Shifting Sands

Posted: 07/2002

Shifting Sands
Competitors Seek Sure Footing Under Changing Regulatory Landscape

By Fred Dawson and Kim Sunderland

WITH
ALL BRANCHES OF THE FEDERAL government piling on to make 2002 a year to remember
in telecom regulation, confusion over where it all will lead is making it harder
than ever to plan for the future. But, make no mistake, there’s a discernable
direction upon which strategists can act, if they want to maintain a competitive
edge.

The clues to the new regulatory
framework taking shape in Washington lie in an assessment of what’s been done to
date on several fronts, including the FCC, the Congress and the federal courts.
For example, rulings issued in May by the U.S. Supreme Court and the U.S. Court
of Appeals for the District of Columbia make it much easier to ascertain now
than it was before the course the FCC will take under the direction of chairman
Michael Powell. And new action in the Senate, where stridently opposing sides
introduced two broadband bills in late April and early May, has implications for
the overall direction of the FCC initiatives as well, no matter what type of
broadband measure Congress ultimately sends to President Bush.

Overall, the picture is a fairly
bleak one for the competitive local telecommunications sector. "I guess
theoretically it’s up for grabs, and hell could freeze over as well," says
Charles Hunter, general counsel for the Association of Communications
Enterprises (ASCENT) "But it’s abundantly clear the FCC is trying to
insulate any advanced services from any kind of pro-competitive regulatory
controls. They want cable and telcos to go head to head, and to hell with
competition."

A Shot in the Arm

Even as the options open to
competitors seem destined to shrink, at least there’s some greater certainty
than before about the cost structure these competitors will have to work with.
In May the Supreme Court upheld the FCC’s rules pertaining to the pricing of
unbundled network elements — the total-element long-run incremental cost (TELRIC)
methodology. Under TELRIC, UNE pricing factors in future cost efficiency gains
as well as the initial cost of state-of-the-art equipment rather than actual
costs of legacy gear. The court also upheld commission rules requiring ILECs to
bundle elements they normally don’t bundle when asked to do so by CLECs.

The ruling is a shot in the arm for
competitors for whom uncertainty over the pricing rules has been a major
impediment to planning and fund raising, notes H. Russell Frisby, Jr., president
of the Competitive Telecommunications Association (CompTel). "Finally, this
five-year battle, which has hindered the development of true competition, can
come to an end,"

CompTel was "especially
gratified" the court also confirmed the FCC’s power to require UNE
combination, Frisby adds. "We hope the FCC keeps this ruling in mind as it
considers its Triennial Review."

But Frisby and other representatives
of the competitive players were not calling on the commission to keep the other
major federal court ruling in mind. In late May the appeals court overturned and
remanded for reconsideration the FCC’s rules for determining what ILEC network
elements must be offered on an unbundled basis. Making matters worse for
competitors, the court vacated the commission’s rules that require ILECs to
share voice lines for CLEC delivery of DSL services.

Within days of its ruling, Verizon
Communications Inc. and SBC Communications Inc. cited the court ruling in
efforts to preclude line sharing, according to the Association for Local
Telecommunications Services (ALTS) and CompTel. In a June 5 letter the
associations implored the FCC to take steps to ensure that ILECs preserve
line-sharing availability during its scheduled triennial review of the
Telecommunications Act of 1996.

"It is no exaggeration to say
that the failure to ensure the ongoing provisioning of line-shared loops will
result in a crisis in the broadband industry, with disconnected lines by the
thousands, consumer uncertainty about service availability and an immediate and
predictable decrease in the availability of DSL services," Frisby and John
Windhausen Jr., ALTS’ president wrote.

Support for Powell

But, the appeals court’s decision
was a ringing endorsement for change, if Powell was looking for some outside
support for a major revamping of the commission’s approach to the unbundling
rules. The court questions the FCC’s reliance on cost disparities between
incumbent and new-build network elements as the sort of impairment to entry
Congress had in mind as a measure of whether a network element must be
unbundled. "To rely on cost disparities that are universal as between new
entrants and incumbents in any industry is to invoke a concept too broad, even
in support of an initial mandate, to be reasonably linked to the purpose of the
(Telecom) Act’s unbundling provisions," the court says.

Moreover, the court says it saw no
justification for requiring network elements classified as subject to unbundling
be made available on a universal basis, without regard to local conditions.
"To the extent that the commission orders access to UNEs in circumstances
where there is little or no reason to think that its absence will genuinely
impair competition that might otherwise occur, we believe it must point to
something a bit more concrete than its belief in the beneficence of the widest
unbundling possible," the court says.

Clearly, the appeals court indicates
Powell is free to redefine what impairments justify unbundling an element and to
take local conditions into account when applying the unbundling rules. "The
court decision lends support to the direction the FCC seems to be going with its
current reviews of rules on the microscopic dissection of Bell networks,"
says Herschel Abbott, vice president for government affairs at BellSouth Corp.
"We are confident the FCC will follow the court’s suggestion that similar
and competing technologies be treated equally, " Abbott says, in reference
to the court’s criticism of the FCC for not taking into account the competitive
impact of cable modem service when it set the line-sharing rule,

This, of course, is precisely what
Powell says the FCC has in mind with respect to the notices of proposed
rulemaking on regulatory frameworks for high-speed data services delivered over
telco and cable networks. Notwithstanding their mild reactions to the court of
appeals ruling on unbundling, competitors clearly were alarmed at the direction
things were taking at the FCC.

Allying for Battle

To strengthen their efforts, CompTel,
ALTS and their allies have formed a Competition Working Group. The Group’s
mandate is to reach out to Congress, the press, consumer groups, other
industries and the FCC to help ensure "rules now being considered by the
FCC are consistent with the intent of the Telecommunications Act of 1996."
ALTS and CompTel’s leaders say the questions the commission has in various
proceedings leave room for action more favorable to their cause. They also made
clear they saw little hope for such an outcome without a groundswell of
resistance to the commission’s present leanings on the issues.

"The basic reason for forming
this coalition is that the future of local competition is at risk,"
Windhausen says. Bells and other ILECs’ competitors have invested some $65
billion in building high-speed local networks "based on rules the FCC
adopted" under the Telecom Act, says Windhausen. "The FCC has now
thrown all those rules up into the air."

Says Frisby, "Clearly the FCC
has indicated in its (wireline broadband) NPRM that it’s inclined to go in a
direction harmful to CLECs, but that’s not final. We believe they’re asking in
good faith a lot of questions which, if properly answered, would bend one to the
conclusion that you need to keep the facilities open under the information
services classification."

The Working Group hopes to enlist
support in Congress and at the state level, Frisby says. It also will meet with
a wide array of organizations, including new ad hoc groups formed by technology
interests to push for a national broadband agenda, he says. Just how the group’s
message will be conveyed to the press and the public remains undecided, but it
could go as far as placement of ads in broadcast media, officials say.

While the courts help Powell
formulate regulatory parameters under the Telecom Act, Congress has been
wrestling with changes to the act that could foster faster and broader rollout
of broadband services.

Opposing Solutions

In late April, Sens. John Breaux
(D-La.) and Don Nickles (R-Okla.) offered a bill that aims to establish
"parity" in broadband regulation of the Bell companies and cablecos.
The Breaux-Nickles bill essentially parallels the intentions of the recently
passed Tauzin-Dingell bill in the House. A week later, Commerce Committee
chairman Sen. Ernest "Fritz" Hollings (D-S.C.) responded with a
measure that would leave the restrictions of the Telecom Act in place while
tapping funds raised through the telephone excise tax to foster broadband
deployment in underserved areas and to stimulate development of more advanced
technologies and applications.

Hollings’ bill would put ILEC and
cable provision of broadband access to Internet content and services under the
same regulatory regime, with the exception that ILECs would be required to
provide ISPs the data transmission capabilities they need to deliver Internet
services. The bill defines broadband as access that operates in at least one
direction at speeds of 256kbps or higher. In contrast, the Breaux-Nickles bill
would leave it to the FCC to set the rules, stipulating only that the commission
would not be allowed to impose any new regulatory restraints on any broadband
provider. Breaux-Nickles also provides for relief from restrictions on interLATA
data services, which is not mentioned in the Senate bill.

Like Tauzin-Dingell, few people
expect the Senate to pass the Breaux-Nickles bill. "The Breaux-Nickles bill
appears to have very little support at this point," says a lobbyist who did
not wish to be identified. "The Hollings approach is much more in line with
mainstream thinking in the Senate."

Still, it’s clear that supporters of
regulatory parity between ILEC and cable broadband services have moved the
marker in the debate. Hollings had shied away from backing any measure in the
Senate that took the approach his new bill is expected to take, prior to House
passage in February of the broadband bill introduced by Reps. W.J.
"Billy" Tauzin (R-La.) and John Dingell (D-Mich.). Apparently Hollings
had wanted to avoid sending such a bill to a House-Senate conference committee,
fearing a compromise measure might give the ILECs what they were looking for.
But in the end, Hollings couldn’t afford to fight both the Breaux-Nickles and
the Tauzin-Dingell bills without offering an alternative.

Meanwhile, there’s more political
cover for Powell’s initiatives as the House and key members of the Senate push a
deregulatory approach to broadband. That’s important to Powell. Hollings sharply
criticized Powell’s actions for making an "end run victory for the Bells
rather than regulate the local monopoly as Congress intended." Hollings’
Broadband Telecommunications Act of 2002 would establish loan and grant programs
to make broadband Internet access more available and promote richer content and
higher speeds. It would set aside $2 billion in loans for carriers to build
broadband in rural and underserved areas and another $500 million in loans to
cover the costs of upgrading remote terminals and fiber between central offices
and remote terminals, with the stipulation CLECs would have unbundled access to
such terminals. The Hollings plan also calls for $1.5 billion in grants to local
governments and institutions to assist them in stimulating broadband deployment
and would establish a number of multimillion-dollar grants for research into the
benefits of and approaches to fostering high-speed access and to develop new
content and applications.

In a letter to Senate colleagues,
Hollings attacked the Breaux-Nickles bill as "nothing less than a Trojan
Horse to deregulate the Bells and extend their monopoly." If the goal is
parity, he wrote, Congress should look at "every area where industries are
treated differently," possibly including imposing new regulations on cable
or action pertaining to parity between the Bells and "the competitive
carriers they want to squash."

So while the deregulatory mood in
Washington may have cooled a bit as a result of the widely reported excesses in
energy, accounting, investment, and telecom, it remains to be seen whether the
pendulum has swung to the point represented by the Hollings bill. "Sen.
Hollings apparently believes the current problem in the broadband marketplace is
that government has not done enough to deliver the goods to the masses,"
says Adam Thierer, the director of telecommunications studies at the Cato
Institute, a Washington think tank with a strong libertarian bias. "His
solution is to micromanage the telecom marketplace through a jumble of complex
rules and then prime the broadband pump by spending billions of taxpayer dollars
on worthless studies, grants, and programs."

Words From the White House

It took until last month for
President Bush to make a broadband statement.

Speaking at a White House high-tech
conference in mid-June, Bush said his administration would rely on the FCC to
"eliminate hurdles and barriers" that have stymied widespread
broadband use. Not exactly a solid stance on a controversial issue, sources
note.

House Minority Leader Richard
Gephardt (D-Mo.), for instance, thinks that the president’s announcement lacks
substance, according to his spokesman. Gephardt and Senate Majority Leader
Thomas Daschle (D-S.D.) have petitioned Bush to develop a national broadband
policy. This against the backdrop of policy initiatives by Sens. Hollings,
Joseph Lieberman (D-Conn.), Sam Brownback (R-Kan.), and John McCain (R-Ariz.).

The absence of White House guidance
has allowed various federal agencies to weigh in on all sides of the issue. The
results border on being a bit comical.

James Gattuso, research fellow in
regulatory policy at the Heritage Foundation and adjunct scholar at the
Competitive Enterprise Institute, two of the more conservative think tanks in
Washington, said that in an embarrassing exception to the administration’s
silence, the General Services Administration (GSA) filed pro-regulatory comments
in April with the FCC. The GSA, which filed comments in the unbundling review
proceeding "on behalf of the customer interests of all federal executive
agencies," opposed efforts to reduce unbundling requirements and urged that
the requirements be expanded.

Meanwhile, the U.S. Trade
Representative (USTR) appeared to be pushing regulation abroad, Gattuso notes,
which underscored the need for the White House to articulate its own views. As
the administration’s trade negotiator, the USTR is responsible for getting other
nations to open up their markets to outsiders. A recent paper for the AEI-Brookings
Joint Center for Regulatory Studies, written by economists Jeff Rohlfs and Greg
Sidak, takes the USTR to task for advocating Clinton-era pro-policy positions.
As a result, Rohlfs and Sidak say that the United States is "exporting
telecommunications regulation."

"It could also be putting the
administration in the odd situation of pushing other countries to adopt policies
that the FCC is trying to change in the U.S., and — at least for those
involving broadband — on which the administration claims to be neutral,"
Gattuso says. "It’s a fine mess. And one in no small part created by the
Bush administration’s lack of leadership on this key issue."

Leiberman is singing the same tune.
In late May he offered his support for instituting a national broadband policy.
He also called on the Bush administration to step up to the plate. "It is
clear that broadband will revolutionize business and society in our time; but it
is also a confusing time, as many different interests emerge with many different
agendas," Leiberman says. "The issues to be faced are many and they
are complex. For some, there will be no easy answers. But it is time for us to
have a national strategy that addresses these issues in a coherent and
comprehensive manner."

The senator’s staff has assembled a
report with extensive input from industry, academia, and government. As the
first in a series of legislative initiatives, Leiberman introduced the National
Broadband Strategy Act of 2002. The bill highlights the need for a carefully
planned national strategy to provide universal availability of broadband and to
motivate research and advances in broadband applications and content. It calls
on the administration to recommend to Congress a coherent, cross-agency national
broadband strategy in a series of key government policy areas.

Leiberman’s staff report identifies
four key elements the senator says will be integral to advanced broadband
deployment. They include an FCC regulatory plan, tax incentives, research on
advanced infrastructure technology and deployment of applications.

In a nutshell, says Jeffery A.
Eisenach, a former member of the administration’s transition team for the FCC
and president of the Progress & Freedom Foundation, another Washington think
tank, chairman Powell supports the laissez-faire regulatory approach favored by
the Baby Bells.

"President Bush left no doubt
that FCC Chairman Michael Powell has his full support to move ahead on broadband
deregulation," Eisenach said. "Just as the administration lent its
support to the FCC’s decision to lift ownership caps on wireless spectrum, the
president has now personally given the green light to move forward on
broadband."

But that isn’t how the competitive
carriers or consumer groups heard it.

"Obviously, Mike Powell and the
administration have an agenda: to promote the interests of the corporations
through backdoor deregulation," said Mark Cooper, director of research for
the Consumer Federation of America. If the FCC deregulates broadband service,
the Internet landscape will resemble cable television, which Cooper describes as
having "500 channels with nothing on."

Powell, was unavailable for comment.

When it comes down to it, however,
it’s Powell, backed by his Republican colleagues at the FCC, who’s in the
driver’s seat on telecom regulation. The winds of change seem to be blowing in
Powell’s direction, which could well be all Bush deems he needs to ensure his
preferred outcome.