Democracy & Technology Blog Is the FCC losing its nerve?

This week the Federal Communications Commission failed to muster 3 votes to deregulate the broadband access services of Qwest Communications, as it has already done for Verizon in early 2006. The nature of the relief we’re talking about is analogous to the commission’s reclassification of DSL as an “information” service rather than a “telecommunications” service in 2005. In both cases, the effect is to free broadband providers from onerous common carrier regulation, allow them to tailor their offerings to customer needs and not be forced to offer their services to competitors at regulated, cost-based rates for resale.
To be fair, the relief Verizon got didn’t garner 3 of 5 votes. Verizon’s petition was filed pursuant to Sec. 10 of the Communications Act, which provides that a forbearance petition (a petition which asks the FCC to forbear from applying a regulation) will be granted automatically unless the commission denies it for good reason within one year plus a 90-day extension. That didn’t happen, so Verizon’s petition was granted automatically. This procedure may not sound like an ideal way to conduct public business, but Congress enacted Sec. 10 because of a long history of FCC foot-dragging. The commission is a political animal, and many former staffers are employed by the companies the FCC regulates.
Word is that Chairman Kevin J. Martin and Commissioner Deborah Taylor Tate were both prepared to vote “yes” on the Qwest petition. Republican Commissioner Robert M. McDowell, meanwhile, claims that the commission as a whole was prepared to grant at least some of the relief sought by Qwest, and that he is disappointed an “appropriate accommodation” could not be found. Qwest chose to withdraw its petition before it could be denied.
Maybe Qwest was unwilling to settle for half a loaf, but maybe the commission wasn’t prepared to offer anything of value. The commission’s recent ruling allowing Qwest and other telecom providers to integrate their long-distance and local services provided some of the regulatory relief Qwest sought in the petition it withdrew this week. Thus it may be Qwest was merely offered the portion of its petition which matched the relief it won a couple weeks ago.
It’s ironic: The broadband services offered to consumers and used by most small businesses have been deregulated.  One would assume the primary concern of government would be to “protect” consumers and small businesses — those who can least afford to hire expensive lawyers, consultants and lobbyists. But now that the question is whether to finish the job — to deregulate the broadband services offered by AT&T, Embarq, Qwest and Verizon to large businesses and competing carriers, the FCC is receiving pushback.  Big business and competitive carriers oppose deregulation, hoping to pay less — even if that means residential and small business users who rely on DSL have to shoulder a greater share of carrier revenues.  There is no free lunch. 
The outcome of the Qwest petition coupled with the commission’s recent decision in the matter of ACS of Anchorage, Inc., suggests that the commission has set a new bar which could slow, or possibly even reverse, the commission’s successful policy of promoting investment and competition in broadband through deregulation. In voting to grant a recent petition for regulatory forbearance submitted by an Anchorage telephone company which is subject to unusually intense competition, Republican Commissioner Robert M. McDowell — the commission’s swing vote —adhered to a competitive analysis focusing not on the existence of the requisite conditions for competition nor even the actual presence of competition, but on the competitors’ market share.

I support the relief from regulation that is granted in this forbearance petition filed by ACS of Anchorage, Inc. (ACS). The Anchorage, Alaska study area is a unique market, where the incumbent local exchange carrier, ACS, faces significant facilities-based competition from other carriers, primarily General Communication Inc. (GCI). For instance, GCI purportedly has over one-half of the exchange access market and 60 percent of the high-speed Internet market in Alaska. In addition, the geographic location of Anchorage contributes to the special characteristics of that market that are not duplicated in any other market in the country. With regard to ACS’s enterprise broadband services, forbearance from regulating those services is appropriate based on the level of competition it faces in the Anchorage market, not only from GCI but also from AT&T and other providers. I believe that a local market analysis, rather than a national market analysis, is the correct basis for determining whether this type of relief is warranted. (emphasis added.)

Although the commission reached the correct result, ACS’s petition was granted, the vote was 3-2 and McDowell’s analysis combined with the pro-regulatory sentiments of the commission’s two Democrats raises the possibility that the commission is in the midst of retreating from its preexisting policy of deregulating incumbents based on the presence of competitive facilities — which is comparatively easy to verify — in favor of an analysis of relative market shares, which could lead to endless quarrels over methodology, data and the appropriateness of desired thresholds.  McDowell also said that he thinks localized market analysis is the correct basis for determining whether deregulation is warranted.  Since there are hundreds if not thousands of localities, this would only magnify the problem.    
The commission is considering other proposals for deregulation and re-regulation. Rep. Ed Markey (D-MA), who chairs the House subcommittee responsible for FCC oversight, recently asked the commission to complete any review of special access issues (as I have discussed here) necessary to revise the current rules no later than Sept. 15th.  Though somewhat cleverly couched, Markey’s letter is a clear signal to the FCC to re-regulate the services that telecom providers offer large businesses and competitive carriers.
But to do so would completely ignore what’s happening in the marketplace.  There is abundant evidence that competition is increasing, actual prices are declining and that additional regulation is not only unlikely to promote competition but is actually more likely to reduce it, as I recently noted in comments to the FCC on this matter.

Cable operators and fixed wireless providers are currently investing in new facilities that will compete with the special access services provided by incumbent LECs. For example, Sprint Nextel is partnering with Clearwire to build a nationwide WiMAX network partly in order to reduce the backhaul costs it pays to route calls from cell towers to switching centers (Sprint claims in this proceeding that special access constitutes, on average, approximately 33 percent of the monthly cost of operating a cell site). Sprint has also inked a deal with FiberTower to provide backhaul for its 4G/WiMAX service in several markets. [AT&T has submitted an affidavit which claims] that Sprint told AT&T negotiators it has “many other options” to meet its backhaul needs.
Cablevision and Time Warner are making “major pushes” to offer packages of phone, TV and high-speed Internet service to small and midsize businesses, according to the Wall Street Journal, and Comcast has said that offering services to small and midsize businesses will be its top new priority of 2007 and 2008. (citations omitted.) ….
If the Commission arbitrarily reduces what incumbent LECs can charge for special access, that would also reduce the revenue investors could expect to earn from these new facilities which, in turn, may affect their willingness to follow through with these investments. The risk that Sprint Nextel, for example, might cancel its plans to build a WiMAX network if the Commission reduces its backhaul costs via regulation of incumbent LECs is a risk the Commission should avoid.

As another example, Google CEO Eric Schmidt has commented that “One of the neat things about the bubble is that people built all of this fiber that is now essentially free.”
The dilemma facing the commission is, small new entrants are struggling in the marketplace (yes, they employ several well-regarded former FCC staffers).  As I pointed out in my comments, it may not be possible to save these carriers without indefinite regulation.

The rates incumbent LECs charge for special access aren’t the primary  headache facing CLECs, just the easiest for lobbyists to fix.  As COMPTEL acknowledges, CLECs “do not have the scale and scope to compete with the Bells for the major purchasers of special access.”  AdHoc makes a similar point when it observes that the “rummage sale prices” at which the divestiture assets from the AT&T/BellSouth merger were sold may indicate that the assets conferred little competitive benefit to the CLECs.  Since the CLECs can offer high-revenue customers only limited facilities and a limited array of services, COMPTEL confirms that its members “have to offer extremely steep discounts” relative to the prices charged by incumbent LECs. (footnotes omitted.)

The point is this: Indefinite regulation isn’t necessary to protect robust competition from cable and wireless. In fact, regulation will diminish their enthusiasm for new investment. 
We can’t have  it both ways.  Either we ensure that investments can profitably be made in new facilities by letting the market set prices, or we can attempt through regulation to keep prices low which will encourage competitors to share existing facilities and beseech regulators to impose ever-lower prices.  In that case, their offerings will simply mirror the incumbents’ and the incumbents will search for investment opportunities that don’t require profit-sharing.  This is not a recipe for innovation.   

Hance Haney

Director and Senior Fellow of the Technology & Democracy Project
Hance Haney served as Director and Senior Fellow of the Technology & Democracy Project at the Discovery Institute, in Washington, D.C. Haney spent ten years as an aide to former Senator Bob Packwood (OR), and advised him in his capacity as chairman of the Senate Communications Subcommittee during the deliberations leading to the Telecommunications Act of 1996. He subsequently held various positions with the United States Telecom Association and Qwest Communications. He earned a B.A. in history from Willamette University and a J.D. from Lewis and Clark Law School in Portland, Oregon.