Telecom Crunch

n Feb. 8, President Clinton signed the 1996 Telecommunications Act, the first major overhaul of communications law since the Great Depression. The dramatic signing ceremony at the Library of Congress included top lawmakers and executive branch officials, along with an all-star roster of the entertainment, communications and media industries, including media moguls Rupert Murdoch and Ted Turner and AT&T's Robert Allen.

CEOs and politicians mingled in an atmosphere of mutual congratulations and almost giddy anticipation. The signing capped an intense year-long effort to end federal limits on competition between long-distance carriers, regional phone companies, cable-TV operators and entertainment providers. The new law recognized that restrictions on competition, designed when radio was state-of-the-art technology, had become outdated. Now, after perhaps the most intense and expensive lobbying campaign in a decade, deregulation of the exploding $1 trillion telecommunications industry was a reality. The hard work was finally over.

Actually, it was just beginning. But the focus had shifted about 20 blocks west, from the U.S. Capitol to the nondescript M Street headquarters of the Federal Communications Commission. Normally a bureaucratic backwater, the tiny FCC has emerged with the signing of telecommunications reform as an important center of economic power. The decisions the commission makes under chairman Reed Hundt during the next two years will have more lasting impact on the economy than those of virtually any other government agency.

In passing telecommunications reform, lawmakers charted the general path of less regulation and wide open, cross-industry competition, but FCC commissioners and career staff will decide the all-important details. Their choices will affect some of the country's largest corporations-companies such as AT&T, Time Warner and the broadcast networks-as well as one-seventh of the economy. They will determine how and at what price consumers will obtain telephone, entertainment and information services. Among the most important regulatory tasks on the FCC agenda: determining the ground rules for allowing local phone companies and long-distance carriers to invade each other's markets for the first time since the 1984 breakup of Ma Bell. Long distance and local phone calls alone make up a $160 billion market.

The commission faces a staggering workload. More than 80 rule-makings are required to implement the telecommunications bill. Thanks to the legislation's strict timetables, many of the toughest orders must be completed within six months of the legislation's enactment. The entire job is to be finished within 18 months. In May, for example, the commission was to issue a requirement that gives customers who switch to a new local phone company the option of retaining their existing phone numbers. In August, two important orders are due. The commission must specify how local phone companies will enable competitors, like AT&T or MCI, to connect to their networks. And the FCC must set out a procedure allowing it to supersede state authority in areas that do not move quickly enough to establish full local competition. "The whole success of the legislation is going to come down to what kind of job the commission does implementing [it]," says Brian Moir, a communications attorney who represents business customers of the phone companies.

The irony of this legislation, which has been billed as deregulatory, is how busy it will make the regulators. Of course, it's not just regulation-writing that preoccupies the commission in the aftermath of the bill's passage. By removing artificial barriers separating industries, the Telecommunications Act also encourages consolidation in the radio and television, long-distance, local telephone and cable industries. In fact, on the day President Clinton signed the bill, the FCC approved Walt Disney's $19 billion purchase of Capital Cities/ABC. In recent weeks, the pace of merger and acquisition activity has grown even more frenetic. Regional Bell operating company SBC announced plans to acquire fellow Bell Pacific Telesis in April. That followed US West's acquisition of Continental Cablevision by several weeks. And government agencies continue to review pending deals, such as Time Warner's bid for Turner Broadcasting. The FCC's role in such deals is to decide whether transferring the regulatory licenses to new owners is in the public interest.

FCC's increased prominence has come at a difficult time. Hundt, appointed by the President in 1993, has repeatedly squabbled with Commissioners James Quello, a Democrat, and Andrew Barrett, a Republican. To his critics, Hundt is an arrogant elitist with little time for opinions other than his own. Still, the chairman has won praise from some Republicans, including Sen. John McCain, R-Ariz., an anti-regulation fundamentalist, for promoting competition in communications and for often relying on market forces. But House Republicans, including Rep. Jack Fields, R-Tex., chairman of the House telecommunications subcommittee, remain suspicious of the chairman. And some Republicans still maintain the hope of one day eliminating the FCC altogether.

For now, lawmakers have concentrated on reining in the commission by tightening the purse strings. This year, Congress cut the FCC's budget by more than 5 percent, to $175.7 million. The reduction forced Hundt to trim the FCC head count to 2,050-10 percent below previous levels-and shutter field offices in Atlanta, Boston and Seattle. Commission officials saw the cuts as counterproductive and virtually inexplicable. But Republican lawmakers were undaunted. "If [the FCC is] smart enough, agile enough, to change its focus and reorganize itself, its resources are adequate to the task,'' says Rep. W.J. "Billy" Tauzin, R-La., of the House telecommunications subcommittee. Telecommunications executives, who might normally be sympathetic to the Republicans' penny-pinching, are worried about the commission having what it needs to meet an ambitious schedule. "I do have some concerns about the budgetary constraints of the FCC, particularly as parts of Congress are using the agency as a political whipping boy," says Bert Roberts, chief executive officer of MCI. "It's going to be a very intense and enormous workload for them to do it right.''

Under Close Watch

Congressional Republicans also are keeping a close eye on the FCC as it implements the Telecommunications Act. In March, Fields chaired hearings before his House telecommunications panel on possible reforms for the commission. Likewise, less than two weeks after the bill was signed, Sen. Larry Pressler, R-S.D., chairman of the Senate Commerce Committee, criticized the FCC for suggesting it needed more money to finish the job and for failing to act quickly on several issues in the legislation. The commission should immediately do more to privatize records management and publication activities, the senator wrote to Hundt. Pressler also noted that FCC funding has risen sharply since 1993. Of course, the industries that the commission regulates also have expanded greatly in recent years. Communications sector revenues have grown from $478 billion in 1982 to about $1 trillion today. It remains the fastest growing segment of the economy. In March, President Clinton included in his fiscal 1997 budget request a 27 percent funding increase for the FCC to $222.5 million. Almost three-quarters of the increase is associated with the costs of moving the FCC to a new Washington headquarters.

The budget situation was made worse by a $9 million increase in costs for fiscal 1996, largely due to rising salaries, rent and utility bills. Still, FCC officials hope to receive some budget relief before the end of this fiscal year. It would be no panacea, but the extra cash would allow officials to hire temporary clerical help and paralegals, who are desperately needed.

To some extent, the FCC got a head start on implementing the legislation. Last year, as passage of the controversial measure became more likely, officials quietly completed formal steps needed to open regulatory proceedings on some key issues, says Gina Keeney, head of the FCC's Common Carrier Bureau and a former Republican Senate Commerce Committee staff member. In looking for ideas on resolving some of the more complex questions, bureau officials contacted regulators in states that were introducing competition in local phone markets, such as New York and Illinois. As implementation has progressed, small delegations of state officials have rotated through commission headquarters on short-term assignments.

While the commission faces a tough 18 months, the Common Carrier Bureau-which oversees long-distance and regional telephone companies-bears the heaviest load. Budgetary realities precluded all but a handful of outside hires for the roughly 300-person unit, so Hundt shifted about 30 staffers from elsewhere in the FCC to new duties in the bureau. "Yes, we're getting more, but it's at someone else's expense,'' says Mary Beth Richards, deputy chief of the Common Carrier Bureau.

A Different Look

Commission officials credit their ability to manage the huge implementation workload to a two-year restructuring effort. In 1994, Hundt tapped Richards, an FCC veteran, to spearhead the effort. Richards interviewed 200 of the FCC's industry and governmental "customers" and met with all commission employees (in groups of 100), before producing in February 1995 a 27-page report, "Creating a Federal Communications Commission for the Information Age." It concluded the FCC "must transform itself from an understaffed and underfunded bureaucracy, using outmoded telephones and computers, having an outdated infrastructure, to an agency with varied and appropriate expertise and staffing, sufficient funding, adequate and consolidated space, state-of-the-art technology and a flexible infrastructure."

It was a lengthy wish list. But one year later, the telecommunications law included 21 of the commission's proposals. Most were broadly deregulatory. One example is eliminating 120,000 annual licensing applications for radio equipment on ships and aircraft. Perhaps the most important change allows FCC officials to refrain from regulating companies when it is unnecessary for protection of the public interest. Previously, officials were legally bound to regulate, whether or not they felt it necessary. Richards says the new provision is "the one that gives us the greatest ability to further change the way we regulate." The commission moved quickly to take advantage of the new power. On March 21, it proposed that long-distance carriers no longer be required to file notices with the commission before instituting tariffs or price changes. If approved, the change would mean that AT&T, MCI or Sprint could change prices or offer new services more quickly. It was an important step toward creating more competitive markets.

Hundt led a reorganization that established new bureaus to handle wireless communications and international issues, including satellite programs. The Wireless Bureau, headed by Michelle Farquhar, has presided over one of the commission's most successful innovations-auctions of frequencies needed to transmit wireless communications. The most recent was the so-called C-block auction for personal communications services, a digital competitor to cellular phones. It should raise more than $10 billion for the U.S. treasury. The International Bureau, headed by attorney Scott Blake Harris, who was scheduled to depart the commission in May, has had notable success streamlining complex procedures. For example, in 1994, before the new bureau was formed, licenses for satellite earth stations took an average of 386 days to process. Now, the average wait is roughly 50 days. The International Bureau has only a tiny role in implementing the telecommunications law, but Harris says deregulation in the United States will help the FCC further pry open foreign markets. In February, shortly after the president signed the measure, a delegation of French legislators visited Harris to assess deregulation's meaning. "The impact of the legislation is profound,'' says Harris. "We now will fully live up to our rhetoric.''

Hundt has beefed up the commission's legal talent. Some of the commission's most contentious rulings are likely to face court challenges from industry. In the past, poor drafting left commission orders vulnerable to challenges. But Hundt, formerly a communications attorney with the Washington law firm Latham & Watkins, hired attorney Bill Kennard as general counsel. And Kennard has upgraded the caliber of the FCC's legal team. Among the new additions are former Supreme Court law clerks and lawyers who graduated at the top of their law school classes at Harvard and Yale. The new hires have paid off. The commission's orders are upheld 80 percent of the time, versus 60 percent previously.

The FCC has made subtle changes to routine procedures that should help mitigate the current crush. For example, comments on proposed FCC rules now must be submitted on computer diskettes to reduce the paperwork burden. Submissions no longer can run on without limit. Formal comments on the question of what telecommunication services should be universally available are limited to 25 pages, plus factual appendices. "So there will be probably 1,000 pages of appendices," quips Richards.

Tight deadlines are among the FCC's biggest worries. Many of the implementation decisions must be made within six months and the entire task is to be finished by the fall of 1997. Hundt and officials down the line vow to meet the deadlines. As a first step, they've shortened the comment cycle on proposed rule-makings, in some cases cutting it in half. And they'll be taking a harder line on requests for time extensions. "We'll make all our deadlines, but at large cost to the people involved,'' says Keeney.

The Politics of Policy

The commission's efforts to implement the bill are complicated by institutional weakness and personality disputes. Hundt chairs the commission, but he has only one vote, the same as his four commission colleagues. In theory, he and Commissioners James Quello and Susan Ness comprise a three-person Democratic majority. But it hasn't always worked out that way. Hundt and Quello have feuded from the start. Quello, a favorite of the broadcast industry and a close ally of Rep. John Dingell, D-Mich., had been interim chairman for 11 months in 1993 while Hundt awaited confirmation. Once in office, Hundt's first acts involved overturning two Quello decisions. The two men could not have been less alike. Quello is a story-telling, octogenarian pol; Hundt, a classic litigator with an occasionally unyielding manner. Hundt also has battled with Andrew Barrett, a Republican who resigned from the commission last month. The discord erupted over the chairman's advocacy of more educational television programming. But by early spring, relations among the commissioners seemed smoother. Barrett was headed to the private sector and Hundt-though privately blaming much of the discord on the Washington political environment after the 1994 election-acknowledged a need for a different style.

In mid-April, one of the most potentially far-reaching commission debates began over what services should be available to all citizens. Under a statutory deadline, Hundt appointed a joint federal-state board to recommend what should fall under the heading of "universal service." And with little fanfare or public notice, the commission began moving forward. Because economic subsidies are required, the board's recommendations, and the FCC's ultimate decisions, have the potential to force the telecommunications industry to rewrite its pricing structure. "I think the five of us," Hundt says, referring to the commission, "are going to surprise people."