An Overview of Telecommunications Regulatory Issues and Law

1. An Overview of Telecommunications Regulatory Issues and Law Scott D. Bolton Director, Government and Regulatory Affairs Enron Corp.

2. Presentation Goals • Provide Regulatory Background • Understand TA’96 • Highlight Regulatory Policy Issues • Effects on EBS and other Enron Businesses

3. OVERVIEW • U.S. Regulatory Framework • Federal regulation • Historical background • The Telecommunications Act of 1996 • FCC implementation & judicial review • State regulation

4. Wireline Services Historic Dividing Line: Interstate vs. Intrastate Blurring the Boundary Customer premises equipment “CPE” Jointly used network facilities Internet TA 96: increased Federal role U.S. REGULATORY FRAMEWORKFederal -State Division of Authority

5. U.S. REGULATORY FRAMEWORKThe Regulatory Players • Congress • White House • Executive Branch • Commerce Department (NTIA) • Justice Department • State Department • U.S. Trade Representative

6. U.S. REGULATORY FRAMEWORKThe Regulatory Players • Federal Communications Commission • Chairman & four commissioners • Five bureaus • Other offices • Functions • Rulemaking • Licensing • Enforcement

7. U.S. REGULATORY FRAMEWORKThe Regulatory Players • Rulemaking Procedures • Public notice • Comments & replies • Ex parte communications • Orders • Reconsideration • Appeal • Remand

8. U.S. REGULATORY FRAMEWORKHistorical Background • The Old Order Telephony viewed as a natural monopoly • Bell System bundled local, long-distance & CPE • Government regulation of rates & service terms • Inter-service subsidies used to promote universal service • 1956 Consent Decree barred Bell System from non-telecom markets

9. U.S. REGULATORY FRAMEWORKHistorical Background • Start of Competition • FCC’s 1956 Hush-A-Phone & 1968 Carterfone decisions allowed consumers to attach competitively provided CPE to the public telephone network • 1980 Computer II Order directed AT&T to “unbundle” & “detariff” CPE • AT&T permitted to provide CPE & “enhanced services” through a structurally separate affiliate • Bell System required to interconnect with “competitive carriers”

10. U.S. REGULATORY FRAMEWORKHistorical Background • Modification of Final Judgment (1984) • AT&T divested its local exchange operations to seven regional Bell Operating Companies (“BOCs”) • BOCs limited to providing “intra-LATA” telecom services; barred from CPE & “information services” markets • Three Assumptions • The local exchange would remain a natural monopoly • The BOCs would be content to limit their activities to regulated telecom • Decree would be “self-enforcing”

11. U.S. REGULATORY FRAMEWORKThe Telecommunications Act of 1996 • Principal Goals • ” Update 1934 Communications Act to reflect market & technological changes • Reassert congressional control • Promote competition • Reduce regulation • Preserve the States’ role • Enhance universal service • Combat “indecency”

12. U.S. REGULATORY FRAMEWORKThe Telecommunications Act • Introduction of Local Competition: The Three-Part Strategy • Eliminate legal barriers • Preempt state-granted telecom monopolies • Eliminate Federal restrictions

13. U.S. REGULATORY FRAMEWORKThe Telecommunications Act • Promote entry by competitive local exchange carriers (“CLECs”), which can: • construct new facilities • resell service of the incumbent LECs (“ILEC”) • lease unbundled network elements (“UNEs”) from ILECs, where necessary

14. U.S. REGULATORY FRAMEWORKThe Telecommunications Act • Provide incentives to ILECs to cooperate with new entrants • Eliminate BOC “line of business restrictions” once local markets are open • Deregulate as competition takes root

15. U.S. REGULATORY FRAMEWORKThe Telecommunications Act • In order to provide in-region, inter-LATA telephone service in any State, a BOC must: • enter into an interconnection agreement with at least one facilities-based competitor • comply with 14 point “competitive checklist” • establish a separate affiliate • obtain FCC approval

16. U.S. REGULATORY FRAMEWORKThe Telecommunications Act • Cable-Telco Competition • State restrictions on cable telephony voided • Telcos permitted to provide video service as common carrier, cable system, or open video system • LEC-cable cross-ownership limited to 10 percent

17. U.S. REGULATORY FRAMEWORKThe Telecommunications Act • Universal Service • “Evolving level of telecom services” that FCC determines should be affordable to all Americans • Funding to be “explicit” & “sufficient” • All telecom providers to contribute equitably • Special emphasis on rural areas, high-cost areas, schools, libraries & health care providers

18. U.S. REGULATORY FRAMEWORKThe Telecommunications Act • Advanced Services • FCC to assess availability of “advanced services” such as broadband used for high-speed Internet access • FCC to eliminate regulatory barriers to deployment

19. U.S. REGULATORY FRAMEWORKThe Telecommunications Act Communications Decency Act • Restricts sending of “obscene” & “indecent” material over the Internet, TV & cable • Criminalizes use of the Internet to post “indecent” information in a manner “available” to minors • Directs creation of a TV rating system • Requires cable operators to “scramble” sexually explicit programming

20. U.S. REGULATORY FRAMEWORKThe Telecommunications Act • Deregulation • FCC must forbear from applying statutory or regulatory requirements not necessary to protect consumers & public interest • Forbearance petitions deemed granted if no FCC action within one year • FCC required to conduct biennial review; must eliminate regulations no longer needed

21. U.S. REGULATORY FRAMEWORKFCC Implementation • Major Proceedings • Competition Trilogy • Local Competition Order • Access Reform Order • Universal Service Order • BOC entry • Advanced services • Forbearance/Deregulation

22. U.S. REGULATORY FRAMEWORKFCC ImplementationLocal Competition Order • ILECs & CLECs to negotiate interconnection agreements; parties can agree on any terms; disputes arbitrated by State PUCs • Minimum national standards for States to apply in any arbitration • Points of interconnection • Seven network elements to be unbundled • Collocation obligations

23. U.S. REGULATORY FRAMEWORKFCC Implementation • Pricing • Total element long run incremental cost (“TELRIC”) pricing for interconnection, collocation & UNEs • “Avoided cost” for resale • ILEC also must: • allow CLEC to “pick-and-choose” provisinos in existing interconnection agreements • provide “UNE Platform”

24. U.S. REGULATORY FRAMEWORKFCC Implementation • Access of rights-of-way • ILECs must provide competing carriers with access to poles, ducts, conduits & rights-of-way • Utilities must grant telecom carriers non-discriminatory access to all poles, ducts, conduits & rights-of-way • May apply capacity, safety, reliability & general engineering standards • Federal requirements (FERC & OSHA) apply • State & local requirements entitled to deference

25. U.S. REGULATORY FRAMEWORKFCC Implementation • Universal Service Order • Federal support tripled to nearly $5 million per year • Rural & high-cost support: Federal fund to pay 25% of difference between TELRIC & national average price • Support for low-income users increased to $500 million per year • New $400 million per year program for health care providers • New $2.25 billion per year program to provide schools & libraries with telecom, Internet access & “internal connection”

26. U.S. REGULATORY FRAMEWORKFCC Implementation • Carriers & private telecom providers must take payments to the Universal Service Fund (“USF”) • Payments based on intrastate, interstate & international “end-user telecom revenue” • Payments equal 3 to 5 percent of revenues • Information service providers (“ISPs”) not required to make direct USF payments

27. U.S. REGULATORY FRAMEWORKFCC Implementation • Access Reform Order • Interexchange carriers (“IXCs”) must pay LECs for local facilities used to orginate & terminate long-distance traffic -- $20 million per year at issue • ISPs not required to pay • FCC goals • Rate structure should reflect cost structure • Rate level should fall to cost

28. U.S. REGULATORY FRAMEWORKFCC Implementation • Advanced Service Orders • Deployment adequate at this early stage • No current need to order “open access” to cable infrastructure • ILECs need not offer facilities used to provide enhanced services, such as DSLAMs, as unbundled network elements

29. U.S. REGULATORY FRAMEWORKFCC Implementation • Forbearance/Deregulation • Elimination of tariff filing requirements by IXCs & CLECs (stayed by court) • Elimination of “all carrier” network interface disclosure • Proposed elimination of restrictions on bundling telecom service with CPE & information services

30. U.S. REGULATORY FRAMEWORKJudicial Review • Every major FCC decision now routinely appealed • FCC has generally won, but has suffered a few significant losses • Appeals process has caused delay & uncertainty

31. U.S. REGULATORY FRAMEWORKThe States • State Public Utility Commissions (“PUCs”) Regulate Intrastate Telecommunications Services • Issue certificates of public convenience & necessity • Regulate rates of incumbent carriers; some States also regulate new entrants • Enforce intrastate telecommunications service quality standards • Consumer protection

32. U.S. REGULATORY FRAMEWORKThe States • Local Competition • Arbitrate interconnection disputes, consistent with rules established by the FCC • Augment FCC interconnection rules • Approve or reject interconnection agreements

33. U.S. REGULATORY FRAMEWORKThe States • BOC Entry Into In-Region, Inter-LATA Market • Approve BOCs’ statements of generally available terms & conditions • Confirm BOC compliance with competitive checklist • Provide recommendations to FCC regarding BOC entry

34. U.S. REGULATORY FRAMEWORKThe States • Promoting Universal Service • Designate carriers eligible to provide universal service in undeserved areas • May adopt regulations to advance universal service • May require carriers providing instrate service to contribute to the support of universal service • Must adopt rules to prevent carriers from using universal service support payments to cross-subsidize intrastate services

35. U.S. REGULATORY FRAMEWORKThe States • Authority to regulate public rights-of-way used by telecom providers • States may adopt reasonable & non-discriminatory regulations • Construction schedules • Insurance requirements • Bonding & indemnity requirements • Building codes • Regulations intended to prevent interference with other carriers • Compensation for use of public rights-of-way

36. U.S. REGULATORY FRAMEWORKThe States • State (and Municipalities) may not adopt franchise regulations that prohibit or impede any entity from providing telecom service • Franchise fees must be competitively neutral • Franchise fee must be reasonably related to the costs of the right-of-way • Franchise authorities may not regulate service providers that do not use public rights-of-way

37. Regulatory Issues • Broadband Deployment • Government Subsidies • Treatment of New Technologies • Electronic Commerce

38. Regulatory Issues Broadband Deployment • The Issue --- Infrastructure Deployment Long-term growth of the Internet requires deployment of broadband, packet-switched local data transport networks Regulation or Deregulation? - ILECS promise to deploy “Advanced Services” if FCC eliminates regulatory burdens - CLECS claim those “burdens” are necessary to promote competitive entry into local market

39. Regulatory Issues Broadband Deployment • Must ILECS allow CLECS to interconnect & lease UNEs at cost-based (TELRIC) prices? • Must ILECS provide data-oriented facilities, such as DLAMS & DSL compatible loops as UNEs? • Must ILECS allow CLECS to collocate equipment on ILEC’s premises? • Must ILECs compensate CLECS for delivering traffic to ISPs?

40. Regulatory Issues Broadband Deployment • The Issue --- Cable Open Access Cable has the potential to provide consumers faster access to the Internet that the local telecom network - Unlike telecom service, cable operators are generally not required to provide transport services on demand - ISPs are seeking regulations to open access to systems - FCC has chosen to to regulate / some local governments have required opening platform (City of Portland vs. AT&T)

41. Regulatory Issues Government Subsidies • The Issue --- The impact of Universal Service Fund and E-Rate on emerging Services The FCC has adopted a $2.25 Billion dollar a year program to subsidize schools and libraries access to telecom and Internet services - All providers of telecom services contribute to USF based on “end-user revenue” - Information Services vs. Telecom Services debate

42. Regulatory Issues Treatment of New Technologies • The Issue --- How to Regulate (non-regulate) emerging services? Historically telephony, cable, broadcasting & information services were viewed as discrete services, convergence is changing regulatory boundaries - Webcasting - IP Telephony

43. Regulatory Issues Electronic Commerce • The Issues --- When are electronic agreements enforceable? In the event of cross-border disputes, what law applies? How can data security be assured? How should on-line transactions be taxed? - WTO, Bi-Lats, EC Directive - Advisory Commission on Electronic - Commerce - 2000 Presidential Race, 107th Congress

44. Contacts