A NEW ACT

Posted 1/01/2002

A NEW ACT
As an Economic Booster, Broadband Could Redefine U.S. Telecom Law

By Kim Sunderland

Broadband could be the match that sets torch to the Tele- communications Act of 1996.

This year the Bell operating companies (BOCs) and their rivals will dig in deeper over broadband-related issues, specifically whether changing the Telecom Act to incorporate broadband technologies, among other things, could help Congress reinvigorate a stalled and bleeding national economy.

It's a new and highly controversial twist on the recurring adage that rewriting the Act would help advance local competition.

FCC Chairman Michael K. Powell certainly believes a change is in order.

"The commission is not content simply to be reactive," Powell says. "My colleagues and I have embarked on efforts designed to consider more comprehensively the various components of a sound competition policy. We intend to examine the last six years and consider what has worked and what has not."

With the Telecom Act turning six years old next month, Powell noted there are many new considerations to be aware of in implementing it.

"The rise of broadband deployment as a central policy objective will have to be more fully considered," he said.

In addition to the FCC and the telecom industry, broadband is considered a national priority by the Bush Admin- istration, Congress and the states, all of which are grappling over how to make the Telecom Act better reflect today's tech world compared to the telephone-dominated world of yesterday.

The Bell companies and the competitive carriers, for instance, agree that the slow rollout of high-speed Internet access via phone lines can be blamed largely on outdated regulations contained in the Telecom Act.

"The reluctance of state and federal policymakers to eliminate Depression-era regulation has significantly impeded the pace of local phone competition," asserts John O. Dudley, president of the Great Lakes Region for Verizon Communications Inc. "That reluctance has had a chilling effect on investment in advanced technology by firms like Verizon which are subject to those rules."

The disagreement is centered on how to solve this dilemma.

The BOCs seek federal clearance to bypass some of the Telecom Act's local market opening requirements by having regulators ease up on rules that they say hinder their ability to roll out broadband. Their biggest lobbying effort last year, and likely again this year, will be supporting the Tauzin-Dingell bill, or some new form of it in this session of Congress.

A bill like Tauzin-Dingell, the Internet Freedom and Broadband Deployment Act (H.R. 1542), could give the Bells a boost in the marketplace by getting rid of outdated regulations, the BOCs say.

"The issue on broadband is really pretty simple: how to push more diverse technologies into the marketplace where they can fuel the economy, stimulate innovation and give America the secure, redundant infrastructure it needs," says Ivan Seidenberg, president and CEO of Verizon.

"In our industry -- as in all capital intensive, technology driven businesses -- it's also pretty clear how to do that: promote new investment by taking down the 'do not enter' signs that impede the flow of capital. At the most basic level, that's what the broadband legislation known as the Tauzin-Dingell bill is designed to do."

But the answer isn't fewer rules, say competitors, who are calling for tougher requirements and tighter enforcement over the BOCs by Congress and the FCC.

"The Bells claim that they are restricted by laws from delivering broadband," says Bruce Kushnick, executive director of the New Networks Institute. "The truth is that laws were already deregulated in most states. That's how they got the billions of dollars in extra phone charges.

"Instead of giving the Bells more of American's money, it's time to hold them accountable for their actions and get what America was promised," Kushnick urges.

That promise by the Bells was to open up their local markets to competitors in exchange for receiving Section 271 approval to offer in-region long-distance services. Now that the BOCs are receiving numerous Section 271 approvals, they want to renege on their promises, competitors say.

The battle unfolding will be bloody.

While Powell and Congressman W.J. "Billy" Tauzin, both Republicans, seek legislative relief for the BOCs, Senate Commerce Committee Chairman Ernest "Fritz" Hollings (D-S.C.) vows to lay it on thicker. One card up Hollings' sleeve is a proposal that would force the Bells to separate into wholesale and retail operations. His office wasn't forthcoming about other strategies.

Another colleague of Tauzin, and a fellow Republican, appears to be on Hollings' side. Rep. Heather A. Wilson of New Mexico said she believes that while competition works, there is little of it in the local market, and the remonopolization of the phone industry will negatively affect innovation.

"Continuing on the road to competition is what will bring services to people," Wilson said during a recent Association for Local Telecommunications Services (ALTS) business conference. "That's what I care about."

"For a fellow Republican to take a stand against Tauzin shows a lot of guts," says ALTS president John D. Windhausen Jr.

And obviously for every pro-Bell piece of legislation that emerges this year, there likely will be an anti-Bell proposal to counteract them, one source said.

Fiber Route Miles Graph

Source: PCC Fiber Deployment Report (1993-1998): MMTA & TIA. 2000 MultiMedia Communications Market Review and Forecast (1999-2003), FCC (www.FCC.gov)

BOCs: Dump the Rules!

To bring about a broadband revolution, several other sources agree with the Bells that deregulation is the key.

"Think of Tauzin-Dingell [or similar legislation] as high-tech's stimulus package for the nation," says Walter B. McCormick Jr., president and CEO of the U.S. Telecom Association, which lobbies on behalf of the Bells.

"Think of it as an adrenaline shot for the economy worth hundreds of billions of dollars that doesn't cost the U.S. Treasury a dime," McCormick says. "All it takes is one vote for basic regulatory fairness. I think we'll get that vote. I think we'll win that vote. It's the right thing for the telecom industry, for regulatory policy and for the country."

Proposing federal tax credits for deploying broadband telecom services, as some carriers suggest, won't cut it, says James Gattuso, vice president for policy at the Competitive Enterprise Institute. Instead of hand out subsidies, he says policymakers should address the regulatory and other barriers holding back broadband telecommunications.

"What could be wrong with giving broadband a little subsidized boost? Well, a lot actually," Gattuso adds. "Perhaps most worrisome, subsidies could distort the development of broadband in unknown ways."

For instance, credits could slow deployment in some rural areas. By accelerating deployment of existing technologies in rural areas closest to metro areas, business plans based on new technologies that could serve the most remote areas could be undercut. As a result, the chances of providing broadband in these areas would be reduced.

This is only one of many possible distortions, Gattuso says. Removing regulatory barriers, such as unbundling and other forced access rules on telcos, would help increase BOC incentives to invest in technology.

While he acknowledged that the unbundling and access rules are major components of the Telecom Act, revamping the law piecemeal "is perhaps a more politically challenging task, but one that will leave telecom consumers, and the economy, much better off," Gattuso says.

Powell agrees that the commission should guard against regulatory creep of existing models into broadband in order to encourage investment. He advocates facilities-based competition as the "ultimate objective" of the FCC to help deploy broadband, stimulate the economy and improve competition.

"I believe that other methods of entry are useful interim steps to competing for local service, but commission policy should provide incentives for competitors to ultimately offer more of their own facilities," Powell says.

Similarly chilling remarks to the ears of those who are exploiting unbundled network opportunities came from FCC Commissioner Kevin J. Martin, who says the Telecom Act's goal is to establish a competitive and deregulated environment, and the way to get there is through facilities-based competition.

"In the past, the commission adopted a framework that may have discouraged facilities-based competition, allowing competitors to use every piece of the incumbents' network at super-efficient prices," Martin says. "This regime creates significant disincentives for the deployment of new facilities that could be used to provide broadband."

In light of such comments, the FCC's key proceedings for 2002 include a notice of proposed rulemaking (NPRM) on broadband, a triennial review of unbundled network elements (UNEs), and an NPRM on UNE performance measures.

Powell urges competitive carriers not to view such proceedings "as a crusade to eviscerate access to all UNEs in favor of full-facilities providers." But it's just such a crusade they fear is in the offing.

Backing the FCC point of view, James V. DeLong, a senior fellow for the Project on Technology and Innovation at the CEI, states the problem simply: the incumbents invested in assets necessary to deploy broadband, incurred all the risks and then had to share their gains with new entrants.

"Privatized costs and socialized returns result in paralysis," DeLong says. "Neither the incumbents nor the entrants have any incentive to invest in facilities, while both have incentives to spend heavily on whining to Congress, the FCC and the courts."

Tighten Those Reins!

Competitive carriers equate deregulation with changing the Telecom Act, which they consider to be their reason for existence. If the government decides to deregulate the BOCs in the name of broadband, competitive carriers say their throats are as good as slit.

H. Russell Frisby, Jr., president of the Competitive Telecommunications Association (CompTel, www.comptel.org), says it's important for the FCC to understand that it could make matters worse by promulgating policies that would concentrate the ownership of broadband facilities (especially the crucial "last/first mile") into the hands of a few select incumbents.

"Our economy would be doubly hurt by such action," Frisby adds.

Instead, the commission should set national broadband goals and let the states experiment with new ideas to achieve them, according to CompTel. For instance the federal government could:

• Allow states to serve as laboratories for policy innovations to help create multi-protocol, multi-vendor, multi-user solutions;

• Distribute block grants to the states to achieve the goals of stimulating deployment and demand in underserved areas;

• Provide incentives (tax, legal and regulatory) for new application development, deployment and adoption;

• Reform federal procurement policies to mandate redundancy in telecommunications service providers serving all federal buildings and facilities, thus ensuring reliability and security in the event of emergencies while stimulating demand;

• Commit to robust and non-discriminatory enforcement of existing telecom laws;

• Increase certainty in the financial marketplace by consistently supporting pro-competition policies, thus increasing the flow of investment dollars; and

• Ensure competitive telecom companies have non-discriminatory access to federal lands at reasonable rates and adopt policies that eliminate local barriers to entry (rights of way, licensing, etc.);

• Endorse broadband policies that ensure competitors have access to the buildings where their customers are located.

States, meanwhile, can form partnerships with businesses to create broadband enterprise zones; they could use federal block grants to foster competition to induce broadband-based economic development that spurs broadband demand; and create state-based economic and tax incentives for application development and adoption.

CompTel says the majority of competitors have been crippled by the monopolies that prevented them from reaching customers. The rest of the telecom supply chain crumbled behind them.

According to recent FCC reports, in fact, since the Telecom Act became law, the ILECs still control more than 92 percent of America's local phone lines.

Rather than continue to rely exclusively on regulation to open the local exchange network to multiple providers, the only true and effective solution is to adopt a corporate structure --- such as the proposal by Sen. Hollings --- that realigns the incumbent's commercial incentives to achieve, rather than frustrate, access to the local network, Frisby said.

"All of our collective and well-intentioned efforts have just not been enough to change the fundamental reality that a monopoly will always behave like a monopoly unless it is incented [sic] to do otherwise," Frisby said. "And as we all know, the only incentive that works is the bottom line."

Like CompTel, other entities are poised to fight.

Legislation such as Tauzin-Dingell, said NNI's Kushnick, "is an attempt by Bell campaign-financed congressmen to forget history and give more money to the Bell monopolies, all in the name of broadband.

The Bells already received over $58 billion in added customer phone charges for fiber-optic broadband services they never delivered."

This can't go on any longer, agree other competitors.

CEOs of some 106 telecom companies, ranging from AT&T Corp. to KMC Telecom Holdings Inc. sent a letter to congressional members opposing legislation that would give the incumbents relief from the Telecom Act's market opening provisions.

If enacted into law, they wrote, the consequences would be devastating for a New Economy because such legislation would allow four megacompanies, each possessing an unregulated monopoly over local telephone services and Internet access, to have too much concentrated power.

And in response to FCC Chairman Powell's comments, resellers and entrants using the unbundled network element platform (UNE-P) say such methods must be protected for competitors to keep deploying broadband.

Congresswoman Wilson, for one, plans to help keep the status quo regarding competitors' access to UNEs.

What's the Deal?

The never-ending logjam over the Telecom Act that's occurring between the warring local exchange fractions, the FCC and Congress is heavily responsible for the current market creep of broadband, several sources contend.

"Government efforts to support broadband deployment are complicated by industry infighting and competing policy considerations," said Bruce Mehlman, assistant secretary for technology policy at the U.S. Department of Commerce. "Both sides insist they support competition, and both sides purport to seek deregulatory conclusions, and as a result, neither seems likely to make progress."

"The FCC has to follow the dictates of Congress, and my boss doesn't want to get rid of regulations that serve a purpose," Jordan Goldstein, legal advisor to FCC Commissioner Michael J. Copps told CLECs during an ALTS's business conference. "Competition is always going to be better."

But Goldstein said that there is a sense of urgency at the FCC regarding broadband. "This isn't a marathon, but we thought things would happen sooner than they have under the Telecom Act," he said. "Obviously there's a whole lot more work to do, and we'll have to consult with states and the industry."

And while Chairman Powell has made no secret of his desire to move towards a less regulated market for broadband communications, Progress & Freedom Foundation President Jeff Eisenach said "the question is how far deregulation will go, and how fast, and whether Congress will play a role in answering those questions" pertaining to the Telecom Act. That's a question which all concerned hope to see answered in the year ahead.

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