The 1996 Telecommunications Act

Why are we telling this story? In part because history has a habit of repeating itself. In 1897 Jewett, Connecticut talked the state legislature into letting it build its own electric utility. It did so because it knew that electricity was not coming to Jewett anytime soon from the private sector. If they wanted street lights and home lighting powered by electricity they would have to do it themselves. Their municipal electric plant exists to this day, along with almost 3000 others in America, founded on the same reason. Indeed, 25% of American electricity flows through municipal electric utilities, most of them conceived during the early roll-out of electrical wiring and power plants. Had the state legislature denied Jewett’s petition, it would have been an act of betrayal.

Betrayal is a strong word. But we think it applies to the 1996 Telecommunications Act (the Act) and its subsequent administration. We apply it not because the Act betrayed its central mission, of creating more competition and greater investment in telecommunications, television, and radio broadcasting, although it is far from clear that these goals were fulfilled. We apply it because there was collateral damage that the Act itself almost predicts. The Act has a section devoted to Universal Service, applicable then to telecommunications. Its administration subsequently applied the requirement to broadband. The Act also has a section requiring universal access to Advanced
Telecommunications Services
(meaning broadband) as they mature. The Act’s architects were aware of the problem.

But where are we? According to the FCC 35 million Americans have no access to broadband services of any sort. Tens of millions more must use forms of Digital Subscriber Line (DSL—high speed modems that share telephone lines with voice services) or satellite links that the FCC no longer defines as broadband. We know the FCC understates figures for both the unserved and the underserved. What if that many people in America were denied electricity? We would be considered a third-world country. Broadband is now as central to life in America as roads and electricity. To deny broadband and its benefits to so many people is betrayal, of those denied service, and of our country as a whole given the effects on our economy, our global position, our culture, and our values.

So we are going to tell the story. It must begin with the origins of the 1996 Act and the history of universal service before it was passed. Our version is necessarily compressed and focused on one or two points; the whole story is long, complex, filled with twists and turns, and is characteristically American in its seemingly endless struggle between private and public answers to important questions, like universal service in vital utilities like electricity, water, and now broadband.

The Act’s Origins

In 1877 Western Union, then the monopoly supplier of telegraph networks, decided against buying the exclusive rights to Alexander Bell’s patented telephone (in part because one of their employees, Elisha Gray, had the same idea but was an hour late to the patent office).  So Bell found investors and went into the telephone business.  Through an odd set of twists and turns his company became American Telephone and Telegraph, which was a classic market predator.  After Bell’s patents ran out in 1893, thousands of small, local exchanges sprouted up in America (an exchange then comprising wiring sometimes nailed to trees but usually to purpose-built poles, a manual switchboard, and very crude telephones).  AT&T bought Western Union, bought rival local telephone exchanges, and refused to connect their long-distance lines to local exchanges that refused to be bought.

Given the growing importance of telephone communications, our federal government decided to not just allow this to go on,  but to enable AT&T to become a “natural monopoly.”  The 1921 Willis-Graham Act gave AT&T permission to legally appropriate rival exchanges.  By 1927 AT&T controlled 79% of the U.S. local exchange market and virtually all of the long distance market.  (There were then as there are now hundreds of small, independent telephone companies servicing largely rural communities.  At 79% AT&T was a clear and established monopoly.)  Every other developed nation in the world nationalized telephone services around this time, often joining them with national postal and telegraph services.

The rise of AT&T and real universal service

The federal legislature wrote the first Communications Act in 1934 (the 1934 Act) that formed the Federal Communications Commission (FCC).  The 1934 Act remained virtually untouched until 1996.  The 1934 Act declared in its preamble that a central purpose was to provide services to all Americans at reasonable rates.  However, the 1934 Act did not provide explicit means by which universal service was to be realized.  The FCC itself regulated AT&T long-distance rates and services.  But over the intervening fifty years each state formed regulatory commissions that controlled AT&T intrastate pricing.  The deal was essentially this: AT&T was entitled to a fixed profit (around 10%), but must find a way to connect every residential customer to its network when technically feasible at the same rate as it charged every other residential customer, which rate was to be affordable.

AT&T managed such a feat by overcharging business customers with the blessings of regulatory commissions.  As all business customers had the same rates (for the most part) and telephone services tended to be small parts of total business expenses, the deal did not harm the business marketplace.  So rural customers in upper New York miles from a central office had telephone service at $3 a month, the same price paid by New York customers in Manhattan located ten feet from an exchange, even though the most expensive part of the network was the wiring.  During this interval AT&T stock became the bedrock of personal and corporate pensions plans and from the early 1950s until 1984 AT&T was the world’s largest company in terms of employees.  During this Interval Bell Labs invented the laser, the transistor, radar, digital networking, cell phone systems, the solar cell, and digital signal processing among many other things.

The constant threats to AT&T

This seemingly sanguine and mutually beneficial arrangement for a national necessity still bothered a Justice Department charged with corralling monopolies.  They regularly sued AT&T with hopes of breaking it up.  They reached a so-called Consent Decree in 1956 that required Bell Labs to license all of its existing patents free of royalties and all future patents at reasonable royalties; Silicon Valley ensued as the Bell Labs inventors of the transistor moved to Mountain View.  In 1968 the FCC issued its Carterfone Ruling by which AT&T had to allow attachment of non-AT&T devices to its network.  Markets for telephones, answering machines, fax machines, private branch exchanges, and perhaps most importantly dial-up modems ensued; the modern dial-up modem emerged from Palo Alto in 1974, without which the early development of the Internet was unthinkable.

Then AT&T was broken apart after a long and jarring trial in 1982 conducted by now-famous Judge Harold Greene.  Effective 1 January 1984, seven regional phone companies emerged, with AT&T left with just long distance services.  Bell Labs was split in two, one part to the regional phone companies, one part to Lucent, the split-off equipment manufacturing arm.  A kind of carnival of recombinations followed.  Lucent is now part of the French company Alcatel and Bell Labs is now part of the Finish company Nokia.  With Nokia the look ahead for Bell Labs is now three years; it is a shadow of its former self.  In a sequence only consistent with Alice in Wonderland Bell South became AT&T and Bell Atlantic became Verizon.  Eventually Southwestern Bell bought AT&T but kept the global brand name.  We cannot run the tape twice, and the changes had compensatory benefits, but much was also lost when the old AT&T died in 1984.

The 1996 Telecommunications Act

Even after the break-up of AT&T each local phone company operated under regulation as before, with the same distribution of pricing.  But by the early 1990s it became clear that the three central communications industries—telephone, television, and radio—had reached quite mature conditions, with the country largely blanketed by each.  Meanwhile, cable television companies had begun offering telephone services, telephone companies were contemplating the television business, and each had new technologies in the works for broadband communications over their existing networks.  It looked like a massive technology conversion was underway, one that fit the existing regulatory practices poorly.

So Congress began serious deliberations of a major revision to the 1934 Act in 1993.  Congress changed from Democrat to Republican in 1994 which changed the tone of the discussion, but President Clinton signed the 1996 Telecommunications Act on 8 February of that year.  By then almost everyone in America could connect to telephone, television, and radio services.  Those who were not connected either opted out or could not afford it; virtually everyone had access if they wanted the service.  The Act concerned itself principally with the commercial restructuring of these three industries. The Act gave an apostrophe to the new game in town—information services—but no significant thought to how they might materialize over the next two decades.  Of the several hundred pages of the act, information services and broadband got a definition and three paragraphs in section 706 entitled “Advanced Telecommunications Incentives.”  That was it.

Dial-up then was king.

The principal means then of connecting to information services required dial-up modems, devices enabling the transmission of digital information over analog voice-grade telephone lines.  As such, dial-up modems could be as ubiquitous as telephony itself.  The top speed for dial-up modems in 1996 was 33 kilobits per second (56 kbps came a year or two later).   Cable modems and DSL, broadband systems using existing lines for cable television and telephone services respectively, were just crawling out of laboratories; markets for each would not become strong until 1999.  The future of Internet access was so misunderstood then that telephone company executives saw DSL as a means for transmitting digital television signals, a view not corrected until 1996.  It is true that AOL had been offering “You’ve Got Mail” for several years over slow modems and HTML and the World Wide Web had been invented.  But Google opened its doors in late 1998, Facebook crawled out of a Harvard dormitory in 2004, and Twitter hatched itself in 2006.  The first iPhone hit the market in 2007.  No one in 1996 foresaw the explosion we know now as the Internet, social media, and a cell phone in every hand checking e-mail or texting messages.

 

The Act brought broad forms of deregulation.

The Act hoped to straighten out anomalies arising from the unbundling of AT&T in 1984 and the apparent technology convergence within telephone and television markets.  Lawmakers seemed to feel that deregulation would encourage greater investment and competition in all three markets.  Investment and competition would then produce increased consumer choice, lower consumer prices, and more rapid introduction of new technologies into each marketplace.  Or so was the hope.  With many pages of complex rules the Act thus relaxed constraints on local Bell companies relative to long distance services, created conditions by which new companies could enter telecom markets using incumbent infrastructure at reasonable fees, and slashed limitations on radio and television ownership to encourage greater investment including foreign investment in both areas.

 

Assessment is difficult.

Given what happened thereafter, it is hard to assess the effects of the Act relative to its intentions.  Long distance telephone costs did plummet and now seem free.  Those willing to venture into Voice over IP local services can get good prices, but prices for land-line telephone service seem to have gone up relative to inflation.  Furthermore the unexpected explosion of cell phones allowed tens of millions to cancel their land line telephone service; from almost universal coverage in 2000, land line telephone service has dwindled to 43% of the country.  Television channels exploded with improvements in the cable TV plant, a plus on the investment side, but television bills escalated, a negative on the price side.  From many telephone companies we now have two giants, Verizon and AT&T, each the result of bewildering changes in ownership and consolidations; as each has its own territory they do not really compete.  We are now down to two dominant CATV companies—Comcast and Charter—the two together occupying 80% of the market in about equal measure, both operating as monopolies in served areas.  Radio stations have consolidated at a great rate, radically reducing the previous diversity of program choices and points of view that held forth when the FCC restricted ownership.  But alternative radio programming such as Spotify have made sensational improvements in content through technologies that have grown largely from Moore’s Law, that prices for semiconductor chips will halve every two years and chip densities will double every two years, making the very complex signal processing code required for these new services realizable.

 

The rise in CATV prices

We might digress a moment into television.  Many are angry at how fast cable television prices have risen over the last ten years, sometimes as much as 10% a year.  “Cord Cutting” is in.  But we cannot attribute this to price gouging by rapacious CATV companies.  We must attribute a large part and perhaps all to huge increases in content costs (CATV executives claim “all,” but without access to their books it is hard to tell).  Sports salaries have skyrocketed, Computer Generated Imagery (CGI) has become increasing prevalent and increasingly expensive, and high quality dramatic programming has attracted very expensive talent.  Content prices have increased 10% or more a year for quite a while, and these costs must be passed to consumers.  So we have price increases and substantial increases in TV time devoted to advertising (against the will of the Act), but with perhaps even greater increases in value (in line with the will of the Act).  Who can say what the proportions are, what the relative values are?  We can make the same judgment about cell phones—much more expensive in both phone costs and service costs but so much more powerful and useful.

 

The two major unanticipated developments

What were not contemplated before 1996, what changed everything irrevocably, were the incredibly rapid rise of mobile telephony and the equally incredible rise of social networking and its use of image and video transmission over the Internet.  The most credible writer for the Wall Street Journal would have never been allowed to publish in 1996 a prediction that the principal use of cell phones in twenty years would be taking high quality photographs and sharing them with friends on the Internet, or that we would have more cellphones than people.  The Internet is not mentioned in the 1996 Act; mobile telephony gets but a nod.  As noted above, “broadband” gets three paragraphs.  The Act is a completely understandable and completely mistaken package devoted to making the past come up to the present without a clue about the fast moving future.  It took forty years for electric power to cover 50% of America, another forty to get close to 90%.  Cell phones were 100% within two decades.

 

So why bring the Act up at all?

The Act is relevant because broadband requires infrastructure, that infrastructure created for telecommunications and cable television, both targets of the Act.  We do not have a separate broadband network, we have broadband over existing telephone lines, existing cable television lines, special-built satellites, and mobile telephone networks.  Broadband is completely dependent upon telecommunications today, and hence is as involved with the Act as a pig is with pork chops.  If you are not connected to one of these networks, you do not get broadband.   Even if you are connected to one of these networks, your broadband service may vary considerably from moment to moment, or with the capacities of the network itself.  If broadband means 25 mbps downstream, 75% or more of broadband connections in America depend upon monopoly cable television networks that are not required to connect everyone and do not connect everyone.

 

Betrayal

The betrayal of the 1996 Act was stripping out universal service from the telecommunications landscape and ironically creating conditions by which broadband services could be controlled by de facto monopolies in as much as half of the country. The authors of the Act might object that, unlike the original 1934 Act, it recognizes the need for universal service overtly.  Section 254 of the 1934 Act as amended by the 1996 Act, entitled “Universal Service,” prescribes the collection of fees from telephone bills to create a fund designed to foster universal service that is demanded by Section 214.  It further requires a Federal-State Joint Board (FSJB) and its set of committees to be formed in every state to see to the administration of such funds.  In 2016 the FCC declared that these funds could be used just to extend broadband—an information service—in unserved areas.  The FCC administers a Connect America fund with the proceeds from the universal service fee attached to every phone bill.

Furthermore, Section 706 of the 1996 Act before being commingled with the 1934 Act is entitled “Advanced Telecommunications Incentives.”  It specifically requires the “deployment on a reasonably and timely basis of advanced telecommunications capability to all Americans,” which “capability” is defined in the Act as “high speed switched, broadband telecommunications capability that enables users to originate and receive high quality voice, data, graphics, and video telecommunication using any technology.”  Section 706 became a footnote in the commingled Act.

Where is the problem?

We should have said “problems.”  The problems come from the Act’s administration, its interpretation, and America’s general problem with equitable distribution of subsidies absent meaningful legal demands for universal service

 

The problems with current subsidies

Connect America funds are usually handed back to the incumbent carriers responsible for the networks; there are no other networks.  They are handed back with none of the rigor of prior regulatory procedures, and hence are often siphoned off for other purposes or used by independent companies to forge completely fictitious customers to collect universal service fees.  When universal service was finally applied to broadband services, the money usually went to telephone companies in rural regions who might use the money to drive fiber deeper into their networks to shorten copper wire lengths to enable DSL installations, usually below FCC definitions of broadband.

On the bright side are more than 500 very small rural telephone companies who have used Connect America funds from Section 254 to build out full Fiber to the Home networks.  But the darker side feels larger.  In a 2014 report the FCC estimated that 23 million Americans were without any access to broadband services, defined then as 4 mbps down, 1 mbps up, their target for Connect America support.  In its 2018 report the FCC estimated that 35 million Americans were without any access to broadband services, defined as 25 mbps down and 3 mbps up.  The current FCC administration appears not to care.  The last meeting of the Federal-State Joint Board created under Section 254 was in December of 2017, during which meeting many problems were presented and deferred, with no new meeting scheduled.  Under the current administration no new meeting is in sight.  Connect America relative to broadband is a farce, a betrayal.

 

The Problem with Section 706

Buried at the end of the 1996 Act in its pure form, before begin consolidated with the 1934 Act, is Section 706 (which became a footnote in the consolidated Act).  Its first paragraph reads

(a) In General: The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

It defines “advanced telecommunications capability” as: “high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology.”   This section thus acknowledges implicitly what the act tries to keep separate elsewhere, namely, that broadband and telecommunications are bound together like Siamese twins.

Section 706 has been subjected to an interpretative torture machine, a kind of medieval rack.  At one time it was considered a warning system with no instrumental power.  At another time it was presumed to give the FCC the power to enforce its provisions.  In the latest twist, found in the 2018 order that unwound the net neutrality order of 2105, section 706 was dropped in status to an information gathering program without a tooth.

The problem of course arises from the word “encourage” which can be taken in so many ways.  But another problem lurks in the means of redress.  The redress was to increase competition and remove barriers to infrastructure investment.  In an infrastructure business increasing competition will usually lower prices, which usually reduces the incentive to increase infrastructure spending if the money is all private.  At no time, here or elsewhere in the Act, does it give the FCC an order to make universal service happen by mandate or obligation; everything is indirect, left to softly modified market forces.  It was a guarantee of failure.

 

The Problem with government subsidies generally

What was to be expected from a system of administered subsidies to achieve universal service.  Where can we find examples of government subsidies supplied to private third parties that actually accomplish universal service elsewhere?  The big programs—health care, education, housing, food stamps and support, transportation—are famous for their inequities, indeed, the systemic intractability of their inequities.  Medicare only comes close through private supplemental insurance, clearly only accessible to those with $200 a month extra to spend.  Food supply only approaches universal service through tens of thousands of volunteer efforts, often through churches, but millions are still undernourished.  Anyone working in affordable housing knows how difficult and time consuming just a few units can be while millions live in shelters, with parents, or in squalor befitting a third world country.

We are not compelled here to explain this phenomenon—the incapacities of the state to adequately distribute resources in some equitable manner to all those who need them.  We are only required to observe its universality.  Those formulating the 1996 Act may not have overtly recognized the problems with Sections 254 and 706 when they drafted it, but handing the problem off to some ill-defined bunch of  committees after the Act passed suggests a singular lack of confidence or vision.

 

Was this predictable?

Was it betrayal, or just an unintended consequence beyond the control of those writing the legislation?  Well, it was predictable.  (We have not done enough research to find out if anyone actually predicted it.  If you know of such a source, please let us know.)  In a sense the existence and shape of Sections 254 and 706 illustrate the point.  If natural market forces could be expected to provide universal service (as it might for example in the fast food or toothpaste business) Sections 254 and 706 would not have been introduced.  But those writing the bill knew that the combination of capital intensive infrastructures and real competition meant many unserved citizens, largely in rural communities with long lines required to connect homes to central offices.  When broadband replaced dial-up modems for accessing the Internet, the number of unserved homes grew by millions.   It is still millions.

 

Mobile will not fill the gap.

For those who think that mobile telephone systems will fill the competitive gap, we offer the analysis given in our discussion of 5G, and an anecdote.  Sitting in a chair in a restaurant in Litchfield, Connecticut at one moment the LTE downstream rate was above 30 mbps, the upstream rate around 6 mbps.  On another day, a Saturday with lots of cell phone activity, the figures were 4 mbps downstream and 700 kpbs upstream, far below broadband.  As we say elsewhere on this site, any network with last mile connections, wired or wireless, that are shared by many potential users will suffer highly variable data rates and latencies, making them increasingly unsuitable for serving all current and future applications for broadband.

 

The parallel with electrification

We suggested at the beginning that history repeats itself.  The history we named was the history of electrification.  Many communities in America, mostly small but some large, built their own electric utilities to realize electrical services before the natural expansion of private networks would get to them.  We are at a similar point with the deployment of broadband services, but the history has not run its string yet.  Our country has a long standing commitment to regulated communication services provided by private companies.  We abandoned the regulations related to universal service in 1996 without realizing the effects in broadband distribution.  Now we know that universal service in broadband will not be, and very probably cannot be realized under the rules of the 1996 Act.  We have to look back at electrification for help.  We have to look to municipal networks that carry the obligation to connect everyone as a political mandate.  Broadband now is as important as electricity.  Our governments must open the doors to universal service through realistic mechanisms.  Fiber optic networks owned or orchestrated by municipal or state governments are the only answer.

 

The Saga of Section 706

SEC. 706. ADVANCED TELECOMMUNICATIONS INCENTIVES.

(a) In General: The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

(b) Inquiry: The Commission shall, within 30 months after the date of enactment of this Act, and regularly thereafter, initiate a notice of inquiry concerning the availability of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) and shall complete the inquiry within 180 days after its initiation. In the inquiry, the Commission shall determine whether advanced telecommunications capability is being deployed to all Americans in a reasonable and timely fashion. If the Commission’s determination is negative, it shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.

(c) Definitions: For purposes of this subsection:

(1) Advanced telecommunications capability: The term ‘advanced telecommunications capability’ is defined, without regard to any transmission media or technology, as high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology.

(2) Elementary and secondary schools: The term ‘elementary and secondary schools’ means elementary and secondary schools, as defined in paragraphs (14) and (25), respectively, of section 14101 of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 8801)

Do NOT follow this link or you will be banned from the site!