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Public Utility, Communications & Transportation Law

Consolidation, Reregulation, and Globalization

Gregory L. Wortham

The 1995 Annual Report of the Section of Public Utility, Communi-cations and Transportation Law described an "Infrastructure in Transition." As you will see in reading the committee reports in the 1996 Annual Report, that transition has only intensified, with changes in law, strengthening competitive forces, and shifting corporate strategies. Three broad trends are especially prevalent across the public utility, communications, and transportation sectors: consolidation, reregulation, and globalization.

Mergers and other "strategic alliances" increasing the consolidation of market power are prominent features of the electric utility, telecommunications, railroad, aviation, and water utility industries. This is especially ironic in the telecommunications industry, where Judge Harold Greene put the final touches on implementation of the 1984 AT&T breakup just in time for the proposed megamergers of Bell operating companies that signal a reversal in market power concentration levels. As this report goes to press, the former Southwestern Bell and Pacific Bell operating companies announced their merger plans, as did other erstwhile AT&T components Bell Atlantic and NYNEX. Acting quickly on the heels of enactment of the Telecommunications Act of 1996 (Telecom Act), these and likely follow-on consolidations will have as dramatic an effect on the face of the telecommunications business as did the original AT&T consent order. And the hectic pace of proposed electric utility mergers has caused the Federal Energy Regulatory Commission (FERC) to initiate a preliminary rulemaking docket on revision of its policies on review of merger applications.

Changes in the fundamental federal laws structuring U.S. public utility industries also continue to be a major feature. President Clinton signed the Telecom Act in February, facilitating the convergence of the communications, cable television, and electric utility industries. Federal courts continue to work through the residue of the Order 636 reorganization of the natural gas industry. The electric utility industry stands poised as the next in line for major statutory and regulatory restructuring.

Increasing cross-border transactions demonstrate the irreversible international character of many utility sectors. As an acknowledgment of the global reach of many utility transactions, the 1996 Annual Report marks the inaugural report from the International Committee, which describes the continuing globalization of the electric utility industry. The natural gas and electric power markets now routinely involve cross-border transactions. The airline industry has featured a growing number of strategic alliances between U.S. and international air carriers.

[Editor’s Note: The overview presents brief summaries of the areas of interest to the Section. The summary on "communications law" appears below.]

Communications. The Communi-cations Committee reports on an exceptionally active year in the telecommunications industry. As the era of active implementation of the AT&T consent decree draws to a close, Congress has fundamentally restructured the legal framework of the telecommunications industry with passage of the Telecommunications Act of 1996. In addition to analysis of the Telecom Act, the committee’s report includes significant developments in the realm of federal and state court decisions, federal and state legislation, Federal Communications Commission (FCC) actions, and state commission orders.

On February 8, 1996, President Clinton signed the Telecom Act, and the FCC has identified at least sixty rulemakings necessary to implement the legislation. Several state commission actions are also necessary.

Significantly, the Telecom Act creates a framework for competition in the local exchange market. Local exchange carriers are required to negotiate in good faith with other carriers the terms of interconnection and resale agreements. In general, such arrangements must satisfy a statutory checklist of procompetitive conditions. The Telecom Act prohibits state or local rules from having the effect of barring entry into any telecommunications market or service and requires state rules to be consistent with the Telecom Act. In addition, the Telecom Act supersedes the AT&T consent decree, the GTE decree, and the AT&T—McCaw consent decree, but incorporates some of the requirements and limitations of those decrees. The Telecom Act also allows RBOCs to offer certain long-distance services.

In a potential model for other utility industries undergoing re-regulation, the Telecom Act requires the FCC to appoint a Federal—State Joint Board to make recommendations concerning the current system of subsidies designed to keep local telephone rates low to achieve universal service. Developments on this issue will be watched closely, in particular, by stakeholders in the electric industry restructuring debate, where similar concerns are being raised about universal service and providers of last resort.

The current telco—cable cross-ownership ban was eliminated upon enactment of the Telecom Act, and the FCC video dialtone rules have been repealed. The Telecom Act also removes barriers to the provision of telecommunications and information services by public utility holding companies, establishes rules to govern licensing of broadcast spectrum for advanced television services, and reduces limitations on the ownership of radio and television broadcast stations. It also sets rules concerning the deregulation of cable programming rates, and the provision of video programming services by telephone companies.

During the past year the federal courts have issued several significant decisions impacting telecommunications regulation. Following the U.S. Supreme Court’s 1995 ruling that federal affirmative action programs must meet the strict scrutiny test if they are to be maintained, the FCC postponed an application deadline for participants in the government’s Personal Communication Services "C" Block radio licenses, and subsequently eliminated all race-based and gender-based preferences from the C Block eligibility rules.

The Ninth Circuit in 1996 affirmed the FCC’s decision to preempt the California Public Utilities Commission (CPUC) rule on caller ID. The CPUC argued that the FCC’s order violated constitutionally protected rights and was arbitrary and capricious in preempting the CPUC’s rule concerning customers who fail to make a choice of either "per line" or "per call" blocking. The Ninth Circuit held that the FCC did not act arbitrarily and capriciously in preempting the CPUC’s rule as it was necessary to allow development of caller ID services.

The FCC has taken significant action on several key issues within the last year, including unauthorized changes of consumers’ long-distance carriers (so-called slamming), an issue that is expected to reappear in residential natural gas marketing and in any residential "retail wheeling" regime that may develop in the electric industry. Other prominent FCC rulemakings involved caller ID and issuance of all "A" Block and "B" Block broadband PCS licenses. Addition-ally, the FCC granted an order to reclassify AT&T as a "nondominant" carrier. The FCC is currently working on several additional issues, particularly in response to its obligations under the Telecom Act.

Also in 1995, the FCC established a new effective competitive opportunities (ECO) test with respect to foreign carrier applications to provide U.S. international service to countries in which the carrier possesses market power. The first case using the FCC’s ECO test involved Sprint’s request for a waiver of section 310 to permit France Telecom and Deutsche Telekom to acquire a 20 percent equity interest in Sprint.

The Communications Committee also reports a tremendous amount of activity among state governments. More than a dozen states passed telecommunications regulatory reform measures. Several states took regulatory action to implement local competition. Also, many states adopted alternative regulation plans and advanced the implementation of "intraLATA" presubscription. California, Florida, and Pennsylvania commissions issued orders on universal service.

Gregory L. Wortham is Association Counsel for the National Rural Electric Cooperative Association in Arlington, Virginia.

Excerpted from the overview section of the 1996 Annual Report of the Section of Public Utility, Communications & Transportation Law. The full report contains, in addition to the overview, detailed sections covering legal developments in the energy, communications, and transportation industries and in the principal practice areas affecting those industries.

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