Information Superhighway: Issues Affecting Development (Chapter Report,
09/30/94, GAO/RCED-94-285).

Congress is now considering landmark telecommunications legislation. At
the same time, the administration views recent technological advances in
telecommunications as an opportunity to build an Information
Superhighway that will place voice, data, and video information at
consumers' fingertips. Increased competition in telecommunications could
spur private investors to build the superhighway, but existing
telecommunications law and court order could limit or prohibit some
telecommunications competition. This report provides an overview of
several major issues facing Congress as it considers the
telecommunications legislation. GAO discusses (1) managing the
transition to a more competitive local telecommunications marketplace;
(2) ensuring universal service in a competitive marketplace; and (3)
ensuring network security, privacy, reliability, and interoperability.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-94-285
     TITLE:  Information Superhighway: Issues Affecting Development
      DATE:  09/30/94
   SUBJECT:  Telecommunications operations
             Computerized information systems
             Telephone communications operations
             Competition
             Data transmission operations
             Monopolies
             Antitrust law
             Technology transfer
             Proposed legislation
             Confidential records
IDENTIFIER:  Internet
             Antitrust and Communications Reform Act of 1994
             National Communications Competition and Information 
             Infrastructure Act of 1994
             Information Superhighway
             National Information Infrastructure Program
             
**************************************************************************
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Cover
================================================================ COVER


Report to the Congress

September 1994

INFORMATION SUPERHIGHWAY - ISSUES
AFFECTING DEVELOPMENT

GAO/RCED-94-285

Information Superhighway


Abbreviations
=============================================================== ABBREV

  ATM - asynchronous transfer mode
  AT&T - American Telephone and Telegraph Company
  BOC - Bell operating company
  CD-ROM -
  CAP - competitive access provider
  FCC - Federal Communications Commission
  GTE -
  HDTV -
  Hz -
  IBM - International Business Machines
  ISDN - Integrated Services Digital Network
  Kbps -
  LAN - local area network
  M -
  Mb -
  MB -
  Mbi -
  MCI -
  PCS - personal communications service
  TCP/IP -
  WAN -

Letter
=============================================================== LETTER


B-258041

September 30, 1994

To the President of the Senate and the
Speaker of the House of Representatives

As you know, the Congress has been deliberating landmark
telecommunications legislation.  At the same time, the administration
views recent technological advances in telecommunications as an
opportunity to build an Information Superhighway that will place
voice, data, and video information at consumers' fingertips. 
Increased competition in telecommunications could spur private
investors to build the superhighway, but existing telecommunications
legislation and court orders limit or prohibit certain types of
telecommunications competition. 

This report provides an overview of several major issues facing the
Congress as it considers the telecommunications legislation.  We
discuss (1) managing the transition to a more competitive local
telecommunications marketplace; (2) ensuring universal service in a
competitive marketplace; and (3) ensuring network security, privacy,
reliability, and interoperability. 

We are sending copies of this report to all Members of Congress; the
Chairman, Federal Communications Commission; and the Assistant
Secretary of Commerce for Communications and Information.  We will
also make copies available to others on request. 

This report was prepared under the direction of Kenneth M.  Mead,
Director, Transportation and Telecommunications Issues, who may be
reached on (202) 512-2834.  Other major contributors to this report
are listed in appendix IV. 

Charles A.  Bowsher
Comptroller General
of the United States


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

Technological advances in the transmission of voice, video, and data
are fostering fundamental changes in the telecommunications industry. 
For example, large local telephone companies plan to offer video
services in competition with cable and broadcast television, while
cable television companies plan to offer local telephone service over
their wires in competition with the local telephone companies.  The
administration believes that these technological changes provide the
opportunity to develop an "Information Superhighway" that could
provide every element of society with ready access to data, voice,
and video communications.  Concurrently, the Congress is considering
sweeping changes to telecommunications regulations to keep pace with
this dynamic industry.  GAO prepared this report to serve as an
overview of three key issues that decisionmakers may face as they
deliberate telecommunications legislation; it focuses on three
pivotal issues they face in formulating new telecommunications
legislation:  (1) managing the transition to a more competitive local
telecommunications marketplace; (2) ensuring that all consumers have
access to affordable telecommunications as competition develops; and
(3) ensuring that the Information Superhighway provides adequate
security, privacy, reliability, and interoperability. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

The administration has set forth its vision of a National Information
Infrastructure, commonly known as the Information Superhighway, which
could fundamentally change the way we live, work, and play.  As
easily as turning on a television, school children could obtain
access to instructional programming from distant learning centers, or
a doctor in a remote area could transmit X-rays or test results to
experts for consultation.  Television viewers may be able to
interactively order movies or other recorded programs and be able to
pause, fast-forward, or reverse them.  While these services are
currently available on a limited scale, the Information Superhighway
could make them a routine part of everyday life.  Advances in digital
technology allow these services to be provided through telephone or
cable television companies or through some other providers, such as
wireless telephone or satellite television services, thus blurring
the formerly distinct lines among industry segments. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Competition in the long-distance telephone market, facilitated by
technological advances and regulatory changes, has led to large
investments in the long-distance infrastructure; these investments
have provided the capacity likely to be required to support the
interstate portion of the Information Superhighway.  Similar
increases in the local infrastructure's capacity are needed to allow
the superhighway's services to reach homes, businesses, and schools. 
However, because the local infrastructure is larger and more widely
distributed than the long-distance infrastructure, these upgrades
will be more costly.  Some upgrades have occurred through further
technological advances and emerging competition at the local level. 
However, the extent to which competition can develop in the local
marketplace is limited by the provisions of the 1982 consent decree
that broke up the American Telephone and Telegraph Company, certain
provisions of the 1984 Cable Communications Policy Act, and certain
state laws.  Industry leaders, the Congress, and the administration
agree in principle that increased competition will accelerate
investment in the local infrastructure, and the Congress is
developing legislation to that end.  However, much debate has focused
on how to protect consumers from anticompetitive behavior if it
occurs during the transition to increased competition.  The prospect
of increased competition in certain segments of the local telephone
service market raises questions about how to ensure continued access
to affordable telephone service for all consumers--commonly known as
universal service.  Regulators have developed a cost allocation and
recovery system that results in above-cost rates for some services
and below-cost rates for residential and rural services.  However, as
competition becomes more widespread, local telephone companies could
lose to competitors the revenues from services now priced above
costs.  Since these revenues help provide affordable telephone
service for residential and rural subscribers, an alternate source of
funding will be required.  Also, as the array of available services
expands, questions arise about which services should be provided to
everyone at affordable rates and which, if any, should be universally
available as options. 

If the Information Superhighway is to function as envisioned, a
number of technical challenges need attention.  The security and
privacy of personal, medical, financial, and proprietary data must be
safeguarded.  The network's interoperability and reliability must be
ensured to protect against system failures.  Number portability--the
capability of allowing consumers to switch telecommunications
providers without changing telephone numbers--will be critical to
facilitating competition.  Because no single entity will build the
Information Superhighway, no single entity is in a position to
resolve these challenges in a coordinated fashion. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      MANAGING THE TRANSITION TO A
      MORE COMPETITIVE LOCAL
      TELECOMMUNICATIONS
      MARKETPLACE PRESENTS
      CHALLENGES
-------------------------------------------------------- Chapter 0:4.1

After the American Telephone and Telegraph Company was broken up in
1984, its share of long-distance revenues dropped from 92 percent to
below 60 percent in 1993.  The increased competition and
technological advances have led to vast improvements in the
long-distance infrastructure.  Further advances in technology are
making competition more feasible in the local market, and in some
areas competitors have won customers from the local telephone
companies. 

Federal government and industry officials believe that increased
competition in local telephone and cable television markets will be a
key factor in increasing choices and lowering prices and in
encouraging the private sector to invest in the local capacity
improvements that are necessary to make the Information Superhighway
a reality.  However, a number of states have laws prohibiting
competition for local telephone service.  Furthermore, the 1984 Cable
Communications Policy Act prohibits local telephone companies from
providing video services in their own service areas.  The Congress
has been considering bills that would, among other things, facilitate
competition by permitting Bell operating companies--the local
telephone companies spun off from the American Telephone and
Telegraph Company in 1984--to enter additional markets and allow the
Bells and other local telephone companies to provide video services
in their own service areas.  The bills would also supersede state
laws that now prohibit local telephone competition. 

However, the bills propose different criteria for allowing the Bell
operating companies to compete in related markets, reflecting
controversy over whether the conditions that led to the
restrictions--particularly the Bells' dominant market power--have
changed sufficiently to permit the Bells to enter additional markets. 
A key concern has been that without sufficient local competition, the
Bells' market power could allow them to inhibit competition in
markets that they enter. 


      UNIVERSAL SERVICE FUNDING
      PROCESS AND DEFINITION NEED
      REVISION
-------------------------------------------------------- Chapter 0:4.2

Increased competition in the local market raises questions about how
to continue to pursue the objectives of universal service.  Many
observers believe that regulators have generally required telephone
companies to allocate certain costs of the local telephone
infrastructure to other services, leading the local telephone
companies to charge above-cost rates for long-distance companies'
access to the local infrastructure and for intrastate long-distance
service.  Local residential and rural telephone service is believed
by many to be provided at below-cost rates.  However, as competitors
attract customers by offering lower rates on certain services, the
local telephone companies stand to lose the funds that have
heretofore allowed them to keep residential rates at affordable
levels.  The local companies say that raising rates to cover costs
could place a financial strain on some subscribers, thereby
jeopardizing universal service.  Rather than relying on the local
telephone companies to provide affordable service, some other
mechanism will be needed in a competitive environment. 

Universal service has traditionally included only rudimentary
telephone service--not the currently available advanced options such
as caller identification and call waiting.  Through the Information
Superhighway, many additional services, such as on-line access to
health care or government information, could become available,
raising the question of which, if any, additional services should be
universally available.  Building the infrastructure to provide all
these services could cost up to $500 billion, according to some
estimates.  Redefining universal service in the future presents
challenges in balancing the benefits of, expected demand for, and
cost of these services to consumers. 


      INFORMATION SUPERHIGHWAY
      POSES TECHNICAL CHALLENGES
-------------------------------------------------------- Chapter 0:4.3

Security, privacy, and reliability will be important issues as the
Information Superhighway develops.  Computer programs have been
developed that can undermine many computer security systems and
provide access to vast amounts of personal or proprietary
information.  Meanwhile, law enforcement agencies face advanced
software coding schemes that can foil decoding efforts and
telecommunications equipment that can be made immune to wiretapping. 
System reliability is important to avoid a widespread shutdown of
telecommunications links such as occurred in the Northeast in 1991,
disabling the air traffic control system and stalling commercial
activity. 

Standards have not been established to ensure the interoperability of
new communications technologies.  For example, interoperability
problems have surfaced in videoconferencing equipment made by
different companies and in digital networks developed by various
telephone companies.  Additionally, standards need to be developed
for data bases that would allow subscribers to change telephone
companies without changing telephone numbers.  Addressing these
challenges raises the question of who will provide the systemwide
perspective to encourage the industry to develop a secure, reliable,
smoothly functioning infrastructure. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

Because this report is intended to serve as an overview of key
telecommunications issues, it makes no recommendations. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO informally discussed information in this report with the Deputy
Chief Counsel of the National Telecommunications and Information
Administration, Department of Commerce; and the acting Chief, Common
Carrier Bureau, and the Chief, Office of Plans and Policy, Federal
Communications Commission.  While agreeing generally with the
report's contents, officials of both agencies encouraged GAO to
distinguish more clearly between the Bell operating companies and
other local telephone companies and suggested other points of
clarification.  National Telecommunications and Information
Administration officials urged GAO to clarify the respective
regulatory roles of state and federal agencies and to mention
intellectual property rights as an Information Superhighway issue. 
Federal Communications Commission officials suggested that GAO
provide additional background information on the American Telephone
and Telegraph Company consent decree and on the sources of universal
service funding. 

In response, GAO (1) revised the draft to more clearly reflect that
local telephone companies provide most local telephone service and
that the Bell operating companies are specific local telephone
companies that are subject to the American Telephone and Telegraph
Company consent decree; (2) added information on the roles of the
states in regulating local telephone rates and acknowledged
intellectual property rights as an issue; and (3) provided additional
background on the American Telephone and Telegraph Company consent
decree and revised the discussion of universal service.  GAO
incorporated other comments, where appropriate, throughout the
report. 


INTRODUCTION
============================================================ Chapter 1

The term "National Information Infrastructure"--commonly known as the
"Information Superhighway"\1 --refers collectively to the hardware,
software, standards, personnel, and training facilities that will one
day form an information infrastructure that will place vast
quantities of voice, video, and data at users' fingertips.  Delivery
of these services is being made possible by advances in digital
communications, which allow voice, video, and data to travel together
over any type of telecommunications medium.  These developments are
unfolding against a financial and regulatory backdrop that limits the
expansion plans of major segments of the telecommunications industry. 
Recognizing that the regulatory structure of the telecommunications
industry needs updating, lawmakers are considering sweeping changes
designed to provide a framework that will promote competition and
innovation while protecting consumers over the coming decades. 


--------------------
\1 The administration has used the terms "National Information
Infrastructure" and "Information Superhighway" synonymously. 


   TELECOMMUNICATIONS ENCOMPASSES
   MANY TECHNOLOGIES
---------------------------------------------------------- Chapter 1:1

Telecommunications, which we define as voice, video, or data (textual
information) transmission, travels over a variety of wired and
wireless networks.\2 Telephone networks carry primarily voice
conversations over a combination of copper wire and fiber-optic
cable, connecting the caller and receiver through a system of
switches.  Cellular telephone networks use a combination of wired and
wireless technology to connect the caller with the receiver. 
Television and radio stations send their signals through the airwaves
over broadcast networks, while cable television signals reach the
television set through a wired network.  Data normally travel between
computers over telephone wires.  On the horizon are developing
technologies that could add networks for satellite television and
wireless personal communications services (PCS) that could allow
anyone, anywhere, to send and receive voice, video, and data. 


--------------------
\2 A network is a group of interconnected communications facilities
and devices used to transmit information. 


   THE INFORMATION SUPERHIGHWAY
   WOULD INTEGRATE TECHNOLOGIES
   INTO A SEAMLESS WEB
---------------------------------------------------------- Chapter 1:2

The concept of the Information Superhighway integrates these
individual telecommunications networks into a seamless web that would
allow information to travel over wires, be transferred to an
over-the-air network, and be transferred among networks as it moves
from sender to receiver.  The administration believes that the
Information Superhighway could unleash an "information revolution"
that would change forever the way people live, work, and interact
with each other.  Figure 1.1 illustrates conceptually how the
Information Superhighway might function.  The superhighway could, for
example, expand opportunities for students in rural or inner-city
schools to have access to top-level instructional programming
transmitted from distant learning centers.  Rural doctors could
transmit X-rays or test results to experts at leading medical
centers.  Businesses could more easily connect with customers and
suppliers, improve communications among employees, and gather
competitive data.  Finally, individuals could enjoy more work/home
flexibility by telecommuting--working from home while maintaining
contact with the office through telephone, fax, and personal
computer. 

   Figure 1.1:  Conceptual
   Illustration of the Information
   Superhighway

   (See figure in printed
   edition.)

The Information Superhighway could also affect life in the home. 
Through interactive television, viewers would no longer be subject to
programming schedules.  Instead, they could select a previously
recorded program--such as a movie, news report, or sporting
event--and view it on their televisions.  In addition, they could
pause, reverse, or fast-forward the program, as they can today in
viewing video tapes.  Using the Information Superhighway, consumers
could electronically select merchandise now available through
mail-order catalogs.  While many of these services are currently
available on a limited scale, all of them could become a routine part
of everyday life through the Information Superhighway. 

Although no one now knows exactly how the superhighway will evolve,
the Internet provides current-day examples of the types of services
that the Information Superhighway could provide.  The Internet began
about 25 years ago as a federal effort to investigate computer
networking technology under the Advanced Research Projects Agency of
the Department of Defense.  Today, the Internet connects users to a
network of networks that spans all parts of the United States and
other sites around the world, and it supports activities in the
federal government, universities, and industry research laboratories. 
The core of the Internet operates over federal "backbone" networks,
including those of the National Science Foundation, the National
Aeronautics and Space Administration, the Department of Energy, and
the Department of Defense.  Most users obtain access to the Internet
backbone through numerous other networks that, collectively, form the
Internet. 


   DIGITIZATION MAKES IT ALL
   POSSIBLE
---------------------------------------------------------- Chapter 1:3

Digitization makes telecommunications signals interchangeable, thus
allowing signals from different sources to travel over various types
of infrastructure.  Digitization translates voice, data, and video
signals into the common language of computers--"ones" and "zeros"
called "bits." This process greatly increases flexibility in
determining whether the signals must be sent over a specific type of
infrastructure.  Through digitization, the Information Superhighway
can carry any type of "freight" in the form of bits--be they voice,
video, or data--from the source to the user. 


   INCREASES IN INFRASTRUCTURE
   CAPACITY ARE REQUIRED
---------------------------------------------------------- Chapter 1:4

In order to carry interactive video services, some portions of the
telecommunications infrastructure require greater capacity. 
High-capacity "broadband" fiber-optic cable, which could carry many
Information Superhighway services, exists in the interstate,
long-distance portion of the infrastructure.\3 However, the local
infrastructure, largely consisting of copper telephone wire and
coaxial cable television wire, has lower capacity.  While copper
telephone wire enters about 95 percent of U.S.  residences and
businesses and provides interactive, two-way communications, its low
capacity would prevent some Information Superhighway services (e.g.,
interactive video) from reaching users in many homes, schools,
libraries, or medical centers.  Coaxial cable, which is used for
cable television, is available to about 95 percent, and enters about
60 percent, of U.S.  residences.  It has about 900 times the capacity
of copper wire.  Although the capacity of coaxial cable is not as
great as that of fiber-optic cable, coaxial cable could meet most of
the currently envisioned residential requirements for Information
Superhighway services.  However, to carry interactive two-way
traffic, the cable infrastructure's delivery systems must be
upgraded.  According to an industry trade association, such upgrades
would cost about $20 billion. 


--------------------
\3 For additional information on capacity and other aspects of
telecommunications technology, see appendix I.  This report also
contains a glossary of telecommunications terms. 


   EXISTING LEGAL AND REGULATORY
   STRUCTURE SETS THE STAGE FOR
   POTENTIAL CHANGES
---------------------------------------------------------- Chapter 1:5

The Communications Act of 1934 established the Federal Communications
Commission (FCC) as an independent agency

     "for the purpose of regulating interstate and foreign commerce
     in communication by wire and radio so as to make available, so
     far as possible, to all the people of the United States a rapid,
     efficient, nationwide and worldwide wire and radio
     communications service with adequate facilities at reasonable
     charges."

As enacted, the act focused on telephone and radio, but it was not
restricted to any particular technology.  The act now covers many new
technologies such as cable television, cellular telephones, and
satellite communications.  The act generally left regulation of
intrastate services to the states.  Appendix II provides information
on the other agencies that establish or influence telecommunications
policy and the diverse set of businesses that make up the
telecommunications industry. 

Following the passage of the Communications Act of 1934, the American
Telephone and Telegraph Company (AT&T) continued to operate as a
regulated monopoly but generally remained subject to federal
antitrust laws.  Throughout the 1950s and 1960s, competitive
pressures mounted from innovations in customer premises equipment
(e.g., telephones) and improvements in radio technology.  FCC
responded with a number of regulatory decisions that allowed limited
competition in specific markets.  In 1974, the United States issued
the third of three major antitrust actions against AT&T, each of
which ended in a settlement agreement.  The 1974 action was settled
in 1982 through a consent decree that was approved with modifications
by the court. 

The 1982 consent decree significantly changed the regulatory
landscape of the telecommunications industry by generally separating
the competitive segments of the telephone industry--long-distance
service and customer premises equipment--from what was viewed as a
natural monopoly\4 --local telephone service.  The decree divested
AT&T of its 22 local telephone service companies, called Bell
operating companies (BOCs). 

Today the BOCs, together with GTE, a holding company for 24 local
telephone companies, and nearly 1,300 other local telephone companies
provide local telephone service.\5 AT&T continues to provide
long-distance service in competition with other long-distance
carriers.  Unlike the days before divestiture when a single company
provided a majority of service, long-distance calls now travel over
competitive long-distance carriers' lines for the long-distance
portion of the call, and through the local telephone company's
infrastructure at the call's beginning and end points.  The consent
decree required that the BOCs grant long-distance carriers access to
their local infrastructure to complete long-distance connections,
while FCC regulations imposed similar requirements on other local
telephone companies.  The local telephone companies charge the
long-distance companies access fees to route long-distance calls
through the local telephone lines. 


--------------------
\4 A natural monopoly exists when the costs of production decline as
additional output is produced so that a single producer can supply
the entire market cheaper than any combination of two or more
producers. 

\5 AT&T's consent decree does not apply to GTE or to other local
telephone companies.  However, in the early 1980s, the government
filed an antitrust action against GTE challenging GTE's acquisition
of the telecommunication enterprises of Southern Pacific Corp. 
(which operated Sprint long-distance service).  Under a
court-approved consent decree, the acquisition was permitted subject
to a number of conditions, including that GTE's local monopoly
operations be kept separate from its long-distance and other
competitive operations.  In 1993, GTE was the second largest
telephone company in terms of revenue and fourth in terms of access
lines. 


   INDUSTRY IS CONVERGING,
   PROVIDING COMPETITIVE
   OPPORTUNITIES
---------------------------------------------------------- Chapter 1:6

Against this legal and regulatory backdrop, the telecommunications
industry is undergoing substantial change.  The emerging ability to
transmit data, voice, and video through a variety of methods is
stimulating formerly separate segments of the industry to diversify
product lines and to take advantage of complementary strengths.  For
example, some large telephone companies see opportunities to compete
in their existing service areas with cable and broadcast television
companies by transmitting or providing video programming over
telephone lines, while cable television companies are considering
providing local telephone service over their infrastructure, in
competition with the telephone companies. 

To optimally position themselves to provide diversified services,
these formerly separate segments of the telecommunications industry
are considering mergers and strategic alliances.  Cable companies
believe that the large telephone companies' substantial cash flows
will help them upgrade their systems to provide telephone service,
while the telephone companies believe that the cable companies'
experience in managing and marketing video services will be a
critical asset to compete successfully in the video programming
market.  Additionally, the large telephone companies and
long-distance companies are acquiring or investing in cellular
telephone companies to broaden their networks and take advantage of
advances in wireless technology. 

Some such mergers have already occurred.  Southwestern Bell has
purchased a cable system in Montgomery County, Maryland, through
which it plans to begin offering local telephone services.  Sprint, a
long-distance provider, merged with Centel Cellular company, which at
the time of the merger was the nation's ninth largest cellular
provider. 


   LEGISLATIVE CHANGES HAVE BEEN
   PROPOSED
---------------------------------------------------------- Chapter 1:7

Lawmakers are considering legislation designed to allow increased
competition in the telecommunications industry.  The proposed
legislation addresses several major issues, such as whether federal
legislation should supersede state laws that prohibit local telephone
competition; whether and under what conditions the BOCs should be
allowed entry into long-distance telephone service; whether and under
what conditions local telephone companies, including the BOCs, should
be allowed to provide video services in their service areas; how to
ensure competitors' equal access to local, long-distance, and
cellular infrastructures; and how to ensure that no consumers lose
access to telecommunications services because of rate increases.  In
addition, the legislation would shift much of the locus of
responsibility for overseeing BOCs' entry into certain competitive
markets from the courts, where it has resided since 1984, to the
executive branch of the federal government. 


   DECISION MAKERS FACE SEVERAL
   ISSUES
---------------------------------------------------------- Chapter 1:8

The prospect of a restructured telecommunications industry that would
collectively build and operate an Information Superhighway raises a
number of issues.  Chapter 2 discusses the central issues related to
reducing barriers to local telecommunications competition.  Chapter 3
discusses the issues associated with providing universal service in a
competitive environment, and chapter 4 provides an overview of some
of the pressing technical challenges that decision makers will face
as the Information Superhighway develops. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:9

Under our basic legislative responsibility to prepare evaluations of
issues that the Comptroller General believes will assist the
Congress, we reviewed issues facing decision makers as they develop
new telecommunications laws and regulations to facilitate the
development of the Information Superhighway.  These issues include
(1) managing the transition to a more competitive local
telecommunications marketplace; (2) ensuring that all consumers have
access to affordable telecommunications as competition develops; and
(3) ensuring that the Information Superhighway provides adequate
security, privacy, reliability and interoperability. 

To determine the central issues facing decision makers, we reviewed
an extensive body of reports, white papers, and industry statements. 
We held discussions with officials at FCC, the Department of Commerce
(the National Institute of Standards and Technology and the National
Telecommunications and Information Administration), the National
Science Foundation, the Department of Education, the Office of
Technology Assessment, the Department of Defense, the National
Security Agency, and the Rural Electrification Administration.  We
also met with representatives of a long-distance carrier and of the
United States Telephone Association.  To keep abreast of legislative
developments, we closely followed the numerous congressional hearings
on telecommunications issues held during 1993 and 1994.  We conducted
our work between October 1993 and August 1994. 


REDUCING BARRIERS TO LOCAL
COMPETITION MAY HELP BUILD THE
INFORMATION SUPERHIGHWAY, BUT
PRESENTS CHALLENGES
============================================================ Chapter 2

Technological advances and competition in the long-distance market
have led to infrastructure improvements needed to support the
interstate portion of the Information Superhighway.  However, the
local infrastructure needs significant improvement to bring the
superhighway to homes, businesses, and schools.  Local infrastructure
improvements have begun, stimulated in part by the limited
competition that has begun to emerge in local telephone services. 
However, legal and regulatory barriers, established to maintain
affordable residential telephone rates and protect consumers from the
local telephone company's monopoly power, limit the extent to which
competition can develop at the local level.  Consequently, the
Congress is considering regulatory revisions aimed at removing
barriers to transforming the local market from one dominated by the
local telephone company to one that is more competitive while
retaining appropriate safeguards.  However, disagreement exists over
whether and to what extent consumers will need protection from the
local telephone company's market power. 


   TECHNOLOGICAL ADVANCES AND
   COMPETITION LED TO IMPROVEMENTS
   IN THE LONG-DISTANCE
   INFRASTRUCTURE
---------------------------------------------------------- Chapter 2:1

The divestiture of AT&T, which became effective in 1984, helped
facilitate the growth of competition in the long-distance telephone
service market.  Spurred by advances in technology, some competitors
had been attempting to establish a competitive foothold in the
long-distance market since FCC first authorized competitive entry in
1969.  However, at the time of divestiture, AT&T held 92 percent of
total long-distance revenues.  As figure 2.1 shows, AT&T's market
share steadily decreased after 1984 but remained well over 50 percent
in 1993. 

   Figure 2.1:  Percentage of
   Long-Distance Revenues of AT&T,
   MCI, Sprint, and All Other
   Long-Distance Carriers, 1984-93

   (See figure in printed
   edition.)

The consent decree, together with FCC requirements that local
telephone companies provide every long-distance competitor equal
access to the local infrastructure, enhanced the ability of new
long-distance companies to compete with AT&T.  While other long
distance providers--MCI, Sprint, and AT&T--hold most of the
long-distance market, FCC estimated that about 400 long-distance
carriers were in business as of January 1994, allowing customers to
choose among a wide range of services, pricing arrangements, and
service options.  Because of its significant market share, AT&T has
remained subject to FCC's regulatory oversight for long-distance
services. 

Since the divestiture, consumers have benefited from lower prices and
the long-distance infrastructure has been significantly upgraded.  As
figure 2.2 shows, published tariff rates declined sharply between
1984 and 1989 and more slowly since then,\6 while long-distance usage
has increased, as figure 2.3 shows. 

   Figure 2.2:  Price of a
   5-minute Mid-Day Call From
   Washington, D.C., to San
   Francisco, California, 1984-93

   (See figure in printed
   edition.)

Note:  Rates are for calls using AT&T and are based on published
tariffs, not including discounts. 

   Figure 2.3:  Total
   Long-Distance Usage, 1985-93

   (See figure in printed
   edition.)

Technological advances and increased competition spurred AT&T,
Sprint, and MCI to install all-digital and/or fiber-optic networks. 
In 1987, AT&T estimated that it would finish installing an
all-digital network by 2010.  However, after investing $6 billion
since 1984, AT&T had completed its installation by 1991.  Between
1986 and 1993, the total miles of fiber-optic cable installed by all
long-distance companies increased nearly fivefold, from about 20,000
to nearly 100,000, as shown in figure 2.4. 

   Figure 2.4:  Miles of
   Fiber-Optic Cable in the
   Long-Distance Infrastructure,
   1985-93

   (See figure in printed
   edition.)

Note:  According to FCC, route miles in the long-distance
infrastructure are essentially equal to sheath-miles. 

These improvements in the long-distance infrastructure have provided
the large capacity that the Information Superhighway could
conceivably require.  However, local infrastructure will also need to
have greater capacity if the Information Superhighway is to reach
homes, schools, and businesses.  Because the local infrastructure
contains many times the route-miles of the long-distance
infrastructure, these capacity improvements will be more costly.  The
administration, the Congress, and the telecommunications industry
agree in principle that competition in the local telecommunications
markets would help increase consumer choices, lower prices, and
stimulate the required investment, just as it has in the
long-distance market. 


--------------------
\6 A representative of a long-distance carriers' association noted
that tariffed rates do not represent what consumers actually pay
because the tariffed rates do not reflect the variety of discount
plans offered by the industry.  The representative said rates
actually paid by consumers are lower than tariffed rates. 


   NEW COMPETITORS IN LOCAL
   TELEPHONE SERVICE ARE
   STIMULATING INFRASTRUCTURE
   IMPROVEMENTS
---------------------------------------------------------- Chapter 2:2

Some competition has emerged at the local level.  Companies called
competitive access providers (CAP) have begun providing businesses
with alternatives to the local telephone companies in some markets. 
These companies use their own local infrastructure and switches to
route calls directly to and from the long-distance network, thus
bypassing the local telephone companies' access charges.  While
competition from CAPs is expected to grow, telephone service provided
by cable television companies and wireless communications
providers--cellular, satellite, and PCS--could also increase
competition in the local telephone service market.\7 Finally, some
utility companies are installing fiber-optic cable to assist in
demand management.\8 These companies are considering providing some
telecommunications services over this infrastructure. 

Existing and anticipated competition, as well as relaxed pricing
regulations, has stimulated cost reductions and upgrades in local
networks.  Between 1988 and 1992, the BOCs reduced their operating
expenses, excluding depreciation, by 27 percent and cut the number of
employees per 10,000 access lines by nearly 7 percent.  A recent
industry analysis forecasts that similar reductions could occur over
the next 5 years.  According to the President and Chief Executive
Officer of one CAP, local telephone companies reduced their rates for
large business customers by up to 30 percent in several markets
within 2 years after companies such as his began offering competitive
alternatives.  This official also cited improvements in customer
service, such as reductions in installation and repair times. 

Local telephone companies have begun installing fiber-optic cable, as
figure 2.5 shows.  While the total number of fiber sheath-miles in
the local telephone infrastructure may appear high compared with the
total number of route-miles in the long-distance infrastructure, the
local infrastructure is many times larger and more distributed. 
Consequently, it is more costly to upgrade.  As figure 2.6 shows,
only 6 percent of the local infrastructure contained fiber-optic
cable at the end of 1993.  Most of these exist primarily in the
central arteries of the local infrastructure and do not extend to
residences.  To carry the Information Superhighway through a wired
network to homes, schools, and businesses, high-capacity wires, such
as fiber-optic or coaxial cables, will be needed throughout the local
infrastructure.\9

   Figure 2.5:  Miles of
   Fiber-Optic Cable Installed by
   Local Telephone Companies,
   1985-93

   (See figure in printed
   edition.)

   Figure 2.6:  Fiber-Optic Cable
   As a Percentage of All Wire in
   the Local Infrastructure as of
   December 31, 1993

   (See figure in printed
   edition.)

Note:  According to FCC, most wire other than fiber-optic cable is
copper. 

Source:  Preliminary Statistics of Communications Common Carriers,
FCC, July 5, 1994, Washington, D.C. 

Additionally, the BOCs and GTE have installed Integrated Services
Digital Network (ISDN) technology--which allows the simultaneous
transmission of voice and data--in about 25 percent of their local
networks, and they have introduced advanced network control functions
that permit a multitude of advanced applications in over 63 percent
of their networks.  These percentages are expected to increase to 45
percent and 90 percent, respectively, by 1996, according to a recent
industry analysis.  These upgrades will enable these companies to
provide advanced services such as caller identification, return call,
repeat call, and ultimately, video entertainment. 

Cost estimates to fully deploy fiber-optics in the local
infrastructure vary widely.  Some are as high as $500 billion to
upgrade the existing local infrastructure to provide the full range
of multimedia services, such as video-on-demand, high-speed data
transmission, home shopping, and interactive games.  However, others
claim that telephone companies would, on their own accord, spend a
large percentage of that sum in the course of replacing copper wire
with fiber-optic cable in the coming decades, and the incremental
cost of accelerating fiber deployment would be only about 5 percent
higher than the total that the telephone companies would have
otherwise spent. 


--------------------
\7 Currently, carriers attempting to compete with local telephone
companies, or those providing adjunct (e.g., cellular) services, must
pay local telephone companies for interconnection when completing
calls in the local network.  However, local telephone companies do
not pay similar access fees when delivering a call to other carriers,
such as cellular service providers.  This lack of reciprocal pricing
could be an obstacle for competitors. 

\8 Through demand management, utilities encourage consumers to use
major appliances during off-peak hours, thereby reducing
peak-capacity requirements and deferring the need to build additional
power plants. 

\9 Wireless networks, such as PCS, will also have a role in the
development of the Information Superhighway. 


   CURRENT RESTRICTIONS LIMIT
   GROWTH OF COMPETITION
---------------------------------------------------------- Chapter 2:3

Existing restrictions and the 1982 AT&T consent decree limit the
extent to which competition between telephone and cable television
services can grow at the local level.  A number of states have laws
that restrict or prohibit competition in the provision of local
telephone service.  In addition, the Cable Communications Policy Act
of 1984 prohibits local telephone companies from providing video
services within their local service area.  Finally, the 1982 consent
decree prohibits the BOCs from entering a number of lines of
business. 


      MANY STATES PROHIBIT LOCAL
      TELEPHONE SERVICE
      COMPETITION
-------------------------------------------------------- Chapter 2:3.1

A number of states have laws that prohibit or restrict competition in
the provision of local telephone service.  According to the National
Association of Regulatory Utility Commissioners, 24 states prohibit
and another 16 partially restrict local competition.  If these
restrictions were eliminated, increased local competition could come
from a number of sources.  The cable television infrastructure could
be used to carry telephone service, since it can be upgraded to
provide such service and is readily accessible to about 95 percent of
U.S.  homes.  This would allow cable television companies to offer
local telephone service in competition with local telephone
companies.  Additionally, by purchasing cable television companies
outside their geographic regions, local telephone companies could
begin competing with one another by providing local telephone service
through their cable subsidiaries.  Similarly, long-distance companies
could provide local telephone service through joint ventures with
cable companies.  Outside the cable infrastructure, CAPs could begin
operating in states where local competition had heretofore been
prohibited, or companies could build their own local infrastructure,
as MCI plans to do. 

In general, state laws prohibiting local competition allow regulators
to maintain a pricing structure for local telephone service that
furthers the goal of universal service--the availability of
affordably priced rudimentary telephone service to all Americans.\10
As discussed in chapter 3, many observers believe that states have
pursued this goal by requiring the local telephone companies to
allocate their costs in such a way that the local telephone company
can provide residential and rural telephone service at rates that are
below fully distributed costs, while charging rates above fully
distributed costs for long-distance access to the local
infrastructure and for intrastate long-distance calls.  Because
greater competition generally leads to prices that are more in
accordance with cost considerations, allowing competitors to enter
the local telephone market may make the current cost allocation
system unworkable.  Chapter 3 discusses this issue in more detail. 


--------------------
\10 Also, in many states, public utility commissions believe that the
local telephone service market is a natural monopoly. 


      CABLE REGULATIONS LIMIT
      LOCAL TELEPHONE COMPANIES'
      COMPETITIVE OPTIONS
-------------------------------------------------------- Chapter 2:3.2

Some telephone companies want to provide video programming services
in competition with local cable companies within their local service
area, but existing restrictions generally prevent local telephone
companies from doing so.  Section 613(b) of the Communications Act of
1934, as amended, generally prohibits local telephone companies from
providing video programming over their own systems, either directly
or through an affiliate, to subscribers in their telephone service
area.\11 This provision is commonly referred to as the "telco/cable
cross-ownership restriction."

The telco/cable cross-ownership restriction had its genesis in a
similar restriction imposed by FCC in 1970.  At that time, FCC found
that local telephone companies had the potential to discriminate
against independent cable television providers in favor of their own
affiliates in granting access to poles for attaching cable television
lines.  While the issue of pole access was addressed in major part by
the Pole Attachment Act of 1978, FCC noted concern that local
telephone companies could hide the costs of providing cable
television in their telephone rate structures, a practice called
cross-subsidizing.  This practice would result in higher telephone
rates and increased cash flow from the telephone companies' monopoly
telephone service customers, which local telephone companies could
then use to underprice cable television competitors, force them out
of business, and thus extend their monopolies to cable television.\12


--------------------
\11 The provision of video services by a BOC within its service area
would also conflict with the AT&T consent decree, since operation of
a cable system may involve crossing of its local access and transport
area boundaries--the geographic limits of the telephone company's
service area.  The AT&T consent decree prohibits BOCs from providing
services that extend beyond these boundaries.  While some BOCs have
plans to provide video services outside their service areas, these
require that the court grant a waiver from the consent decree's
provision. 

\12 Federal and state rate regulations attempt to ensure that costs
associated with any nonregulated services (such as information
services) are not allocated to regulated local telephone service. 
However, as the regulatory process is complex and confronts many
uncertainties, not all inappropriate cost shifting can be uncovered
by regulators. 


      THE 1982 CONSENT DECREE
      IMPOSED LINE-OF-BUSINESS
      RESTRICTIONS ON THE BOCS
-------------------------------------------------------- Chapter 2:3.3

The 1982 AT&T consent decree, approved by the U.S.  district court,
initially prohibited the BOCs from (1) providing long-distance
services, (2) manufacturing or providing telecommunication equipment,
(3) manufacturing customer premises equipment, (4) providing
information services, and (5) providing nontelecommunications
products or services, such as operating a cafeteria on company
premises.\13 These restrictions are referred to as line-of-business
restrictions. 

The court recognized that after divestiture, the BOCs would possess a
monopoly over local telephone service in their geographic areas but
concluded that this condition alone would not require the BOCs to be
barred from all competitive markets.  Rather, the court concluded
that a line-of-business restriction on the BOCs would be permissible
only if there was a substantial possibility that the BOCs would use
their monopoly power to impede competition in a particular market. 
Two relevant factors were considered:  (1) whether the BOCs would
actually have the incentive and opportunity to act anticompetitively
and (2) whether the participation of the BOCs would contribute to the
creation of a competitive market.  In addition, the court also
considered important public policies, such as the effects of the
restrictions on the rates for local telephone services.  Applying
this analysis, the court found the five previously noted restrictions
to be warranted. 

The court recognized, however, that over time it was probable that
the BOCs would lose the ability to leverage their monopoly power in
competitive markets.  Accordingly, the court required that the decree
explicitly provide a mechanism for removing line-of-business
restrictions.  The competitive entry test imposed by the modified
consent decree provides for the removal of a line-of-business
restriction upon a showing "that there is no substantial possibility
that [a BOC] could use its monopoly power to impede competition in
the market it seeks to enter."


--------------------
\13 The restriction on nontelecommunication products or services was
lifted in 1987, and the prohibition on providing information services
was lifted in 1991. 


   SOME COMPETITIVE BARRIERS HAVE
   BEEN ELIMINATED, WHILE OTHERS
   HAVE BEEN QUESTIONED
---------------------------------------------------------- Chapter 2:4

States, FCC, and the courts have taken a number of actions that have
affected telecommunications. 

  Some states have changed their laws to allow more local telephone
     competition in recent years, and others are considering such
     changes. 

  FCC reevaluated its cable cross-ownership policy, noting that the
     cable television industry has achieved substantial growth and
     that the potential benefits of increased competition outweighed
     the risk of anticompetitive behavior.  In 1992, FCC recommended
     that the Congress remove the statutory provision against local
     telephone companies providing video services, subject to
     appropriate safeguards. 

  Two district courts have ruled that the cable cross-ownership
     restriction is an unconstitutional burden on the telephone
     companies' right to free speech under the First Amendment.\14

  The U.S.  district court removed the BOCs' restriction on providing
     nontelecommunications products and services in 1987 and
     information services in 1991.\15


--------------------
\14 See, U.S.  West Inc.  v.  United States, No.  C93-1523R (W.D. 
Wash.  June 15, 1994); Chesapeake & Potomac Tel.  Co.  v.  United
States, 830 F.  Supp.  909 (E.D.  Va.  1993). 

\15 In U.S.  v.  Western Elec.  Co., 900 F.2d 283, 305 (D.C.  Cir. 
1990), the court of appeals concluded that the consent decree's test
for removing line-of-business restrictions applied only to contested
modifications.  For uncontested modifications--when all the parties
to an agreement agree to the lifting of a restriction--the court
found that a public interest test is appropriate.  Because the
removal of the information services restriction was uncontested, the
court specified that the public interest standard be applied to
remove this restriction. 


   HOUSE AND SENATE HAVE PROPOSED
   LEGISLATION
---------------------------------------------------------- Chapter 2:5

Recognizing that technological advances have eroded and will continue
to erode the distinctions between the competitive and noncompetitive
segments of the telecommunications industry, the Congress is
considering legislation aimed at encouraging competition while
protecting consumers from monopolistic pricing practices as the
transition to competition occurs.  The House passed H.R.  3626--The
Antitrust and Communications Reform Act of 1994 and H.R.  3636, the
National Communications Competition and Information Infrastructure
Act of 1994--on June 28, 1994, and combined these into one bill,
numbered and titled as the former.  Senate bill S.  1822--The
Communications Act of 1994--has been reported out of the Committee on
Commerce, Science, and Transportation but as of September 23, 1994,
had not reached the Senate floor for consideration. 

The bills, among other things, provide the conditions that must be
met before a BOC can provide long-distance services; allow telephone
companies to offer video programming services in their market areas
under specific conditions and safeguards; provide requirements for
the FCC to establish procedures to ensure preservation of the
principle of universal service; preempt state and local laws that
prohibit telecommunications competition; and provide requirements for
interconnection and nondiscriminatory access to telecommunications
facilities and equipment.  Appendix III provides highlights of
selected provisions of these bills. 


   MARKET POWER OF LOCAL TELEPHONE
   COMPANIES PRESENTS CHALLENGES
   IN FOSTERING COMPETITION
---------------------------------------------------------- Chapter 2:6

The proposed telecommunications legislation has generated intense
debate over whether and to what extent consumers will need protection
from the local telephone companies' potentially anticompetitive use
of market power.  A central issue in the debate is whether the recent
emergence of CAPs provides sufficient competition to safely remove
the existing controls on the BOCs and if not, what conditions would
indicate that sufficient competition exists and what safeguards would
be needed to protect consumers from the BOCs' market power.  The BOCs
raised the issue of regulatory parity, claiming that if state
regulations are modified to allow long-distance, cable television, or
other businesses to provide local telephone service, the BOCs should
be allowed similar flexibility.  The BOCs claim that the local
telephone market is already competitive, citing the increasing
presence of CAPs and potential competition from cable television
companies and long-distance companies offering local telephone
service. 

On the other hand, a recent industry analysis reported that CAPs--the
major current source of local competition--have attracted only about
$250 million out of $27 billion in long-distance access business. 
Consequently, long-distance companies argue that the BOCs dominate
the local market nearly as much as they did in 1984 when the consent
decree was implemented, and therefore more competition at the local
level is needed before the BOCs can be allowed to provide
long-distance services. 

In addition, other groups, including the cable television industry,
have cited the strong financial position of the seven regional Bell
operating companies.  The regional companies' ready access to cash,
relative to that of cable companies, could provide them with a
competitive advantage in making the required investment to provide
diversified services.  As figure 2.7 shows, the regional companies'
1993 cash flow, defined as the cash received from customers minus the
cash paid for operating expenses, ranged from $2.7 billion to $4.8
billion.  Most of this cash flow was invested in capital.  In
contrast, the financial position of the five largest cable
companies--likely future competitors of the BOCs--was not nearly as
strong.  While Telecommunications, Inc., and Time Warner had 1993
cash flows of $1.25 billion and $1.53 billion,\16 respectively, the
combined cash flow of the remaining three cable companies totaled
only $470 million.\17

   Figure 2.7:  1993 Cash Flow of
   Regional Bell Operating
   Companies and the Five Largest
   Cable Companies

   (See figure in printed
   edition.)


--------------------
\16 About 85 percent of Time Warner's $1.53 billion operating
revenues are from noncable sources. 

\17 Telecommunication:  Financial Information on 16 Telephone and
Cable Companies (GAO/RCED/AIMD-94-221FS, July 8, 1994). 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:7

The outcome of the debate over when and how to remove restrictions on
competition will affect the development of the Information
Superhighway.  On the one hand, removing state regulations that bar
local competition and allowing local telephone companies to provide
video services in competition with the local cable television
companies could benefit consumers and accelerate the local
infrastructure upgrades needed to bring the Information Superhighway
to homes, businesses, and schools.  On the other hand, removing
regulations either too soon or without implementing adequate
safeguards to prevent monopolistic pricing practices could drive out
rather than encourage competition. 


COMPETITION AND TECHNOLOGY AFFECT
UNIVERSAL SERVICE
============================================================ Chapter 3

The prospect of competition in the local telephone service market, as
well as advances in telecommunications technology, require that
several decisions be made about universal service--the long-standing
public policy goal that affordable rudimentary telephone service be
accessible to all individuals.  These decisions involve (1)
procedural issues concerning how to fund universal service in a more
competitive environment and (2) value judgments on whether and how
the package of services included under the universal service and
universal access umbrella should be broadened. 


   FUNDING MECHANISM FOR UNIVERSAL
   SERVICE WILL NEED REVISION IN A
   COMPETITIVE ENVIRONMENT
---------------------------------------------------------- Chapter 3:1

Currently, universal service is provided through a complex system of
implicit and explicit subsidies provided through the federal and
state regulatory process and through federally managed programs. 
However, because the majority of universal service funding comes from
services that, through the state regulatory process, are priced above
fully distributed costs, the funding process could break down as
competitors price these services lower than the incumbent telephone
company. 


      VARIOUS POLICIES AND
      PROGRAMS HELP FUND UNIVERSAL
      SERVICE
-------------------------------------------------------- Chapter 3:1.1

Federal and state regulators have developed a system of cost
allocation and recovery that keeps residential and rural rates at
affordable levels in order to meet the objective of universal
service--providing everyone with access to affordable rudimentary
telephone service.  Since the rate-making process has traditionally
been based on the cost of providing services, many observers believe
that rates for local residential and rural service would be higher
than existing levels if based on fully distributed costs.  Federal
and state regulators have maintained low rates for these services
through a system that allocates some local telephone infrastructure
costs to other services. 

Historically, FCC and state regulators worked with AT&T and other
local telephone companies to establish affordable local residential
rates by allocating some of the cost of the local infrastructure to
inter- and intrastate long-distance service.  Because fewer costs
were allocated to local telephone service, rates were held at lower
levels than would have otherwise been the case.  After divestiture,
the pricing mechanism used to fund low local residential and rural
rates became more complex as regulators were now dealing with many
more companies providing service in numerous market segments of the
telephone industry.  However, the key elements of providing
affordable local residential and rural telephone service continued to
involve cost allocation and recovery as in the pre-divestiture era. 

Today, as before the divestiture, regulators require the local
telephone companies to allocate some of the costs of the local
telephone infrastructure to other services.  The following summarizes
two major ways that cost allocation occurs. 

  FCC's policies require long-distance companies to pay to the local
     telephone companies a per-minute Carrier Common Line Charge
     (access fee).  These revenues are used to recover part of the
     costs of the local telephone infrastructure that are assigned to
     interstate long-distance service.  Because many local
     infrastructure costs do not vary with actual usage, charging
     per-minute fees amounts to pricing access above fully
     distributed cost.  A 1994 industry analysis estimated that
     long-distance access charges were between 35 percent and 60
     percent above cost-based pricing levels, while residential and
     rural local-service rates were 35 percent to 40 percent below
     what they would be under cost-based prices.\18

  Regulators in many states allocate a significant portion of the
     cost of the local telephone infrastructure to intrastate
     long-distance services.  This practice results in above-cost
     rates for access fees and per-minute usage on these types of
     calls, thereby helping to provide affordable rural and
     residential telephone service. 

While the above noted programs provide a large share of the cost of
providing affordable residential and rural telephone service, several
other federal and state policies and programs help to promote
universal service.  A brief description of some of these programs
follows. 

  The Universal Service Fund assists "high-cost" local telephone
     companies, which the FCC defines as those that have an average
     cost per access line exceeding 115 percent of the national
     average.  The fund helps these high-cost companies (that tend to
     be located in rural areas) to provide local telephone service at
     rates that are similar to national averages.  The Universal
     Service Fund is supported by fees levied on long-distance
     carriers according to the number of customers choosing their
     company for long-distance service. 

  FCC administers two programs aimed at providing direct subsidies to
     low-income individuals.  The Link-up Program helps offset
     low-income subscribers' initial installation costs and
     encourages telephone companies to offer installment payments. 
     The Lifeline Program helps defray the cost of monthly service
     for low-income residents by waiving up to $3.50 of the federal
     monthly subscriber line charge.  Eligibility criteria for these
     programs vary from state to state. 

  The Rural Electrification Administration, Department of
     Agriculture, provides low-cost loans and loan guarantees to
     rural telephone companies and cooperatives. 


--------------------
\18 A result of charging prices that are higher than fully
distributed cost is that consumers will choose to use less of the
service than is economically efficient. 


      REVISED FUNDING MECHANISM IS
      NEEDED
-------------------------------------------------------- Chapter 3:1.2

If competition in the local telephone service market is allowed, new
procedures will be required to ensure the continuation of universal
service.  While inter- and intrastate long-distance access charges
and intrastate long-distance rates have traditionally provided the
major source of funds used to keep residential and rural rates low,
competitors are likely to compete primarily for heavy users of inter-
and intrastate long-distance services in states where regulations
permit local competition.  Currently, these competitors have no
obligation to provide or contribute toward the provision of local
residential and rural telephone service.  Local telephone companies
believe that losing this source of funds to provide universal service
could place a financial strain on high-cost companies and on some
subscribers.  Hence, as competition becomes more widespread, a
revised funding mechanism for universal service is required. 


      CURRENT SYSTEM OF ALLOCATING
      UNIVERSAL SERVICE SUBSIDIES
      QUESTIONED
-------------------------------------------------------- Chapter 3:1.3

An additional issue that policy makers will need to consider is how
to distribute subsidies.  Currently, cost allocation mechanisms and
other programs designed to further universal service are based
primarily on the pricing of different types of services and on the
cost structure of providers (i.e., residential service and high-cost
telephone companies), rather than on an individual subscriber's
ability to pay.  Consequently, subsidies may not go where they are
most needed. 

While over 94 percent of U.S.  residences had telephone service in
1993, the distribution varies according to household income.  For
example, while more than 99 percent of households with incomes over
$40,000 had telephone service, less than 90 percent with incomes
under $10,000 had service, and only 73 percent of households with
incomes below $5,000 had service.  Some industry observers have
pointed out that a means test should be used as the principal
criterion to allocate universal service subsidies. 


   QUESTIONS EXIST ABOUT WHETHER
   AND WHICH ADDITIONAL SERVICES
   SHOULD BE PROVIDED OR
   UNIVERSALLY ACCESSIBLE
---------------------------------------------------------- Chapter 3:2

The Information Superhighway could make available a host of advanced
services to businesses, schools, medical centers, and the population
at large.  Redefining universal service in this new environment
raises questions on two levels.  First, what advanced services should
be provided to everyone?  Second, what, if any, additional services
should be accessible to everyone as options? 


      DECISIONS ARE REQUIRED ON
      WHAT SERVICES SHOULD BE
      UNIVERSALLY PROVIDED
-------------------------------------------------------- Chapter 3:2.1

Currently, universal service consists of rudimentary telephone
service, the definition of which has evolved over time.  Initially,
rudimentary service was considered a multiparty line.  Gradually, the
number of parties decreased until today, single-party lines are
standard.  In some locations, touch-tone service has been included in
rudimentary telephone service. 

As the Information Superhighway develops, a vastly expanded array of
telecommunications services could become available.  For example,
consumers may have on-line access to health care information,
allowing them to become more actively involved in their own health
care, thereby reducing unnecessary visits to the doctor.  Consumers
could also have better access to government information and services. 
While these services could benefit society, building the
infrastructure to provide these expanded services to every home in
America will be costly--up to $500 billion by some estimates--and
some question exists as to which services the average citizen needs
or wants.  Although a recent survey indicated significant consumer
demand for interactive services, the survey also showed that over 40
percent of the respondents in the households surveyed were either
undecided or unwilling to pay for additional services. 

In addition to facing infrastructure costs, consumers may need new
appliances to access Information Superhighway services.  For access
to rudimentary telephone service, only a telephone was required. 
Those accessing the Information Superhighway's services may need a
personal computer, interactive television, or other wired or wireless
devices, in addition to a conventional telephone.  These appliances
are not commonly found in homes of the economically disadvantaged. 
Providing the required appliances to those who cannot otherwise
afford them will increase the cost of providing universal service. 


      DECISIONS NEEDED ON WHETHER
      SERVICES SHOULD BE
      UNIVERSALLY AVAILABLE AS
      OPTIONS
-------------------------------------------------------- Chapter 3:2.2

An additional issue is determining which Information Superhighway
services should be universally accessible as options, beyond those
services made available to everyone under universal service.  To make
these services available, infrastructure improvements may be required
beyond those required to provide universal service.  However, these
costs could be mitigated, depending on how decision makers define
"availability." Additional services could be deemed available if
consumers can obtain them at central locations, such as at a public
library, which would be less costly than making them available to
every home.  Whatever the results of these decisions, consumers would
ultimately pay the cost of providing the required infrastructure. 
However, the installation and appliance costs, if needed to receive
optional services, would probably not be subsidized. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:3

The prospect of greater competition in the local telephone services
market raises the question of how to maintain the pricing structures
that help to promote universal service.  Some form of funding for
universal service, supported by providers of telecommunications
services, is probably appropriate.  A more difficult issue, however,
is determining which telecommunications services should be provided
as part of the universal service package, which should be available
as options, and how to pay for them.  Providing Information
Superhighway services to all schools, hospitals, and libraries would
provide social benefits that could justify some of the cost. 
However, building the infrastructure needed to make every Information
Superhighway service available to every home and business would be
costly, and not everyone may need or desire every service. 


INFORMATION SUPERHIGHWAY POSES
TECHNICAL CHALLENGES
============================================================ Chapter 4

The success of the Information Superhighway will also depend on how
well industry and government address several technical challenges. 
An effective Information Superhighway requires technology that can
ensure (1) security, privacy, and reliability and (2) the smooth flow
of information and provide number portability--the freedom to change
carriers without changing telephone numbers.\19 A systems perspective
is needed to ensure that these challenges are addressed in a
coordinated fashion. 


--------------------
\19 While we recognize that intellectual property rights also pose
significant issues for telecommunications decision makers, we did
does not address this area.  The Information Infrastructure Task
Force, chaired by the Secretary of Commerce, is preparing a report
focusing on copyright law and its application and effectiveness in
the context of the Information Superhighway. 


   TECHNOLOGICAL ADVANCES POSE
   CHALLENGES TO SECURITY,
   PRIVACY, AND RELIABILITY
---------------------------------------------------------- Chapter 4:1

Concentrated data bases, widely distributed networks, and the
increasing sophistication of criminals pose threats to computer
security and information privacy.  Advances in communications and
data encryption technologies hamper federal law enforcement efforts,
while federal efforts to address this issue have caused controversy. 
Concentrated data bases also heighten the need for ensuring
reliability, since the failure of a single component of a system can
render millions of records inaccessible. 


      SECURITY THREAT HAS
      INCREASED
-------------------------------------------------------- Chapter 4:1.1

While information security has long been an important issue, a number
of factors increase the risks in today's electronic age.  First,
electronic recordkeeping concentrates large volumes of data in a
single location, thereby rendering the consequences of unauthorized
access more severe.  Second, networked computers widely disperse
electronic traffic, increasing the potential for unauthorized
intercept.  Third, criminals are gaining technical skills that enable
them to foil sophisticated security systems. 

Attacks against the Internet illustrate potential vulnerabilities. 
In 1988, a worm--a malignant computer program that reproduces itself
automatically--invaded the Internet and denied service to thousands
of people working at the nation's major research centers.  Again, in
1994, intruders managed to obtain the names and passwords of 100,000
people who use the Internet at certain locations and to conceal the
theft. 

The Department of Defense's Advanced Research Projects Agency has
established a Computer Emergency Response Team to help the Internet
community respond to attacks.  This and other incident response teams
now serve as focal points for identifying security vulnerabilities. 
While response teams can identify problems and recommend corrective
action, the manufacturers and network users themselves are
responsible for taking action.  To ensure security on the Information
Superhighway, additional procedures will be required to accurately
identify the users, verify their authority to access information, and
prevent malicious interference with software programs or modification
of data files. 


      PRIVACY NEEDS TO BE ENSURED
-------------------------------------------------------- Chapter 4:1.2

Systems for protecting privacy should enable individuals to determine
when, how, and to what extent personal information is collected and
used.  However, if not properly implemented and managed, the
technologies that provide the means to manage massive volumes of
personal information also increase the risk that this information may
be abused.  This risk is heightened by

  the widespread use of common identifiers, such as Social Security
     numbers, to select, track, and link electronic records;

  the dramatic increase in the number of widely interconnected
     systems, which increases opportunities for unauthorized access;

  the growth of large data bases and the increasing sophistication of
     applications that allow the rapid matching of millions of
     records and the development of detailed computer profiles on
     individuals; and

  the increasing sophistication of computer criminals and their
     growing ability to secretly penetrate computer systems and
     retrieve massive amounts of confidential information. 

Today's patchwork of information privacy laws, practices, and
technical safeguards may fall short of ensuring the privacy of
personal information maintained in thousands of widely interconnected
government and private computer systems.  In 1990, we reported that
in over 900 of the largest federal computer systems containing
privacy data, 11 percent did not require user authentication, 40
percent had no intrusion detection controls, and 6 percent had no
access controls.\20 A lack of such controls can lead to egregious
abuses.  For example, in 1993 we reported that scores of Internal
Revenue Service employees had accessed the agency's data bases to
issue fraudulent refunds or had browsed the taxpayer accounts of
friends, relatives, neighbors, and celebrities.\21

Recognizing that personal data need better protection, the
administration's Information Infrastructure Task Force is studying
the issue.  A working group has identified a number of tasks,
including (1) scoping the nature of the privacy problem; (2)
developing a statement of fair information practices and determining
the responsible organizations and individuals; and (3) identifying
gaps in existing laws, recommending changes, and drafting
legislation, if necessary. 


--------------------
\20 Computers and Privacy:  How the Government Obtains, Verifies,
Uses, and Protects Personal Data (GAO/IMTEC-90-70BR, Aug.  3, 1990). 

\21 IRS Information Systems:  Weaknesses Increase Risk of Fraud and
Impair Reliability of Management Information (GAO/AIMD-93-34, Sept. 
22, 1993). 


      TECHNOLOGY COULD IMPAIR LAW
      ENFORCEMENT AND INTELLIGENCE
      CAPABILITIES
-------------------------------------------------------- Chapter 4:1.3

Sophisticated encryption prevents third parties, including law
enforcement and intelligence agencies, from monitoring encrypted
messages, while digital communication makes wiretapping increasingly
difficult.  The federal government is attempting to address these
issues, but its efforts to date have generated considerable
controversy.  The government's strategy includes (1) a major new
federal encryption initiative known as the "Clipper Chip," recently
renamed the "Key Encryption Standard," to facilitate court-ordered
wiretapping and (2) proposed legislation that would ensure that
telecommunication equipment and services can meet law enforcement's
wiretapping requirements. 


         EFFORTS TO DECIPHER
         ENCRYPTED MESSAGES ARE
         CONTROVERSIAL
------------------------------------------------------ Chapter 4:1.3.1

To enable federal authorities to decrypt intercepted messages, the
federal government is seeking the computer hardware industry's
voluntary cooperation to install the Clipper Chip in all its
telephone communications hardware.  The chip contains a unique key
that is used to encrypt and decrypt messages.  This unique key is
then split into two components and delivered to government agencies,
acting as escrow agents, for safekeeping.  To decipher information
encoded using the Clipper Chip in the course of court-authorized
wiretapping, federal authorities can obtain the unique key from the
escrow agents. 

The Clipper Chip initiative has generated considerable controversy
within the information industry.  According to the Computer System
Security and Privacy Advisory Board, created by the Congress in 1987
to advise the Secretary of Commerce and the Director of the National
Institute of Standards and Technology on security and privacy issues,
the federal government has not (1) clearly articulated the problem
that the Clipper Chip attempts to resolve, (2) considered other
potential alternatives, or (3) fully examined the chip's legal and
economic implications. 

In response to the controversy, the administration is reviewing its
policy on the Clipper Chip.  The administration stated that the
Clipper Chip would not be used for computer or video networks and
expressed a willingness to work with computer industry
representatives and privacy advocates to design a system more
acceptable to all. 


         NEW LEGISLATION WOULD
         REQUIRE WIRETAP
         CAPABILITY IN
         TELECOMMUNICATIONS
         DEVICES
------------------------------------------------------ Chapter 4:1.3.2

Recognizing that new telecommunications devices can be developed that
are invulnerable to court-ordered wiretaps, a bill has been
introduced that would, among other things, generally require
communications carriers to deploy equipment and services that can
accommodate law enforcement needs.  The bill would require that a
communications carrier's equipment and services allow law enforcement
personnel to intercept a subscriber's communications and obtain
reasonably available call-identifying information about the origin
and destination of communications.  Because subjects of wiretaps on
mobile communications devices may cross carrier boundaries, the bill
would require that a carrier inform government personnel of the
identity of the carrier to whom the signal was transferred.  The bill
would authorize $500 million over 4 years for the Department of
Justice to reimburse telecommunications carriers for expenses that
they incur in complying with these requirements. 


      ASSURANCE OF RELIABILITY IS
      NEEDED
-------------------------------------------------------- Chapter 4:1.4

As more and more telecommunications traffic is concentrated in fewer,
high-capacity channels, a failure by any one element of the
Information Superhighway could become increasingly damaging.  For
example, in June 1991 two separate telephone outages at opposite ends
of the country eliminated local telephone service to 8 million people
and affected emergency services.  A few months later, AT&T suffered a
massive outage in New York City that cut most long-distance telephone
communications to and from the city as well as air traffic to the
area's major airports.  FCC noted that this outage resulted in
significant loss of the Federal Aviation Administration's radar
sites, radio channels, and computer links.  This resulted in 1,174
canceled or delayed flights and about 85,000 inconvenienced
passengers.  More than 7 hours passed before full service was
restored.\22

The federal government and industry have undertaken a variety of
efforts to improve the reliability of telecommunications systems. 
For example, FCC formed the Network Reliability Council following
serious network outages in 1991.  Additionally, the administration's
Information Infrastructure Task Force has formed a network
reliability working group, and industry has developed a number of
mutual aid and restoration agreements to permit the temporary sharing
of resources and rerouting of information traffic and services
through other systems. 

Added attention to system reliability will be required, however, as
the Information Superhighway grows to its full potential.  Although
mutual aid agreements exist, the current approach relies primarily on
individual carriers to manage their own networks.  As the
telecommunications industry grows more competitive, these
arrangements may prove inadequate.  Additionally, the diversity of
products and operators on the Information Superhighway may increase
the difficulty of diagnosing and correcting problems. 


--------------------
\22 Telecommunications:  Interruptions of Telephone Service
(GAO/RCED-93-79FS, Mar.  5, 1993). 


   INTEROPERABILITY IS REQUIRED
---------------------------------------------------------- Chapter 4:2

Interoperability--defined as the ability of two systems to transfer
information easily--will be critical to establishing the "seamless
web" of networks and equipment envisioned for the Information
Superhighway.  Number portability, which would allow consumers to
switch telecommunications carriers without changing their telephone
numbers, is a second aspect of interoperability that will be
important to the success of the superhighway. 


      EQUIPMENT AND SYSTEMS
      INTEROPERABILITY IS REQUIRED
-------------------------------------------------------- Chapter 4:2.1

A seamless web of equipment and networks would allow equipment and
systems, manufactured by different companies and using different
technologies, to transfer information without delay.  Complete
interoperability would, for example, allow a social worker in
Appalachia to prepare a message on a lap-top computer and transmit it
via wireless technology to a receiver.  From there, the message might
be carried over wires to a satellite earth station, beamed up to a
satellite, and beamed back to earth in San Francisco.  The message
might then be sent over wires to a broadcast television station and
then, ultimately, to the addressee's interactive television.  The
addressee might respond to the message via the reverse route. 

Each component of the Information Superhighway--the lap-top
computers, wire infrastructures and switches, satellites, television
stations, and interactive televisions--will likely be built by a
variety of private concerns.  The success of the Information
Superhighway will hinge on the ability of these technologies to
transfer information easily and accurately, allowing voice, video,
and data to flow unimpeded throughout the network. 


         SOME INFORMATION
         SUPERHIGHWAY FACILITIES
         LACK INTEROPERABILITY
------------------------------------------------------ Chapter 4:2.1.1

Interoperability problems have surfaced in today's information
technology.  For example, as the BOCs implemented their Integrated
Services Digital Networks (ISDN), interoperability problems developed
because each BOC had purchased equipment built to differing standards
from different suppliers.\23 Videoconferencing also faces
interoperability problems because over a dozen incompatible
videoconferencing systems are currently on the market.  While these
systems can interoperate to a degree, certain incompatibilities
degrade the picture's quality and preclude the use of advanced
features.  In the future, interoperability problems are likely to
continue, since many of the emerging, sophisticated technologies that
are expected to play a role in the Information Superhighway, such as
asynchronous transfer mode (ATM),\24 have not realized an acceptable
level of interoperability. 


--------------------
\23 ISDN allows the simultaneous use of telephone lines for
transmitting data and voice.  (See app.  I for a detailed explanation
of ISDN.)

\24 See appendix I for a detailed description of ATM and other
advanced telecommunications technologies. 


         SOME EFFORTS ARE UNDER
         WAY TO PROMOTE
         INTEROPERABILITY
------------------------------------------------------ Chapter 4:2.1.2

The private sector and the National Institute of Standards and
Technology are addressing ISDN interoperability problems. 
Additionally, a consortium of government agencies, industry, and
academia has formed the National Information Infrastructure Test Bed
to develop standards and test applications in a wide variety of
fields, including health care, mineral and gas exploration,
education, and entertainment.  Finally, the Alliance for
Telecommunications Industry Solutions (formerly called the Exchange
Carriers' Standards Association) has formed an ad hoc committee to
develop product interoperability tests.  The test methodology is
available to the industry for use whenever new hardware or software
emerges on the market. 


         INTEROPERABILITY OF
         DEVELOPING TECHNOLOGY IS
         NOT YET ASSURED
------------------------------------------------------ Chapter 4:2.1.3

If data, voice, and video are to move unimpeded over the Information
Superhighway, further work will be required to ensure
interoperability.  For example, the Alliance's ad hoc committee
addressed only one facet of the Information Superhighway.  The
committee considered intra-network, product-to-product, and
stand-alone equipment modeling and testing to be outside its charter. 
Other aspects of existing networks, such as interoperability testing
requirements for newer technologies, were also not addressed.  The
Information Superhighway will likely consist of many systems and
subsystems, developed by a variety of private sector entities, each
with its own--often proprietary--set of standards. 


      SUPERHIGHWAY PRESENTS
      TELEPHONE NUMBERING
      CHALLENGES
-------------------------------------------------------- Chapter 4:2.2

Development of a telephone numbering system that is interchangeable
among telecommunications carriers will be important to the
development of the Information Superhighway.  Consumers' ability to
change carriers without changing telephone numbers will play a
critical role in developing competition, which, as discussed in
chapter 2, will be a key element in spurring development of the
Information Superhighway.  Number portability, as the concept is
called, requires that subscribers, rather than physical locations, be
assigned a permanent personal telephone number that would not change
if the subscriber changed carriers.  While such a system was
developed for commercial "800" numbers, no such numbering system has
yet been devised for individuals. 

Bellcore\25 plans to implement an expanded numbering system in 1995
that would vastly increase the quantity of available telephone
numbers.  The additional numbers would facilitate the assignment of
numbers to individuals and could allow them to switch carriers
without changing numbers.  However, no entity is currently developing
the data base architecture required to implement the system. 
Bellcore, the entity that has administered the telephone numbering
system, plans to relinquish its voluntary performance of this task as
soon as FCC finds a replacement. 


--------------------
\25 Bell Communications Research, also known as Bellcore, is a
research organization funded by the BOCs. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:3

If the Information Superhighway is to be successful, privacy,
security, reliability, interoperability, and numbering systems must
be addressed from a systems perspective.  Individuals, governments,
and businesses will not use the superhighway without assurances of
security, privacy, and a reasonable expectation of reliability.  The
superhighway cannot function as a seamless web without
interoperability.  To permit individuals to switch carriers without
changing telephone numbers, data bases are required that have yet to
be developed.  The Information Superhighway will be developed by a
number of diverse entities, none of which are likely to be in a
position to address these challenges from a systems standpoint.  Some
mechanism will be needed to ensure that all the challenges are met to
allow the Information Superhighway to function as planned.  We will
examine these and other issues in greater detail in a forthcoming
report. 


TELECOMMUNICATIONS
=========================================================== Appendix I

Advances in telecommunications technology are driving many of the
changes occurring in the telecommunications industry today.  Because
many readers may not be familiar with this technology, this appendix
provides a general overview of the technological developments in the
field.  In addition, this report contains a glossary of
telecommunications terms. 

Telecommunications is the electronic transmission of information of
any type, such as data, television pictures, sound, and facsimile. 
Telecommunications frequently involves the use of a network, which is
a group of interconnected communications facilities and devices used
to transmit information.  Examples of telecommunications networks
include the telephone networks, the television broadcast networks,
the Internet "network of networks," and private corporate computer
networks. 


   NETWORK CAPACITY
--------------------------------------------------------- Appendix I:1

Current telecommunications networks are designed to transmit one or
more of three types of information--audio, video, and/or other types
of digital information, such as text--each of which places different
demands on the underlying network.  These demands differ in terms of
the "space" required on a network and how the space is used.  The
space requirement is called the bandwidth and the ability of a
network to accommodate bandwidth is called its transmission capacity. 
Conversational telephone audio traffic requires a transmission
capacity of about 64,000 digital bits per second (referred to as 64
kilobits per second).  Additionally, telephone audio traffic requires
uninterrupted interactive processing, meaning that the signals must
travel quickly between the sender and receiver without unacceptable
delays. 

In contrast, video transmission requires significantly more capacity
than does audio or data transmission.  For example, digital
television needs a transmission channel with an uncompressed
capacity\26 of at least 30 million bits per second (referred to as 30
megabits per second), which is over 450 times the capacity required
for telephone conversation.  However, video transmissions are
generally not interactive and also require uninterrupted operation. 
Text traffic, such as electronic mail, generally does not require
real-time processing and can therefore run at a variety of speeds,
depending on the capacity of the network. 


--------------------
\26 Compression allows the transmission of data using less capacity. 


   ANALOG VERSUS DIGITAL SIGNAL
   FORMAT
--------------------------------------------------------- Appendix I:2

Electronically transmitted information is sent in either a digital or
an analog format.  As figure I.1 shows, electronic analog signals are
continuous electromagnetic waves, while digital signals are usually
represented by ones and zeroes. 

   Figure I.1:  Analog and Digital
   Signals

   (See figure in printed
   edition.)

Historically, most signals have been sent in an analog format. 
However, the digital format is gaining favor because it offers cost,
transmission, and quality control advantages.  For example,
traditional television broadcasts have been transmitted in an analog
format, but the emerging direct broadcast satellite telecasts will be
sent to the home in a digital format.\27


--------------------
\27 Direct-broadcast satellite transmissions will be sent to
residences as digital signals and then changed into analog signals
for viewing on standard televisions. 


   TELECOMMUNICATIONS PROTOCOLS
--------------------------------------------------------- Appendix I:3

All electronic signals--digital or analog--must be transmitted in an
organized manner to ensure that the communications devices in a
network send and receive the signals accurately and efficiently. 
Therefore, transmission devices employ "communication protocols" that
establish rules for organizing the transmitted signals.  Different
protocols have emerged as standards for each particular type of
network.  These standards can emerge by virtue of their widespread
acceptance or they may be developed by an influential group and then
adopted by the industry for its products.  For example, the
Transmission Control Protocol/Internet Protocol has become the
Internet standard through its widespread acceptance, while the
National Television System Committee developed the U.S.  television
standard, which FCC and the industry adopted.  These differing
communications standards can create interoperability problems when
attempting to connect different types of networks.  For example,
although television sets and computer screens both provide video
displays, these displays are not interoperable because televisions
use an analog display standard, while most computers use a digital
display standard. 


   TELECOMMUNICATIONS TRANSMISSION
   MEDIA
--------------------------------------------------------- Appendix I:4

All signals, whether digital or analog, travel via some type of
medium to reach their destinations.  The predominant electronic
transmission media are copper "twisted pair" wire, coaxial wire,
fiber-optic cable, and over-the-air signals.  Figure I.2 shows the
advantages and disadvantages of each type of medium. 

   Figure I.2:  Transmission Media
   and Their Advantages and
   Disadvantages

   (See figure in printed
   edition.)


   NETWORK SWITCHING
--------------------------------------------------------- Appendix I:5

The four previously mentioned media are components of networks.  Many
networks also use switching and routing devices to send signals to
their intended destinations.  Circuit switching and packet switching
are common switching designs.  In a circuit-switching network (see
fig.  I.3), as in a traditional telephone network, a connection is
made at a switching center that physically connects the calling and
receiving parties and maintains this connection for as long as
needed.  No other audio, text, or video information can be sent over
this circuit as long as the connection remains intact. 

   Figure I.3:  Representation of
   a Circuit-Switching Network

   (See figure in printed
   edition.)

In a packet-switching network, such as the Internet, digital data are
organized into "packets" and sent through a computer network along
the best route available between the source and the destination.  A
transmitted file, for example, may be broken up into many packets,
and these packets may take different paths across the network and
then be reassembled at their destination.  For most applications, a
packet-switching network is more efficient than a circuit-switching
network because many data packet sources may use the same
communications line simultaneously (see fig.  I.4).  However, a
circuit-switching network tends to have more consistent performance
than a packet-switching network because there is no competition from
other communications devices using the line. 

   Figure I.4:  Representation of
   a Packet-Switching Network

   (See figure in printed
   edition.)


   INTERACTIVE NETWORKS
--------------------------------------------------------- Appendix I:6

Interactive networks allow two-way communication.  Providing an
interactive service requires that signals travel rapidly to and from
the source and the destination of the activity.  The telephone
network is an example of an interactive network designed to carry
voice traffic. 

Currently, most residential access to interactive services is through
telephone lines, which are generally copper twisted-pair wires that
lack the ability to carry interactive video traffic.  Consequently,
interactive services at the residential level are generally limited
to audio and text applications.  In contrast, cable television
networks carry video traffic into residences using coaxial cable,
which has a higher capacity than copper twisted-pair wire.  However,
the cable networks currently do not have the switching infrastructure
needed to provide interactive services to the home. 

Fiber-optic cable has higher capacity than either copper twisted-pair
or coaxial cable.  Although the cost of using fiber-optic cable is
decreasing, its cost has historically limited its use to high-traffic
trunk routes.  More recently, as costs decrease, some
telecommunications providers are extending fiber-optic cable from the
trunk routes to locations closer to residences.  However, extending
fiber-optic cable all the way from the trunk routes to individual
residences remains costly.  Thus, a hybrid coaxial-fiber system will
most likely be used to provide residential access to interactive
services. 


   EMERGING TECHNOLOGIES
--------------------------------------------------------- Appendix I:7

Several types of telecommunications technologies are emerging that
could overcome current technical obstacles or provide new or advanced
services.  Among these technologies are data compression, techniques
for sending audio traffic over a data network, and network
enhancements that provide improved or interactive services. 

Data compression refers to techniques for compacting digital signals
for more efficient transmission or storage.  Compressed data can be
sent faster, more cheaply, and over lower-capacity networks than can
uncompressed data.  Data compression is particularly useful for
digital video transmission because (1) video normally requires a
relatively high network capacity and (2) some data can be lost during
compression without significantly affecting the picture's quality. 
Compression allows, for example, an increase in the number of
available residential cable TV channels from 125 to over 500. 

Because packet-switched networks are more efficient than
circuit-switched networks, some organizations are developing
techniques for sending audio traffic over a packet-switched network. 
One technique, referred to as asynchronous transfer mode (ATM),
places digitized audio signals into packets and sends them over a
high-speed packet-switched network.  The federal government has
developed ATM test beds as part of its National Research and
Education Network initiative, and several telecommunications firms
are now offering commercial ATM technologies.  Government researchers
are investigating very-high-speed networks that challenge the limits
of the technology. 

Some emerging technologies may provide improved or interactive
services over the current telecommunications infrastructure.  One
such technology, called the asymmetrical digital subscriber line, is
being tested by the Bell Atlantic telephone company.  This
technology, if proven successful, will allow video programming to
travel over copper twisted-pair telephone lines while allowing
concurrent telephone service.  Bell Atlantic is testing this
technology in northern Virginia.  Another example is the
implementation of ISDN technology.  ISDN is designed to provide
interactive telephone and data services simultaneously over a
standard copper telephone line.  Combined with video compression
techniques, ISDN can provide interactive video service over a
standard telephone line. 


REGULATORS AND BUSINESSES IN THE
TELECOMMUNICATIONS INDUSTRY
========================================================== Appendix II

Regulators have had substantial impact on the telecommunications
industry.  Regulators seek to promote universal service, ensure
markets' stability, protect property rights, promote multiple
information sources, and protect consumers from unfair pricing
practices.  The regulatory structure is administered and influenced
through a complex web of state and local governments, FCC, the
Congress, the courts, and special interest groups, as figure II.1
indicates.  In addition, the telecommunications industry consists of
many businesses, each of which is affected in different ways by
telecommunications policy. 

   Figure II.1:  The Arena for
   Formulating Telecommunications
   Policy

   (See figure in printed
   edition.)


   A NUMBER OF BODIES FORMULATE
   AND INFLUENCE
   TELECOMMUNICATIONS POLICY
-------------------------------------------------------- Appendix II:1

The following briefly discusses the functions of the entities
primarily responsible for formulating telecommunications policy and
regulations. 


      FEDERAL COMMUNICATIONS
      COMMISSION
------------------------------------------------------ Appendix II:1.1

FCC was established by the 1934 Communications Act as an independent
regulatory body responsible for regulating interstate and foreign
communication by radio and wire.  According to the 1934 act, FCC's
telecommunications policy goal is to make available, as far as
possible, to all the people of the United States a rapid, efficient,
nationwide, and worldwide wire and radio communication service with
adequate facilities at reasonable charges.  To achieve this goal, FCC
believes it must promote efficiency, universal service, reasonable
charges, and innovative services. 


      THE DEPARTMENT OF JUSTICE
------------------------------------------------------ Appendix II:1.2

The Department enforces antitrust laws.  In 1974, the Department
filed suit against AT&T, alleging a number of anticompetitive abuses
under the Sherman Antitrust Act.  The suit culminated in a consent
decree that separated AT&T's long-distance and local telephone
service industries.  The Department, together with the U.S.  district
courts, administers the provisions of the consent decree. 


      THE COURTS
------------------------------------------------------ Appendix II:1.3

The federal courts interpret telecommunications legislation and
review FCC's actions.  The U.S.  district court has administered the
provisions of the AT&T consent decree, including whether and when the
BOCs can begin providing long-distance service, manufacture
telecommunications equipment, and provide information services. 
Pending legislation would shift some of these responsibilities to FCC
and the Justice Department. 


      STATE AND LOCAL GOVERNMENTS
------------------------------------------------------ Appendix II:1.4

State and local governments generally regulate intrastate telephone
services.  Among other things, they (1) establish regulatory
policies, (2) control the entry of other telephone service providers,
and (3) regulate rates. 

In addition, a number of organizations exist to assist in formulating
public policy and addressing technical issues associated with the
Information Superhighway.  Examples follow. 


      DEPARTMENT OF COMMERCE'S
      NATIONAL TELECOMMUNICATIONS
      AND INFORMATION
      ADMINISTRATION
------------------------------------------------------ Appendix II:1.5

This agency serves as the President's expert adviser on
telecommunications matters, including economic and technological
advancement and industry regulation.  The agency manages the federal
government's use of portions of the radio frequency spectrum,
coordinates federal telecommunications assistance to state and local
governments, and studies and evaluates telecommunications research
and development and the impact of the convergence of computer and
communications technology. 


      INTERAGENCY INFORMATION
      INFRASTRUCTURE TASK FORCE
------------------------------------------------------ Appendix II:1.6

This task force works with the Congress and the private sector to
propose the policies and initiatives needed to accelerate the
deployment of the Information Superhighway.  The task force is
chaired by the Secretary of Commerce and includes representatives of
the key federal agencies involved in telecommunications and
information policy. 


      ADVISORY COUNCIL ON THE
      NATIONAL INFORMATION
      INFRASTRUCTURE
------------------------------------------------------ Appendix II:1.7

The Advisory Council provides advice from the private sector to the
Interagency Infrastructure Task Force on (1) the appropriate roles of
the private and public sectors in national infrastructure
development; (2) the administration's vision for the evolution of the
infrastructure; (3) privacy, security, and copyright issues; (4)
national strategies for maximizing the interconnection and
interoperability of communications networks; and (5) universal access
policies.  The council is composed of members from industry, labor,
academia, public interest groups, and state and local governments. 


   TELECOMMUNICATIONS INDUSTRY
   CONSISTS OF MANY PLAYERS
-------------------------------------------------------- Appendix II:2

In addition to local and long-distance telephone companies, the
telecommunications industry includes a variety of other businesses. 
Competitive access providers (CAP) compete with local telephone
companies for certain types of business in specific locations, while
other players include cable, satellite, and broadcast television;
cellular and satellite telephone; on-line information services (e.g.,
Compuserve and Prodigy); and a host of hardware and software
manufacturers.  Advances in technology have shaped the way these
companies have developed and competed.  Some companies are in their
formative stages, such as direct-broadcast satellite television and
satellite telephone services.  Others, such as cellular telephone and
on-line information services, while established only within the past
decade, have achieved substantial growth and now play significant
roles in the industry. 


      COMPETITIVE ACCESS PROVIDERS
------------------------------------------------------ Appendix II:2.1

CAPs provide competitive local telephone service alternatives by
linking customers to long-distance networks and to other local
customers.  CAPs currently focus primarily on large-volume customers
in major business districts.  Many have installed their own
fiber-optic infrastructure which facilitates high-capacity services
such as videoconferencing.  Estimates on the number of CAPs range
between 30 and 45.  CAPs' customers believe they receive high-quality
services, quick response times, and economical prices.  However, many
states prohibit competition with the local telephone company, and in
others, CAPs face franchise fees and other restrictions that do not
apply to the local telephone company. 


      CABLE TELEVISION COMPANIES
------------------------------------------------------ Appendix II:2.2

Cable television companies provide a wide variety of programming that
is sent to residences mainly over coaxial cable rather than over the
air, as in broadcast television.  Cable companies retransmit local
television broadcast signals and may also offer programs available
via satellite transmission, such as C-Span and Cable News Network. 

Regulation of the cable television industry has historically involved
a mixture of policies, regulations, rules, and procedures
administered by federal, state, and local entities.  The 1984 Cable
Communications Policy Act deregulated the industry.  However, in
response to continually increasing cable rates, the Congress enacted
the Cable Television Consumer Protection and Competition Act of 1992
(commonly known as the 1992 Cable Act), which requires cable rate
regulation in areas where effective competition does not exist.  FCC
estimated that rate reregulation would affect up to three-quarters of
the cable systems and cable subscribers across the country. 


      PERSONAL COMMUNICATIONS
      SERVICES AND CELLULAR
      TELECOMMUNICATION COMPANIES
------------------------------------------------------ Appendix II:2.3

Cellular telephone companies offer mobility for customers when
providing local service, some long-distance service, and some data
services.  The cellular industry generally consists of two providers
per geographic region and is generally unregulated.  Personal
Communications Services--a lightweight, more portable, and versatile
cousin of cellular telephones that is just now emerging--is expected
to provide additional data as well as video services.  Although FCC
allocates spectrum for these industries, they are not generally
subject to comprehensive federal and state regulation. 


      SATELLITE-BASED SERVICES
------------------------------------------------------ Appendix II:2.4

Satellite television and satellite telephone services can reach rural
areas not served by wires.  The size and cost of satellite television
antennas has been a drawback of this technology.  However, two
direct-broadcast satellite companies, which will deliver programming
to customers using 18-inch dish antennas, are planning to initiate
operations in the near future.  The companies plan to offer the
antennas for about $700 initially but anticipate lower prices as the
number of subscriptions increases.  In addition, several companies
are developing satellite-based telephone systems.  The size and cost
of this equipment and the expected rates for using the systems
present challenges. 


      BROADCAST COMPANIES
------------------------------------------------------ Appendix II:2.5

Broadcast companies, which provide consumers with the only free radio
and television services, are subject to FCC spectrum allocation and
content guidelines.  Broadcasters believe they are potential
participants in the Information Superhighway, since they reach nearly
100 percent of all homes and will soon be able to broadcast data to
pagers and fax machines.  In addition, broadcasters would like to
offer enhanced advertising services.  For example, if a viewer
desired additional information about an advertised product, the
viewer could interactively obtain information on the product's
availability or price or perhaps on the location of the nearest
dealer. 

Digital television is expected to represent the next generation in
television technology.  Because information in digital format can be
compressed into less space than information in analog format, more
frequency spectrum is expected to become available when digital
television arrives.  Broadcasters hope to deliver advanced services
over this new-found capacity. 

The 1934 Communications Act and certain provisions of the 1984 and
1992 cable acts govern television and radio broadcasters.  The 1984
Cable Communications Policy Act prohibits certain types of
television-cable cross-ownership.  FCC's licenses limit broadcasters'
use of allocated spectrum to providing free over-the-air broadcast
signals.  These rules are intended to ensure multiple ownership and a
diverse array of mass media providers.  However, broadcasters
perceive their regulatory structure as a barrier to operating in
other lines of businesses. 


      ELECTRIC UTILITY COMPANIES
------------------------------------------------------ Appendix II:2.6

Electric utilities plan to use the Information Superhighway's
technology, and some are considering providing expanded services. 
Some utilities have been installing fiber-optic cable in their
internal communications networks to monitor customers' energy
consumption and read meters for billing purposes.  These utilities
hope to assist customers in managing their demand by suggesting the
use of major appliances during off-peak hours.  Reduced peak energy
demand could postpone the need for utilities to build new power
plants.  However, because these services use only a portion of the
fiber-optic cable's capacity, some utility companies are considering
leasing the excess capacity to other communications service providers
or possibly providing local telephone service. 

Electric utilities are regulated at the state level for intrastate
generation, distribution, transmission, and sales by public utility
commissions or equivalent agencies and at the federal level for
interstate transmissions and wholesale sales by the Federal Energy
Regulatory Commission.  Existing regulations prevent some of these
companies from engaging in non-utility lines of business. 


HIGHLIGHTS OF SELECTED PROVISIONS
OF HOUSE AND SENATE
TELECOMMUNICATIONS BILLS
========================================================= Appendix III

House--H.R. 3626\                        Senate--S. 1822\
---------------------------------------  ---------------------------------------
Long distance
--------------------------------------------------------------------------------
Interstate                               The Senate bill requires the same U.S.
                                         Attorney General and FCC approvals but
A BOC would have to get approval from    extends them to both interstate and
both the U.S. Attorney General and the   intrastate long-distance service, and
FCC in order to provide interstate       only through a separate subsidiary.
long-distance service.
                                         For FCC approval of in-region long-
The U.S. Attorney General must find no   distance service originating in any
"substantial possibility" that the BOC   area where the BOC is the dominant
or its affiliates could use monopoly     provider of local telephone service,
power to impede competition in the       the FCC must find that there are no
market it seeks to enter in order to     barriers to market entry, such as state
approve a BOC request for long-          laws or other regulations, and that the
distance market entry.                   BOC is meeting its telecommunications
                                         obligations such as interconnection and
FCC must find that approval is           nondiscriminatory access.
"consistent with the public interest,
convenience, and necessity".             Also, the FCC cannot approve an
                                         application before it has issued
Intrastate                               regulations implementing universal
                                         service requirements, or until 21
BOCs may provide intrastate long-        months have passed since enactment of
distance services without obtaining      the bill, whichever is earlier.
U.S. Attorney General or FCC approval
if the state involved has approved or
authorized such services. States must
consider the potential effects of
approval on competition and the public
interest.

Within 90 days of receiving notice of
state approval, the U.S. Attorney
General can pursue civil action to
prevent the service.
--------------------------------------------------------------------------------
House--H.R. 3626                         Senate--S. 1822
---------------------------------------  ---------------------------------------
Video programming
--------------------------------------------------------------------------------
Common carriers, such as local           Local telephone companies may offer
telephone companies, may offer video     video programming to their subscribers
programming directly to their            through a subsidiary, or make their
subscribers through an affiliate. Any    television channel capacity available
common carrier providing these services  to other video providers, but only if
must make its television channel         preconditions similar to those required
capacity available to any video service  for in-region long-distance service
provider, consistent with FCC            have been met.
regulations, which the Commission must
prescribe within 1 year.                 The Senate bill would allow FCC to
                                         exempt local telephone companies and
FCC must also prescribe regulations      cable companies from the subsidiary
prohibiting telephone companies and      requirement if it determines that a
cable operators from cross-              subsidiary is no longer necessary for
subsidizing. That is, telephone          the protection of consumers,
companies could not include in           competition, or the public interest.
telephone rates, any funds to help pay
for video programming. Likewise, cable   The Senate bill also prohibits cross-
operators could not help pay for         subsidization.
telephone operations with cable
revenues.                                Cable companies are permitted to offer
                                         telephone services in their franchise
                                         areas, but only through a subsidiary.
--------------------------------------------------------------------------------
House--H.R. 3626                         Senate--S. 1822
---------------------------------------  ---------------------------------------
Universal service
--------------------------------------------------------------------------------
FCC must, within 30 days of enactment,   The Senate bill contains universal
convene a joint federal-state board to   service provisions that are similar to
recommend how to preserve universal      those in the House bill. The FCC would
service and what services should be      have to convene the joint board within
universal. The board may recommend to    1 month of enactment and at least once
FCC changes to the definition of "from   every 6 years.
time to time."
                                         The Senate bill requires that the FCC
One of the guiding principles to be      establish a Universal Service Fund
followed by the joint board is the       within 18 months. An independent
pursuit of reasonably comparable         administrator would control and manage
services, including advanced             the fund. FCC and the states would
telecommunications, at "just and         determine distribution of the funds.\a
reasonable rates" for rural and urban
areas.                                   The Senate bill provides a guiding
                                         principle for the joint board that is
                                         similar to that in the House bill on
                                         pursuit of comparable services at
                                         reasonable rates for rural and urban
                                         areas.
--------------------------------------------------------------------------------
\a As this report went to printing, the Senate Committee on Commerce,
Science, and Transportation was drafting a floor amendment that would
revise the provision requiring FCC to establish a Universal Service
Fund. 

House--H.R. 3626                         Senate--S.1822
---------------------------------------  ---------------------------------------
Federal preemption of state and local laws
--------------------------------------------------------------------------------
After 1 year of enactment, no state or   The Senate bill bars state or local
local government may prohibit any        laws and regulations that prohibit the
person or any carrier providing          ability of any entity to provide any
interstate or intrastate                 interstate or intrastate
telecommunications or information        telecommunications service.
services from entering the market. They  Additionally, a state may not impose
also may not prohibit any person or any  requirements on a carrier for
carrier providing such services from     intrastate services that are
exercising interconnection or access     inconsistent with those imposed by FCC
rights.                                  for interstate services.
--------------------------------------------------------------------------------
House--H.R. 3626                         Senate--S.1822
---------------------------------------  ---------------------------------------
Equal access
--------------------------------------------------------------------------------
Common carriers that furnish             Common carriers are similarly required
communications services must provide     to provide equal access and
interconnection with other providers'    interconnection on an unbundled basis
facilities and equipment, in accordance  where technically and economically
with any applicable FCC regulations.     feasible, and without any unreasonable
                                         conditions or restrictions on the
Upon reasonable request by other         resale or sharing of those services or
telecommunications carriers, local       functions.
telephone companies must provide equal
access to and interconnection with       FCC shall modify the requirements for
their facilities in a manner that        rural telephone companies at a
achieves full interoperability.          company's request or on FCC's own
Whenever technically feasible and        initiative.
economically reasonable, local
telephone companies must offer           With carrier justification, FCC may
unbundled features, functions, and       waive or modify the requirements for a
capabilities.                            telecommunications carrier if the
                                         carrier has fewer than 2 percent of the
Within 30 days of enactment, the FCC     nation's subscriber lines installed.
must convene a Federal-State Joint
Board to make recommendations to the
FCC; and within 1 year of enactment the
FCC must issue regulations that
implement the equal access and
interconnection requirements.

Rural telephone companies are exempt
from these requirements unless the FCC
determines that compliance is
economically workable, competitively
fair, technologically feasible, or in
the public interest.

FCC may modify the requirements for
local telephone companies that have
fewer than 500,000 access lines
installed nationwide.
--------------------------------------------------------------------------------

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Barry T.  Hill, Associate Director
Joyce E.  Bozic, Assistant Director
Paul J.  O'Neill, Assistant Director
Marnie Shaul, Assistant Director
Edmond E.  Menoche, Evaluator-in-Charge
Amy D.  Abramowitz, Senior Economist
Beverly A.  Bendekgey, Senior Evaluator
John A.  Thomson, Senior Evaluator
Jacqueline A.  Cook, Senior Evaluator
John P.  Rehberger, Evaluator

OFFICE OF GENERAL COUNSEL

Michael R.  Volpe, Assistant General Counsel
John A.  Carter, Senior Attorney
Mindi G.  Weisenbloom, Senior Attorney

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION

Ronald W.  Beers, Assistant Director
Mirko J.  Dolak, Senior Evaluator

BOSTON REGIONAL OFFICE

Bruce Holmes, Technical Assistance Director

PHILADELPHIA REGIONAL OFFICE

William Gillies, Senior Evaluator


GLOSSARY
============================================================ Chapter 1

Except where noted, we based the definitions in this glossary on
those contained in Computer Dictionary:  The Comprehensive Standard
for Business, School, Library, and Home, Microsoft Press, 1991,
Washington, D.C. 


      ANALOG
-------------------------------------------------------- Chapter 1:0.1

A term applied to any device, usually electronic, that represents
values by a continuously variable physical property, such as voltage
in an electronic circuit.  An analog device can represent an infinite
number of values within the range the device can handle.  In
contrast, digital representation maps values onto discrete numbers,
limiting the possible range of values to the resolution of the
digital device. 


      ARCHITECTURE
-------------------------------------------------------- Chapter 1:0.2

A general term referring to the structure of all or part of a
computer system.  The term also covers the design of system software,
such as the operating system, as well as refers to the combination of
hardware and basic software that links the machines on a computer
network.  Computer architecture refers to an entire structure and to
the details needed to make it functional.  Thus, computer
architecture covers computer systems, chips, circuits, and system
programs but typically does not cover applications, which are
required to perform a task but not to make the system run. 


      ASYNCHRONOUS OPERATION
-------------------------------------------------------- Chapter 1:0.3

Generally, an operation that proceeds independently of any timing
mechanism, such as a clock.  In communications, for example, two
modems communicating asynchronously rely upon each one sending the
other start and stop signals in order to pace the exchange of
information. 


      BANDWIDTH
-------------------------------------------------------- Chapter 1:0.4

In communications, the difference between the highest and lowest
frequencies in a given range.  For example, a telephone accommodates
a bandwidth of 3000 hertz (Hz), the difference between the lowest
(300 Hz) and highest (3300 Hz) frequencies it can carry.  In computer
networks, greater bandwidth indicates faster data-transfer
capabilities. 


      BIT
-------------------------------------------------------- Chapter 1:0.5

Short for "binary digit"; either 1 or 0 in the binary number system. 
In processing and storage, a bit is the smallest unit of information
handled by a computer and is represented physically by an element
such as a single pulse sent through a circuit or a small spot on a
magnetic disk capable of storing either a 1 or a 0.  Considered
singly, bits convey little information a human would consider
meaningful.  In groups of eight, however, bits become the familiar
bytes used to represent all types of information, including the
letters of the alphabet and the digits. 


      BROADBAND NETWORK
-------------------------------------------------------- Chapter 1:0.6

A type of local area network on which transmissions travel as
radio-frequency signals over separate inbound and outbound channels. 
Stations on a broadband network are connected by coaxial or
fiber-optic cable.  The cable itself can be made to carry data,
voice, and video simultaneously over multiple transmission channels. 
This complex transmission is accomplished by the technique called
frequency-division multiplexing, in which individual channels are
separated by frequency and buffered from one another by guard bands
of frequencies that are not used for transmission.  A broadband
network is capable of high-speed operation (20 megabits or more), but
it is more expensive than a baseband network and can be difficult to
install.  Such a network is based on the same technology that is used
by cable television.  Broadband transmission is sometimes called
wideband transmission. 


      CIRCUIT SWITCHING
-------------------------------------------------------- Chapter 1:0.7

A method of opening communications lines, as through the telephone
system, creating a physical link between the initiating and receiving
parties.  In circuit switching, the connection is made at a switching
center, which physically connects the two parties and maintains an
open line between them for as long as needed.  Circuit switching is
typically used in modem communications on the dial-up telephone
network, and it is also used on a smaller scale in privately
maintained communications networks. 


      COAXIAL CABLE
-------------------------------------------------------- Chapter 1:0.8

Often referred to as coax or coax cable.  A cable that consists of
two conductors, a center wire inside a cylindrical shield that is
grounded.  The shield is typically made of braided wire and is
insulated from the center wire.  The shield minimizes electrical and
radio-frequency interference; signals in a coaxial cable do not
affect nearby components, and potential interference from these
components does not affect the signal carried on the cable. 


      COMMUNICATIONS PROTOCOL
-------------------------------------------------------- Chapter 1:0.9

A set of rules or standards designed to enable computers to connect
with one another and to exchange information with as little error as
possible.  The word "protocol" is used, sometimes confusingly, in
reference to a multitude of standards affecting different aspects of
communication.  Some standards affect hardware connections, while
other standards govern data transmission.  Still other protocols
govern file transfer, and others define the methods by which messages
are passed around the stations on a local area network.  Taken as a
whole, these various and sometimes conflicting protocols represent
attempts to facilitate communication among computers of different
makes and models. 


      COMPUTER NETWORK
------------------------------------------------------- Chapter 1:0.10

A group of computers and associated devices that are connected by
communications facilities.  A network can involve permanent
connections, such as cables, or temporary connections made through
telephone or other communications links.  A network can be as small
as a local area network consisting of a few computers, printers, and
other devices, or it can consist of many small and large computers
distributed over a vast geographic area.  Small or large, a computer
network exists to provide computer users with the means of
communicating and transferring information electronically.  Some
types of communication are simple user-to-user messages; others, of
the type known as distributed processes, can involve several
computers and the sharing of workloads or cooperative efforts in
performing a task. 


      DATA
------------------------------------------------------- Chapter 1:0.11

Plural of the Latin datum, meaning an item of information.  The term
is frequently used for the singular as well as the plural form of the
noun. 


      DATA COMPRESSION
------------------------------------------------------- Chapter 1:0.12

A term applied to various means of compacting information for more
efficient transmission or storage, used in such areas as data
communication, data base management systems, facsimile transmission,
and CD-ROM publishing.  One common compression technique, called
key-word encode, replaces each frequently occurring word--such as the
or here--with a 2-byte token, thus saving one or more bytes of
storage for every instance of that word in a text file. 


      DIGITAL
------------------------------------------------------- Chapter 1:0.13

Related to digits or the way they are represented.  In computing,
digital is virtually synonymous with binary because the computers
familiar to most people process information coded as combinations of
binary digits, or bits--zeros and ones.  One bit can represent at
most two values--0 or 1.  Two bits can represent up to 4 different
values--00, 01, 11, and 10.  Eight bits can represent 256
values--00000000, 00000001, 00000011, and so on. 


      DIRECT BROADCAST SATELLITE
------------------------------------------------------- Chapter 1:0.14

Employs a satellite to beam TV programming and information directly
to homes.  The first direct broadcast satellite was launched in
December 1993 to relay signals from a ground station to 18-inch
satellite dishes located at residences.  Direct broadcast signals are
sent in a digital format so as to increase signal capacity and
improve reception quality. 


      ELECTRONIC MAIL
------------------------------------------------------- Chapter 1:0.15

Messages transmitted over a communications network.  Electronic mail,
or e-mail, is a computer-to-computer (or terminal-to-terminal)
version of interoffice mail or the postal service.  Used on both
local area networks and larger communications networks, electronic
mail enables users to send and receive messages and in some instances
graphics or voice messages, either to individual recipients or in
broadcast form to larger groups.  Delivered messages are stored in
electronic mailboxes assigned to users on the network and can be
viewed, saved, or deleted by the recipient.  Depending on the
capabilities of the electronic mail program, users can also forward
mail, include "carbon" copies, request return receipts, attach files,
and edit messages with a text editor.  With systems on which the mail
program can remain active in the background while the user works on
other tasks, recipients can also be informed when new mail arrives
and can choose to view the message immediately or save it for later
viewing. 


      ENCRYPTION\28
------------------------------------------------------- Chapter 1:0.16

The transformation of data into a form readable only by using the
appropriate key, held only by authorized parties.  The key rearranges
the data into its original form by reversing the encryption. 


--------------------
\28 This definition is based on information in Protecting Privacy in
Computerized Medical Information, U.S.  Office of Technology
Assessment, Sept.  1993, U.S.  Government Printing Office,
Washington, D.C. 


      FIBER-OPTICS
------------------------------------------------------- Chapter 1:0.17

A method of transmitting light beams along optical fibers.  A light
beam, such as that produced in a laser, can be modulated to carry
information.  A single fiber-optic channel can carry significantly
more information than most other means of information transmission. 
Optical fibers are thin strands of glass or other transparent
material. 


      GATEWAY
------------------------------------------------------- Chapter 1:0.18

A device used to connect dissimilar networks--networks using
different communications protocols--so that information can be passed
from one to the other.  Unlike a bridge, which transfers information
between similar networks, a gateway both transfers information and
converts it to a form compatible with the protocols used by the
second network for transport and delivery. 


      GIGABYTE
------------------------------------------------------- Chapter 1:0.19

The precise meaning often varies with the context; strictly, a
gigabyte is 1 billion bytes.  In reference to computers, however,
bytes are often expressed in multiples of powers of two.  Therefore,
a gigabyte can also be either 1,000 megabytes or 1,024 megabytes,
where a megabyte is considered to be 1,048,576 bytes. 


      HDTV
------------------------------------------------------- Chapter 1:0.20

Acronym for high-definition television, a method of transmitting and
receiving television signals that produces a picture with much
greater resolution and clarity than standard television technology. 
With suitable standards, the quality of a high-definition television
picture can approach that of a movie screen.  The standards for
high-definition television are not yet established, and competing
technologies are under development in Europe, Japan, and the United
States. 


      INTERACTIVE
------------------------------------------------------- Chapter 1:0.21

Operating in a back-and-forth, often conversational manner, as when a
user enters a question or command and the system immediately
responds.  Microcomputers are interactive machines; this
interactivity is one of the features that make them approachable and
easy to use. 


      INTERFACE
------------------------------------------------------- Chapter 1:0.22

The point at which a connection is made between two elements so that
they can work with one another.  In computing, different types of
interfacing occur on different levels, ranging from highly visible
user interfaces that enable people to communicate with programs to
often invisible, yet necessary, hardware interfaces that connect
devices and components inside the computer. 

User interfaces consist of the graphical design, commands, prompts,
and other devices that enable a user to interact with a program. 
Microcomputers have three basic types of user interfaces (which are
not necessarily mutually exclusive): 

  The command-line interface responds to commands typed by the user. 

  The menu-based interface (also called the menu-driven interface),
     used by many application programs, offers the user a choice of
     command words that can be activated by typing a letter, pressing
     a direction key, or pointing with a mouse. 

  The graphical interface, characteristic of windowing programs,
     presents the user with a visual representation of some metaphor,
     such as a desk-top, and allows the user to control not only menu
     choices but also the size, layout, and contents of one or more
     on-screen "windows" or working areas. 

At less-visible software levels within the computer are other types
of interfaces, such as those that enable an application to work with
the operating system and those that enable an operating system to
work with the computer's hardware.  In hardware, interfaces are
cards, plugs, and other devices that connect pieces of hardware with
the computer so that information can be moved from place to place. 
Standardized data-transfer interfaces enable connections between
computers and printers, hard disks, and other devices. 


      INTERNET
------------------------------------------------------- Chapter 1:0.23

Abbreviation for "internetwork." In communications, a set of computer
networks--possibly dissimilar--joined together by means of gateways
that handle data transfer and the conversion of messages from the
sending network to the protocols used by the receiving network (with
packets if necessary).  When capitalized, the term "Internet" refers
to the collection of networks and gateways that use the Transmission
Control Protocol/Internet Protocol suite of protocols. 


      ISDN
------------------------------------------------------- Chapter 1:0.24

Abbreviation for "Integrated Services Digital Network"--a worldwide
digital communications network evolving from existing telephone
services.  The goal of ISDN is to replace the current analog
telephone system with totally digital switching and transmission
facilities capable of carrying data ranging from voice to computer
transmissions, music, and video.  ISDN is built on two main types of
communications channels:  a B channel, which carries data at a rate
of 64 Kbps (kilobits per second), and a D channel, which carries
control information at either 16 or 64 Kbps.  Computers and other
devices are connected to ISDN lines through simple, standardized
interfaces.  When fully implemented (possibly around the turn of the
century), ISDN is expected to provide users with faster, more
extensive communications services. 


      LOCAL AREA NETWORK (LAN)
------------------------------------------------------- Chapter 1:0.25

A group of computers and other devices dispersed over a relatively
limited area and connected by a communications link that enables a
device to interact with any other on the network.  LANs commonly
include microcomputers and shared (often expensive) resources such as
laser printers and large hard disks.  Most modern LANs can support a
wide variety of computers and other devices.  Each device must use
the proper physical and data-link protocols for the particular LAN,
and all devices that want to communicate with each other on the LAN
must use the same upper-level communications protocol.  Although
single LANs are geographically limited (to a department or an office
building, for example), separate LANs can be connected to form larger
networks.  Similar LANs are linked by bridges that act as transfer
points between networks; dissimilar LANs are linked by gateways,
which both transfer data and convert it according to the protocols
used by the receiving network. 

The devices on a LAN are known as nodes, and the nodes are connected
by cables through which messages are transmitted.  Types of cables
include twisted-pair wiring, coaxial cable, or fiber-optic
(light-transmitting) cable.  Nodes on a LAN can be wired together in
any of three basic layouts, known as bus, ring, and star.  As implied
by their names, a bus network is more or less linear, a ring network
forms a loop, and a star network radiates from a central hub.  To
avoid potential collisions when two or more nodes attempt to transmit
at the same time, LANs use either contention and collision detection
or token passing to regulate traffic. 


      MEGA
------------------------------------------------------- Chapter 1:0.26

Abbreviated M.  A prefix meaning 1 million (10\6 ).  In computing,
which is based on the binary (base-2) numbering system, mega has a
literal value of 1,048,576, which is the power of 2 closest to one
million. 


      MEGABIT
------------------------------------------------------- Chapter 1:0.27

Abbreviated Mb or Mbit.  Usually, 1,048,576 bits; sometimes
interpreted as 1 million bits. 


      MEGABYTE
------------------------------------------------------- Chapter 1:0.28

Abbreviated MB.  Either 1 million bytes or 1,048,576 bytes. 


      NETWORK ARCHITECTURE
------------------------------------------------------- Chapter 1:0.29

The underlying structure of a computer network includes hardware,
functional layers, interfaces, and protocols (rules) used to
establish communications and ensure the reliable transfer of
information.  Because a computer network is a mixture of hardware and
software, network architectures are designed to provide both
philosophical and physical standards for enabling computers and other
devices to handle the complexities of establishing communications
links and transferring information without conflict.  Various network
architectures exist, among them the internationally accepted
seven-layer open systems interconnection model and International
Business Machine (IBM) Systems Network Architecture.  Both the open
systems interconnection model and the Systems Network Architecture
organize network functions in layers, each layer dedicated to a
particular aspect of communication or transmission and each requiring
protocols that define how functions are carried out.  The ultimate
objective of these and other network architectures is the creation of
communications standards that will enable computers of many kinds to
exchange information freely. 


      OPEN ARCHITECTURE
------------------------------------------------------- Chapter 1:0.30

A term used to describe any computer or peripheral device that has
published specifications.  A published specification lets third
parties develop add-on hardware for an open architecture computer or
device.  The term can also refer to a design that provides for
expansion slots that allow the addition of parts to enhance or
customize a system. 

Open System

In communications, especially in connection with the International
Organization for Standardization's Open Systems Interconnection
model, a computer network designed to incorporate all
devices--regardless of manufacturer or model--that can use the same
communications facilities and protocols.  In reference to individual
pieces of computer hardware or software, an open system is one that
can accept add-ons produced by third-party suppliers. 


      PACKET
------------------------------------------------------- Chapter 1:0.31

In general usage, a unit of information transmitted as a whole from
one device to another on a network.  In packet-switching networks, a
packet is defined more specifically as a transmission unit of fixed
maximum size that consists of binary digits representing both data
and a header containing an identification number, source and
destination addresses, and, sometimes, error-control data. 


      PACKET SWITCHING
------------------------------------------------------- Chapter 1:0.32

A message-delivery technique in which small units of information
(packets) are relayed through stations in a computer network along
the best route currently available between the source and the
destination.  A packet-switching network handles information in small
units, breaking long messages into multiple packets before routing. 
Although each packet may travel along a different path, and the
packets composing a message may arrive at different times or out of
sequence, the receiving computer reassembles the original message. 
Packet-switching networks are considered to be fast and efficient. 
To manage the tasks of routing traffic and assembling/disassembling
packets, such networks require some "intelligence" from the computers
and software that control delivery. 


      REAL-TIME SYSTEM
------------------------------------------------------- Chapter 1:0.33

A computer and/or a software system that reacts to events before the
events become obsolete.  For example, airline collision avoidance
systems must process radar input, detect a possible collision, and
warn air traffic controllers or pilots while they still have time to
react. 


      ROUTER
------------------------------------------------------- Chapter 1:0.34

An intermediate device on a communications network that expedites
message delivery.  On a single network linking many computers through
a mesh of possible connections, a router receives transmitted
messages and forwards them to the correct destinations over the most
efficient available route.  On an interconnected set of local area
networks using the same communication protocols, a router serves the
somewhat different function of acting as a link between networks,
enabling messages to be sent from one to another. 


      STANDARD
------------------------------------------------------- Chapter 1:0.35

In computing, a set of detailed technical guidelines used as a means
of establishing uniformity in an area of hardware or software
development.  Computer standards have traditionally developed in
either of two ways.  The first, a highly informal process, occurs
when a product or philosophy is developed by a single company and,
through success and imitation, becomes so widely used that deviation
from the norm causes compatibility problems or limits marketability. 
This type of de facto standard setting is typified by such products
as Hayes modems and IBM Personal Computers.  The second type of
standard-setting is a far more formal process in which specifications
are drafted by a cooperative group or committee after an intensive
study of existing methods, approaches, and technological trends and
developments.  The proposed standards are later ratified by consensus
through an accredited organization and are adopted over time as
products based on the standards become increasingly prevalent in the
market. 


      SYNCHRONOUS OPERATION
------------------------------------------------------- Chapter 1:0.36

Generally, any operation that proceeds under control of a clock or
timing mechanism. 


      TCP/IP
------------------------------------------------------- Chapter 1:0.37

Acronym for Transport Control Protocol/Internet Protocol, a software
protocol developed by the Department of Defense for communications
between computers and used on the Internet. 


      TELECOMMUNICATIONS
------------------------------------------------------- Chapter 1:0.38

A general term for the electronic transmission of information of any
type, including data, television pictures, sound, facsimiles, and so
on. 


      TELECOMMUTING
------------------------------------------------------- Chapter 1:0.39

Also called electronic commuting.  The practice of working in one
location (often, at home) and communicating with a main office in a
different location through a personal computer equipped with a modem
and communications software. 


      TELECONFERENCING
------------------------------------------------------- Chapter 1:0.40

The use of audio, video, or computer equipment linked through a
communications system to enable geographically separated individuals
to participate in a meeting or discussion. 


      THROUGHPUT
------------------------------------------------------- Chapter 1:0.41

A measure of the data transfer rate through a typically complex
communications system or of the data processing rate in a computer
system. 


      TWISTED-PAIR CABLE
------------------------------------------------------- Chapter 1:0.42

A cable made of two separately insulated strands of wire twisted
together. 


      VIRTUAL CIRCUIT
------------------------------------------------------- Chapter 1:0.43

Literally, a communications link that appears to be a direct
connection between sender and receiver, although physically (as on a
packet-switching network) the link can involve routing through more
circuitous paths.  A virtual circuit is conceptual rather than
physical.  The virtual circuit connects caller A with receiver B, but
the physical circuit through which they actually communicate can run
from A through stations D, E, and F before reaching B. 


      WIDE AREA NETWORK (WAN)
------------------------------------------------------- Chapter 1:0.44

A communications network that connects geographically separated
areas. 



RELATED GAO PRODUCTS
============================================================ Chapter 2

IRS Automation:  Controlling Electronic Filing Fraud and Improper
Access to Taxpayer Data (GAO/T-AIMD/GGD-94-183, July 19, 1994). 

Telecommunications:  Financial Information on 16 Telephone and Cable
Companies (GAO/RCED/AIMD-94-221FS, July 8, 1994). 

Telecommunications:  FCC's Oversight Efforts to Control
Cross-Subsidization (GAO/RCED-93-34, Feb.  3, 1993). 

IRS Information Systems:  Weaknesses Increase Risk of Fraud and
Impair Reliability of Management Information (GAO/AIMD-93-34, Sept. 
22, 1993). 

Communications Privacy:  Federal Policy and Actions (GAO/OSI-94-2,
Nov.  4, 1993). 

Economic Espionage:  The Threat to U.S.  Industry (GAO/T-OSI-92-6,
Apr.  29, 1992). 

Computer Security:  Hackers Penetrate DOD Computer Systems
(GAO/T-IMTEC-92-5, Nov.  20, 1991). 

Computers and Privacy:  How the Government Obtains, Verifies, Uses,
and Protects Personal Data (GAO/IMTEC-90-70BR, Aug.  3, 1990). 

Computer Security:  Virus Highlights Need for Improved Internet
Management (GAO/IMTEC-89-57, June 12, 1989). 

