2006: Year of the Franchise

When service providers reflect on 2006, they might well see it as the year of the Bell video franchise, punctuated by months of back-and-forth over net (network or Internet?) neutrality. Indeed, Congress and the FCC tackled a number of issues this year, several of which seemed to explode from out of nowhere and take center stage until pending mid-term elections turned focus and speculation from telecom matters to wider political considerations.

Congress Tackles Telecom
The year kicked off with a series of Senate Commerce Committee hearings, led by Sen. Ted Stevens, R-Alaska. After facing criticism that he had held closed-door telecom rewrite discussions in late 2005 that should have been public, his staff developed a schedule of topics germane to a new law, taking testimony from lobbyists, activists and insiders from across the industry. Stevens’ efforts, combined with a proposed bill from the House, led to the creation of the doubly titled “Advanced Telecommunications and Opportunities Reform Act” and the “Communications Act of 2006.” The bill widely was viewed as favoring the Bells, who spent millions of dollars on lobbying for a national video franchising process. Cable operators frowned on the Act because they perceived it as making it easier for the telcos to offer video services while the cable industry still had to abide by 10-year-old rules. Competitive carriers and their associated organizations decried the absence of net neutrality regulation, which they said would have ensured DSL and cable modem Internet access providers could not prioritize traffic, such as high-bandwidth video streams.

And yet, some niche providers saw bright spots in the bill. “The rewrite was a huge endeavor and the fact that Congress took some leadership on some very significant USF issues — expanding the base, anti-deficiency, codifying public interest standards,” says Shirley Bloomfield, vice president of government affairs and association services for the National Telecommunications Cooperative Association (NTCA), which represents rural telcos. “The industry is seeking stability right now and addressing — and resolving — many of these issues is key to the future of the rural telecom industry.”

The NTCA also hailed the provision within the Senate and House bills that would allow shared headends, which the organization says would keep programming costs lower. “It was the start of what will hopefully be more dialogue in the coming year,” Bloomfield says.

To be sure, net neutrality surfaced again and again as a pivotal matter that drew attention from outside of the communications industry. Consumer rights’ groups formed and activists pressed lawmakers to consider their concerns, joining associations such as COMPTEL, which represents competitive carriers, as being most vocal in calling for the protections of net neutrality. On the other side of the debate, some groups typically at odds with one another saw eye to eye on net neutrality. “We and the Bells agreed,” says Kyle McSlarrow, president and CEO of the National Cable & Telecommunications Association (NCTA). “We were concerned that net neutrality proponents would drag the government into regulating” sectors of the industry they didn’t think should be touched, he says. Ultimately, the proposed communications rewrite paid only scant attention to net neutrality. Proponents said there was no reason to regulate a “nonexistent problem.” The Senate bill would allow the FCC to levy fines of up to $500,000 per violation, but it would not let the agency establish net neutrality regulations.

Going Stateside
For the states, one of the biggest snags with the proposed rewrite was a pre-emption of their rights to deal with consumers’ wireless service and billing complaints. The Stevens bill would transfer authority to the FCC, which critics contended was an already over-burdened agency unable to handle the volume of complaints. One big concern with this plan, says Brad Ramsay, general counsel for the National Association of Regulatory Utility Commissioners (NARUC), is that residents in Western states — such as Alaska, California and Hawaii — would have a hard time getting effective resolution to their problems from an agency in Washington, D.C. Another obstacle, he says, is not many consumers know about the FCC and would therefore not know where to direct their grievances.

Also at the state level, as Congress occupied itself with telecom reform, legislatures were busy changing their franchise laws. The Bells initially wanted a national franchising system, but when federal efforts were stalled by arguments over net neutrality, the USF and other matters, they went to the states. At press time in late October, nearly 10 states had revamped their books to grant one statewide franchise so operators would not have to seek permission from individual municipalities. The overall outcome on video franchising was “pretty good,” says NCTA’s McSlarrow. His association fought back against the Bells’ contention that they should be freed from regulation while cable should remain tied to the old regime, he says. “The overarching point we were making to Congress, to the House and to the Senate, was, ‘We’re for reform, we’re for streamlining, we’re for more deregulation when it comes to video, and whatever you’re doing for any other provider, you ought to do be doing for cable to give us all a level playing field on Day One,” he explains.

FCC Frenzy
At the FCC level, one coup for the Bells this year took place in the form of forbearance petitions. The forbearance petition process allows an operator to request relief from certain requirements of providing telecommunications services; if the FCC does not act within 15 months, such a petition is granted by default. That’s exactly what happened in March when the FCC’s inaction allowed Verizon Communications Inc. to reclassify its broadband services for large businesses as information services. That freed Verizon from certain rules, potentially even releasing the carrier from having to make USF contributions from those DSL proceeds. The uproar from the competitive carrier community was sizeable, and COMPTEL still has a legal challenge pending against that default grant. And while CLECs were unhappy with the action, Blair Levin, analyst and managing director for Stifel, Nicolaus & Co., calls the LECs’ forbearance petitions “a very smart strategy” because those companies knew they were unlikely to get what they wanted any other way. Verizon, especially, “has done a very good job of lawyering,” he says.

Finally, mergers made a giant dent on the regulatory landscape in 2006. After the combinations of SBC Communications Inc. and AT&T Corp., and Verizon and MCI Inc., there were two RBOCs — Qwest Communications International Inc. and BellSouth Corp. — left untouched. That is, until AT&T Inc. snapped up BellSouth in what turned out to be an $80 billion merger. As a result, CLECs started consolidating; at press time, there were three billion-dollar competitive carriers ready to mount formidable opposition to the Bells. “Some of it’s a reaction to peoples’ perceptions of what their business plans have to look like in light of the regulatory environment,” says Earl Comstock, president and CEO of COMPTEL. “I think the other part of it may well happen even in the absence of those things because as peoples’ business plans shake out, there is a certain economy of scope and scale that applies in the telecommunications world, and you’re seeing that reflected in some of the mergers.”

What’s Next?
The most looming question at press time was, how will mid-term elections affect the proposed communications law? Analysts predicted if the Democrats took the House and made inroads in the Senate, the Stevens bill would die. Such forecasts did not dampen the telcos’ spirits, however. Verizon’s Tom Tauke, executive vice president of public affairs, policy and communications, already had declared the company got the franchising relief it wanted from the states and would not pursue another federal rewrite in 2007. AT&T said it would maintain a “two-pronged” — state and federal — approach to video franchise reform. “We still feel that federal franchise rules are important for consumers because, without them, consumers who live in states that have passed statewide franchise bills will realize the benefits of having a competitor to the entrenched cable provider, but those who don’t will not have the investment or consumer benefits associated with meaningful competition,” says Claudia Jones, a spokeswoman for AT&T.

For others, the industry is evening out. “The word I see on the horizon is stability and predictability,” says NTCA’s Bloomfield. “Telcos have some very big technology and business decisions to make in the next year or so as they look at their plant and services and their competition — but it is tough to make these decisions without knowing what your legislative or regulatory landscape looks like.” Among NTCA’s priorities: making sure intercarrier compensation is handled well; promoting the stability of the USF; deploying broadband in high-cost areas; and working for smaller license areas in spectrum auctions so wireless providers can build out rural markets.

Comstock, too, looks forward to the stabilization of the regulatory environment. With any luck, he says, “we won’t find the rules changing on us so rapidly, and that will allow the carriers that remain — most of whom have survived various shakeouts of one sort or another — to prosper and grow. It’s potentially a more optimistic year for CLECs and competitors in general than otherwise might be the case.”

For NARUC, the most important subjects to address will be at the FCC: the USF and the intercarrier compensation fund, says Ramsay. In summer 2006, NARUC gave the FCC its idea for USF reform. Called “The Missoula Plan,” the complex proposal is a starting point for change, says Ramsay. “That’s what it’s designed to be. It’s not a final solution,” he says. NCTA’s McSlarrow says there will be a continued push for deregulation, adding that fewer rules will lead to greater investment, benefiting the country as a whole.

Analyst Levin also predicts a shift in focus from Congress to the FCC. He says continued use of the forbearance process, reform of the USF and more M&A activity among rural LECs will dominate telecom headlines in 2007.

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