Background:
U.S. Institutions that Affect Telecommunications Policies and Rules

The federalist system of government that exists in the United States divides authority between the federal government and the states. For purposes of telecommunications, the central principle that defines the division of authority is the Commerce Clause (Article I, [[section]] 8) of the United States Constitution. That provision of the Constitution is read to give Congress the power to legislate on all matters of interstate and foreign commerce.⁹ As interpreted by the courts, this constitutional provision, together with other parts of the U.S. Constitution, is interpreted to permit Congress to exert exclusive (and preemptive) power over commercial matters that affect more than a single state. In areas where Congress has exercised this grant of authority, conflicting state legislative action will be deemed preempted. In some cases, federal laws that purport to regulate matters of interstate commerce may be challenged as improperly infringing on matters that the Constitution reserves for state governance. Such disputes, which are settled by federal courts in the United States, create an extremely complicated and dynamic body of jurisprudence that defines the limits of congressional power to assert exclusive and preemptive authority over various aspects of commercial activity.¹⁰

Exercising its authority over interstate commerce, Congress adopted the Communications Act of 1934 (the "Communications Act"), which established the FCC as an independent regulatory body responsible for regulating interstate and foreign communication "by radio and wire." In practice, the FCC has exclusive regulatory power over matters involving use of the radio frequency spectrum. Spectrum is considered to be inherently interstate, as radio wave transmissions are not confined by state boundaries. Wire communication, by contrast, is subject to both FCC and state regulation, depending upon whether the activity is interstate or international (FCC) or intrastate (state).

The FCC's regulatory responsibility includes the following matters, as specified by the Communications Act:

• Allocating radio frequency spectrum for use by nongovernment entities;
• Assigning licenses for the use of this spetrum;
• Authorizing "common carriers" to provide interstate and foreign communications services;
• Establishing rules and policies for the prices charged by common carriers and the arrangements for interconnection to the networks operated by common carriers; and
• Carrying out a program of type acceptance and registration of equipment.

The FCC can act both like a legislature and like a court. In the first instance, the FCC adopts broad rules of general application and general policy statements. In the second instance, it resolves disputes and defines rights, most often through decisions about the grant, renewal, suspension, or revocation of a license or the imposition of a penalty for violation of a rule or law.

The flexibility given to the FCC is subject to an elaborate system of "checks and balances" that are intended to permit the public, both directly and through its elected representatives, to exert influence on the FCC's decisions. The following checks and balances are most notable:

• The President nominates the five FCC Commissioners, each of whom serves a five-year term, which is subject to renewal at the discretion of the President. The terms are staggered so that no more than one Commissioner's term expires each year. Thus, absent a Commissioner's resignation before the end of his term, a President will be able to appoint four of the five Commissioners during the President's own term of office.
• The President's nominees must be interviewed and confirmed by the Senate. This confirmation process provides the legislature with a say in the composition of the FCC's decision making body. The Senate does not typically reject a President's nominee, but the threat of rejection can guard against the possibility that a President will nominate an individual with extreme views that are inconsistent with the views of the public, as expressed through their election of Senators
• The President designates one Commissioner to serve as Chairman. The Chairman has power to set agendas and direct Commission activities in a way that, potentially, can have a profound impact on the actions that the FCC takes.
• Congress decides the size of the FCC's budget each year through its fiscal appropriations process. The budget is contained in legislation, which must be adopted each year. Budget decisions are made after hearings are held. During the hearings, FCC Commissioners and staff members may be questioned about specific plans for regulatory or policy actions during the coming year. (In some cases, legislators will use a budget hearing as a forum to express, publicly, their opposition to or concern about certain FCC actions or plans. Because Congress controls the FCC's budget, Commissioners and staff members may be quite responsive to strongly held views of the elected officials making the budget recommendations.) If the FCC is to function as an effective, independent regulatory agency, it must have a sufficient budget. At various times, the Congress has used its control over the budget to limit the FCC's activities. For example, budget legislation in a particular year may specifically prohibit the use of funds for certain activities or proposed policy intiatives. Congress also may reduce the FCC's total budget if it wants to slow or limit the FCC's activity generally.
• Various committees within the Congress also have responsibility to "oversee" the activities of the FCC and to consider new laws that affect communications activities. When a legislator on such a committee has concerns about a particular FCC action or proposed action, he may convene a hearing to question the regulators or, in some cases, to rebuke them in a public setting. These hearings may be used for several purposes. One is to allow Congress, when it is considering a new law (or the need for a new law), to learn about the subject on which it may legislate. Another is to permit Congress to hold a public dis- cussion with Commissioners and FCC staff members. At these hearings, legislators may express the views of their constituents and also may expose the regulators to views of other panelists that Congress wants to be expressed. At these hearings, as well as in the budget hearings, explicit and implicit messages are often delivered about the directions the FCC should and should not be taking.
• The President, members of Congress, and members of other Executive Branch agencies meet privately with Commissioners and FCC staff members to express their views and apply political pressure.¹¹
• Any interested person may appeal an FCC decision to the federal courts. Such judicial review is made available under the terms of the Communications Act and in accordance with the provisions of the Administrative Procedure Act (the APA), which sets out various procedural standards for federal administrative agencies, such as the FCC. The time limits for filing an appeal are set out in Section 402 of the Communications Act. Under the APA, a court has only limited authority to review an FCC decision. In general, a court will consider only whether the FCC has acted consistently with its authority under the Communications Act, and in a reasoned manner, based upon the evidence before it, and not arbitrarily or capriciously.¹²
• As discussed more completely in Section VII, the FCC is required to act in accordance with an elaborate process that ensures public participation in decision making.¹³ This permits the direct involvement of interested individuals and entities in regulatory action.

In short, the courts, the Congress, the President (as well as his advisors and the Executive Branch agencies, which are discussed below), and the FCC all participate actively and regularly in the process of developing and implementing U.S. communications policy. A current controversy concerning this mix of actors is the degree to which federal courts should use their powers to make or implement national communications policy. It is well established, for example, that the federal courts are expected and empowered to review the constitutionality of laws and rules and, as discussed above, the propriety of the processes followed by the FCC to adopt rules and make decisions. The courts also routinely hear and decide antitrust cases, including those that involve communications companies. The courts also administer what are called "consent decrees," which are agreements that establish the terms on which an antitrust lawsuit is settled. A consent decree is like a contract between a private company and the government, and the courts enforce compliance with the terms of that decree.

At least one federal judge, however, has gone considerably further than many ever expected a judge to go in managing the structure of the U.S. telecommunications market. The 1984 divestiture by AT&T of its local telephone businesses was accomplished by a consent decree, commonly known as the Modification of Final Judgment (the MFJ), which settled a long-running antitrust suit brought by the federal government against AT&T.¹⁴ Judge Harold Greene approved the consent decree and, since 1984, has administered its enforcement. In the view of many critics, Judge Greene has used his power to administer the consent decree to shape U.S. communications policy. For example, critics charge, his continuing application of the so-called "line-of-business" restrictions that apply to the Bell Operating Companies (BOCs) have kept the country's dominant local telephone companies from using their resources and expertise to develop more accessible, affordable, and sophisticated telecommunications equipment and "information services."¹⁵ According to these critics, a federal court judge should not be deciding whether to prohibit local phone companies from entering various businesses. Such a decision, which has a profound impact on the U.S. telecommunications market, should be made by the FCC and the Congress.

For years, Congress has considered adopting legislation that would either incorporate parts of the MFJ into federal law (and overturn other parts), transfer the task of administering the provisions of the MFJ from the courts to the FCC, or explicitly overturn some or all of the MFJ. Congress, however, has not been able to agree upon any particular law that will defuse this politically explosive and hotly debated issue. In the absence of legislative action, the MFJ has remained an impediment to certain FCC actions. For example, a 1971 decision by the FCC to encourage telephone companies to offer information and other value-added or enhanced services on a less regulated or unregulated basis could not be implemented for two decades, because of the restriction in the MFJ on RBOC involvement in offering information services. (Before the MFJ was entered and AT&T was broken up in the divestiture, the old Bell System telephone companies were subject to broad restrictions -- as part of the prior antitrust consent decree -- that had the same practical effect.) The information services restriction in the MFJ was eliminated in 1991, amid great controversy and debate.^15A

Others, particularly those who support the restrictions imposed by the MFJ on the BOCs, contend that Judge Greene is simply doing his job as a judge in ensuring the proper enforcement of the antitrust laws.¹⁶

In addition to these various institutions and processes, there are other important participants in the U.S. communications policy-making process. Briefly, the most frequent participants include the following:

• The U.S. Department of State (primarily through the Bureau on International Communications and Information Policy) represents the United States in many foreign policy matters and in international for a that involve communications issues.

• The U.S. Department of Commerce (primarily through the National Telecommunications and Information Administration) serves as the President's expert Executive Branch adviser on communications matters and manages government use of portions of the radio frequency spectrum.

• The U.S. Department of Justice is involved in communications matters primarily through its role as the agency responsible for enforcing the antitrust laws.

• The U.S. Trade Representative administers foreign trade agreements (both bilateral and multilateral), coordinates trade policy, and represents the United States in trade negotiations. Telecommunications equipment and services have become an increasingly significant component of the United States' international trading activities.

• The Agency for International Development is involved in assisting other countries with economic development programs, including many related to communications.

• The Trade and Development Program participates in various projects to promote economic development in developing countries and coordinates government-to-government assistance, all of which often involves the Program in telecommunications activities.

The first three institutions are equivalent to what many countries refer to as "ministries." The U.S. Trade Representative is considered a member of the President's staff. The last two organizations are part of an independent agency, the International Development and Cooperation Agency.

Finally, state governments play a significant role in overseeing telecommunications companies and services, particularly in the area of basic local telephone service. Every state has a regulatory agency responsible for overseeing intrastate telecommunications. Typically referred to as Public Utility Commissions or Public Service Commissions, these agencies oversee a number of regulated businesses that most often include telephone service, electric and water service, and various transportation services. In most cases, these state agencies are similar in many respects to the FCC, except that their actions are restricted to matters involving intrastate communications.¹⁷ Historically, in the telecommunications area, their principal task has been the regulation of local, monopoly telephone companies.

At the state level, the treatment of telecommunications as a "utility" reflected a historic view of the local telephone business as a natural monopoly business that had to be regulated.¹⁸ As the fundamental nature and diversity of the telecommunications business have evolved over time, many states have altered their laws and rules, or at least considered such alterations, to accommodate a more competitive, less regulated business. For example, the Illinois Public Utilities Act identifies "Competitive Telecommunications Service[s]" as a category of activities exempt from many of the regulatory burdens applicable to noncompetitive services.¹⁹

As the variety of telecommunications services changes, and as competition becomes more prevalent, the state regulator faces an increasingly complex and dynamic job. For years, the state regulator focused almost exclusively on ensuring that state residents received affordable, reliable telephone service. The mission is no longer so clear or so simple. As businesses demand more sophisticated and varied services, and as many users are offered (or are able to construct) alternatives to the local public telephone network, state regulators face the greater challenge of contending with competitive pressures among the states themselves: states want businesses and investment dollars to be located within their own borders, and many companies and investors look for a sophisticated, reasonably priced communications infrastructure before they decide where to locate and to invest. State regulators also are more involved now in creating incentives that will encourage communications companies to improve their facilities, diversify their services, and share the financial benefits of increased efficiencies with consumers. As this report discusses below, regulation has become a more complex and delicate job in today's dynamic and competitive market environment.^19A

Against this background, we can turn to specific questions and answers that examine particular aspects of the process of restructuring national telecommunications markets. Section III begins by analyzing the role of competition in the national restructuring process.