I. DOMESTIC COMMUNICATIONS

A. COMMON CARRIER COMMUNICATIONS

Common carrier communications is for the most part a monopoly public utility service provided by the Bell System and independent telephone companies. The performance of the industry has come under increasing criticism in recent years, and it has been proposed that various segments of common carrier operations be opened to competition. In response to such proposals the carriers have asserted that the benefits of economy of scale and operational integrity derived from integrated ownership and operation far outweigh any potential customer benefits from competition.

GTP has initiated several investigations into these questions. The ultimate aims of these studies are, first, to develop recommendations as to which aspects of common carrier operation can safely be opened to increased competition, and which should remain under integrated control; and, second, to determine the regulatory principles and practices best designed to ensure that noncompetitive operations remain efficient and innovative.

Principal studies and findings to date include the following:

1. Domestic Satellite Communications

OTP has consistently found that there are insufficient economies of scale in domestic satellite communications to warrant government restriction of competition. It therefore recommended to the FCC that any technically and financially qualified applicant be allowed to establish and operate satellite systems on a competitive basis, and participated in the FCC hearings on this subject. Subsequently, the FCC adopted what is essentially an open entry policy with respect to the provision of communications services via domestic satellites.

2. Specialized Communications Carriers

The entry of new communications carriers offering “specialized” services (generally any services other than public telephone, e.g. data, private line, video interconnection) in competition with the existing telephone carriers was approved in principle by the FCC, but a number of issues which could determine the practical feasibility of competitive entry were left unresolved-such as the allowable monopoly pricing response and interconnection constraints.

To assess the implications of these issues for long-range public policy, OTP initiated three major programs. First, OTP undertook a major study to identify and quantify scale economies in the provision of all significant voice, data, and video common carrier services by individual functional areas (i.e., long-haul transmission, toll switching, local distribution, terminal supply, and general provision of service). This is necessary in order to decide where monopoly should be protected from competition or is inevitable, from where it is not. OTP also explored various pricing policies with a view toward determining which of these policies would promote the greatest efficiency in the monopoly area, as well as prevent hidden subsidies from arising, and best promote competition.

Second, OTP began to investigate the technical and economic implications of alternative interconnection policies which, among other factors, will be a major determinant as to whether competition in the supply of terminal equipment (e.g., telephone and data sets) to be used with the existing telephone network is viable. This investigation will serve as the basis for recommendations for new legislation or regulatory policy.

Finally, OTP began an examination of the benefits and feasibility of a brokerage market-i.e., a market in the resale of communications services by noncommon carriers-and an evaluation of possible impact of removing current restrictions on such activities on common carrier operations, revenues, revenue requirements and service arrangements under various policy alternatives.

Taken together, these three programs will provide guidelines for public policy regarding the major structural characteristics desirable in this industry group. 3. Common Carrier Regulation

Even if it is feasible to allow new communications services to develop on a competitive, rather than monopoly basis, and to introduce competition into selected existent aspects of common carrier operations, this will affect only about 10-20% of current total common carrier operations. Most common carrier operations, notably the public telephone service, will continue to be monopolistic for some time.

Effective regulation of monopolies is necessary to prevent investments in inefficient facilities, excessive rates and profits, technological obsolescence, service degradation, and other problems, but it is difficult for government to secondguess a large public utility on detailed investment and operating decisions. For this reason, in the coming year OTP will continue to explore the desirability of encouraging better public performance of regulated utilities through improved policies rather than increasingly detailed regulation.

a. Depreciation Programs.-The common carrier industry is heavily capital intensive, requiring sums for the expansion and replacement of facilities of close to $10 billion per year. OTP is very much concerned with the cost of obtaining such large amounts of capital, as well as the impact of the demand for such capital. Consequently, it is carrying out a study of common carrier depreciation policy with the aim of determining how capital can be generated internally under various depreciation alternatives, at what costs, and to whom; and also how depreciation policies generally can affect the rate at which new technologies capable of reducing both capital and operating costs are implemented. Common carrier equipment is typically depreciated over very long periods corresponding to the expected physical life of the equipment, although the useful life is often much shorter due to rapid technological advances. This is only one aspect of depreciation policies that affect common carrier financial decisions and customer rates; other aspects are disposition of fixed asset salvage, separation of depreciable and nondepreciable investments, and purchasing policies of common carriers along with the pricing policies of their suppliers. In 1972, OTP made an overall investigation of the depreciation practices, objectives, effects, and alternatives in the common carrier industry.

b. Accounting Programs.-OTP is also conducting an in-depth study of the FCC's Uniform System of Accounts for common carriers, the objective of which is to identify the full range of operating incentives implied for the carriers by this regulatory reporting system and the effect these in turn have on the quality and cost of service. One of the study's major findings to date is that the classification for capital facilities costs and for operating costs bears no relationship to the classification for service revenues, and thus the Uniform System currently can provide little or no guidance in assessing the reasonableness of the rate of return for particular services. Other issues which will be considered wtihin the study this coming year are the types of incentives and controls under the existing system of accounts that govern the classification of expenditures as either capital or operating costs, the treatment of asset salvage. and the method of tax accounting. Additonally, the possibility of making certain changes with respect to station connection accounting and installation procedures changes which could add substantially to common carrier cash flow as well as to customer options in instrument selection, payment and rearrangements-will be explored.

B. CABLE TELEVISION AND BROADBAND COMMUNICATIONS

Broadband cable systems represent a new communications medium which can increase consumer choice in television programming and provide many new communication services hitherto unavailable. The immediate effect of cable expansion, however, is to disrupt some of the distribution practices of the existing television industry and to threaten the economic position of some broadcast stations and copyright owners. There is urgent need for policies to guide the development and regulation of cable in such a fashion that its enormous benefits can be rapidly achieved without depriving the society of its healthy programming industry and its essential broadcasting services.

In 1972, OTP undertook a series of studies and investigations to identify and illuminate particular aspects of broadband cable development that require policy consideration, and to develop policy recommendations.

Two of these studies have been completed :

(a) A study of the present and projected costs of broadband cable systems, to serve as a basis for estimating future growth patterns and rates of development of cable distribution systems:

(b) A study directed to the development of an industry simulation model to be used in conjunction with the results of (a) and (c), below, to predict future industry development.

A third study has yielded significant information and is close to completion:

(c) A study on projected consumer demand for cable television as a function of population and market characteristics, to enable the formulation of alternative regulatory policies appropriate for different economic environments.

In addition, the following study was initiated in January of 1973:

(d) A study to determine the most economical way of conserving and enhancing broadband communications services in low density rural areas, where cable technology may not be economically feasible.

In addition to thees studies, OTP has provided supporting analysis and developed alternative policy options for the President's Cabinet committee on cable television. In this work it has examined, among other matters, the economic and social effects of vertical integration in the production and distribution of cable television programming; the probable impact of expected cable growth on the broadcast and copyright industries; the problems of access to the cable media for all segments of the public and industry; and considerations pertaining to joint ownership of broadcast, cable, and telephone facilities. Policy alternatives pertaining to these various matters were developed for consideration by the Cabinet committee. The results of this activity have been presented to the committee, which is expected to complete its report in the near future.

A significant achievement in the cable television field was resolution of the long-standing controversy concerning distant signal importation, that is, cable use of signals broadcast by out-of-market television stations. The distant signal question involved complex, interrelated issues such as CATV's need to offer this service in order to attract capital and begin its growth, the effect of distant signal competition upon the economic stability of local radio and TV stations, program suppliers' need for copyright protection, and the public need for a wide diversity of quality program services. Since OTP believed that delay and uncertainty would be harmful to the public interest. it agreed to act as mediator in the dispute. The principal private parties ultimately agreed upon a compromise plan, the main feature of which was to supplement the then existent FCC rules with regulatory and legislative copyright and exclusivity provisions. Main elements of this plan were ultimately reflected in rules which the FCC adopted in March of 1972. Congress is still considering the copyright provision of the plan, the main element of which is to establish a schedule of fees governing the use of copyrighted programs, or if such a schedule cannot be agreed on, compulsory arbitration. OTP will retain its interest in this area and follow developments closely.

In addition to the above activities, OTP is coordinating, with HUD and HEW as major participants, the design of a demonstration program that would show effective and economical uses of broadband communications for the delivery of public services and would allow industry to test earlier than otherwise possible the potential of broadband communications for innovative non-public services. The program would be a joint government and industry undertaking that would ultimately benefit both the private and public sectors. During 1973, OTP will continue its coordination of interagency effort, and will guide the demonstration program through its various stages, including the planning of specific experiments, the selection of demonstration sites, and the enlisting of state and local government participation. Finally, also during 1973, OTP will initiate a study to evaluate the economics of allowing consumers to purchase television programs directly over cable. This study will enable an assessment of the desirability and feasibility of such systems and their potential role within the broadcasting and cable industries.

1. Public Broadcasting

C. BROADCASTING

The Public Broadcasting Act of 1967 created a framework for educational and instructional broadcasting, largely as envisioned by the Carnegie Commission on Educational Television. However, the means of establishing a stable source of federal support funds which would avoid detailed government oversight of program content, was left unresolved and has remained so. In addition, the years since 1967 have witnessed the development of important new technologies for which no provision is made in the Public Broadcasting Act.

During the past two years, OTP sought to achieve amendments to the Act which would eliminate both these deficiencies. It consulted with interested organizations in public broadcasting and with the relevant agencies of government, and reviewed a range of approaches to new legislation.

Last year, OTP worked with the Congress and submitted a bill providing for an additional year of funding for CPB and assuring federal funding of individual public broadcast stations. Congress, however, adopted a different bill which would have increased the federal funding of public broadcasting by more than $115 million over a period of two years. As a practical matter, the bill would have undercut any hope of resolving the various problems that have developed in public broadcasting regarding its structure and the various relationships between the local stations and the national organizations. Consequently, the President vetoed the bill.

In the coming year, OTP will prepare legislative proposals to continue funding of public broadcasting by the Federal Government.

2. License Renewal Policy

One of the major broadcasting controveries of recent years has involved the triennial license renewal process. Although all can agree that a broadcaster who has performed well in the public interest should have his license renewed, the Congress, FCC, and the courts have struggled with the questions of what is good performance and what standard should be used to judge the incumbent licensee's performance in the face of a challenge to his renewal application.

Because the search for standards comes at a time when community interest in licensee performance is strong and when competition for licenses is increasing, a certain amount of undesirable instability has been injected into the broadcasting industry. The regulatory process has become frought with delay and uncertainty, and the industry's ability to serve the public has suffered.

Late in 1971, OTP developed and proposed for public discussion a wide-ranging series of suggestions for modifying the Communications Act of 1934, one of which dealt with license renewal policy. OTP pointed out the dangers of adopting renewal standards that led to government supervision of program content. It proposed for discussion a more "neutral" renewal standard that would place the primary emphasis on the licensee's being attuned to the programming needs and interests of his local audience. Using this standard, a premium would be placed on the obligation to be directly responsive to community problems and issues; licensees who had met this obligation would be assured license renewal. This would lead to needed stability in an industry that must make relatively long-term commitments to public service.

In December of 1972, following further study of the license renewal process, OTP proposed that the legislative provisions governing license renewals be revised. It proposed an amendment to the Communications Act of 1934 which would make four revisions in the present renewal process: the extension of the term of license from three to five years; the requirement that policies concerning qualifications to hold a license be made solely through rule-making; the establishment of specific procedures to be used in the event that a renewal application is challenged by a competing application; and finally, the prohibition on use by the FCC of predetermined performance criteria to be used in evaluating renewal applications.

The proposed legislation seeks to establish a regulatory environment which allows for competition for the grant of a license, and, at the same time, reduces the uncertainty and instability that has beset the industry.

3. Fairness Doctrine and Access to the Broadcast Media

Another critical issue-one that is central to the role of the mass media in an open society-is that of public access to the broadcast media for discussion of and information about controversial public issues. The FCC's Fairness Doctrine requires the broadcaster to make time available for the presentation of contrasting viewpoints once a particular side of a controversial issue of public importance has been expressed. Although not originally contemplated, this "farness" obligation is now being enforced on an issue-by-issue, case-by-case basis. instead of through an overall evaluation of whether the broadcaster has kept the public well informed, with reasonable time for contrasting views. When enforced in this manner, the broadcaster's journalistic determinations are repeatedly second-guessed by the FCC and the courts, and since these are agencies of government, the decision as to who shall speak on what issues becomes part of the governmental process. This diminishes the "free press" discretion of the licensee and tends to convert broadcasting from a private enterprise activity to a government supervised service.

A major incentive for case-by-case application of the Fairness Doctrine is the fact that individuals' access to the media for discussion of controversial issues

can only effectively be achieved through that device. Broadcasters do not ordinarily sell their advertising time for such purposes-partly because they may be compelled to "balance" such presentations in their program time.

In 1971 OTP studied the history of Fairness Doctrine enforcement and the closely related problem of access to the media. As part of the series of suggestions for modifications in broadcast regulation made in October 1971, OTP proposed that there be considered a right of nondiscriminatory access to TV advertising time, accompanied by the elimination of any requirement that paid views be "balanced" by views expressed in program time. In program time, OTP suggested that the fairness obligation ultimately should be enforced by an overall inquiry into the licensee's journalistic responsibility at license renewal time, rather than in the case-by-case fashion now employed.

Under the present structure of broadcasting-the technical scarcity of channels available as broadcast outlets, and the reliance on persons entrusted with these outlets to serve as a vehicle for informing the public-the Fairness Doc trine itself is necessary for the time being as a means of preserving the public's right to be informed. However, the means and mechanisms of enforcing the Doctrine must be improved, and governmental intrusion into program content must be minimized. Enforcement of the Fairness Doctrine through a review of the broadcaster's overall performance and programming at license renewal time, rather than through case-by-case adjudication, would be a step in this direction. OTP will continue during the present year to explore various alternatives for solving the fairness and access dilemmas. It will seek to assist the Congress and the FCC in devising mechanisms to enhance free expression and to minimize government intervention in the marketplace of ideas.

4. Radio Regulation

For many years, radio broadcasting has been regulated as an afterthought to television. Some of the rationales and assumptions, such as scarcity of outlets and restricted entry, which shaped early radio regulation and still justify regulation of television stations, have been rendered meaningless by the phenomenal growth in the number of AM and FM radio stations, offering widely diversified special program services to the public.

In 1971 OTP proposed to the FCC that it undertake an experiment in radio deregulation, with a view toward lessening the regualtory controls on commercial radio programming, commercial practices and other nontechnical operations. The proposal was supported by an OTP Staff Paper setting forth the reasons such an experiment seemed appropriate and promising. In response, the FCC instituted a program to reassess its regulations governing radio, and is in the process of acting on its findings. OTP will continue working with the Commission, broadcasters, and public to provide recommendations as to how radio regulation can be improved.

5. Reruns of Networks Programs

In recent years, the portion of network prime time devoted to reruns of original programs has increased dramatically. The increase in reruns has resulted in a diminution in the variety and creativity of programming available to the public and, by contracting the market for new programs, has threatened the economic underpinnings of the program production industry.

However, it has been unclear what the cause of this change is, and what are the available techniques for dealing with it. On the one hand, the shift to more reruns may be attributable to unfair use by the networks of their monopoly position in buying and distributing programs. Or, on the other hand, the trend may be due to inexorable market forces, such as increases in program production costs not covered by commensurate rises in advertising revenues. Better knowledge of this is required as a basis for determining whether Federal action is necessary.

In view of the importance of this matter to the viewing public and to the health of the program production indusrty, the President requested that OTP inquire into the causes of increases in network reruns, and, if appropriate. recommend remedial action. OTP is completing its study and is preparing its report for the President.

D. FEDERAL-STATE COMMUNICATIONS

Issues affecting state and local governments arise in every area of communication policy and in varying contexts. For example, the planning of a national emergency communication system requires state and local participation; regula