There are also other substantial reasons for proceeding in this direct fashion rather than employing the telecommunications subsidy scheme proposed in the bills. That scheme is one of taxation without accountability, because it is a hidden tax. More important, it represents a substantial tax on telecommunications services, and thus will diminish the use of such services. The whole idea of legislative reform is to enable telecommunications to make a maximum contribution to efficiency and jobs, so the tax militates against this legislative goal.

Furthermore, Congress has correctly decided to introduce competition throughout the telecommunications sphere, including in local telecommunications. This means that the subsidy can no longer be imposed on a protected monopoly, but must involve all the competitors. Not only is this difficult to do, but even if done equitably, new entrants will complain that a large subsidy scheme will impede their success. Finally, it encourages uneconomic bypass by private telecommunications systems. Large users have the option largely to bypass the public system by using their own private systems. When done for sound economic reasons, this benefits the economy, but if done to avoid a substantial subsidy scheme, it is simply a response to an uneconomic signal imposed by the government and has an unfair impact on public networks.

In short, the route proposed today looks good, but in reality is certain to fail. If we take that easy and glib way, we will cheat our children, to the nation's future detriment.