<DOC>
[108th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:89000.wais]
THE REGULATORY STATUS OF BROADBAND SERVICES: INFORMATION SERVICES,
COMMON CARRIAGE, OR SOMETHING IN BETWEEN?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON TELECOMMUNICATIONS AND THE INTERNET
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JULY 21, 2003
__________
Serial No. 108-40
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
89-000 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
---------------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800
Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001
COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas Ranking Member
FRED UPTON, Michigan HENRY A. WAXMAN, California
CLIFF STEARNS, Florida EDWARD J. MARKEY, Massachusetts
PAUL E. GILLMOR, Ohio RALPH M. HALL, Texas
JAMES C. GREENWOOD, Pennsylvania RICK BOUCHER, Virginia
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, Jr., New Jersey
RICHARD BURR, North Carolina SHERROD BROWN, Ohio
Vice Chairman BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
CHARLIE NORWOOD, Georgia BOBBY L. RUSH, Illinois
BARBARA CUBIN, Wyoming ANNA G. ESHOO, California
JOHN SHIMKUS, Illinois BART STUPAK, Michigan
HEATHER WILSON, New Mexico ELIOT L. ENGEL, New York
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES W. ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania TOM ALLEN, Maine
MARY BONO, California JIM DAVIS, Florida
GREG WALDEN, Oregon JAN SCHAKOWSKY, Illinois
LEE TERRY, Nebraska HILDA L. SOLIS, California
ERNIE FLETCHER, Kentucky
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
Dan R. Brouillette, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Telecommunications and the Internet
FRED UPTON, Michigan, Chairman
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas Ranking Member
CLIFF STEARNS, Florida BOBBY L. RUSH, Illinois
Vice Chairman KAREN McCARTHY, Missouri
PAUL E. GILLMOR, Ohio MICHAEL F. DOYLE, Pennsylvania
CHRISTOPHER COX, California JIM DAVIS, Florida
NATHAN DEAL, Georgia RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky EDOLPHUS TOWNS, New York
BARBARA CUBIN, Wyoming BART GORDON, Tennessee
JOHN SHIMKUS, Illinois PETER DEUTSCH, Florida
HEATHER WILSON, New Mexico ANNA G. ESHOO, California
CHARLES W. ``CHIP'' PICKERING, BART STUPAK, Michigan
Mississippi ELIOT L. ENGEL, New York
VITO FOSSELLA, New York ALBERT R. WYNN, Maryland
CHARLES F. BASS, New Hampshire GENE GREEN, Texas
MARY BONO, California JOHN D. DINGELL, Michigan,
GREG WALDEN, Oregon (Ex Officio)
LEE TERRY, Nebraska
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Baker, David, Vice President, Law and Public Policy,
Earthlink, Inc............................................. 42
Davidson, Charles M., Commissioner, Florida Public Service
Commission................................................. 22
Goldman, Debbie, Policy Committee Chairwoman, Alliance for
Public Technology.......................................... 47
Jones, Thomas, Willkie Farr & Gallagher...................... 36
Misener, Paul, Vice President for Global Public Policy,
Amazon.com................................................. 50
Nelson, Robert B., Commissioner, Michigan Public Service
Commission, Chairman, Committee on Telecommunications,
National Association of Regulatory Utility Commissioners... 15
Pepper, Robert, Chief, Policy Development, Office of
Strategic Planning and Policy Analysis, Federal
Communications Commission.................................. 10
Sachs, Robert, President and Chief Executive Officer,
National Cable and Telecommunications Association.......... 39
Tauke, Thomas J., Senior Vice President, Government
Relations, Verizon Communications, Inc..................... 30
Material submitted for the record by:
Allegiance Telecom; Conversent Communications; and Time
Warner Telecom, prepared statement of...................... 95
National League of Cities; United States Conference of
Mayors; National Association of Counties; National
Association of Telecommunications Officers and Advisors;
and TeleCommUnity, prepared statement of................... 78
(iii)
THE REGULATORY STATUS OF BROADBAND SERVICES: INFORMATION SERVICES,
COMMON CARRIAGE, OR SOMETHING IN BETWEEN?
----------
MONDAY, JULY 21, 2003
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Telecommunications
and the Internet,
Washington, DC.
The subcommittee met, pursuant to notice, at 3:05 p.m., in
room 2123, Rayburn House Office Building, Hon. Fred Upton
(chairman) presiding.
Members present: Representatives Upton, Stearns, Shimkus,
Walden, Tauzin (ex officio); Markey, Davis, Engel, Wynn, and
Dingell (ex officio).
Staff present: Howard Waltzman, majority counsel; Will
Nordwind, majority counsel and policy coordinator; Will Carty,
legislative clerk; Gregg Rothschild, minority counsel; and
Peter Filon, minority Counsel.
Mr. Upton. Good afternoon.
To a casual observer, the discussions of Title I and Title
II and classifications of broadband as either a
telecommunications service or an information service may seem
mind-numbingly arcane. However, the distinctions are critically
important, and the FCC's decisions in this regard may have a
profound effect on our Nation's consumers and our economy.
On July 15, Alan Greenspan suggested that corporate
executives are still sitting out this recovery. He seemed to
suggest that everyone else is on board the flight, but
businesses remain in the waiting area. We need to ask why this
is the case in the telecommunications sector.
The short answer is that outmoded regulation is getting in
the way of investment in broadband deployment. The FCC needs to
act now, and I hope that the FCC is listening, because I expect
to have the Commission back shortly after we return in
September and we will be asking them to explain if they have
not acted by then.
Our Nation's economy is hanging in the balance. I commend
Chairman Powell for his vision and efforts to create a national
broadband policy. I share that vision, and I believe that it
should be accomplished through deregulatory parity, not
regulatory parity, and I have said that a number of times.
In my view, we should endeavor to provide the same
deregulatory treatment to all broadband services, regardless of
the platform by which they are delivered. We need to knock down
regulatory barriers which are stifling incentives to invest if
we are to bring the promise of broadband to the American people
and realize the economic stimulus which this will create. In
fact, some experts suggest that the widespread adoption of
broadband will increase the efficiency and productivity in the
American workplace to the tune of half a trillion dollars.
Of course, the multiplier effect of investment in the
telecommunications sector is enormous. Every dollar of
investment in telecommunications infrastructure results in
almost $3 in economic output.
In February, the Commission announced the results of its
Triennial Review. Five months later, the Commission still has
not issued its order. It seems that the Commission is moving at
dial-up speeds. Nevertheless, I am cautiously optimistic that
the Commission's order once issued will remove significant
regulatory shackles from the backs of the ILEC's broadband
facilities. This would be a welcome regulatory change, and it
will promote investment in broadband which will be good for the
consumer and the economy.
Today we will turn our attention to two proceedings which
will determine how broadband services offered by telephone
companies and cable companies are defined. These proceedings
will also have a significant bearing on whether we create the
right incentives to invest in broadband and promote real
competition.
So far, the Commission has declared that broadband services
provided by cable companies are information services, not
telecommunications services. The Commission is right on the
mark, both as a matter of policy and as a matter of law.
Moreover, the Commission has tentatively concluded that
broadband services provided by phone companies are also
information services, not telecommunications services; and I
hope that the Commission continues down the same logistical
path in this proceeding as it did in the cable broadband
proceeding and removes the tentiveness of this conclusion.
What such classifications would promote is the notion that
old legacy telephone regs are simply not appropriate for
broadband services, particularly given that there are numerous
technological platforms by which broadband services are
delivered, and it makes no sense to tie one hand behind the
backs of the telephone companies seeking to provide the same
service as the cable companies or, for that matter, satellite
TV companies, wireless companies or, hopefully in the not-too-
distant future, power line carrier companies.
Again, this is not to suggest that we should tie one hand
behind the back of all other broadband service providers to put
them on the same regulatory playing field of the telephone
companies either. That would be a big mistake. What we need is
deregulatory parity, and we need both Federal and State
regulators to be involved in promoting real competition and
stimulating investment in the broadband marketplace.
I am convinced that this would create real, sustainable
economic growth, provide the jobs and ensure the most
competitive broadband marketplace which would lead to the most
rapid deployment of broadband to the American people. Now is
the time for the FCC to act. We will hear from the FCC today,
and I look forward to hearing from the Commission again this
fall, and the news, I hope, better be good.
I yield to the ranking member of the subcommittee, Mr.
Markey.
Mr. Markey. Thank you, Mr. Chairman, very much, and thank
you for putting together this extremely distinguished panel.
I am glad to see Mr. Tauke's name elevated in the center of
the panel, reflecting the exalted status which he holds and the
memory of this committee as a former member of it. Although I
would say that the concomitant reality is not true for you, Mr.
Misener, and your status. That is unrelated to why you are
sitting at that table, and we also hold Amazon in very high
status as well.
The purpose of this hearing, Mr. Chairman, is to discuss
the regulatory classification that should be accorded to
broadband access to the Internet, whether it is over a cable
facility or over a telephone wire. There are some who assert
that such services are information services, others who
stipulate that they are telecommunications services. The
distinction in nomenclature is important, because the providers
of information services have differing legal and regulatory
obligations than those entities providing telecommunications
services.
Information services are largely unregulated, as opposed to
providers of telecommunications services. Providers of
information services do not currently have the universal
service, consumer privacy, law enforcement, interconnection,
unbundling or resale obligations that telecommunications
carriers have, just to name a few items.
By recently classifying broadband access to the Internet
over cable systems as an interstate information service, the
FCC took jurisdiction away from State regulators and local
franchising authorities for such services offered by cable
operators and rendered cable modem broadband services
unregulated.
The telephone companies, who compete with cable broadband
offerings in the residential marketplace with their DSL
offerings, correctly point out that their service is comparable
to that offered by cable operators. It certainly is similar in
the eyes of millions of consumers.
DSL services are fungible substitutes in the marketplace
for cable broadband offerings. They are marketed as competing
products, and they are essentially priced the same.
The fact that the telephone companies seek equal treatment
for cable, modem and DSL offerings is understandable. They
should be treated the same way. The phone company's desire to
achieve parity by deregulating down to the unregulated
offerings of the cable industry is also a perfectly
understandable goal from their point of view. The law compels
parity and like treatment, however, not by deregulating the
phone industry by redefining their services so that they have
minimal obligations in the public interest, but to spur on
digital technologies and competition.
Congress enacted the Telecommunications Act of 1996. That
Act broke down historic barriers to competition and was
designed to unleash a digital free-for-all across all market
sectors and industries.
Central to the Act was the notion that we would treat
entities based on the services that they were providing rather
than based on their pedigree as a cable company or phone
company or on the particular type of facilities used to deliver
the service. The law, therefore, is intended to treat cable
modem and DSL services similarly.
Clearly, Congress built much of the Act and its structure
upon the definitions of telecommunications services and
telecommunications carriers. To believe, therefore, that when
we achieve the digital convergence and deployment of such
services to the American people that we also meant to obviate a
phone company's or cable company's obligations to law
enforcement, interconnection, equal access, universal service
or consumer privacy is mistaken. Simply put, it could not have
been what Congress intended, because no one would have voted
for that.
We must remember that when this subcommittee worked in the
1990's to get the phone industry and the cable industry to
deploy digital services to consumers we did so not for the sake
of such deployment itself. We did so for the widespread
benefits of harnessing the best of the digital revolution, for
the entrepreneurs and the businesses at the end of the line,
for those that would innovate and contribute to economic growth
and job creation.
There may be better ways to achieve the type of broadband
competition that drives deployment and consumer affordability,
and we may hear some new ideas today that the subcommittee
could pursue. The latitude, however, that the Commission has
afforded itself to redefine the very services we sought to
promote in the Telecommunications Act puts in jeopardy not only
many current provisions of law, it also undermines our ability
to legislate effectively in the future, especially if the words
and terms we use to describe the rights and obligations of
unregulated entities may be subsequently swapped for others by
regulatory fiat and in headlong pursuit of obtaining a level of
deregulation that Congress itself did not endorse.
Again, I commend the chairman for calling this hearing; and
I look forward to hearing from our witnesses.
Mr. Upton. Thank you, Mr. Markey.
I will recognize the chairman of the full committee, Mr.
Tauzin.
Chairman Tauzin. Thank you, Chairman Upton.
Let me congratulate and offer my welcome to all of the
witnesses who are here today. It seems whenever we have a
telecom hearing we have more witnesses requesting attendance
than we have space in the committee. Today is no exception. And
I want you all to know that while we hold you all in very deep
and personal affection and equal respect, that we hold Mr.
Tauke in greater equal respect and admiration, simply because
he has served with us and we have developed over the years such
an admiration of him. Mr. Tauke and I, in fact, from different
sides of the aisle, then led the effort together to begin
deregulating free speech in America, and in essence we are
still on that track.
What we are talking about today again is an area of free
speech in a new form, and every time we talk about the capacity
or the power of the Federal Government and local governments to
regulate the manner which Americans speak to one another in
whatever new form they find, I generally fall on the side of
less regulation rather than more, not just to incentivize the
new entrants into the marketplace but because I think our
Founding Fathers meant for us to fall on that side wherever
possible. Because when it comes to the speech of Americans,
however they wish to speak, whether it is over a telephone or
over an Internet line or a broadband facility provided by a
telephone company or a cable company, we ought to, as much as
we can, facilitate that freedom.
That is why the Founding Fathers meant and wrote so
carefully a first amendment to our U.S. Constitution. It was
not designed to protect citizens from one another. It was
designed to protect citizens from a government that might
regulate the way in which they speak and what they might say
and how they might be heard or viewed throughout the
generations.
So we start from that principle, and the chairman and Mr.
Markey have outlined to some degree the technicality of today's
hearing, and while it bears repeating, this is a technical
hearing to some degree, because it is government-speak. It is
government-speak as to whether or not this new digital world is
really information or telecommunications.
Let me first say that I think Chairman Powell has done us
all a service by making the right decision when he decided on
the underlying question here, that broadband facilities should
not have to be provided on an unbundled basis. That was right.
It is a good decision.
I only wish we could see it all. I don't know why it is
taking so long. It is incomprehensible. Maybe that is why they
call it a Triennial Review, because it is going to take 3 years
to roll out the decision. But it is time for us to see that
decision and begin to see the effects of it.
Now, as you know, the Commission is also getting into the
question of what are the services; and the fact that they have
decided these are not telecommunication services is a good
start. But the underlying transmission component of broadband
services is also at stake here, and if you decide that that
underlying transmission is going to be subjected to the same
sort of regulations by which telephone traffic was formally
regulated, then I think we can get into some deep trouble here.
So we are all interested in knowing, both from a State and
Federal standpoint, as to how we can advance the cause of
freedom of speech here, at the same time advance the deployment
of broadband services so that Americans can as freely and as
unfettered as possible engage in all the new forms of
communication that the digital broadband world might offer
them.
So with all the technical speak we are going to hear today,
I hope we remember what it is all about. It is all about
whether we are going to continue these old forms of regulation
that were designed in a day and age of analog transmission when
your pedigree did matter because you were different then. As we
move into an age when it is all the same, it is all digital
broadband transmission of data that could be voice, could be
pictures, could be information or could be entertainment, could
be technical, could be medical help, could be educational
services, who knows; and as we enter that new world can we
enter it with the first amendment in mind, or do we have to
just regulate it to death?
I particularly want to welcome Commissioner Davidson of
Florida, because you present a refreshing perspective from
State commissions. You basically start with the notion, as I
do, that it would be awfully good not to regulate it to death.
Too much of our State commissioners believe that they have got
to regulate everything that walks or crawls or if it threatens
to walk or crawl they are going to regulate it. I appreciate
your fresh approach.
As Mr. Markey said, I hope we get some good new ideas
today. Through all the technical discussions, all that
technical FCC and PUCA rigmarole, if we can just all agree that
in a broadband world it is all the same and Americans ought to
have access to it as unfettered as we can make it available to
them.
I yield back. Thank you, Mr. Chairman.
Mr. Upton. Thank you.
Recognize the ranking member of the full committee, the
gentleman from the great State of Michigan, Mr. Dingell.
Mr. Dingell. Mr. Chairman, I thank you, and I commend you
for holding this hearing on the regulatory status of broadband.
I particularly want to welcome our panel. It is a
distinguished one, and thank you gentlemen and ladies for being
with us today. We appreciate your presence and your assistance.
I want to particularly welcome Commissioner Nelson from the
Michigan Public Service Commission; our old friend Mr. Tauke,
who I hope is feeling well and doing well, we miss you here on
the committee; and also Mr. Sachs; and to the rest of the panel
members, my welcome and my appreciation to each of you, too.
Mr. Chairman, this is a timely hearing. It has been more
than 7 years since we passed the legislation which came to be
known as the Telecommunications Act of 1996. With that Act, it
was the intention and the hope of this committee and the
Congress that we would see competition enter into the
telecommunications business. People would be able to enter it.
There would be few regulatory barriers to the entry or to the
conduct of the business so that we might see a situation, in
the mind of the Congress, where consumers would have options of
many kinds of services where entry would be easy, where
competition would be brisk and vigorous and where we would
remove what the Congress found to be essentially the dead hand
of regulation.
We find that we were mistaken. We find that that statute
has been much disregarded by the regulatory agencies,
particularly the FCC. In fact, there is a publication by a
former FCC employee in which he virtually told us how the FCC
had reinterpreted the statute, much in defiance of the wishes
of the Congress and the committee. We have, from time to time,
had members of the Commission up here to discuss these matters
and to inquire of them how they could interpret the statute in
the curious way in which they have, but we find ourselves now
confronted with a rather remarkable series of roadblocks in
which the Justice Department and the FCC are able to find new
and unique mechanisms for denying the public the benefits of
the congressionally mandated deregulation.
The telecommunications industry continues to suffer, as
does the economy in general. Likewise, consumers of
telecommunications services continue to suffer and have the
lack of availability of high-speed service.
Other countries do splendidly. The United States does not.
This is not a coincidence. Telecommunications is a large part
of the national economy, and it played a central role in the
boom which existed until just a few years ago. As I have said
before and will say again, revitalizing this industry can do a
lot to improve the fiscal health of this Nation. Promoting
broadband development, I believe, is the key to helping this
ailing sector, and one way to promote such development is to
eliminate roadblocks of a regulatory character which are
constantly being placed in the way of that industry by the FCC,
the Department and occasionally by State agencies.
Those companies that have weathered the storm so far have
had no choice but to reduce capital budgets. Investments in
capital expenditures have plummeted, as have company valuations
and the stock market, too. The corporate and economic
consequences are grave, but the personal consequences in terms
of lost jobs and lost retirement savings are even more
profound.
The largest of the telecommunications failures, that of MCI
WorldCom, was a result of egregious fiscal malfeasance, or
perhaps worse; but regulatory mismanagement must accept its
fair share of blame for the industry's current state. Applying
old rules to new broadband facilities discourages investment,
and I find myself constantly trying to understand why it is
that different offerers of service in this precise area,
substitutable exactly in kind one for another, are treated so
differently.
We need to end such regulatory nonsense as we try to
transition from narrowband to broadband technologies. DSL has
its limits as it rides over the old copper network. Next-
generation services and applications, those that will offer
broadband, including Internet, voice and video services, will
require significant upgrades of current copper-based networks.
We in Congress and those currently at the FCC have an
obligation to adopt smart policies so that the marketplace can
fund investment and reward those companies willing to risk
capital and permit them to do so. We have a responsibility to
our constituents who can benefit from the next-generation
broadband services and applications and who often have suffered
lost jobs and savings.
We must start by freeing new broadband investment from
inappropriate regulation such as that curious TELRIC pricing
device. We must also create a regulatory regime that does not
favor one technology or provider but instead creates parity and
opportunity for the smart, the vigorous, the capable and the
hard working.
Other opportunities lie ahead, however. We must await the
full text of the FCC's long overdue Triennial Review. By all
accounts the decision appears to have made some progress, at
least with respect to broadband. Having been disappointed many
times, I have some curiosity as to whether this is, in fact,
so--but from what I am told, if it is finally released someday,
if that day comes, it will adopt much of what this committee
tried to achieve in the Tauzin-Dingell bill by ending outmoded
regulation of new fiber networks.
I fear, however, that it does little to rationalize the
FCC's destructive pricing rules. My understanding is that it
preserves the so-called TELRIC methodology with only slight
modifications. Such a heavily and artificially discounted
pricing mechanism only skews incentives. It robs the incumbents
not only of a reasonable return but also of valuable resources
they could use to build out robust broadband facilities.
To add insult to injury, it pads the coffers of those who
merely sit on the sidelines, doing nothing to improve the
telecommunications infrastructure or increase its reach. The
FCC should provide for sensible rates to be sure these rates
will be wholesale, but they should reflect at least some
resemblance of a fair market price.
Further FCC decisions on the regulatory treatment of cable
and wire-line broadband services are around the corner. The FCC
has already ruled that the cable broadband falls under Title I
rather than Title II.
Absent another Triennial Review-type delay, we will soon
learn how the FCC will regulate a telephone company's provision
of DSL. My position on this matter is clear. If cable broadband
deserves Title I treatment, so does wire-line broadband. We
will see if the FCC can rise to the occasion. It has
disappointed us many times and in serious fashion. If it does
not rise to the occasion, then the Congress must.
I look for today's witnesses to give us suggestions on how
we can do so. Thank you, Mr. Chairman, and thank you, members
of the panel.
Mr. Upton. Thank you.
Mr. Shimkus.
Mr. Shimkus. Thank you, Mr. Chairman. I will just defer my
opening statement.
Mr. Upton. Mr. Wynn defers.
[Additional statements submitted for the record follow:]
Prepared Statement of Hon. Barbara Cubin, a Representative in Congress
from the State of Wyoming
Thank you, Mr. Chairman.
I would like to thank you for holding this hearing to address an
important component of life in the Twenty-First Century. Affordable,
reliable and rapid access to the Internet is integral to the evolution
of this new, modern means of communication. It also affects how well it
can be integrated into our daily lives. Those of us who have broadband
connections at work and a dial-up, or narrowband, connection at home
know firsthand how a slow connection can impede modern and
sophisticated Internet services. That's why properly incenting
broadband deployment is a worthy goal for Congress.
Often, however, properly incenting means simply doing no harm. The
federal government ought not be in the business of picking winners and
losers, so a uniform and non-discriminatory regulatory environment
ought to be the policy of this Congress, the Commission and those who
seek to apply anti-growth regulations across the nation. That is not to
say, however, we need to apply more regulations to more industries just
to achieve uniformity--honestly we need less regulation, and I am
pleased that it appears this is the direction the Commission is headed.
Additionally, if there is an asymmetrical treatment of technologies, it
will present troubles in the future as to how classify new and emerging
technologies by trying to apply the present scheme.
Of course my overarching concern on broadband is the treatment of
rural areas. The more barriers we erect the less likely it is for a
company to put capital on the line only to end up bankrupt. There are
already impediments that exist all over rural America--and in my state
of Wyoming--that discourage broadband service. There are costs that a
service provider has to bear in Wyoming that are relatively tiny in
more dense population centers. You find miles and miles of roads and
acres of majestic beauty in Wyoming. But with a population of around
half a million, there is no density to make laying all of those lines
and cables profitable.
We do, however, have federal programs that provide assistance to
encourage broadband deployment and I also note that they do not
discriminate against any specific technology. I think that's a good
model to serve consumers and I will continue seeking solutions to
encourage broadband service to high-cost rural areas.
I thank our witnesses for coming today and I look forward to
hearing their comments on this matter and thoughts about where we go
from here.
______
Prepared Statement of Hon. Vito Fossella, a Representative in Congress
from the State of New York
Mr. Chairman, I'd like to thank you for convening this hearing
today. Our Subcommittee has a history of involvement in the development
of broadband policy, and our hearing today provides a tangible reminder
of our commitment to accelerating broadband deployment.
Many of my colleagues will remember our efforts to enact the
Tauzin-Dingell bill in the last Congress. While we were successful in
getting that bill passed in the House, unfortunately our counterpart
was not able to take up similar legislation. Had we been successful,
this hearing might have been very different.
Mr. Tauke states in his testimony that Wall Street is skeptical of
increased capital spending and rather has been rewarding cutbacks in
investments. He goes on to say that investors believe the regulatory
rules make it nearly impossible to realize any return from investments
in new technologies. Even though most of my colleagues would agree that
telecommunications has changed significantly since the 1996 Act, we
still have some people in the decision making process ignoring what the
experts are saying and basing their decision on detrimental regulations
put in place during an entirely different era of the telecommunications
industry.
The FCC had the opportunity to address these issues in its
``Triennial Review'' proceeding that was concluded earlier this year.
While we've all seen the press reports describing the Commission's
actions, the text of its decision has not yet been released. I hope
that when the Commission's report is released, that those of us who
favor the rapid rollout of broadband will be pleased.
I look forward to hearing our testimony here this morning, and
yield back the balance of my time.
Mr. Upton. Well, we are delighted with the panel that we
have assembled this afternoon. We will lead off with Dr. Robert
Pepper, Chief of Policy Development, Office of Strategic
Planning and Policy Analysis at the FCC; followed by Michigan
Public Service Commissioner Robert Nelson; Mr. Charles
Davidson, Commissioner of the Florida Public Service
Commission; Mr. Tom Tauke, our former colleague and now Senior
Vice President of Verizon; Mr. Thomas Jones from Willkie Farr &
Gallagher; Mr. Robert Sachs, President and Chief Executive
Officer of the National Cable and Telecommunications
Association; Mr. David Baker, Vice President of Law and Public
Policy at EarthLink; Ms. Debbie Goldman, Policy Committee Chair
of the Alliance for Public Technology; and Mr. Paul Misener,
Vice President of Global Public Policy for Amazon.com.
Dr. Pepper, we will start with you. We appreciate your
testimony. All of you that submitted it in advance will try to
limit your remarks to 5 minutes.
Dr. Pepper.
STATEMENTS OF ROBERT PEPPER, CHIEF, POLICY DEVELOPMENT, OFFICE
OF STRATEGIC PLANNING AND POLICY ANALYSIS, FEDERAL
COMMUNICATIONS COMMISSION; ROBERT B. NELSON, COMMISSIONER,
MICHIGAN PUBLIC SERVICE COMMISSION, CHAIRMAN, COMMITTEE ON
TELECOMMUNICATIONS, NATIONAL ASSOCIATION OF REGULATORY UTILITY
COMMISSIONERS; CHARLES M. DAVIDSON, COMMISSIONER, FLORIDA
PUBLIC SERVICE COMMISSION; THOMAS J. TAUKE, SENIOR VICE
PRESIDENT, GOVERNMENT RELATIONS, VERIZON COMMUNICATIONS, INC.;
THOMAS JONES, WILLKIE FARR & GALLAGHER; ROBERT SACHS, PRESIDENT
AND CHIEF EXECUTIVE OFFICER, NATIONAL CABLE AND
TELECOMMUNICATIONS ASSOCIATION; DAVID BAKER, VICE PRESIDENT,
LAW AND PUBLIC POLICY, EARTHLINK, INC.; DEBBIE GOLDMAN, POLICY
COMMITTEE CHAIRWOMAN, ALLIANCE FOR PUBLIC TECHNOLOGY; AND PAUL
MISENER, VICE PRESIDENT FOR GLOBAL PUBLIC POLICY, AMAZON.COM
Mr. Pepper. Good afternoon, Mr. Chairman, Ranking Member
Markey, distinguished members of the subcommittee. It is my
pleasure to come before you today on behalf of the FCC to
discuss broadband policy. There are three essential points I
would like to make.
First, we believe that widespread broadband deployment will
bring valuable new services to consumers, stimulate economic
activity, improve national productivity and advance economic,
educational and social opportunities for the American public.
Second, the Commission has taken a number of actions to foster
investment and innovation in competitive broadband platforms.
And, third, we are beginning to see the positive results of our
actions.
The Commission's broadband policy is guided by several
principles and goals.
First, it is the Commission's primary goal to encourage the
ubiquitous availability of broadband to all Americans. Creating
incentives for innovation and investment in the broadband
digital migration stands as a companion alongside our
commitment to traditional universal service goals. Second, the
Commission is committed to promoting competition across all
platforms for broadband services. Third, the Commission's
broadband policy is designed to promote investment and
innovation in a competitive market by ensuring the broadband
services exist in a minimally regulated environment. And,
fourth, the Commission is striving to develop an analytical
framework that is consistent to the extent possible across
multiple platforms.
Over the past 2 years the Commission has taken a number of
important steps to implement its broadband policy. The
Commission has authorized new broadband technologies. For
example, the Commission has opened the proceeding evaluating
using existing electric power lines to provide Internet and
broadband services. It has also initiated a number of spectrum-
related proceedings geared toward broadband, including a
proceeding to encourage more efficient use of the 2.5 gigahertz
band, authorizing ultrawideband technologies, clearing the way
for advanced wireless data networks, also known as 3G services,
and more recently the Commission initiated proceedings to
provide more unlicensed spectrum and band such as the 5.8
gigahertz band.
In addition to authorizing these new technologies, the
Commission also has revisited certain rules and proposed to
modify others in order to reduce regulatory costs and
uncertainty.
In its cable modem declaratory ruling, the Commission
determined the cable modem service is appropriately classified
as Title I interstate information service and thus is not
subject to Title II traditional common carrier regulation.
In a companion notice of proposed rulemaking, the
Commission sought comment on the implications of this finding,
and that proceeding is still pending.
The Commission also has a proceeding on broadband over
telephone networks and in a notice of proposed rulemaking
tentatively concluded that wire-line broadband Internet access
is also an information service. The Commission has requested
comment on this tentative conclusion and its implications; and
this proceeding also, Mr. Chairman, is pending.
As you have noted, the Commission's decision in its
Triennial Review proceeding, although not yet released, is
important for creating incentives to invest in new-generation
networks for broadband services. The Commission's press release
at the time of adoption was absolutely clear that fiber-to-the-
home loops would not have to be unbundled.
The Commission's broadband policies are beginning to have
real results. According to the most recent data available,
nearly 20 percent of U.S. households subscribe to a broadband
service, and this represents about 30 percent of Internet
households. A little less than two-thirds of these subscribers
use cable modem service, and the vast majority of the remaining
households subscribe to DSL. And according to FCC year-end 2002
data, the number of ZIP codes with at least one broadband
provider serving at least one broadband customer grew from 81
percent to 88 percent. These ZIP codes include 99 percent of
the U.S. population.
Recent developments also indicate that competition is
heating up with consumers as the beneficiaries.
First, the recent announcement by major phone companies
that they are coalescing around a single fiber-to-the-home
standard is an indication that they are putting new emphasis on
lowering costs in order to deploy fiber faster. Second, several
of the largest phone companies have lowered their DSL retail
prices by more than 40 percent in an effort to stimulate demand
and gain market share in cable operators. And, third, new
wireless ISPs are emerging that use unlicensed devices to
provide Wi-Fi-based broadband.
In conclusion, while first-generation broadband deployment
and adoption has been successful, in large portions of the U.S.
our job is not done. Not everyone has access to even one, let
alone multiple, broadband providers.
In addition, while the experience with first-generation
broadband indicates a substantial appetite for broadband,
today's networks will not support future broadband and
bandwidth-hungry applications. Therefore, the Commission is
pursuing actions and policies that create incentives for new
innovation and new investment in competing advanced broadband
platforms that will benefit all Americans.
Thank you very much.
[The prepared statement of Robert Pepper follows:]
Prepared Statement of Robert Pepper, Chief, Policy Development, Federal
Communications Commission
Good afternoon, Mr. Chairman, Ranking Member Markey and
distinguished Members of the Subcommittee. It is my pleasure to come
before you today on behalf of the Federal Communications Commission to
discuss broadband policy. There are three essential points that I would
like to make.
First, we believe that widespread broadband deployment will bring
valuable new services to consumers, stimulate economic activity,
improve national productivity, and advance economic, educational and
social opportunities for the American public. Recognizing this,
Chairman Powell has noted that the development and deployment of
broadband infrastructure is the central communications policy of the
day.
Second, the Commission has taken a number of actions to foster
investment and innovation in competitive broadband platforms.
Third, we are beginning to see the positive results from the
direction of our broadband policies.
Goals for Broadband Policy
The Commission's broadband policy is guided by several principles
and policy goals. First, it is the Commission's primary policy goal to
encourage the ubiquitous availability of broadband to all Americans.
Indeed, Congress has explicitly charged the Commission to ``encourage
the deployment on a reasonable and timely basis'' of broadband
capabilities to ``all Americans.'' In addition, Congress has expressly
stated that it is the policy of United States to ``promote the
continued development of the Internet and other interactive computer
services and other interactive media.''
Second, the Commission is committed to promoting competition across
all platforms for broadband services. The Commission's regulatory
framework conceptualizes broadband to include any and all platforms
capable of combining the power of communications and computing to carry
bandwidth hungry applications and offer access to the Internet. The
migration to broadband is occurring across multiple electronic
platforms including traditional telephone, cable, and mobile wireless
providers, as well as those developing new technological architectures
using unlicensed wireless devices such as WiFi, digital television and
even electric power lines. Broadband is based upon a digital migration
from traditional technical/industry/legal silos in which the platform
on which a communications traveled was integrated with and optimized
for a specific service such as voice or video. In the future broadband
world, any of the competitive broadband platforms can support any of
these services and emerging broadband applications--no platform will be
tied to a particular service or application.
The third goal of the Commission's broadband policy is to promote
investment and innovation in a competitive market by ensuring that
broadband services exist in a minimal regulatory environment. We
recognize that substantial investment is required to build out the
networks that will support future broadband capabilities and
applications. Therefore, our policy and regulatory framework is
designed to foster investment and innovation by limiting regulatory
uncertainty and unnecessary or unduly burdensome regulatory costs. The
need for regulation greatly diminishes as the new and multiple
platforms described above develop. At the same time, however, the
Commission remains alert and ready to act against anticompetitive
behavior by industry players that result in consumer harm. Regardless
of the paradigm, the Commission will remain vigilant in monitoring for
such behavior.
Fourth, the Commission is striving to develop an analytical
framework that is consistent, to the extent possible, across multiple
platforms. As service providers re-engineer their systems to provide
broadband services, we recognize that because these legacy networks
have historically been regulated differently, the migration to digital
broadband platforms may raise different questions for different
platforms. Stemming from these differing legacies, a consistent
analytical framework may or may not lead to identical regulatory models
across all platforms. It is entirely plausible that legal, market, or
technological distinctions may require different regulatory
requirements between platforms, or between certain types of providers
of one particular platform. At the same time, there are overarching
policy objectives that are similar regardless of platform and should be
harmonized to the greatest extent possible.
The technological changes driving the broadband digital migration
are unrelenting. With this approach the Commission's aim is to ensure
that this migration serves the public interest and that all Americans
can benefit from advanced services. Universal service has been very
successful in bringing telephone service to Americans, including dial-
up Internet service. The Commission remains committed to promoting the
enormous value of universal service. Creating incentives for innovation
and investment in the broadband digital migration stands as a companion
alongside our traditional universal service goals.
Implementing the Policy
Over the past two years, the Commission has taken a number of
important steps to implement its broadband policy, focusing
particularly on creating incentives for the development and deployment
of multiple new facilities-based broadband platforms and services. The
first group of proceedings focus on authorizing new, potential
broadband technologies/platforms while the second group of actions
fashion better incentives for additional investment in broadband
platforms by reducing unnecessary regulatory costs.
Among the Commission's actions authorizing new technologies/
platforms are efforts to reform spectrum policy and to authorize new
power line and wireless communications networks.
Broadband Over Power Line Notice of Inquiry (NOI). The Commission
is seeking comment to evaluate the current state of using existing
electrical power lines to provide Internet and broadband services to
homes and offices and to evaluate whether rule changes may be plausible
to facilitate the deployment of this technology.
MMDS/ITFS. The Commission initiated a proceeding to facilitate
the provision of fixed and mobile broadband access and other advanced
wireless services by encouraging more efficient use of the 2500-2690
MHz bands.
Spectrum Policy Task Force/Secondary Markets. The Commission
completed first phase of its ``Secondary Markets'' proceeding, which
will provide more flexibility for non-licensee broadband providers to
lease spectrum for last-mile connections to homes and businesses, as
well as backhaul connections to fiber/broadband networks.
Ultrawideband. The Commission modified Part 15 rules to permit
marketing and operation of certain types of new products incorporating
ultrawideband technology, including short-range, high-speed data
transmissions such as high-speed home and business networking devices.
3G/Advanced Wireless Services. The pending allocation and service
rule proceedings will clear the way for auctions (involving, in part,
former government spectrum) to provide significant opportunities for
high-speed wireless data communications.
Additional Unlicensed Spectrum. The Commission has initiated
proceedings to provide more spectrum for the use of unlicensed devices
in bands such as the 5.8 GHz band for WiFi, as well as using new and
innovative concepts such as ``spectrum easements'' to enable operation
of low-powered unlicensed devices in unused portions of the spectrum.
The Commission also has reformed certain rules and proposed to
modify others in order to reduce regulatory costs and uncertainty to
investment in new broadband networks and services. These decisions
include:
Cable Modem Declaratory Ruling and Notice of Proposed Rulemaking
(NPRM). In March of last year, The Commission determined that cable
modem service is appropriately classified as a Title I interstate
information service under the Communications Act, and does not include
a separate offering of a telecommunications service, and therefore, is
not subject to Title II common carrier regulation. Historically, the
Commission has refrained from regulating services it has classified as
interstate ``enhanced'' or information services. In a companion NPRM,
the Commission sought comment on the regulatory implications of this
determination and sought comment on (1) legal and policy reasons that
might justify different regulatory treatment of cable modem and
wireline broadband Internet access services; (2) any constitutional
limitations to the Commission's authority to regulate these services;
(3) on whether it is appropriate to require multiple ISP access; and
(4) the scope of state and local authority to regulate cable modem
service.
Wireline Broadband NPRM. In February of last year, the Commission
tentatively concluded that wireline broadband Internet access service--
whether provided over a third party's facilities or self-provisioned
facilities, is an ``information service.'' It also tentatively
concluded that, when a provider is self-providing the transmission
component of wireline broadband Internet access, this transmission
component is properly classified under the Act as
``telecommunications,'' as opposed to a ``telecommunications service.''
The Commission requested comment on this tentative conclusion and
whether the Commission's Computer Inquiry requirements be maintained,
modified or eliminated and whether important national security, network
reliability, and consumer protection obligations should apply to
providers of wireline broadband Internet access services.
Dominance/Non-Dominance NPRM. The Commission is seeking comment
on what regulatory changes, if any, should apply to the provision of
wireline broadband telecommunications services, including whether
dominant carrier safeguards should govern incumbent LEC provision of
such service, based on an assessment of incumbents' market power in any
relevant product or geographic market.
Triennial Review of Unbundled Network Elements Order. Although
the final Order has not yet been released, the Commission's press
release at the time of adoption was clear that a key component of that
decision provides substantial broadband unbundling relief, particularly
the determination that fiber-to-the-home loops would not have to be
unbundled.
Broadband Deployment
The Commission's broadband policies are beginning to have results
in the marketplace. According to the most recent data available, as of
the end of March this year, nearly 20 percent of U.S. households
subscribed to a broadband service which represents about 30 percent of
Internet households. A little less than \2/3\ of these broadband
subscribers use cable modem service while the remaining \1/3\ subscribe
to a digital subscriber line (``DSL'') service. The number of zipcodes
with at least one broadband provider grew from 81 percent to 88 percent
(representing 99% of the population) in 2002.
A recent Nielsen/Net Ratings Report found that broadband's
acceptance is growing dramatically. The report states that nearly 40
million people use broadband connections, 49 percent more than a year
ago. The fastest growing group of broadband subscribers are seniors
over 65, increasing 64 percent over the last year, and broadband use by
students grew by 51 percent in the same period.
Although these levels of broadband adoption indicate a strong
appetite for broadband service, they also indicate a need to foster
broadband deployment to those households that have either no or limited
broadband service available. In addition, the success of first
generation broadband adoption is a clear indicator that there is a need
for incentives for investment in the next generation of broadband
technologies that will support and stimulate higher capacity services
and applications.
Recent developments appear to be strong indications that
competition in broadband is heating up with consumers as the ultimate
beneficiaries. First, the recent announcement by incumbent local
exchange companies (``ILECs'') that they are coalescing around a single
fiber to the home architecture/standard is an indication that they are
putting new emphasis on lowering fiber deployment costs in order to
deploy fiber more ubiquitously. Second, while it is too soon to tell
how adoption rates will be affected, several of the largest ILECs,
including Verizon, have lowered their DSL retail prices by more than 40
percent in an effort to stimulate demand and gain market share on cable
operators. And third, new wireless ISPs (``WISPs'') are emerging using
unlicensed devices to provide WiFi-based broadband service to areas not
served by either cable modem or DSL service or only one of the two. In
time, these kinds of unlicensed wireless services appear to be emerging
as some of the most exciting and potentially viable competitors to
existing broadband providers. In addition to providing competition to
cable modem and DSL providers, WiFi is proving to be an important
broadband driver in another respect. Home WiFi networks are proving to
be significant drivers for cable modem and DSL broadband subscriptions.
Conclusion
First generation broadband deployment and adoption has been
successful to date in large portions of the United States but the job
is not done. Not everyone yet has access to even one, let alone
multiple, broadband service providers. Using existing copper network
architectures and technology, it's been estimated that DSL will
probably not be available to about a fifth of U.S. households. In
addition, while the experience with first generation broadband
indicates a substantial appetite for high speed Internet access,
today's broadband networks will not support the kinds of bandwidth
hungry applications now being contemplated by application developers.
Therefore, the Commission has undertaken actions and is pursuing
policies that create incentives for innovation and new investment in
multiple competing advanced broadband platforms that will benefit
American consumers.
Thank you.
Mr. Upton. Thank you.
Mr. Nelson.
STATEMENT OF ROBERT B. NELSON
Mr. Nelson. Thank you, Mr. Chairman. I appreciate the
opportunity to address the subcommittee today, and I commend
the chairman for calling this hearing on this very important
topic.
I represent the National Association of Regulatory Utility
Commissioners and also the Michigan Public Service Commission,
and it is our belief that now is not the time to undue the
framework for regulation of telecommunications services,
including wire-line broadband services.
The 1996 Act is bearing fruit, and in Michigan today more
than 30 percent of access lines in SBC's Michigan territory are
in the hands of competitive providers. This represents about 1
million residential customers. The framework is working. It has
been a joint effort of Congress, FCC and the State commissions.
The commissions have taken the tools that Congress has given us
and have provided for competition, both in voice lines and in
broadband.
Indeed, the FCC pricing rules that have been referred to
have been upheld by the U.S. Supreme Court, and the court in
that action indicated that some asymmetrical regulation was
indeed called for because of the monopoly power of the regional
Bell operating companies.
While voice competition is increasing in Michigan,
unfortunately broadband competition is not. There seems to be a
dramatic increase in Michigan and other States, and the market
share and competitor providers and indeed the market share of
SBC has increased threefold in the last 2 years.
Now, this is important, because I believe that conclusion
may jeopardize some efforts that our State has made in recent
past. As you know Mr. Chairman, Michigan passed last year some
significant broadband legislation. It was recognized last week
by Technology Network as the leader in broadband policies
throughout the States, both in supply and demand policies. That
broadband legislation in Michigan includes financial incentives
for all forms of broadband, for providers and users,
competitive providers and incumbent providers, but so far none
of the grants that have been issued by the broadband authority
in Michigan have gone to DSL. That is, in my view, because of
the dominance of SBC in the DSL market.
We need to continue to impose the provisions of section 251
and 252 on these providers to allow competition to flourish in
that market.
One of the issues that our Michigan legislation addressed
was the access to right of way, and in my testimony you will
see that we have torn down the barriers of right of way access
in Michigan, and this has been recognized by technology
networks as one of the key reasons that we are the leader in
broadband policies throughout the country.
However, the right of way provisions in Michigan law depend
on the definition of Federal law, which is the definition of
telecommunications services. If that definition is indeed
changed to mean that only information services are provided for
right of way access, it could very well do serious damage to
Michigan's broadband policies and the deployment of broadband
in Michigan.
Similarly, there are other unintended consequences of
characterizing wireline broadband services as information
services that is detailed in my testimony, the consequences in
terms of universal service, 911, consumer protection, including
slamming, entry into rural markets by small providers and,
indeed, consequences for voice service as well.
We believe that reclassifying wireline broadband services
as an information service will lead to more litigation, and
there are ways the FCC can address this issue without so
reclassifying this service. They can forebear under the Act and
comply with the conditions for forbearance that are spelled out
there. They have chosen not to do so.
Now on the eve of the Triennial Review decision, which will
bring significant regulatory relief to the regional Bell
operating companies, we believe it is not the time to abrogate
any vestige of competition in the DSL market. Indeed, 7\1/2\
years of litigation under the old framework is just about over.
We don't need 7\1/2\ years of litigation under the new
framework. Let us continue to allow the States to do the job
the Congress has given us so that we will spur innovation,
lower prices and bring broadband to all providers in Michigan.
Thank you very much, Mr. Chairman.
[The prepared statement of Robert B. Nelson follows:]
Prepared Statement of Hon. Robert B. Nelson, Commissioner, Michigan
Public Service Commission and Chairman, National Association of
Regulatory Utility Commissioners' Committee on Telecommunications
Mr. Chairman and members of the Committee, I am Robert B. Nelson, a
Commissioner with the Michigan Public Service Commission and the
Chairman of the Telecommunications Committee of the National
Association of Regulatory Utility Commissioners (NARUC). I would like
to thank you for providing me the opportunity to testify today on
behalf of NARUC. As many of you know, NARUC, founded in 1889, is
recognized in Sections 410(c) and 254 of the Communications Act by this
esteemed body as the organization that represents the interests of
State Public Service Commissions operating in each of your home States.
Communications Act of 1934, as amended by the Telecommunications Act of
1996, 47 U.S.C. 151 et seq., Pub.L. No. 101-104, 110 Stat. 56 (1996)
(West Supp. 1998) (``1996 Act'' or ``Act'').
Your State commissions, like each of you, have a direct interest in
promoting vigorous competition in the intrastate telecommunications
market. Each of NARUC's member commissions is responsible for
implementing: (1) State telecommunications laws; and (2) federal
statutory provisions specifying incumbent local exchange company
obligations to interconnect and provide nondiscriminatory access to
competitors. See, 47 U.S.C. 252 (1996). Federal law requires the
States (and the FCC) to promote advanced telecommunications services
like those at issue here. See, 47 U.S.C. 706 (1996).
Before turning to NARUC's views on the FCC's current initiative to
reclassify all high speed data services as ``information services,'' I
want to briefly discuss the negative impact these proceedings could
have on Michigan's efforts to promote broadband deployment and economic
growth in the telecommunications market throughout the state.
Michigan's Broadband Deployment Initiatives Could Be Undermined.
The concept of ``regulatory parity'' is compelling to policy-makers
of all stripes. The FCC is attempting to promote broadband deployment
by minimizing the regulation of DSL and other Internet platforms.
However, the agency's approach, which is based on an obvious misreading
of text of the Act is misguided as a matter of both the law and policy.
While I am sympathetic to the overall policy goal of making it easier
for providers to invest in innovative technologies and services, I have
serious reservations regarding the FCC's creation of a whole new
federal regulatory oversight system by reclassifying services--services
that even the FCC, until recently, agreed were stand-alone common
carrier service regulated under Title II of the Act--as ``information
services.'' I am even more concerned about recent agency action that
threatens to eliminate State-imposed line-sharing requirements over the
existing network designed to enable multiple providers to offer a
choice in voice and broadband services to end-users.
In 1996, Congress authorized the regulatory treatment of bottleneck
transmission facilities of the incumbent Local Exchange Carriers
(ILECS) as common carrier services under Title II of the Communications
Act. It did not leave the FCC to freely reclassify these services at
its own discretion. To endorse the FCC's new approach, one must believe
that Congress knew nothing about either the Internet or high-speed data
services--a notion that ignores the clear text of the 1996 Act and
common sense.\1\
High-speed data services/ISDN existed well before 1996, and nothing
in the Act suggests these facilities should be exempt from the scope of
Title II requirements simply because they employ a broadband
technology. Section 251 of the Act makes no distinction between
conventional common carrier service and high-speed transmission
technologies in defining the obligations of incumbent local exchange
carriers.
Moreover, in Section 706, Congress made clear its desire for the
States and the FCC to use their regulatory mandate over common carrier
services to further the deployment of advanced Internet services. Among
the tools identified is ``forbearance'' under Section 10 of the 1996
Act, which gives the FCC authority to forbear from applying Title II
requirements to telecommunications services under specified criteria.
The proposal to reclassify broadband transmission service that the FCC
itself has, until 2002, consistently classified as common carriage
constitutes an impermissible end-run around that section.\2\
As you know, Mr. Chairman, our home State of Michigan has been at
the forefront of State broadband policy initiatives, enacting a
comprehensive package of bills in 2002 \3\ that were designed to
stimulate the availability of high-speed Internet connections in rural
and urban areas of Michigan. These initiatives have resulted in
Michigan being rated #1 in both supply-side policies and demand-side
policies by Technology Network (TechNet) in its recently released
``State broadband Index,'' which can be found at www.technet.org.
Michigan's extensive work in creating a positive environment for
broadband investment could be seriously undermined if either Congress
or the FCC moves forward to classify wireline broadband services as an
``information'' service under Title I of the Communications Act. For
example, one key component of Michigan's broadband deployment
initiative lauded by TechNet, is its dependence on reform of right-of-
way access policies. Specifically, the Michigan legislation, among
other things, streamlined the process for authorizing access to rights-
of-way by providers of telecommunications services, which is defined in
much the same way as the 1996 Act defines them. If Section 251(b)(4),
which requires local exchange carriers to provide access to rights-of-
way by competing providers of telecommunications services, is defined
to exclude broadband access services, it could undo Michigan's attempt
to reform its policies and promote greater broadband deployment.
Nothing under Title I allows the States to exercise any specific
authority to ensure open access for ISPs or any other service provider,
as is the case under Title II. Even with the authority provided under
Title II, Michigan and the surrounding States have still seen an
alarming surge in SBC's dominance over the residential DSL market in
the last two years. Simply put, Michigan needs the ability to apply the
provisions of Sections 251 and 252 of the 1996 Act to require RBOCs to
provide nondiscriminatory access to the underlying facilities necessary
for competitive, non-dominant providers to provide Internet access
services to their customers. Michigan could provide all the financial
incentives to spur broadband deployment imaginable but if competitive
providers are unable to interconnect with SBC's facilities, the
incentives are worthless.
Michigan is not the only State with programs focused on broadband
deployment. Several other States like Minnesota, California, Texas and
others, have, as a matter of State law, imposed various access
requirements on facilities, e.g., ``line sharing''--which could face
court challenges once the long-awaited Triennial Review decision is
released. Many other State initiatives like those in Michigan have
targeted programs designed to encourage the deployment of broadband
facilities rather than encumber it with additional direct regulation.
We believe this is the right path toward invigorating the entire
sector.
The Current Framework under title ii of the communications Act.
Today, ILECS' provide their own DSL service as a stand-alone
telecommunications service over their own bottleneck local loop
facilities. These services are governed by the Act's Title II (common
carrier) regulations that prohibit a carrier from charging unjust and
unreasonable rates. At the federal level, such services are also
subject to the FCC's Computer II and Computer III rules, which require
the ILECs to provide non-affiliated information service providers
(ISPs) with non-discriminatory access to their facilities so that all
non-incumbent ISPs can compete with the ILEC ISPs (e.g. Verizon.Net,
SBC Yahoo!). The broadband sections of the recently passed Triennial
Review Order appears to offer significant regulatory relief for the
incumbents from access requirements to new facilities and overbuilds of
existing facilities.
THE FCC'S APPROACH TO PROMOTING BROADBAND INVESTMENT.
In the FCC's Broadband Framework proceeding, the ILECs have urged
the FCC to declare that Internet access over DSL is an information
service provided via telecommunications, rather than a
telecommunications service. The ILECs want the FCC to find that DSL
Internet access is an integrated information service, subject to Title
I, and that there is no common carriage component of the offering that
is subject to Title II safeguards.
THE IMPACT OF RECLASSIFYING BROADBAND SERVICES ON VOICE SERVICES.
If the FCC proceeds in making this new paradigm shift in the
current rules, the requirement that ILECs provide DSL as a
telecommunications service regulated under Title II of the
Communications Act, and consequently their obligations under FCC's
Computer II and III rules to provide non-discriminatory access to non-
affiliated ISPs, will be eliminated.
Although the scope of the FCC notice apparently is limited to
``broadband'' information services, once the legal principle has been
established, it will be difficult to prevent ILECs from offering an
``information service,'' such as voicemail integrated with every voice
product, and declaring those voice services (which are virtually always
offered to consumers over bottleneck local loop facilities) to be
information services that are not subject to common carrier regulation
by either the States or the FCC. At best, such questions will have to
be litigated.
As voice traffic continues to migrate to the broadband platform,
all of the consumer protections attendant to even the most basic common
carrier voice service will no longer automatically apply if the FCC
declares that broadband services are a ``deregulated information
service'' instead of a common carrier service, as it is currently
classified. The current common carrier protections under Title II also
include the assurance of fair and reliable service at just and
reasonable rates; the assurance of just and reasonable terms and
conditions of service such as billing and service termination
practices; and the assurance of compliance with basic service quality
standards. The FCC's reclassification also undercuts additional goals
that Congress established to ensure that low-income customers who live
in rural high-cost areas, and disabled customers have reasonable and
affordable access to the network. See 47 U.S.C. 254, 255. Congress
further sought to ensure that confidential customer information would
be safeguarded from disclosure to commercial entities without customer
consent. See 47 U.S.C. 258. All of these provisions, however, apply
solely to ``telecommunications services.''
Nothing in the Act demonstrates that all of these public interest
safeguards should be left to the FCC, in its sole discretion under its
vaguely-defined authority under Title I, to decide unilaterally where
and how to regulate essential bottleneck transmission services to
further the Act's goals. Nor is it clear how the FCC could simply
assert its Title I ``ancillary authority'' to extend basic consumer
protections applicable to Title II services to Title I services.
THE CONSUMER IMPACT MUST BE CONSIDERED CAREFULLY BEFORE GOING FORWARD.
The ILECs have already received substantial unbundling relief for
new facilities and overbuilds of existing facilities in the FCC's soon-
to-be released Triennial Review order. In addition, the FCC's proposed
``information services'' approach also recently received a chilly
reception in the 9th Circuit Court of Appeals. These events suggest
that the FCC should proceed with its ``information services''
initiative with caution--if at all. For either the FCC or Congress to
alter the current regulatory structure for broadband and access to
telecommunications facilities is a risky undertaking that at best is
premature. The FCC is basically proposing, through the use of Title I,
a new, undefined, and potentially unlimited paradigm shift in federal
authority over ILEC ``information services.'' NARUC is on record
opposing the legal rationale the FCC used to justify this action. If
the agency chooses to proceed, Congress should urge them to carefully
consider the following issues before making any final determinations.
1. Impact on Intra-Platform Competition:
Broadband services are provided over several different technology
platforms: wireline broadband Internet access (primarily via xDSL
service provided over the legacy telephone infrastructure); wireless
broadband Internet access; cable modem broadband Internet access;
powerline, and satellite broadband Internet access. All these platforms
have different availability and performance characteristics, some of
which are substitutes for others and some of which are not. Most
consumers live in communities where they receive only one provider per
technology platform and some consumers have no choice at all. The FCC's
approach may allow specific platform technologies, e.g., cable modem or
ILEC DSL facilities, to maintain their dominance over specific
facilities in specific geographic areas. Before taking any action, the
FCC should seek additional comment on the potential impact its proposed
revised regulatory structure may have on intra-platform competition and
innovation.
2. Examine The Current Demand for Existing Facilities:
Before moving forward with deregulation, the FCC and Congress
should examine the current status of demand-side issues and solutions.
In 3 of the Notice, the FCC suggests that the primary focus of this
proceeding is to promote broadband offerings. As Chairman Powell
suggested in his October 24, 2001 presentation to the National Summit
on Broadband Deployment, the existing regulatory structure may not be
the root cause of the existing penetration problem. In his
presentation, Chairman Powell noted: ``According to J.P. Morgan, 73% of
households have cable modem service available, and 45% of households
have access to DSL. Combined broadband availability is estimated to be
this year almost 85%. The intriguing statistic is that though this many
households have availability, only 12% of these households have chosen
to subscribe.''
Although the gap between availability and subscriptions is
narrowing, it remains substantial. For example, in October of last
year, the National Cable Association announced that the cable industry
finished the third quarter with 10 million broadband subscribers
nationwide out of 75 million U.S. households then passed by broadband-
enabled cable networks. These reports suggest demand and not supply is
the primary existing impediment to the expansion of this market. The
lack of demand has been identified, but the reasons for that lack of
demand have not been fully explored. The United Kingdom's recent
experience suggests that one major factor limiting demand may be the
way current services are priced.\4\ Others have suggested copyright and
content issues have negatively affected demand. A more careful
examination of what factors affect take rates for broadband Internet
access will help the FCC determine when it should act.
3. Impact on State Proceedings to Promote Competition and Broadband
investment:
The FCC's new definition of ``information services'' will
significantly enhance the prospect for protracted litigation over
``authority'' questions at both the State and federal level.
Introducing a new and wholly unknown scheme of regulation into the
market at this point injects a substantial level of legal and economic
uncertainty. Any regulations that the FCC adopts in this area must not
preempt the extensive work already done in a number of States, pursuant
to Federal law and following FCC guidelines to promote competition.
There are many ongoing proceedings/initiatives designed to foster
competition and facilitate broadband deployment, (271 proceedings, DSL
transport proceedings, comprehensive OSS third-party testing, UNE
pricing dockets), that should be concluded before significant changes
are made to the existing regulatory paradigm. The Notice, at 61,
explicitly leaves open the possibility that such access would not be
subject to provisions of the Act that require unbundled access to
competitors. Under that scenario, access to the transmission path by
telecommunications competitors is foreclosed. As a result, a
significant number of those competitors may lose the ability to compete
for the whole package of services demanded by today's telephone
consumers.
4. The Impact On State/Federal Universal Service/Protections That Apply
Only To Common Carrier Services:
Adding to the difficulty of analyzing the impact and applicability
of the FCC proposals, the Notice applies only to ``domestic wireline
broadband Internet access services,'' but does not fully define
``broadband.'' Notice at footnote 1. Specifically, the Notice is not
explicit on whether ``broadband wireline Internet access'' includes all
of a customer's communications, such as voice traffic. It describes
``broadband'' as an ``elusive concept,'' and reports on two earlier
Commission efforts to define similar terms. Notice at footnote 2. It
does specify that broadband ``presently'' consists primarily of DSL
services, but nowhere addresses explicitly how the FCC will treat voice
service associated with such a DSL service. Significantly, nothing in
the Notice suggests that the FCC anticipates a different regulatory
scheme in which only Internet access over DSL is subject to the scheme
instigated by the Notice, and voice service is subject to some other
kind of regulation. The Notice itself, in 82 raises the specter of
problems with universal service, asking ``[s]pecifically, if voice
traffic over broadband Internet platforms increases and traditional
circuit-switched voice traffic decreases, how, if at all, will that
impact our ability to support universal service in an equitable and
non-discriminatory manner? Will migration lower or raise the cost of
providing service? What, if any, will be the impact on the level of
high-cost universal service support needed as voice traffic migrates
from traditional circuit switched networks to broadband Internet
platforms?'' See also 62 where the FCC first notes its expectation
that ``traditional services [will] migrate to broadband platforms.''
These questions raise a myriad of concerns regarding the FCC's
perception of regulatory oversight of voice over DSL services. Aside
from the possible impact on State and Federal universal service
programs raised in the Notice, for customers who communicate (both
voice and data) only through an integrated DSL service, the
Commission's decision in this proceeding could eliminate many
protections now in place under common carriage principles and Title II
of the Communications Act.\5\ It could also have a substantial impact
on State authority over any local/toll voice service integrated with an
ILEC ``information service.''
5. The Impact on Citizen Access to Internet Content:
Customers using a common carrier today have the ability to send and
receive lawful information of their own design and choosing. Title II
of the Communications Act's prohibition against unreasonable
discrimination has historically protected the rights of those citizens
to transmit and receive information without change in its form or
content. Some citizens today use broadband services and facilities as
their chief source of information and news, even to the point of
replacing newspapers. Some citizens can get broadband service only
through wireline telephone facilities, and others can get broadband
service only through cable modem facilities. In such cases, providers
of broadband services or facilities have the technical capability to
create a ``walled garden'' or ``fenced prairie,'' designed to attract
customers to preferred content while preventing customers from reaching
content other than those of the providers' choosing. Certain broadband
providers may have an incentive to restrict Internet access to favored
news sources or unaffiliated content providers, and if they chose to do
so, could significantly limit free speech.
Although the issue of ``open access'' has been debated largely as a
question of fairness among different kinds of broadband providers, the
restriction of user access and its effect on informed citizenship is an
issue of real significance in a democratic society. Last November,
NARUC adopted a resolution which resulted in the Association urging the
FCC, in this proceeding, to assure that: (1) all Internet users,
including broadband wireline and cable modem users have a right to
access to the Internet that is unrestricted as to viewpoint and that is
provided without unreasonable discrimination as to lawful choice of
content (including software applications) and receive meaningful
information regarding the technical limitations of their broadband
service; and (2) where a broadband facilities provider furnishes
facilities on a nondiscriminatory basis to ISPs, including an
affiliated ISP, nothing prohibits the affiliated ISP from promoting or
preferring particular content. If broadband access services are
classified as ``information services,'' the ability of the FCC to
provide such assurances will be non-existent.
WHAT CAN CONGRESS DO TO PROTECT CONSUMERS UNDER THIS SCENARIO?
Congress should encourage the FCC to delay further action until, at
a minimum, the 9th Circuit has ruled in the related Cable Modem
proceeding. We further suggest that the Agency should watch the
aftermath of the Triennial Review order to see if the promised
explosion in ILEC deployment actually occurs before taking action in
its pending proceedings. Congress may also wish to review the success
of various State and local initiatives to promote broadband deployment,
many of which were dependent on the tools provided them under Title II.
CONCLUSION
Congress, the FCC, and the State commissions have worked in tandem
to take significant steps to achieve deregulation of the local exchange
carriers and to promote competition in telecommunications services.
These efforts must be continued jointly. Telecommunications and
broadband markets are linked. The approach offered by the FCC in its
broadband dockets is inconsistent with the Act and will disrupt
existing State broadband and competition-related initiatives. The
action proposed in those dockets is, at best, premature and at most a
misguided approach to a problem that doesn't even exist--lack of
investment and growth in broadband subscribership
After seven-and-a-half years since the 1996 Act was passed,
competition in the provision of local voice service is a reality in
Michigan and other States, thanks to the tools Congress and the FCC
have given us. However, the ``last mile'' facilities are still owned
largely by ILECs, who have used this ownership to dominate the DSL
market. Now is not the time to remove all semblance of competition in
the provision of wireline broadband services.
ENDNOTES
<SUP>1</SUP> It is clear from the Act's explicit textual
references, that Congress was aware of and very interested in broadband
deployment issues. It is hard to square the Act's numerous specific
provisions addressing both ``advanced'' and ``information'' services,
with the Notice's implied contention that Congress wants the FCC to
assert sweeping and undefined Title I authority over the ``internet and
other interactive computer services'' through what the Notice concedes
is a new approach to defining ``information service.'' When Congress
wishes to discourage regulatory oversight, it has no difficulty doing
so. See, e.g., 47 U.S.C 160, 161, & 274(g)(2). The FCC's view of
Congressional intent is inconsistent with (1) the very limited
legislative history of the ``information service'' definition in the
Act, (See, e.g., House Conference Report 104-458 (January 31, 1996) at
114--116, where Congress chose not to go with the ``Senate definition''
which arguably can be read to support the FCC's view, but rather went
with the House version.) and (2) the uses of the term ``information
services'' elsewhere in the Act. The Notice's view of ``information
service'' specifically includes what the FCC has already found to be a
common carrier ``telecommunications service.'' Other uses of the term
``information service'' in the Act undercut such an interpretation of
Congressional intent. The Act repeatedly uses the term ``information
service'' in a much narrower context, that of a consumer purchase of
information that is delivered to the customer through a
telecommunications service.
<SUP>2</SUP> Treatment of an ILEC consolidated DSL-ISP offering, as
not including a ``telecommunications service'' is also inconsistent
with the FCC's numerous findings that DSL is a Title II
telecommunications service that can be tariffed. See, e.g., GTE
Operating Companies Tariff No. 1, 13 F.C.C.R. 22466, 1998 WL 758441
(1998) at 16. (``We agree that GTE's DSL Solutions-ADSL service
offering is an interstate service that is properly tariffed at the
federal level.'') A recent FCC report to Congress found that, to the
extent certain forms of phonetophone IP telephony are interstate
``telecommunications,'' and to the extent that providers of such
services offer such services directly to the public for a fee, those
providers would be classified as ``telecommunications carriers'' and
therefore subject to the requirement to contribute to universal service
mechanisms.'' As the FCC acknowledges in 15 of the Notice, that
report, in suggesting transmission of an information service is
separate from the information service itself, also conflicts with the
tentative conclusions in the Notice. FederalState Joint Board on
Universal Service, CC Docket No. 9645, Report to Congress, 13 FCC Rcd
11501, 11529, 57 (rel. Apr. 10, 1998). In the Advanced Services
Second Report and Order at 17, the FCC observed that Internet Service
Providers ``. . . combine a regulated telecommunications service with
an enhancement, internet service, and offer the resulting service, and
unregulated information service, to the ultimate end user. (emphasis
added) See also Id at 14, 19 (note 41) & 21 all referring to DSL
service as ``telecommunications services'' under the Act). In re
Deployment of Wireline Services Offering Advanced Telecommunications
Capability, CC Docket No. 98-147 (November 9, 1999), 1999WL 1016447.
<SUP>3</SUP> In 2002, Michigan passed three laws to stimulate the
availability of affordable high-speed Internet connections. Act 48 of
the Public Acts of 2002 creates a Telecommunication Rights-of-Way
Oversight Authority to help telecommunication providers cut through red
tape and get projects done without having to pay excessive fees or
endure unnecessary delays. Act 50 provides tax credits to providers
that invest in new broadband infrastructure and, upon certification of
the MPSC, right-of-way fees paid under the first bill. Act 49 creates
the Michigan Broadband Development Authority to help fund rollout of
broadband services in underserved areas.
<SUP>4</SUP> See, e.g., Playing to Lose in the DSL Pricing Game,
BROADBAND NETWORKING NEWS, Vol. 12, No. 8 (April 9, 2002) (``Even as
cable companies eat their lunch, U.S. DSL providers are raising prices
looking for a sweet spot where they can make money. Indeed a
forthcoming Yankee Group study reportedly calls high prices the
greatest factor preventing broadband adoption from hitting the marks
predicted a couple years ago. In the U.K. they've suddenly inverted the
situation. BT Group's recent move to slash the wholesale prices it
charges British ISPs for providing service through its network has
thrown the market into a tizzy. BT announced earlier this year that, as
of April 1, it would cut wholesale rates by some 40 percent.'') See
also--Emling, Shelley, ``Broadband Providers Moving to Tiered Fees'',
Austin American-Statesman April 11, 2002. ``Companies say tiered
pricing gives them the chance to attract customers who haven't signed
up for broadband because of the price.''
<SUP>5</SUP> See Notice at 61-63 acknowledging and seeking
comment on the potential impact of the new classification scheme on
existing consumer protection requirements, including, e.g., 47 U.S.C.
258 protections against ``slamming'', 47 U.S.C. 214's limitations on
the ability of a telecommunications carrier to unilaterally discontinue
telecommunications service to customers, 47 C.F.R. 64.2001-2009 rules
restricting carrier use and disclosure of customer proprietary network
information derived from the provision of a ``telecommunications
service'' 47 U.S.C. 255's requires a provider of ``telecommunications
service'' to ensure the service is accessible and usable by individuals
with disabilities, if that is readily achievable. 47 U.S.C. 201's
obligations applicable to the furnishing of service and charges for
``communication service'' and 202 restriction preventing ``common
carriers'' from ``unreasonably discriminat[ing] with regard to like
``communications services.''
Mr. Upton. Thank you.
Mr. Davidson.
STATEMENT OF CHARLES M. DAVIDSON
Mr. Davidson. Thank you, Mr. Chairman, ranking member and
honorable members of the committee. Thank you very much for
inviting me here today. I would specifically like to thank the
Florida delegation represented on this committee for its
ongoing consultation with the Florida Commission on utility-
related issues. I am testifying here today as an individual
commissioner, and the views expressed herein are my own. That
is my disclaimer.
Mr. Chairman, as you know, TechNet recently ranked Michigan
in the No. 1 spot on broadband issues, but I have to warn you,
Florida is very competitive; and under the leadership of our
legislature and Governor Bush in trying to promote economic
development, we intend to grab that top spot next year.
Mr. Upton. Sort of like the Gators last January against the
Mighty Wolverines.
Mr. Tauke. No. More like the Bucks, Mr. Chairman.
Mr. Davidson. All right. There you go. Maybe we are ready
to move on to Mr. Tauke now. I have no credible comeback.
Allow me to begin by stating that the policy positions in
which I believe are shaped by the goals of Congress and by
Florida's interest in having a robust, competitive broadband
market. I fundamentally believe in a free market economy and
that the market ultimately is the best tool we have to
stimulate investment, economic growth, innovation and to
maximize consumer welfare.
As our political leaders, you also have recognized and
instructed that broadband plays a critical role in ensuring the
competitive strength of our Nation. I believe that in tough
times regulators have to have the courage to embrace change and
think beyond the traditional roles of regulating the price,
terms and conditions of access to a monopoly market.
Broadband is an emerging market. Candidly, I don't believe
that issues of greater consumer choice, lower prices,
marketplace innovation and competition are necessarily best
addressed by a fixed application of a preexisting regulatory
paradigm that is focused on a monopoly market.
Policymakers to be successful must be willing to consider
new and different regulatory schemes, and we must be willing to
consider not regulating at all, to put ourselves out of a job
if that is what it takes. Our focus in this must not be on
which industry group will benefit or lose, and that is a hard
issue to deal with here, as we are all lobbied day in and day
out, but we have to be focused on ensuring that our consumers
win and protecting fair rules of competition, rather than
competitors will assure that consumers win.
Chairman and honorable members, I am a mass consumer of
technology. I have multiple devices, multiple ISPs, digital
cameras. I spend so much money. I want more capacity, and I
want better prices, and I trust as a consumer the market to get
me there. As this committee has emphasized repeatedly,
broadband development and deployment are critically important,
to people specifically and to economic well-being generally.
Broadband has an immeasurable potential to enhance the lives of
our children, our elderly, our sick, our displaced workers; and
the benefits are real.
The December, 2002, report of President Bush's Council of
Advisors on Science and Technology on building out broadband
found, for example, that broadband telemedicine--and it is not
even widely adopted yet, but broadband telemedicine can result
in a 15 to 20 percent reduction in mortality rates in intensive
care units. Those are the goals that we need to be focused on.
Economists and analysts estimate, as the committee has
noted, that accelerating the deployment and installation of
broadband could generate billions of dollars annually in
economic benefits for the country. Experts also agree that that
is going to take a lot of investment up front in technology
networks and deployment, and the State of the telecom industry
makes this task very, very difficult. Capital spending has
fallen over 40 percent, and people are out of work. The
industry has experienced an increase of some $800 billion in
corporate debt, most of which won't be repaid, and a $2
trillion decrease in market valuation. Market valuation for
telecommunications equipment manufacturers alone fell $1
trillion in 1 year.
The willingness of telecom companies to invest is
critically important in States like Florida. We, like many
States, are facing serious budget deficits; and unemployment
levels are a concern. If additional regulatory certainty can be
had, whether it be the FCC or this committee, then it should be
had.
From my vantage as a regulator, a national broadband policy
framework, whatever that framework is, that is deregulatory in
nature as opposed to a patchwork of State frameworks makes good
policy for a variety of reasons.
First, regulation poses investment risk, and 50 regimes
pose a lot of investment risk.
Second, a national policy is consistent with the overall
intent of the 1996 Act to provide for a pro-competitive,
deregulatory national policy framework.
Third, a national policy is consistent with the inherently
interstate nature of broadband. It is, in essence, a
jurisdictionless, borderless technology; and with FCC rulings
on the interstate and information nature of cable modem service
and DSL, such a policy is also consistent with the treatment of
other interstate regimes such as wireless.
Fourth, a national policy is best suited to reflect the
notion that technological parity should result in regulatory
parity, a principle that everyone here seems to agree with. To
the extent different platforms provide the same service and
customers want high-speed connectivity and data transfer, then
those platforms should be subject to regulatory parity, again,
whatever that parity may be.
Fifth, as President Bush noted at the August, 2002, Waco
Economic Forum, the private sector will deploy broadband, but
government at all levels should remove hurdles that slow the
pace of deployment.
However crafted, the ultimate policy outcome ought to
reflect at least two core principles, parity and a trust in
markets. On the first point, again, any regime should reflect
the basic notion that technological parity should result in
regulatory parity. If regulation responds to technological
parity with regulatory disparity, that disparity is a hurdle to
greater deployment.
Where two products are potential substitutes, competition
is simply not sustainable where the substitutable products are
subject to asymmetrical regulation, because the market will
always, always, always reward the less regulated technology.
Mr. Upton. Mr. Davidson, you need to finish.
Mr. Davidson. Thank you, Mr. Chairman. I will conclude on
that point and be glad to answer any questions you all may
have. Thank you.
[The prepared statement of Charles M. Davidson follows:]
Prepared Statement of Charles M. Davidson, Commissioner, Florida Public
Service Commission
I. INTRODUCTION
Thank you, Mr. Chairman. My name is Charles M. Davidson. I am a
Commissioner at the Florida Public Service Commission, the agency with
regulatory jurisdiction over Florida's investor-owned telephone,
electric, natural gas, water and wastewater utilities, in accordance
with Florida law. My comments here today are those of an individual
Commissioner. I would like to thank the Committee for inviting me here
to testify. I would also like to thank the Florida delegation
represented on this Committee for its consultation with the Florida
Commission on utility-related issues. Finally, I would like to thank
the House for its leadership on the matter before you today.
Chairman Upton, I am sure you are aware that as recently as last
Thursday, TechNet, a national network of CEOs and senior executives of
leading companies in the fields of IT, biotechnology, venture capital,
investment banking, and law, released a state-by-state ranking of
broadband deployment policies with Michigan and Florida leading the
way. So, Mr. Chairman, I wanted to congratulate the great State of
Michigan on that designation, but I have to warn you--Florida is very
competitive, and with the continued leadership of Governor Bush and the
Florida Legislature on making our state increasingly more conducive to
high-tech investment and economic development, we intend to grab the
top spot.
II. OVERVIEW OF COMMENTS
The communications market is characterized by competing and rapidly
evolving technologies, by new business models and by consumer choice.
Experts and analysts are in wide agreement that investment in broadband
technologies and networks is vital for the long-term economic strength
of the country. They also agree that realizing economic benefits will
require billions in additional up-front investments in technology,
networks, and deployment. A sagging tech sector, capital scarcity, and
a market that is averse to committing capital in an uncertain
regulatory climate argue for as rational a regulatory approach as can
be had.
The broadband sector is characterized by fairly robust intermodal
competition. While cable modem service and DSL dominate the broadband
market, overall take rates for other technologies (e.g., fixed
wireless, Wi-Fi, satellite) are increasing. Of the competing
technologies, DSL is potentially subject to greater regulation than the
others. Where there is technological parity confronted with a
regulatory disparity (i.e., where substitutable products are subject to
asymmetrical regulation), the predicted economic outcomes in the long
run include: a competitive advantage for the less burdened product;
decreased investment in the more burdened technology; and less consumer
choice.
Technological parity should result in regulatory parity. This
principle, the intent of the 1996 Act, FCC precedent, and the
interstate nature of broadband all argue strongly for a national
broadband policy. Within that policy, there will clearly be many
opportunities for state to articulate policies designed to attract
investment in, and deployment of, broadband infrastructure within their
borders.
III. THE COMMUNICATIONS MARKET IN 2003
A. The Traditional Telephony Market
The regulatory regime embodied in the1996 Act and its progeny
presupposes that the relevant market is local telephony, and the
regulatory approach is fundamentally grounded in a wireline paradigm.
In the regulated market, for example, LATA boundaries matter. In the
unregulated market, they do not. The regulated telephony regime
presupposes that consumer choice is primarily a function of the ILEC
vs. CLEC competition; it is not focused on other competitors or other
technologies that may be competing with traditional telephony.
B. The Emerging Market
Competing and rapidly evolving technologies, new business models,
and consumer choice characterize the communications market of today.
Cable, DSL, Wi-Fi, fixed wireless and satellite technologies are
competing for market share. Data, not traditional telephony, is the
predominantly stronger growth segment. Convergence of content and
conduits is resulting in new corporate strategies (e.g., mergers of
service providers and content providers, horizontal and vertical
integration) and in bundled product offerings to consumers. The result:
customers have greater choice between competing platforms and competing
applications.
The largest growth segments have been in the less regulated market.
For example, the wireless segment has expanded from roughly 38 million
users in 1996 to over 136 million subscribers as of December 2002 (and
this estimate may be substantially lower than actual results because
carriers with under 10,000 subscribers in a state were not required to
report). The stable and deregulatory nature of the FCC's wireless
policies is credited for much of this growth.
C. The Importance of Broadband
Experts and analysts are in wide agreement that investment in
broadband technologies and networks is vital for the long-term economic
strength of the country and, in the short run, central to jump start
the economy. Florida's economic development--including skills and job
training, education and health care services, and the recruitment and
retention of businesses--is increasingly linked to an advanced
communications infrastructure. The high-tech, IT, and telecom sectors,
which drove economic growth for so long, are suffering. Investments are
down; capital is scarce. Broadband enabled activities (streaming video,
exchanging music, photography) have the potential to spur new rounds of
upstream and downstream investments and consumer spending--in content,
in software and applications, on device makers (MP3 players, digital
cameras, multimedia PCs, etc.) and in retail channels. The oft-cited
estimate (of economist Robert Crandall who recently appeared before
this Committee regarding the health of the telecom sector) is that
accelerating the deployment and installation of broadband could
generate $500 billion a year in economic benefits for the country.
Whether that estimate is too high or too low, consensus exists that
realization of this economic outcome will require billions in
additional up-front investments in technology, networks, and
deployment.
D. A Sagging Tech Economy
In the past 7 years, the industry has moved from a position of
capital abundance to a position of capital shortage. Venture
capitalists in the United States roughly quintupled their investments
in the telecommunications and media, entertainment and Internet sectors
from 1996 to 2000. Investments in the telecommunications and related
sectors are a fraction of what they were just three years ago.
That the high-tech sector, particularly the telecommunications
industry, has been in a lingering slump is an understatement. A June
2003 report by the New Millennium Research Council and the Competitive
Enterprise Institute characterized the state of the industry:
Telecommunications capital spending has fallen over forty percent.
One-half million jobs have been lost in the IT sector during that
time.
The telecommunications industry has experienced an increase of $800
billion in corporate debt and a two trillion dollar decrease in
market valuation.
Market valuation for telecommunications equipment manufacturers alone
fell one trillion dollars in one year.
A July 1, 2003 Wall Street Journal article reports equally dismal
statistics for the nation's telecommunications sector:
Telecom investment is down 75% since 2000.
There have been more than 1,000 telecom bankruptcies.
The market has witnessed a nine-year low in venture capital
investments.
There is a 28-year low in initial public offerings.
Still, this and other recent articles appear to indicate a renewed
optimism based on substantial growth in broadband subscribership. I too
hold out hope for the industry, and if anything can reverse the
downward spiral of this ailing sector, it is broadband. That is why it
is so critical for regulators such as myself to practice restraint in
areas where basic economics dictate that the market provides its own,
more efficient policing mechanism. To do otherwise would risk stifling
investment and further setbacks to our economy.
E. Companies Face a Critical Paradox
Communications companies face a critical paradox: they must respond
to the constant need for innovation and growth while at the same time
they must manage profitability and cash flow in very constricted
capital markets. A recurring topic is the role that the current
regulatory regime has had in creating this paradox. The issue is of
obvious, and critical, importance--given the central role that our
communications infrastructure plays in the nation's economic
development and given that billions of dollars of future investment
will be required for broadband to reach its full potential.
The constriction in the capital markets will impact business
strategy and should impact regulatory policy. Investors increasingly
value companies based on available internal cash flow. The constriction
of capital markets means that companies that can self-finance projects
from internal free cash flow will have a strategic advantage over those
companies seeking cash from Wall Street. It also means that companies
will invest their cash flow cautiously. As such, it is critically
important that regulation not misalign investment incentives by
treating similarly situated competitors dissimilarly.
IV. THE REGULATORY DISPARITY INVOLVING BROADBAND
Based on FCC data released in June 2003, cable remains the dominant
provider in the broadband market. In December 2002, cable held
approximately 57% market share. DSL accounted for 33% of the market.
Broadband technologies such as fiber, satellite, fixed wireless, and
other wireline services (excluding DSL) roughly accounted for the
remaining 10%. With the exception of fiber and other wireline service,
these technologies experienced approximately 25% growth over the last
half of 2002. From the consumer's vantage, a strong argument exists
that DSL and cable and other platforms are substitutes for one another
in the delivery of broadband services. Consumers can receive similar
services over different platforms and could, if the price of one
platform is ``too high,'' switch to another platform.Of the four major
competing broadband-delivery platforms (i.e., cable, DSL, satellite,
wireless), DSL is the most regulated platform. Cable firms can package,
price, invest in and sell services, including broadband, as they deem
appropriate. Economics 101 teaches that where two products are
substitutes for one another, competition is not sustainable where the
substitutable products are subject to asymmetrical regulation. In a
market characterized by competing, substitutable technologies but also
by asymmetric regulation, investors and companies will compare the
anticipated ROI of a dollar of capital when it is invested in the
regulated sector to a dollar of capital invested in the non- or less-
regulated sectors. A rational investor seeking a maximum return on its
investment would, all else equal, choose ``non-regulated'' investments.
The stakes of this debate are high. Competition law is not about
protecting competitors or categories of competitors, whether they are
cable companies, RBOCs, CLECs, or wireless companies--it is about
protecting competition, which, in turn, protects consumers. With its
market share, cable has the greatest potential at present to obtain
market power, i.e., the ability to ``lock in'' customers for its
broadband, content services, and pricing. As a substitute for cable
broadband and with roughly one-third of the market, DSL is currently
the best positioned to compete with cable. The asymmetric regulation of
DSL (i.e., treating DSL like traditional telephony), however, will
likely deter optimal investments in the development and deployment of a
competitive broadband infrastructure. Any regulatory misalignment of
capital flows is especially acute in view of the current capital issues
faced in the communications market.
V. THE RATIONALE FOR REMEDYING REGULATORY DISPARITIES
A. General Considerations
Economic theory argues for a level playing field--let the
competitors compete, and competition will yield optimal results. If the
goal is a level playing field, then two basic questions are begged: (i)
what is the market, and (ii) who are the competitors? A realistic
characterization of the communications marketplace requires that it be
considered broader than wireline. Competing platforms can offer
relatively comparable applications and services. For competing
platforms to be able to meaningfully and fairly compete on a level
playing field, either the mandates to which DSL may be subjected should
be removed, or similar mandates would have to be imposed on cable
broadband and other broadband providers.
The 1996 Act, designed to deal with an established market and
established networks and regional monopolies, is not well-suited to the
development of a competitive, facilities-based broadband market. The
Act presents three approaches to competition and, related, three
strategies for competing: resale, unbundling, and facilities-based
competition. Facilities-based competition is the desired outcome. The
resale components of the Act, confining a competitor to deriving
revenue between resale and retail rates, is not a viable long-term
strategy and would not encourage optimal investment in broadband
infrastructure. Unbundling presents more of a mixed, though still
problematic, picture in the broadband market. With an unbundling
strategy, a competitor does have some latitude to provide
differentiated services that combine unbundled elements from the ILEC
with elements provided by the competitor. And the unbundling of
existing facilities has contributed to the deployment of broadband. For
example, through the unbundling of existing local loops, CLECs have
provided DSL service in some areas underserved by ILECS, and they may
have stimulated greater deployment by ILECs.
Unbundling, as premised in the 1996 Act, connotes an unbundling of
existing (static) facilities. Upgrades and improvements to networks are
constantly required--especially in the context of broadband development
and deployment. Broadband providers would have less of an incentive to
invest in upgrades and improvements if they would ultimately be forced
to provide access to the broadband network on terms & conditions other
than those that are market-based.
While the rules regarding local phone service were appropriate for
opening established networks that were built when traditional telephony
was the market and when that market was dominated by regional
monopolies, the rules do not apply well to emerging markets where
constant innovation is characteristic--as in the broadband market.
Whereas much of the risk in developing the traditional telephony
networks was shouldered long ago, in a market where the incumbents had
monopoly power, the development and deployment of broadband presents an
enormous and immediate financial risk for firms. In contrast to the
traditional telephony market, where there has historically been a
guaranteed customer base from which a service provider could expect a
certain minimum return on its investment, there is no such guaranteed
customer base for competitors in the broadband market. Applying a
monopoly-focused regulatory regime to an emerging market characterized
by competing technologies and companies may disincent players from
investing in broadband.
VI. CORE ELEMENTS OF A BROADBAND POLICY <SUP>1</SUP>
---------------------------------------------------------------------------
\1\ While I believe that a sound deregulatory approach to broadband
will best serve the consumers of Florida (and across the country), my
responsibility, as a state Commissioner, is to apply federal and state
laws on the books.
---------------------------------------------------------------------------
A. A National Policy for an Interstate Service
1. The Interstate Nature of Broadband--Based on the nature of the
technology and the reality of the market, broadband service should be
treated as interstate in nature because broadband is interstate in
nature. Broadband technologies and platforms exist and function for the
most part without regard to state boundaries and as part of a national
(indeed, global) communications infrastructure.<SUP>2</SUP> This
inherently interstate nature of broadband argues strongly for a single,
coordinated federal policy (either via legislation or FCC action) that
is economically rational and respects markets.
---------------------------------------------------------------------------
\2\ Broadband is used almost entirely for Internet service.
Internet access is likely to include communication with websites in
multiple states (and multiple countries). The substantial majority of
communications over the web are interstate on an end-to-end basis. This
is the FCC's longstanding and consistent basis for determining the
jurisdiction of traffic. Treating the entire broadband medium as
interstate in nature reflects that there is no reasonable way to
segregate Internet communications into intrastate and interstate
communications.
---------------------------------------------------------------------------
2. The Intent of the 1996 Act--A national broadband policy is
fundamentally consistent with (if not required by) the
Telecommunications Act of 1996, which was designed ``to provide for a
pro-competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced
telecommunications and information technology and services . . .'').
See H.R. Conf. Rep. No. 104-458, at 1, reprinted in 1996 U.S.C.C.A.N.
10 (emphasis added).
Further, Section 706 of the 1996 Act provides the FCC with the
ability to create a minimalist regulatory regime. Indeed, Section 706
imposes upon the FCC the obligation to ``encourage the deployment on a
reasonable and timely basis of advanced telecommunications capability
to all Americans . . . by utilizing, in a manner consistent with the
public interest, convenience, and necessity, price cap regulation,
regulatory forbearance, measures that promote competition in the local
telecommunications market, or other regulating methods that remove
barriers to infrastructure investment'' (emphasis added).
3. FCC Precedent--Recognizing broadband to be interstate in nature
and an information service <SUP>3</SUP> is entirely consistent with FCC
precedent. In 1998, the FCC determined DSL service to be an interstate
service. In 2001, the FCC determined Internet access to be an
interstate service. In 2002, the FCC determined cable modem service to
be an interstate information service. In its Wireline Broadband NPRM,
the FCC tentatively concluded that wireline broadband is an information
service. Numerous broadband platforms and information services exist
(and new ones will surely emerge).
---------------------------------------------------------------------------
\3\ Telecommunications Service means ``the offering of
telecommunications for a fee directly to the public, or to such classes
of users as to be effectively available to the public, regardless of
the facilities used.'' 47 U.S.C. 153(46). Information Service means
``the offering of a capability for generating, acquiring, storing,
transforming, processing, retrieving, utilizing, or making available
information via telecommunications . . .'' 47 U.S.C. 153(20).
---------------------------------------------------------------------------
The need for regulatory consistency and stability argue for
determining ``broadband'' generally to be an interstate information
service subject to regulation, if any, pursuant to the FCC's Title I
ancillary jurisdiction. If the FCC were inclined to regulate DSL under
Title II, then, given DSL's lack of dominance in a competitive
broadband sector and based on established law and practice, federal
policymakers should consider forbearing from applying Title II access-
like obligations on broadband platforms and services. Related, to the
extent that Title II obligations are imposed on one platform, such
obligations should be applied symmetrically across platforms and should
not intentionally or inadvertently pick winners and losers.<SUP>4</SUP>
---------------------------------------------------------------------------
\4\ Consideration should be given to allowing DSL providers to opt
to provide broadband within Title II, as an argument exists that
providing DSL service as common carriage is important to the deployment
in rural America.
---------------------------------------------------------------------------
4. Regulatory Parity--Any national policy regime should reflect the
basic notion that technological parity should result in regulatory
parity. Whatever Congress or the FCC decide, <SUP>5</SUP> as the case
may be, the ultimate policy should not discriminate based on the
underlying technology and platform used for the delivery of broadband.
From the vantage of the consumer, there is no reason for regulating
non-dominant broadband providers differently. Although via different
platforms, consumers seek essentially the same service from broadband
providers--namely, high-speed connectivity and data transfer.
---------------------------------------------------------------------------
\5\ A blanket FCC policy to treat all broadband services as
information services may be argued by some to be a usurpation of
Congress' power to legislate. As such, a legislative deregulation of
broadband, if that were ultimately the goal of Congress, would provide
greater certainty up-front.
---------------------------------------------------------------------------
Two avenues exist for achieving regulatory parity: ``regulating
up'' or ``deregulating down.'' Because the broadband market is
competitive and because consumers have choice, deregulating broadband
to the point of regulatory symmetry amongst platforms would likely do
more to encourage investment in broadband than would regulating up to
the point of symmetry.
5. The Risks of State Regulation--State regulators are, and have
historically been, concerned with price (i.e., the price that historic
monopolists in local telephony charged consumers and the price at which
parts of the monopolist's network were unbundled or resold to
competitors). Given the lack of fully competitive local markets, the
1996 Act (and the U.S. Supreme Court's May 2002 decision upholding the
FCC's pricing/access rules) instructs regulators to focus on price and
the other terms and conditions of access to local markets. As Chairman
Powell has cautioned, regulators must ``vigilantly guard against the
regulatory creep of existing models into broadband, in order to
encourage investment.''
Absent a national policy, there is a risk that, at least in some
states, the existing model for regulating local competition may creep
into broadband. Because DSL is an emerging technology housed on a
regulated platform (i.e., an incumbent telecommunications network), a
real risk exists that regulators may assume that DSL should be dealt
with in the same manner as the regulated platform on which it is
housed. The risk is that state regulators may seek to regulate the
deployment of broadband using the existing telecom laws and may treat
broadband networks no differently than local phone networks--by
focusing on price and other terms and conditions of broadband. It is
respectfully submitted that in our free market economy, regulation must
not substitute for what markets do best.
The challenge facing state regulators is, thus, to avoid regulation
of the advanced technology while simultaneously fulfilling their
mandate with regard to the regulated technology. A national policy on
the former would help address that challenge.
B. The Roles for the States
As a preliminary matter, regulators should avoid the temptation to
cast the issue as one of states' rights versus federal preemption.
State and federal policymakers should be pursuing the same core goal--
that being to promote investment in the development and deployment of
broadband infrastructure. Fifty states with potentially fifty different
regulatory policies will not further that goal.<SUP>6</SUP>
---------------------------------------------------------------------------
\6\ The reasoning of states-rights supporter Justice Scalia on the
local competition issue supports the notion of a national broadband
policy. As Justice Scalia has stated, ``[T]he question . . . is not
whether the Federal Government has taken the regulation of local
competition away from the states. With regard to the matters addressed
by the 1996 Act, it unquestionably has. The question is whether the
state commissions' participation in the administration of the new
federal regime is to be guided by federal agency regulations. If there
is any presumption applicable to this question, it should arise from
the fact that a federal program administered by 50 independent state
agencies is surpassing strange.''
---------------------------------------------------------------------------
The market teaches that one outcome of national broadband policy
will be greater regulatory certainty. To the extent that a national,
markets-based policy is adopted, as opposed to a patchwork of varying
state rules (some of which may be economically rational and some of
which may not), greater certainty (i.e., less investment risk) will
result. An industry that faces fifty potentially divergent
jurisdictional approaches to broadband will have less of an incentive
to invest than would an industry that faces a more uniform,
deregulatory national policy.<SUP>7</SUP>
---------------------------------------------------------------------------
\7\ The process of reducing the burden of regulation is not an easy
one, however. It may take some time for the FCC to remove all of the
restrictions that potentially stifle the investment needed to develop a
truly vibrant and pervasive national broadband market. Should the FCC
lose heart at some stage in that process, it may fall to the states to
stay the course and continue efforts to ensure that their citizens get
the benefits of a robust market-driven broadband infrastructure.
---------------------------------------------------------------------------
The states clearly have a fundamental role in ensuring that the
benefits of broadband are--available to its citizens. States can and
should work to remove unnecessary barriers to broadband deployment. In
particular, states can work with local governments on rights-of-way
access and permitting issues. To address the supply side, states can
also create financial and non-financial incentives for build-out of the
broadband network. To address the demand side, states can offer e-
learning applications and other e-government initiatives to promote the
value of using broadband technology to carry out day-to-day functions.
If states act quickly to bring broadband to its citizens and to provide
valuable services that can be most effectively utilized by broadband
technology, those states and the citizens within the states can look
forward to reaping the economic rewards that follow investment in
broadband infrastructure.
C. The Common Carriage Argument
Opponents of broadband regulatory reform--or proponents of open
access--argue that to exempt DSL from regulation would undo key
provisions of the 1996 Act and would undermine local phone competition.
Critics of reform argue that the system that has worked for local phone
competition--i.e., incumbents opening their networks at rates set by
the federal government, resulting in more competitors--should be the
same system for regulating broadband. In short, because the broadband
market is competitive, the open access required in a common carriage
regime should not be mandated--though it should certainly be
encouraged. To the extent, open access would be required, such access
should reflect market-based pricing (and other terms and conditions).
VII. CONCLUSION
Advocates for a national broadband policy argue that the potential
for broadband to serve as the engine for (or at least stimulate) the
nation's economic growth is not yet being met. Advocates point to a
number of justifications: the regulatory disparate treatment of
similarly-situated competitors, capital market constriction, sub-
optimal state regulatory philosophies, poor demand for broadband and
related applications, concerns about copyright infringement, etc.
These concerns argue for reform in a variety of arenas: at the FCC,
in Congress, by state regulators and in the private sector. Meaningful
change will not occur in one sphere alone. The FCC's classification of
DSL as an ``interstate information service'' rather than a
``telecommunications service'' would be less significant if broadband
providers do not meaningfully address the business challenges
confronting them--such as getting broadband to the last mile,
stimulating demand, dealing with convergence, etc. Congress legislating
supply-side development or deployment incentives will have a sub-
optimal impact if regulators treat broadband like traditional
telephony. Development of a competitive, fully-functioning broadband
market poses multi-pronged challenges and calls for a multi-pronged
solution by various actors.
My policy positions are based on a fundamental belief that the real
beneficiaries of a robust broadband market are the consumers. Those
entrusted with making public policy decisions must be relentless in
their pursuit of broadband policies that ensure we expeditiously
provide consumers with more choices of innovative technologies at the
most efficient prices.
Mr. Upton. Thank you.
Mr. Tauke.
STATEMENT OF THOMAS J. TAUKE
Mr. Tauke. Thank you, Mr. Chairman and distinguished
members of the committee.
I am before you today to tell you that, without changes in
regulation, the deployment of high-speed Internet access will
be significantly impeded to the detriment of all Americans.
That is how I began my testimony in 1999 before this
subcommittee. I have testified five times in the subsequent 4
years since then. This is becoming a habit; and, as much as I
love all you guys, it is a habit I would like to break.
But at the rate we are going I think the real world on MTV
will take place in a geriatric unit before we see a national
broadband policy coming out of the FCC, not of course that I
have ever seen the real world.
But, in any event, why should you care about a national
broadband policy? Well, I have three reasons.
Reason one is it is the economy. The fact is, is that
sometimes we are so close to the telecom sector that we forget
how important it is to the economy as a whole. Just a few years
ago in the year 2000 this wireline, just the wireline sector of
this industry, had a capital budget of $104 billion. Now to put
that in a little perspective, that is five times the capital
budget of the auto industry.
Second, you should note that now, instead of $104 billion,
the wireline sector has a capital budget of $42 billion, a drop
of some $60 billion, and that is last year's number. This year
it will probably be a little lower.
If you look at a company like Verizon, we had a capital
budget a couple years ago of $18.5 billion. We haven't dropped
as much as the industry as a whole. We are down to $12.5
billion. But that $6 billion reduction in capital investment
means a lot of jobs. For every $100 million we spend, we create
some say 700, other economists say up to 1,000, but 700 to
1,000 jobs.
So if you take the reduction of $6 billion annually in
capital investment that is occurring in our company, that is 45
to 60,000 jobs. But that is only the tip of the iceberg,
because for every job in our company created through capital
investment, there are four more jobs created in other companies
for another 200,000 or so jobs.
Now you can get carried away with this stuff, but if you
think a $60 billion drop in capital investment, five jobs
created for every thousand dollars or--or 5,000 jobs created
for every hundred thousand dollars spent, even if you take the
statistics and cut them in half, it is about 2 million jobs
that this has cost this economy as a result of the decline in
investment in the wireline sector.
Why have we had this decline in investment in the wireline
sector? Because we haven't known what the rules were to make
the transition from the old network to the new network; and if
you don't know what the rules are, it is hard to make a
business case for investment in that new network. So this is
important to infrastructure investment, which now is critically
important to the economy.
Reason two: Consumers are being denied services,
competition and choice. The fact is that uncertain policies
stalls deployment, and when deployment is stalled, consumers
suffer, because services and applications are not developed and
delivered to those consumers.
Reason three: Government policy is unfair, and that is what
you do, government policy. It is unfair. It is wrong. It is
outdated. We love our friends in the cable industry, but the
cable industry has over 65 percent of the consumer broadband
market, yet they aren't regulated. We have about 31 percent of
that market. Our sector of the industry, we are regulated to
beat the band. This isn't right. It is wrong.
So what can be done? Well, first, you need to establish a
national policy, a national broadband policy. The country has
been waiting for 4 or 5 years for this. And as you do that,
bring speed, clarity and decisiveness to this effort.
More specifically, the Triennial Review needs to come out.
We need to know what the FCC did so that we can begin to move
forward with our plans for deployment. We have been marching
forward with the setting of standards. We have been working
with our suppliers, but until you know what the rules are, it
is pretty hard to finalize the business case or even know what
kind of network you are deploying.
Second, we need the proceedings on definitions to be
finalized so we know what rules will govern broadband networks
and services. Right now, we are under Title II, which is voice
telephony. It is complicated regulation. It is arcane
regulation. It is costly regulation. Broadband is not
traditional voice telephony. We are not a utility in the
broadband marketplace. We are not a monopoly in the broadband
marketplace. We are a competitor who is trying to fight for
market share and deliver new services in this marketplace.
So we believe that the FCC should not apply Title II
regulation to us but apply Title I, what the FCC has used in
the past for Internet services and the way it is already
classified cable broadband.
If the FCC acts, it is going to permit the transition of
the wireline industry and the Nation's wireline infrastructure
to move forward. We need that transition in the jobs and
investment to go with it. It is going to provide a boost to the
economy and jobs; and, third, it is going to deliver more
services and more choice to consumers.
Thank you, Mr. Chairman.
[The prepared statement of Thomas J. Tauke follows:]
Prepared Statement of Thomas Tauke, Senior Vice President, Verizon
Communications
Mr. Chairman, thank you for this opportunity to testify before the
Committee. I am Tom Tauke, Senior Vice President for Public Policy and
External Affairs at Verizon Communications. I am before you today to
discuss broadband telecommunications and what the federal government
should do to help broadband achieve its full potential. Unless there
are changes in the current regulatory regime, the deployment of
broadband will be significantly impeded, to the detriment of the
American economy as a whole, and to all Americans.
My message today is simple. There is general consensus that broad
deployment of broadband is a good thing, that it will benefit the
economy and consumers, and that we need a coherent national policy that
fosters the deployment of broadband and all the benefits it promises.
This deployment will require significant additional investment, and
government policy therefore needs to be conducive to that investment.
We believe that the FCC took the first step in that direction in
the broadband sections of the Triennial Review order, limiting some of
the ``old rules'' to the ``old wires'' of traditional telephony. And
Verizon has reacted in the marketplace to what it believes that order
says. The FCC now needs to finish the job and free the ``new wires''
from the remaining ``old rules'' by acting promptly to establish a
consistent national policy that does not interfere with industry's
deployment of broadband capabilities. If the Commission does that,
Verizon and, I believe, others will respond with greater investment in
and deployment of broadband.
THE IMPORTANCE OF BROADBAND
Broadband is the capacity to deliver high-speed data communications
access with a continuous ``always on'' connection and the ability to
both receive and transmit digital content or services at high speeds.
It can provide the stimulus that the economy needs, and transform the
way we live, learn, work and play. The high-speed networking of digital
devices of all kinds--from PCs to digital health monitoring devices is
vital to our economy and the advancement of society.
Mr. Chairman, the Internet is a wonderful tool that developed far
faster than anyone imagined. Use of personal computers and dial-up
access to the Internet fueled the growth the U.S. and world economy
enjoyed in the late 1990's. This growth has reached a plateau. More is
needed now to move the economy to the next level. And that stimulus--
stimulus to the economy as a whole--could be provided by greater
deployment of high-speed, broadband telecommunications. The widespread
adoption of broadband will increase the efficiency and productivity of
Americans at work and at home--with a potential $500 billion impact on
the United States economy <SUP>1</SUP>. The benefits to the quality of
life are immeasurable.
---------------------------------------------------------------------------
\1\ R. Crandall & C. Jackson, The $500 Billion Opportunity: The
Potential Economic Benefit of Widespread Diffusion of Broadband
Internet Access, Executive Summary, page iii (July 2001).
---------------------------------------------------------------------------
There is broad recognition that as a mainstay of the Internet's
development and growth, the telecommunications sector is hurting.
Between 2000 and 2002, overall annual investment by wireline
telecommunications carriers, including Verizon, declined from $104.8
billion to $42.8 billion, a reduction of over $60 billion in just those
two years.<SUP>2</SUP> Spending on new equipment is down 19% in 2003
from the already depressed levels of 2002,<SUP>3</SUP> and R&D
expenditures have plummeted.<SUP>4</SUP> Over half a million jobs have
been lost in the sector since 2000.<SUP>5</SUP>
---------------------------------------------------------------------------
\2\ Skyline Marketing Group, CapEx Report: 2002 Annual Report,
Carrier Data Sheet 1 (June 2003); see also TIA, 2003 Telecommunications
Market Review and Forecast at 56, Tables II-4.1 & II-4.2 (2003)
(spending by carriers on telecommunications equipment decreased by 26.2
percent in 2001 (from $58B to $43B) and by 49.1 percent in 2002 (from
$43B to $22B). Despite cut-backs, Verizon's capital budget that remains
among the largest of all companies in America. It spends more than the
big three auto companies combined, for example. It employs over 250,000
people in 31states, who maintain and build its networks.
\3\ A. Latour et al., A Wrong Number for Telecom: Big Operators Cut
Spending by 19%, Wall St. J. (Apr. 28, 2003).
\4\ M. Balhoff, CFA, Legg Mason, Investment and the Public
Interest, Presentation at the Institute of Public Utilities Conference,
December 10, 2002, page 7 (investment in R&D by Lucent fell 28% from
2001 to 2002 and R&D investment by Nortel fell 39% during the same time
period).
\5\ M. Balhoff, CFA, Legg Mason, Investment and the Public
Interest, Presentation at the Institute of Public Utilities Conference,
December 10, 2002, page 6.
---------------------------------------------------------------------------
Because of the importance of our sector to the economy overall,
this is bad not just for our companies but for the national economy as
well. Historically, almost a quarter of GDP growth in the 1990's was
the result of investment by IT and telecom companies.<SUP>6</SUP>
Investments by the telecom sector have huge multiplier effects. Each
dollar invested in telecommunications infrastructure results in almost
three dollars in economic output.<SUP>7</SUP> For every $100 million of
capital spending by telecommunications companies, about 700 jobs are
created,<SUP>8</SUP> and spending these capital dollars on broadband
means even more job growth. For every job created in building broadband
networks, four more jobs are created in related industries.<SUP>9</SUP>
---------------------------------------------------------------------------
\6\ D. Jorgensen, American Economic Report (March 2001).
\7\ Input-Output Accounts Data: 1999 Annual I-O Table Two Digit at
Table IOTotReqIxCSum.xIs, http://www.bea.doc.gov/dn2/I-o.htm#annual.
\8\ Telnomics Research, 2003, Washington, D.C.
\9\ M.J. Mandel, ``The New Business Cycle,'' Business Week, March
31, 1997, and S. Pociask, ``Building a Nationwide Broadband Network:
Speeding Job Growth'' New Millennium Research Council (February 15,
2001).
---------------------------------------------------------------------------
Broadband deployment will benefit the people of America directly
and personally, in addition to the benefits they will receive from a
healthier national economy. These benefits go well beyond e-mail,
instant messaging and web surfing.
For example, telemedicine over a high-speed network will improve
the quality of medical care in remote or rural areas. But broadband
will also make receiving medical care less of a burden for patients
everywhere by, for example, finally making it unnecessary for the
patient to run around from lab to doctor to specialist picking up and
delivering copies of her x-rays and test results.
And we all know the power of broadband for entertainment and the
promise of video-on-demand and similar services. But broadband will
also let parents send home movies of their children to their
grandparents across the country, instantly and cheaply.
It is these benefits that make Verizon believe in the future of
broadband telecommunications and want to be part of that future.
WHAT ARE THE BARRIERS TO BROADBAND DEPLOYMENT?
Verizon broadband today is primarily DSL services, which provide
significant improvements in data transmission speeds. But DSL is only a
first step, with the goal being fiber optic deployment into
neighborhoods and homes. But as costly as the job is of making DSL
capabilities widely available, the task of rewiring the country with
fiber makes DSL deployment look like pocket change. Though the
investments necessary to make this a reality are massive, Verizon
realizes that this is where its future, and the future of the industry,
lies.
But very real external forces inhibit what Verizon can do.
First and foremost is regulation--both bad rules and regulatory
uncertainty have slowed and continued to slow deployment. When Congress
passed the Telecom Act, it thought competition could work for consumers
in the telecommunications market. That part was right; but regulators
implemented the law by forcing competition through the transfer of
revenues from the telephone companies to firms entering the market.
This was done primarily by making incumbents sell services to the new
firms at below-cost prices, allowing the new entrants to win customers
and make profits without paying the true costs of what they bought and
without making any investments whatever. With this regulatory scheme,
why would any company take the risk of making massive investments to
provide broadband services? The FCC appears to understand that this
scheme will be a disaster for broadband, but it must issue an order to
that effect.
But that's only part of the problem. The FCC has an entire body of
additional regulations developed under Title II of the Act for
traditional telephone services. Those rules limit telephone companies
to recovering the cost of risky new investments that succeed, while
forcing them to absorb the cost of any that don't. They impose still
another set of unbundling obligations that increase both the cost and
risk of investing in new broadband services. And they impose arcane
advance approval requirements that delay the roll out of competitive
new broadband services that our customers want. Applying these rules to
broadband makes no sense, and deters investment.
Given the deep roots of regulation in the telecommunications
sector, policy matters a great deal. It sends important signals to
investors and creates expectations about the relative merits of
investing in new technologies, cutting costs and employing more
workers. Wall Street is skeptical of increasing capital spending in
telecommunications and instead is now rewarding cutbacks in investment.
This skepticism is based, in part, on the normal factors of the
competition and the state of the economy. But in the telecommunications
industry, a significant factor is investors' belief that the regulatory
rules simply make it nearly impossible to realize any return from
investments in new technologies and services. We need to reverse these
trends for the good of the economy, the industry and consumers.
WHAT'S NEEDED?
What's needed is a new approach that takes account of competitive
broadband deployment. The broadband marketplace of today has a number
of competing technologies vying for the consumer's attention and
wallet. Cable companies, telephone companies, wireless companies,
satellite companies and, now, WIFI networks compete aggressively
offering broadband services that consumers regard as interchangeable.
Cable companies, free of regulation, are among the most active
competitors. They have invested $70 billion in upgrading and digitizing
their networks and have the capability of offering hundreds of digital
TV channels and broadband services. They are moving to use this same
platform to offer voice telecommunications services employing efficient
Internet protocols.<SUP>10</SUP> They are dominant in the broadband
market with two-thirds of the households (12 million) that have signed
up for broadband to date.<SUP>11</SUP> And they are not regulated.
---------------------------------------------------------------------------
\10\ R. Sachs, President, National Cable Telecommunications
Association, ``The New Broadband Internet Paradigm,'' Remarks to NARUC/
NECA Summit on Broadband Deployment II, Arlington, Virginia April 28,
2003, page 1.
\11\ National Cable and Telecommunications Association web site,
accessed July 16, 2003, http://www.ncta.com/industry--overview/
indStats.cfm?statID=15.
---------------------------------------------------------------------------
Verizon is eager to compete head on with cable and other
technologies that are vying for costumer's attention. We are willing to
enter these new and unproven markets and to take the risks involved in
doing so. But we--Verizon, the industry and the public--need government
to do its part to reform current regulations that affirmatively hold
back investment.
First, we need a Triennial Review order on broadband that is clear
and that cannot be gamed. We need the FCC to finally declare that
Broadband technologies will not be subject to the unbundling rules that
were devised for a voice network.
Second, we need a sound national policy that permits all
infrastructure providers to compete. Cable has over 65 per cent of the
high-speed broadband consumer market. Cable's broadband network and
services are not regulated. So what is the justification for regulating
the broadband network and services of companies that have a market
share of less than 35 per cent? Why is government continuing to stymie
one group of companies that is trying to invest in the infrastructure
that will serve consumers and provide full competition in the wireline
broadband market? Regulation is appropriate only where markets have
failed, and it should not be imposed in anticipation of problems that
do not exist. Cable was freed of this burden by the ``96 Act and
transformed its coaxial network into the high-speed network it now
touts.
Third, we need the FCC to finish the job on broadband NOW. It needs
to classify our broadband services the same way it already has
classified comparable services provided by the dominant cable
companies. The FCC should first decide that all broadband services
should not be regulated under Title II, and instead should be
classified under Title I of the Communications Act. Broadband is not
telephony, and it should not be regulated like telephony. Imposing old
telephony rules on broadband makes no sense.
And we need the FCC to reform the irrational and destructive
pricing rules that are siphoning away money that could otherwise go to
support new investment, and that instead is going to line the pockets
of arbitrageurs who make no investment. To the extent we have
continuing obligations to make elements of our network available for
use by competitors, we should receive a fair price that lets us recover
the prices we incur in the real world to provide those elements.
And, if investments and deployment plans are to be made now, we--
Verizon, the industry and the public ``need these things done now,
without further delay.
OTHER INTERNET ISSUES
As we move toward a broadband world, the Commission is being asked
at the same time to put new rules in place relating to broadband. Some
have expressed concern that broadband network providers could
discriminate against application providers or Internet service
providers or try to keep customers from accessing services on the
Internet that compete with services, like VOIP, that the broadband
providers are offering.
The Internet is built on layers of services, networks and
technologies. The operating system in your PC is at one layer or level;
the ISPs are another layer; applications, like e-mail, are another
layer; and the network infrastructure--the broadband loop into your
home--is another. Every layer is distinct but they all must work
together in order to provide consumers with information or services
they want. This is what I call the ``Internet's Value Chain'' and in
order for it to work for the consumer, every layer--or link in the
chain--must do its part.
Microsoft, Amazon, Earthlink, and many other players provide links
or parts of links in the Internet's Value Chain. There are things that
any one of these players might do that could be harmful to the openness
of the Internet--but they aren't regulated, and I don't think anyone
would seriously suggest they should be regulated. Yet, that is what
some are advocating for network providers like Verizon. What is being
suggested is pure anticipatory regulation. There is no need for this.
We should be patient and not permit the heavy hand of regulation to
skew the market forces that will determine what consumers want, how
they want it, and what they are willing to pay for it. I do not see how
it is in the interest of any player in Internet space, in the market
right now, to be enacting anticipatory regulation of the Internet
experience.
We think that the High Tech Broadband Coalition principles are
worthy of being embraced by the FCC. Those principles are designed to
ensure that the consumer has access all the services available on the
Internet. And we believe that it's important that consumers have access
to the Internet no matter whether the wires belong to Verizon or
someone else.
There is no need, however, to chisel these principles into
regulation. Rather, the FCC should allow the industry to follow this
vision. The FCC, by endorsing these principles, can put the industry on
notice. This will have tremendous impact on the way in which the market
develops.
Put in simple terms the FCC should endorse these important industry
principles, let the market develop and allow all new services to be
offered in a ``regulatory free'' zone.
CONCLUSION
The key to reinvigorating the telecommunications industry is to
send strong, consistent signals that uncertainty in policy is about to
end and national policies will be adopted forthwith that support, not
impede, investment. We're ready to do our part. If the government soon
makes the right policy changes, broadband can be a true American
success story and help to re-ignite the economy.Thank you.
Mr. Upton. Mr. Jones, before you go, I want to recognize
the chairman for a point of personal privilege.
Chairman Tauzin. I thank the chairman for that privilege.
Let me, first of all, announce to the members of the
committee and the audience that we are privileged to have with
us a group of young people in the audience who have just shown
up. They are from my home district in Louisiana. They are all
high schoolers, and they just attended a session at Nicholls
State University. Mr. Markey, that is my alma mater. We
affectionately call it ``Harvard on the Bayou'' in Louisiana.
These young people attended a session known as Free Enterprise
Institute which is a session where they learn the principles of
free market and free enterprise. What a great time for them to
be here visiting the committee at this time.
But I wanted to welcome them all. They are winners of the
right to attend a week here in Washington where they can see
their government at work, and they are accompanied by a very
special lady in my life. My daughter Kristie Tauzin is with
them. If you will please give all of them a big welcome, I
would appreciate it.
And I yield to my friend Mr. Markey.
Mr. Markey. I think it is important to note that you are a
graduate of Nicholls State University.
Chairman Tauzin. It is important to know I graduated
anywhere, Mr. Markey.
Mr. Markey. Well, I know. I think the audience should know
that. And as a result, you know, up in Boston we oftentimes
refer to Harvard as the Nicholls State University of
Massachusetts, because of the obvious intelligence and fine
education that you----
Chairman Tauzin. I appreciate that. We park our cars down
on the bayou, too, Mr. Markey.
Mr. Upton. Mr. Jones.
STATEMENT OF THOMAS JONES
Mr. Jones. Thank you, Chairman Upton, ranking member and
members of the subcommittee for the opportunity to testify
today.
My name is Thomas Jones. I am a partner in the law firm of
Willkie Farr & Gallagher. I am testifying today on behalf of
three competitive local exchange carriers, or CLECs: Allegiance
Telecom, Conversent Communications and Time Warner Telecom.
Allegiance, Conversent and Time Warner Telecom are all
facilities-based CLECs that serve business customers.
Allegiance and Conversent deploy their own switches, but they
rely on the right established in the Telecommunications Act of
1996 to use unbundled broadband loops from the ILECs to provide
telephone and broadband data services to small- and medium-
sized business customers. Time Warner Telecom uses its own
facilities to provide voice and broadband services to medium
and large business customers but must still purchase broadband
end user connections from ILECs to serve many of its business
customers.
I would like to explain today why the FCC's proposal to
reclassify the transmission used in ILEC broadband Internet
access as an unregulated Title I service threatens Congress'
established telecommunications policy goals in two fundamental
ways. First, by reclassifying these services out of Title II
and reversing decades of precedent, the FCC would eliminate the
ILEC's obligation to sell broadband loops to their CLEC
competitors. For most small- and medium-sized business
customers, the ILECs own the only broadband loops. No other
service provider, including cable, wireless or satellite, has
deployed ubiquitous business end user connections that have the
upstream capacity, reliability and security features that the
ILEC loops have.
Therefore, the only way for CLECs to serve the business
market is by purchasing ILEC broadband loops. Eliminating their
right to do so under Title II, which mandates reasonable prices
and service quality, will likely destroy competition in this
dynamic and innovative segment of the economy.
The purported goal of the FCC's proposal is to treat ILEC
broadband and cable modem services the same way. However, the
end result of reclassifying ILEC broadband transmission as a
Title I service would be to throw the baby out with the bath
water. ILECs would no longer be required to share broadband
loops in the residential mass market in which the cable
companies do compete, but ILECs would also no longer be
required to provide broadband loops in the business broadband
markets in which cable usually does not compete and in which
the ILECs usually have the only viable end user connections.
If the FCC wants to consider deregulating certain aspects
of ILEC broadband transmission, it can only do so within the
scope of its statutory authority established by Congress in the
Communications Act. To the extent that there is any
justification for deregulating the ILECs--and it is our
testimony that the ILEC's market power does continue to warrant
regulation--then the FCC must justify such deregulation under
the standards set forth by Congress in section 10 of the Act.
That provision gives the FCC the authority to target
forbearance to markets where the ILECs lack market power. For
both a policy and legal perspective, section 10 is the only
legitimate vehicle for deregulating ILEC broadband.
Second, reclassifying the broadband transmission used to
provide ILEC Internet access as a Title I service threatens
many core social and national security policy objectives
established by Congress. For example, the FCC's proposal could
cause statutory requirements regarding universal service,
privacy, access to the disabled and unauthorized changes in
service providers to become inapplicable to broadband.
Moreover, the requirements of the Communications Assistance for
Law Enforcement Act, or CALEA, might not apply.
While some observers belief that the FCC can selectively
reimpose these requirements under Title II, I respectfully
submit that such an effort is beyond the FCC's jurisdiction.
The Communications Act specifically states that the
requirements of Title II only apply to the extent a
telecommunications carrier is engaged in providing
telecommunications services. Reclassification would mean that
the ILECs would not be providing broadband as a
telecommunications service, and the Supreme Court precedent
does teach that the FCC may not rely on Title I authority to
change that fact.
In sum, we urge Congress to remind the FCC that it lacks
the authority to interpret Title II out of the Act whenever it
pleases. Congress has specified the mechanism that the agency
may use to deregulate as warranted without negative
consequences for competition and other congressional goals.
That mechanism is selective deregulation under section 10, not
reclassification.
Again, thank you for allowing me to participate here today,
and I would be happy to answer any questions.
[The prepared statement of Thomas Jones follows:]
Prepared Statement of Thomas Jones, Willkie Farr & Gallagher, on Behalf
of Allegiance Telecom, Conversent Communications and Time Warner
Telecom
I want to begin by thanking Chairman Upton, Ranking Member Markey,
and the Members of the subcommittee for the opportunity to testify
today. My name is Thomas Jones. I am a partner in the law firm of
Willkie Farr & Gallagher. I am testifying today on behalf of three
competitive local exchange carriers or ``CLECs'': Allegiance Telecom,
Conversent Communications, and Time Warner Telecom. I would ask that in
addition to my testimony today, you include in the record a joint paper
to be filed by these companies in the FCC's Title I proceeding.
Allegiance, Conversent and Time Warner Telecom are all facilities-
based CLECs that serve business customers. Allegiance and Conversent
deploy their own switches, but they rely on the right established in
the Telecommunications Act of 1996 to use unbundled broadband loops
from the ILECs to provide telephone and broadband data services to
small and medium-sized business customers. Time Warner Telecom uses its
own facilities to provide voice and broadband services to medium and
large business customers, but must still purchase broadband loops from
the ILECs to serve many of its business customers.
I would like to explain today why the FCC's proposal to reclassify
the transmission used in ILEC broadband Internet access as an
unregulated Title I service threatens Congress' established
telecommunications policies in two fundamental ways. First, by
reclassifying these services out of Title II and reversing decades of
precedent, the FCC would eliminate the ILECs' obligation to sell
broadband loops to their CLEC competitors. For most small and medium-
sized business customers, the ILECs own the only broadband loops. No
other service provider, including cable, wireless or satellite, has
deployed ubiquitous business end user connections that have the
upstream capacity, reliability and security features of ILEC loops. The
ILECs' market power over business loops remains, regardless of what is
sent over its loop facilities, whether it be broadband or narrowband,
or if the loop is old, new, borrowed or blue. Therefore, the only way
for CLECs to serve the business market is by purchasing ILEC broadband
loops. Eliminating their right to do so under Title II, which mandates
reasonable prices and service quality, will likely destroy competition
in this dynamic and innovative segment of the economy.
The purported goal of the FCC's proposal is to treat ILEC broadband
and cable modem services the same way. However, the end result of
reclassifying ILEC broadband transmission as a Title I service would be
to throw the baby out with the bath water. ILECs would no longer be
required to share broadband loops in the residential/mass market in
which cable competes, but ILECs would also no longer be required to
provide broadband loops in the business broadband markets in which
cable usually does not compete and in which the ILECs usually own the
only broadband end user connections.
If the FCC wants to consider deregulating certain aspects of ILEC
broadband transmission, it can only do so within the scope of its
statutory authority established by Congress in the Communications Act.
To the extent that there is any justification for deregulating the
ILECs, and it is our testimony that ILECs' market power continues to
warrant regulation, then the FCC must justify such deregulation under
the standards set forth by Congress in Section 10 of the
Act.<SUP>1</SUP> That provision gives the FCC the authority to target
forbearance to markets where the ILECs lack market power. From both a
policy and legal perspective, Section 10 is the only legitimate vehicle
for deregulating ILEC broadband.
---------------------------------------------------------------------------
\1\ The full text of Section 10 is set forth in an appendix to this
testimony.
---------------------------------------------------------------------------
Second, reclassifying the broadband transmission used to provide
ILEC Internet access as a Title I service threatens many core social
and national security policy objectives established by Congress. For
example, the FCC's proposal could cause statutory requirements
regarding universal service, privacy, access to the disabled, and
unauthorized changes in service providers to become inapplicable to
broadband. Moreover, the requirements of the Communications Assistance
for Law Enforcement Act (CALEA) might not apply to transmissions
delivered over broadband, including voice over IP.
While some observers believe the FCC can selectively reimpose these
requirements under Title I, I respectfully submit that such an effort
is beyond the FCC's jurisdiction. The Communications Act specifically
states that the requirements of Title II only apply to the extent a
telecommunications carrier is engaged in providing telecommunications
services. Reclassification would mean that ILECs would not be providing
broadband as telecommunications services, and Supreme Court precedent
teaches that the FCC may not rely on its Title I authority to change
that fact.
In sum, we urge Congress to remind the FCC that it lacks the
authority to interpret Title II out of the Act whenever it pleases.
Congress has specified the mechanism that the agency may use to
deregulate as warranted without negative consequences for competition
and other congressional goals--that mechanism is Section 10, not
reclassification.
Again, thank you for allowing me to participate here today, and I
would be happy to answer any questions.
APPENDIX
SEC. 10. [47 U.S.C. 160] COMPETITION IN PROVISION OF TELECOMMUNICATIONS
SERVICE.
(a) REGULATORY FLEXIBILITY.--Notwithstanding section 332(c)(1)(A)
of this Act, the Commission shall forbear from applying any regulation
or any provision of this Act to a telecommunications carrier or
telecommunications service, or class of telecommunications carriers or
telecommunications services, in any or some of its or their geographic
markets, if the Commission determines that--
(1) enforcement of such regulation or provision is not
necessary to ensure that the charges, practices,
classifications, or regulations by, for, or in connection with
that telecommunications carrier or telecommunications service
are just and reasonable and are not unjustly or unreasonably
discriminatory;
(2) enforcement of such regulation or provision is not
necessary for the protection of consumers, and
(3) forbearance from applying such provision or regulation is
consistent with the public interest.
(b) COMPETITIVE EFFECT TO BE WEIGHED.--In making the determination
under subsection (a)(3), the Commission shall consider whether
forbearance from enforcing the provision or regulation will promote
competitive market conditions, including the extent to which such
forbearance will enhance competition among providers of
telecommunications services. If the Commission determines that such
forbearance will promote competition among providers of
telecommunications services, that determination may be the basis for a
Commission finding that forbearance is in the public interest.
(c) PETITION FOR FORBEARANCE.--Any telecommunications carrier, or
class of telecommunications carriers, may submit a petition to the
Commission requesting that the Commission exercise the authority
granted under this section with respect to that carrier or those
carriers, or any services offered by that carrier or carriers. Any such
petition shall be deemed granted if the Commission does not deny the
petition for failure to meet the requirements for forbearance under
subsection (a) within one year after the Commission receives it, unless
the one-year period is extended by the Commission. The Commission may
extend the initial one-year period by an additional 90 days if the
Commission finds that an extension is necessary to meet the
requirements of subsection (a). The Commission may grant or deny a
petition in whole or in part and shall explain its decision in writing.
(d) LIMITATION.--Except as provided in section 251(f), the
Commission may not forbear from applying the requirements of section
251(c) or 271 under subsection (a) of this section until it determines
that those requirements have been fully implemented.
(e) STATE ENFORCEMENT AFTER COMMISSION FORBEARANCE.--A State
commission may not continue to apply or enforce any provision of this
Act that the Commission has determined to forbear from applying under
subsection (a).
Mr. Upton. Thank you. Mr. Sachs.
STATEMENT OF ROBERT SACHS
Mr. Sachs. Chairman Upton, Ranking Member Markey and
members of the subcommittee, I appreciate this opportunity to
share with you the cable industry's views regarding what
regulation, if any, is appropriate for broadband Internet
services. I would like to make three points.
First, the widespread availability of broadband Internet
service across the U.S. Is largely the result of the cable
industry's massive investment of private risk capital. This
multibillion dollar investment has created a service that has
proved to be a fast growing, highly valued consumer service.
Second, an important reason why the cable industry's risk
taking has greatly enhanced the use of the Internet for
millions of Americans is because FCC policies have avoided
unnecessary regulation.
Third, the cable industry supports policies that favor
broadband competition over regulation. In the absence of any
market failure, and there is none in the broadband market, any
government intervention should be aimed at deregulatory parity;
that is, regulate down, not up.
It is really hard to believe that cable modem service has
existed as a consumer service for only 7 years. I remember well
one of the earliest public demonstrations of this new
technology that my then employer Continental Cablevision
conducted in the early nineties at the Museum of Science in
Boston. Frankly few at the time believed that cable's hybrid
fiber coax networks were suitable for data transmission. After
all, cable was low tech, but the demo made instant converts.
To the credit of an entrepreneurial industry that was
willing to take the risks, broadband has come a long way in a
relatively short period of time. Cable broadband is now
available to almost 85 percent of U.S. Households. This massive
undertaking has involved upgrading over a million miles of
cable plant with fiber optics and the latest digital
technology.
More than 12 million households today subscribe to cable
modem service. Among cable households that own PCs, over 25
percent are cable modem customers. Cable modem service gives
consumers instantaneous access to the Internet and everything
that is available on it.
Companies have experimented with different business models.
Some offer tiers. Some offer unique broadband content. All
allow customers to choose their own home page with unfettered
access to any content on the Internet.
Government regulatory policies can have strong effects on
how rapidly broadband gains mass market. The FCC's approach to
cable modem services certainly helped its development. In 1999,
at the urging of dial-up ISPs and our telephone competitors,
the FCC intensively studied whether it should mandate access
for competitive ISPs on the cable platform on government-set
terms and conditions; in other words, common carriage.
Our industry argued, indeed we committed that we would
build out our broadband networks aggressively if we were not
burdened by this type of costly and intrusive regulation.
Forcing common carriage on cable would only delay deployment,
we said. The FCC's decision not to head down the road of
regulation allowed us to keep our commitment.
By 2002, court cases led the FCC to decide the regulatory
classification of cable modem service. The FCC concluded that
this service is an interstate information service and not a
cable service nor a telecommunications service. In a further
rulemaking the FCC is currently considering the full
implications of its classification of cable modem service as an
information service, which brings me to my final point.
To the extent the FCC believes that cable modem and DSL
services should be subject to some version of equivalent
regulation, it should adopt, as you said, Mr. Chairman,
deregulatory parity; that is, the Commission should remove
regulatory constraints, not add new ones.
NCTA has not participated in the FCC's rulemaking on the
regulatory treatment of DSL. However, as a general principle we
favor market competition over regulation and do not seek to
impose regulatory requirements on competitors.
We do take issue with the suggestion by some companies that
if DSL service remains subject in whole or in part to Title II
regulation, cable modem service should be subjected to
equivalent regulation. ILECs are subject to Title II
constraints for reasons related to their unique history and
network characteristics. Imposing legacy phone regulations on
cable for no reason other than to achieve regulatory parity
would harm consumers by raising the price or lowering the
quality of cable modem service. It would also provide a
disincentive for new investment.
Promoting competition rather than regulating competitors
should be the cornerstone of U.S. Broadband policy.
[The prepared statement of Robert Sachs follows:]
Prepared Statement of Robert Sachs, President and CEO, National Cable
and Telecommunications Association
Mr. Chairman, Ranking Member Markey, and Members of the
Subcommittee: On behalf of the National Cable & Telecommunications
Association, I appreciate this opportunity to share with you the cable
industry's views regarding what regulatory treatment, if any, is
appropriate for broadband Internet services.
In my testimony today, I'd like to make three points. First, the
widespread availability of broadband Internet service across the U.S.
is largely the result of the cable industry's massive investment of
private risk capital. This multi-billion dollar investment has created
a service that has proved to be a fast-growing, highly valued service
by consumers. Second, an important reason that the cable industry's
risk taking has greatly enhanced use of the Internet for millions of
Americans is because FCC policies have avoided unnecessary regulation.
Third, the cable industry supports policies that favor broadband
competition over regulation. In the absence of any market failure--and
there is none in the broadband market--any government intervention
should be aimed at ``deregulatory parity,'' that is, regulate down, not
up.
It's really hard to believe that cable modem service has existed as
a consumer service only for about seven years, with most deployment and
growth taking place since 1999.
I remember well one of the earliest public demonstrations of this
new technology that my then employer, Continental Cablevision,
conducted in the early-1990's at the Museum of Science in Boston.
Frankly, few at the time believed that cable's hybrid fiber coax
networks were suitable for data transport. After all, cable was ``low-
tech.'' But the demo made instant converts.
To the credit of an entrepreneurial industry that was willing to
take the risks, broadband has come a long way in a relatively short
period of time. Cable operators made this investment without any clear
understanding of how or whether government might decide to regulate
this new service. And we continue to operate under some regulatory
uncertainty.
Due in large measure to efforts of the cable industry, broadband is
now available to more than 85% of U.S. households. This massive
undertaking has involved upgrading over a million miles of plant with
fiber optics and the latest digital technology.
More than 12 million consumer households subscribe to cable modem
service. Over 15% of cable households today are cable modem customers.
And among cable households that own PC's, over 25% are cable modem
customers.
Cable internet access has been just that--access to the Internet
and everything that's available on it. Companies have experimented with
different business models. All allow consumers to choose their own home
page with unfettered access to any content on the Internet.
Government regulatory policies can have strong effects on how
rapidly broadband gains a mass market. The FCC's approach to cable
modem service has certainly helped its development. In 1999, at the
urging of dial-up ISP's and our telephone competitors, the FCC
intensively studied whether it should mandate access for competitive
ISP's on the cable platform on government-set terms and conditions. In
other words, common carriage.
Some insisted that unless the FCC acted to mandate carriage of
multiple ISPs before cable's networks were even built, the end-to-end
openness of the Internet would be lost. Our industry argued--indeed, we
committed--that we would build out our broadband networks aggressively
if we were not burdened by this type of unnecessary regulatory
restraint. Forcing common carriage on cable would only delay
deployment, we said. The FCC's decision not to head down the road of
regulation allowed us to keep our commitment. The FCC announced a
policy of vigilant monitoring of developments and has since reported to
Congress on the successful rapid deployment of broadband by cable.
By 2002, court cases led the FCC to decide the regulatory
classification of cable modem service. The FCC concluded that cable
modem service is an ``interstate information service'' and not a
``cable service'' nor a ``telecommunications service.''
The Commission examined the legislative history of the definition
of ``cable service'' and concluded that it did not encompass the
interactive access to the Internet that cable modem service affords to
subscribers.
The Commission also found that the Communications Act did not
permit the classification of cable modem service as a common carrier
``telecommunications service.'' Such a service, by definition requires
that the provider offer ``telecommunications''--transmission capacity--
directly to the public for a fee, something cable operators do not do
in the provision of cable modem service (or, for that matter, in
providing traditional video programming services).
The Commission found that the transmission component of Internet
access provided by cable operators is ``part and parcel of cable modem
service--integral to its other capabilities,'' not a separate transport
facility made available for public use. It therefore concluded that
cable modem service, like Internet access service offered by other
entities, is an ``information service'' delivered to subscribers ``via
telecommunications'' rather than separate offerings of content and
common carrier transport.
The Commission's finding that the ``information service''
classification best fits the attributes of cable modem service is also
consistent with Congress' direction to insure that the Internet remains
``unfettered by Federal or State regulation,'' as much as possible. As
you know, in a further rulemaking, the FCC is currently considering the
full implications of its March 2002 decision.
Which brings me to my final point: to the extent the FCC believes
that cable modem and DSL services should be subject to some version of
equivalent regulation, it should adopt ``deregulatory parity''--that
is, the Commission should remove regulatory constraints, not add new
ones.
NCTA has not participated in the FCC's rulemaking on the regulatory
treatment of DSL, which the FCC is studying concurrently with its
further notice on cable modem service. However, as a general matter, we
favor market competition over regulation and do not seek to impose
regulatory requirements on competitors.
We do take issue with the suggestion by some companies that if DSL
service remains subject, in whole or in part, to Title II regulation,
cable modem service should be subjected to equivalent regulation.
ILEC's are subject to Title II constraints for reasons related to their
unique history, system architecture, and past conduct--none of which
pertain to cable. Imposing those legacy regulations--and the costs
associated with them--on cable for no reason other than to achieve
regulatory parity will harm consumers by raising the price or lowering
the quality of cable modem service. It would also provide a
disincentive for new investment.
Promoting competition rather than regulating competitors should be
the cornerstone of U.S. broadband policy. The cable industry's record
with respect to broadband deployment clearly demonstrates that consumer
benefits result when government policies encourage companies to invest
and compete in the market.
In closing, I'm reminded of the wisdom of Thomas Jefferson, himself
one of America's greatest innovators, who said: ``That government is
best which governs the least, because its people discipline
themselves.'' A modern-day corollary for broadband Internet might be:
That government is best which governs the least, because market forces
provide discipline.
Mr. Chairman, we've come a long way in relatively short period of
time in making broadband services widely available in the U.S. The
challenges ahead are to make broadband ubiquitous in rural and urban
America alike, enhance network capabilities and develop unique
broadband content and applications that will further drive market
penetration. I urge you and your colleagues to encourage the FCC to
continue to give broadband Internet providers the market freedom to
achieve these goals.
Thank you.
Mr. Upton. Thank you very much. Mr. Baker.
STATEMENT OF DAVID BAKER
Mr. Baker. Chairman Upton, Ranking Member Markey and
members of the subcommittee, thank you for the opportunity to
testify before you today. I am Dave Baker, Vice President for
Law and Public Policy with EarthLink. EarthLink is the Nation's
third largest Internet service provider, serving 5 million
customers nationwide with dial-up, broadband, Web posting and
wireless Internet services.
This hearing is about the regulatory status of broadband
services. As members of the subcommittee are aware, this
question has been the focus of several ongoing proceedings at
the Federal Communications Commission. The law is clear about
this regulatory status, and EarthLink is dismayed that the FCC
is misconstruing the law and tilting the playing field in favor
of incoming providers.
What is particularly troubling to EarthLink, and I would
hope would be troubling to members of this subcommittee and the
Congress as well, is the tremendous and far reaching effort of
classifying the facilities used to provide broadband services
as information services under the Communications Act. Common
carrier transmission services that are the foundation of the
information economy would no longer be required to be made
available to information service providers upon reasonable
requests on nondiscriminatory terms and conditions. Network
owners would be free to arbitrarily decide who can use their
networks, at what price and on what terms. This would not only
work against consumer interests but even laws like CALEA would
no longer apply.
The central question of this hearing and of several current
FCC proceedings is the regulatory classification of broadband
services. Let me be clear in answering this question. All
Internet services, whether provided by an independent ISP like
EarthLink, a telco affiliate like Verizon Online or a cable
company like Comcast, are information services. Let me be
equally clear that all information services are by definition
delivered via telecommunications and that offering of such
telecommunications, whether by a telco or a cable company,
makes them telecommunication services. This is true whether the
Internet access is provided by an independent ISP or the
network operators themselves. Internet access, broadband or
otherwise, is therefore an information service riding on top of
a transmission component which is a telecommunications service.
In the world of dial-up Internet access these two
components are easy to see. Consumers purchase their phone line
from their telephone company and their Internet service from an
ISP such as EarthLink. The telephone company provides the
telecommunications service which can be used to transmit voice
or data. The ISP provides an information service. The
underlying transmission link is regulated. The Internet access
is an unregulated information service.
Now suppose the ISP I just described was Verizon Online. It
would make no difference. The underlying transmission provided
by Verizon would still be a regulated common carrier
telecommunications service and Verizon Online's Internet access
service would still be an unregulated information service. This
is the regime that the FCC crafted in its seminal 1980 Computer
II proceeding, which has been affirmed by the FCC and Federal
courts many times in the intervening years and which Congress
adopted in the Telecommunications Act of 1996.
Broadband access is similar, with two exceptions. First, it
is obviously faster because the transmission link has better
electronics and greater capacity. Second, in most cases the end
user is not given the option of buying the transmission link
separately from the information service. Rather they buy a
bundled package which combines the two. Further, most broadband
ISPs are affiliated with or directly owned by the transmission
facility owner.
In the case of broadband Internet access, the FCC is taking
an approach opposite from the one which proved so successful in
the narrowband world. For broadband the FCC suggests that so
long as the facility owner refuses to offer consumers a
separate transmission link, the bundled package of transmission
and information is an information service. As a result facility
owners are able to shield their transmission networks from
requirements for nondiscriminatory access that would otherwise
apply. This all but eliminates competition among broadband
ISPs, violating not only the letter and intent of the
Telecommunications Act but also doing great harm to small
businesses and consumers.
The structure that Congress enacted in the 1996 act mirrors
the structure the FCC adopted in its Computer II decision. The
transmission component integral to delivery and definition of
information service is treated separately under the act just as
the FCC treated it separately in its rulemakings 15 years prior
to that. Only by adding words that don't exist such as separate
and stand-alone does the FCC make their version and definitions
work.
Telephone companies enjoyed a government grant of monopoly
market for almost a century in which to build their
transmission networks. Cable companies had similar monopoly
franchises, the cable-telco cross ownership ban, and below cost
access to ducts and poles in time to build out their networks.
Telcos and cable enjoy 85 percent market share in their core
businesses, which draws a steady stream of revenue to push into
the information services market, and they have some 95 percent
market share in broadband, DSL and cable modem markets
respectively.
In summary, it is crucial to distinguish between broadband
information services and the underlying telecom services which
deliver them. Internet access services, whether narrowband or
broadband, whether offered by an independent ISP or a cable
company, remain unregulated information services but the
transmission facilities which underlie them remain common
carrier telecommunications services. To allow facility owners
to now repudiate their obligation to share their transmission
networks on a nondiscriminatory basis is an abuse of the law
and is anticompetitive. Clearly that is not what Congress
intended when it passed the 1996 act.
Thank you for giving me the opportunity to testify today.
[The prepared statement of David Baker follows:]
Prepared Statement of Dave Baker, Vice President of Law and Public
Policy, Earthlink, Inc.
Mr. Chairman and members of the Subcommittee. Thank you for the
opportunity to testify before you today. My name is Dave Baker. I am
Vice President for Law and Public Policy for EarthLink. EarthLink is
the nation's 3rd largest Internet Service Provider (ISP), serving 5
million customers nationwide with dial-up, broadband (DSL, cable and
satellite), web hosting and wireless internet services. EarthLink
regularly receives awards for its customer service and innovation,
including the J.D. Power and Associates award for highest customer
satisfaction among dial-up ISPs and (tie) highest customer satisfaction
among broadband ISPs.
This hearing is about the regulatory status of broadband services,
and in particular whether those services should be classified as
``information services,'' ``common carrier'' services, or ``something
in between.'' As the members of the subcommittee are aware, this
question has been the focus of several ongoing proceedings at the
Federal Communications Commission (FCC). EarthLink is presently
appealing in court the FCC's declaratory order in the proceeding
dealing with the provision of broadband service over cable facilities,
and is anxiously awaiting the FCC's action in the proceeding dealing
with the provision of broadband services over telephone facilities.
To be frank, EarthLink is dismayed with the answers regarding the
regulatory classification of broadband services that the FCC seems
determined to reach. The law is clear about that regulatory status, and
we are dismayed that the FCC seems determined to ignore the law in an
effort to tilt the playing field in favor of incumbent providers who
have built their networks over public rights of way using federal
authorization while protected from competition by federal, state or
local government-granted monopolies.
What is particularly troubling to EarthLink, and I hope would be
troubling to the members of this subcommittee and the Congress as a
whole, is the tremendous and far reaching effect of classifying all
broadband services as ``information services'' under the Communications
Act. The effect is tremendous because of technology convergence.
Digital, packet-switched transmission networks are replacing analog,
circuit switched networks at an ever increasing rate. It will not be
long before most, if not all, of the major network operators are able
to provide all of their services--voice, data, and video--over packet-
switched networks also used to provide Internet services.
The effect would be far reaching because the common carrier
transmission services that are the foundation of the information
economy would no longer be required to be made available to information
service providers upon reasonable request on non-discriminatory terms
and conditions. Network owners would be free to arbitrarily decide who
can use their networks, at what price, and on what terms. This would
not only work against consumer interests, but vital communications
links that can be reached today under court order by law enforcement
agencies would suddenly be beyond reach because laws like the
Communications Assistance to Law Enforcement Act (CALEA) would no
longer apply. Congress would have re-write an entire body of laws that
have been carefully enacted over the years to promote competition,
protect consumers, and provide for public safety. All because the FCC
is ignoring not only its own precedents, but also the plain language
that Congress wrote in the Telecommunications Act of 1996.
The central question of this hearing (and of several current FCC
proceedings) is the regulatory classification of broadband services.
Let me be clear in answering this question. All internet access
services--whether provided by an independent ISP like EarthLink, a
telco affiliate like Verizon Online, or a cable company like Comcast--
are information services. Let me be equally clear that all information
services are, by definition, delivered via telecommunications, and the
offering of such telecommunications, whether by a telco or a cable
company, for a fee to the public makes them telecommunications
services. This is true whether the Internet access is provided by an
independent ISP or by the network operators themselves. Internet
access, broadband or otherwise, is therefore an information service
riding on top of a transmission component which is a telecommunications
service.
In the world of dial-up Internet access these two components are
easy to see. Consumers purchase their phone line from their telephone
company and their Internet service from an ISP such as EarthLink. The
telephone company provides a telecommunications service which can be
used to transmit voice or data. The ISP provides an information
service. The consumer dials an EarthLink access number, which
establishes an underlying transmission link through the customer's
phone line; the consumer can then use EarthLink's services to access
the Internet. The underlying transmission link is a regulated common
carrier telecommunications service. The Internet access service is an
unregulated information service.
Now suppose that the ISP in the dial-up scenario I just outlined
was not EarthLink but Verizon Online. It would make no difference. The
underlying transmission link (provided by Verizon in this case) would
be regulated as a common carrier telecommunications service, but
Verizon Online's Internet access service would still be an unregulated
information service. This is the regime that the FCC crafted in its
seminal 1980 Computer II proceeding, which has been affirmed by the FCC
and federal courts many times in the intervening years, and which
Congress adopted in the Telecommunications Act of 1996. The FCC created
a level playing field by requiring that the underlying transmission
link be made available by facility owners on a non-discriminatory basis
to all ISPs and then treating all ISPs the same with respect to the
unregulated nature of the information service component, regardless of
whether or not the ISP was owned by the owner of the underlying
transmission facility. As a result, competition in the provision of
information services flourished because the facility owners--the
telephone companies in the dial-up world--could not use their ownership
of the underlying transmission facilities to leverage their position in
the information services market.
Broadband Internet access works much the same as dial-up Internet
access, with two exceptions. First, it is faster, because the
transmission link has better electronics or greater capacity. Second,
in most cases the end user isn't given the option of buying separately
the transmission link from their home or office to the switch. Rather,
they have to buy that portion of the link as part of a bundled package
of services which combines the information service component provided
by an ISP with the transmission component provided by the telco or
cable company. Furthermore, most broadband ISPs are affiliated with or
directly owned by the transmission facility owner.
In the case of broadband Internet access, the FCC seems determined
to take the exact opposite approach from the one that proved so
successful for promoting competition in the dial-up world. For
broadband, the FCC suggests that, so long as the facility owner refuses
to offer consumers the option of buying the transmission link
separately from the information services component, the bundled package
of transmission and information service is an ``information service''
under the Communications Act. Therefore neither the information service
component nor the underlying common carrier transmission link would be
subject to regulation. As a result, facility operators are able to
shield their transmission networks from requirements for non-
discriminatory access by other ISPs. This all but eliminates
competition among broadband Internet service providers and not only
violates the letter and intent of the Telecommunications Act, but also
does great harm to independent businesses and to consumers.
The FCC's interpretation is at odds with both the letter and the
spirit of the Telecommunications Act of 1996. The Communications Act of
1934, as amended by the Telecommunications Act, defines ``information
service'' as ``the offering of a capability for generating, acquiring,
storing, transforming, processing, retrieving, utilizing, or making
available information via telecommunications.'' 47 U.S.C. 153(20). The
term ``telecommunications'' is defined as ``the transmission, between
or among points specified by the user, of information of the user's
choosing, without change in the form or content of the information as
sent and received.'' 47 U.S.C. 153(43). As the statutory language makes
clear, information services are made available to consumers using a
transmission network. Up to this point I believe there is no
disagreement among any of us sitting at the table. It is the next step
which the Commission refuses to take, and over which there is
disagreement among the witnesses today.
In 1996, when Congress added the terms ``information service'' and
``telecommunications'' to the Communications Act, they also added the
terms ``telecommunications service'' and ``telecommunications
carrier.'' A ``telecommunications service'' is ``the offering of
telecommunications for a fee directly to the public, or to such classes
of users as to be effectively available directly to the public,
regardless of the facilities used.'' 47 U.S.C. 153(46). Any provider of
telecommunications service is a ``telecommunications carrier,'' and
telecommunications carriers are to be treated as ``common carriers''
subject to regulation under Title II of the Communications Act. 47
U.S.C. 153(44).
The structure Congress enacted in 1996 mirrors the structure the
FCC adopted in its 1980 Computer II decision. The definition of
``information services'' cross references the defined term
``telecommunications,'' which in turn is incorporated in the
definitions of both ``telecommunications service'' and
``telecommunications carrier.'' The transmission component that is
integral to the delivery and definition of ``information service'' is
treated separately under the Act for regulatory purposes, just as
transmission had been treated separately by the FCC for 15 years prior
to the passage of the 1996 Act. The language of the definition of both
``telecommunications carrier'' and ``telecommunications service'' make
plain that they are intended to apply broadly; they apply to ``any
provider'' ``regardless of the facilities used.''
``Telecommunications carriers'' and ``telecommunications services''
are the key terms that Congress used to define the pro-competitive
provisions of the 1996 Act. Almost all of the rights and
responsibilities in the 1996 Act attach or apply to telecommunications
carriers, which the statute says are to be treated as common carriers
to the extent they provide telecommunications services. Yet under the
FCC's interpretation those terms would apply only to those facility
owners who chose to make a ``separate'' or ``stand-alone'' offering of
telecommunications to the public--those facility owners that chose
instead to offer their telecommunications to the public only if the
public also buys the facility owner's chosen information service get to
escape regulation as a common carrier.
Two examples illustrate severe problems with the FCC's approach.
First, consider the case of a competitor who seeks to offer information
services in competition with the information services offered by a
facility owner--say an RBOC or a cable company. If EarthLink wants to
continue to compete in the information services market, but is now
denied access to the broadband transmission networks needed to offer
its services to consumers, then presumably EarthLink would have to
build its own broadband facilities to reach consumers. Yet to build
those facilities, EarthLink would have to become a common carrier in
order to take advantage of any of the market opening provisions
Congress enacted in 1996. Those provisions only apply to
telecommunications carriers and telecommunications services. At the
same time, EarthLink's competitors, the RBOCs and cable companies, who
already have existing transmission networks that reach almost every
customer, would be unregulated with respect to the same transmission
services for which EarthLink would be regulated.
Going back to the days of old Ma Bell AT&T, the telephone companies
enjoyed a government-granted monopoly market for almost a century in
which to build out their transmission networks. The cable companies had
monopoly franchises, the federal cable-telco cross ownership ban, and
below cost access to ducts and poles for over 15 years in which to
build out their networks. Today the telephone companies and the cable
companies still each have 85% or more of the customers in their core
business--phone or cable--from which to draw a steady revenue stream as
they push into the information services market. And they have some 95%
market share of all broadband DSL or cable modem customers,
respectively. Yet EarthLink and other potential competitors to these
incumbent facility owners would, under the FCC's interpretation, have
to undertake the impossible task of building their own last-mile
network--without any protection or subsidy--in order to continue to
compete in the information services business. This result stands the
1996 Act on its head.
Second, the FCC's own documents demonstrate that their
interpretation can only work if words are added to the statutory
language that Congress adopted in 1996. The statutory definition of
``telecommunications service'' states that such service is ``the
offering telecommunications for a fee directly to the public'' without
qualification. But the FCC, in both their declaratory order in the
cable modem proceeding and in their briefs defending that order to the
Court of Appeals for the Ninth Circuit, insists that a
telecommunications service only exists if there is a ``stand-alone''
offering for a ``separate'' fee. Only by adding words that don't exist
in the statute can the FCC make their version work.
In summary, it is crucial to distinguish between broadband
information services and the underlying telecommunications services
which deliver them. Internet access services, whether narrowband or
broadband, and whether offered by an independent ISP, an RBOC, or a
cable company, remain unregulated information services. But the
facility based transmission services that underlie all information
services remain common carrier telecommunications services, regardless
of whose broadband Internet service the customer subscribes to and
whether or not the facilities operator offers those transmission
services separately to consumers or as part of a combined package of
services that includes information services. Consumers and the economy
have benefited over the past twenty plus years from robust competition
in an unregulated information services industry. That unregulated
competition in information services was made possible because the
underlying transmission networks remained subject to regulations that
require that they be offered to all ISPs on non-discriminatory terms
and conditions.
In most areas of the country today there are at best two broadband
networks; for many residential consumers there is effectively only one.
Both the telephone networks and the cable networks were built with
government-granted monopolies over public rights of ways using Federal
authority using rate-payer money. To allow these facility owners to now
repudiate their obligation to share those transmission networks on a
non-discriminatory basis with others who seek to offer
telecommunications or information services to the public is an abuse of
the law and is anti-competitive. Such an approach would take a robustly
competitive and level playing field and tilt it heavily in favor of a
few players by allowing them to leverage their transmission facility
monopoly into domination of new areas and services. Clearly that was
not what Congress wrote or intended when it passed the 1996 Act.
Thank you again for the opportunity to testify today. I would be
happy to answer any questions.
Mr. Upton. Ms. Goldman.
STATEMENT OF DEBBIE GOLDMAN
Ms. Goldman. Good afternoon, Mr. Chairman and members of
the committee. Thank you for the opportunity to appear before
you today. My name is Debbie Goldman. I am the Policy Chair of
the Alliance for Public Technology. I am also a research
economist with the Communications Workers of America. However,
I want to emphasize I am representing the Alliance for Public
Technology.
For nearly 15 years, the Alliance for Public Technology has
promoted the benefits of universal affordable deployment of
advanced telecommunication services. Many of our members
represent traditionally underserved communities, rural
residents, minorities, people with disabilities, low income
households and senior citizens.
It is critically important for the FCC to establish a
regulatory framework that encourages investment in broadband
technology to ensure affordable access for all Americans. High-
speed Internet access provides a multitude of social benefits
from economic development and health care to education and
lifelong learning for workers to public safety and independence
for people with disabilities.
I will include in the record a recent APT report entitled
``A Broadband World: The Promise of Advanced Services.'' this
report highlights the many social and economic benefits of
broadband technology. It finds that the benefits of broadband
grow exponentially, and prices become more affordable, as more
people are connected to the network. Therefore, public policy
must make sure that universal affordable broadband is available
to everyone.
The FCC must therefore adopt a common regulatory framework
for all broadband services regardless of the technology. The
emerging broadband market is characterized by fierce cross-
platform competition between cable and wireline telephony. The
cable modems are beating DSL two to one, in large part due to
regulatory advantage.
The framework must facilitate a robust marketplace where
multiple providers using a variety of technologies compete on a
level regulatory playing field to offer consumers a wide
variety of services at attractive prices. It must encourage
investment and next generation broadband networks.
The FCC took a step in the right direction in what we
believe will be the final text of the Triennial Review. By
freeing the broadband networks of the wireline carriers from
unbundling and retail price regulation, the investment
incentives are set in the right place.
The regulatory framework must also continue the openness
that has characterized the Internet in the narrowband
environment where content providers have nondiscriminatory
access to the networks. Regulatory policy must ensure that
broadband networks remain open to all content providers so
users have access to diverse information sources of their own
choosing.
The broadband regulatory framework must also continue
consumer protections that have been so critical in the voice
environment. These include accessibility requirements for
people with disabilities. Currently the accessibility
requirements are required only for voice telephone. Unless
these protections are extended to broadband many people with
disabilities will not be able to access much of the content
available over broadband networks.
And finally, we must update our universal service support
system for the broadband world. All broadband providers
regardless of the technology must be required to contribute to
the universal service fund. All broadband providers regardless
of the technology must be required to contribute to the
universal service fund.
In the current debate about the proper regulatory treatment
of broadband, the Alliance for Public Technology has urged the
FCC to develop a new framework modeled on using the language in
section 706 of the Telecommunications Act, and this is the only
section of that act that specifically addresses advanced
telecom technology.
Section 706 of the act establishes in law the goal of
universal access to advanced telecommunications services by all
Americans. Section 706 provides the FCC with the authority to
develop regulating methods to achieve that goal. Therefore, the
Alliance believes that the FCC should use the umbrella language
of section 706 to craft a new regulatory framework for all
broadband.
When the FCC began and then completed these series of
proceedings known as Computer I and then II and then III, the
proceedings were designed to develop a regulatory framework for
computer enabled services transmitted over the telephone
network. The Commission developed a definition of information
services that distinguished these unregulated offerings from
the regulated monopoly telecom services.
As the current definitional controversy demonstrates, it is
becoming increasingly difficult to squeeze broadband into this
framework. At the time of the Computer proceedings no one
envisioned cable or wireless as technology platforms capable of
delivering two-way high-speed digital information to homes and
businesses, yet today that is where we are with the convergence
of technology. Yet each technology platform is subject to a
different regulatory regime.
Therefore, we believe constructing a new regulatory
framework consistent with the principles I have outlined using
the language of section 706 would provide multiple advantages.
It would allow for a single regulatory treatment for all
broadband in a technology neutral fashion. It does not attempt
to force broadband into definitions created for different
services. It reduces regulatory barriers to deployment and
investment, provides important consumer protections for people
with disabilities and would allow updating the system of
universal service support.
Thank you, Mr. Chairman, and members of the committee.
[The prepared statement of Debbie Goldman follows:]
Prepared Statement of Debbie Goldman, Policy Committee Chair, Alliance
for Public Technology
Good afternoon, Mr. Chairman and members of the committee. Thank
you for the opportunity to appear before you today.
My name is Debbie Goldman. I am the Policy Chair of the Alliance
for Public Technology. I am also a Research Economist with the
Communications Workers of America. Today, I am representing the
Alliance.
For nearly fifteen years, the Alliance for Public Technology, or
APT, has promoted the benefits of universal, affordable deployment of
broadband and advanced telecommunications services. Many members of APT
represent traditionally underserved communities, including rural
residents, minorities, people with disabilities, low-income households,
and senior citizens.
It is critically important for the FCC to establish a regulatory
framework that encourages investment in broadband technology to ensure
affordable access for all Americans. High-speed Internet access
provides a multitude of social benefits, from economic development and
health care, to education and lifelong learning for workers, to public
safety and independence for people with disabilities.
I will include in the record a recent APT report entitled ``A
Broadband World: The Promise of Advanced Services.'' The report
highlights the many social and economic benefits of broadband
technology. It finds that the benefits of broadband technology grow
exponentially--and prices become more affordable--as more people are
connected to a broadband network. Thus, public policy must ensure
universal, affordable broadband deployment in order to serve economic
and social goals.
It is imperative, therefore, that the FCC gets the regulatory
framework right for broadband services. The FCC must adopt a common
regulatory framework for all broadband services, regardless of the
technology. The nascent broadband market is characterized by fierce
cross-platform competition between cable and wireline telephony. But
cable modems are beating DSL 2 to 1, in large part due to regulatory
advantages.
The framework must facilitate a robust marketplace where multiple
providers compete on a level regulatory playing field to offer
consumers a variety of services at attractive prices. It must encourage
investment in next-generation broadband networks.
The FCC took at step in the right direction in its Triennial
Review. Freeing wireline carriers' broadband networks from unbundling
and retail price regulation gets the investment incentives right.
The framework must also continue the openness that has
characterized the Internet in the narrowband environment, where content
providers have nondiscriminatory access to the networks. Regulatory
policy must ensure that broadband networks remain open to all content
providers, so that users have access to diverse information sources of
their own choosing. Open networks foster innovation of new services,
and demand for even more network capacity.
The new broadband regulatory framework must also continue consumer
protections that have been so critical in the voice environment. These
include accessibility requirements for people with disabilities.
Currently, accessibility requirements are required only for voice
telephony services. Unless these protections are extended to the
broadband environment, many people with disabilities will not be able
to access much of the content available over broadband networks.
Finally, we must update our universal service support system for
the increasingly broadband world. All broadband providers, regardless
of the technology, must be required to contribute to the universal
service fund.
In the current debate about the proper regulatory treatment of
broadband, APT has urged the FCC to develop a new regulatory framework
for broadband. We have encouraged the FCC to build upon Section 706 of
the Telecommunications Act, the only section of the Act that
specifically addresses advanced telecommunications technology.
Section 706 of the Act establishes in law the goal of universal
access to advanced telecommunications services by all Americans.
Section 706 also provides the FCC with the authority to develop
``regulating methods'' to achieve that goal. APT believes that the FCC
should use the umbrella language of Section 706 to craft a new
regulatory framework for broadband.
Decades ago, the FCC began a series of proceedings known as
Computer I, II, and III. These proceedings were designed to develop a
regulatory framework for computer-enabled services that were
transmitted over the telephone network. The Commission developed a
definition of ``information services'' that distinguished these
unregulated offerings from the regulated, monopoly ``telecommunications
services.''
As the current definitional controversy demonstrates, it is
becoming increasingly difficult to squeeze broadband into this
framework. At the time of the Computer proceedings, none envisioned
cable or wireless as technology platforms capable of delivering two-way
high-speed digital information to homes and businesses. Yet, today we
are experiencing a convergence of different technology platforms, each
capable of delivering digital data over high-speed networks. But each
technology platform is subject to a different regulatory regime.
Constructing a new regulatory framework, consistent with the
principles I have outlined, provides multiple advantages. It allows for
a single regulatory treatment for all broadband services in a
technology neutral fashion. It does not attempt to force broadband into
definitions created for different technology platforms. It reduces
regulatory barriers to deployment and investment, provides important
consumer protections for people with disabilities, and updates the
system of universal service support.
APT believes this framework can provide a manageable regulatory
structure that will increase investment and deployment, create
meaningful facilities-based broadband competition between different
technologies, and bring the benefits of broadband to more Americans.
Thank you, Mr. Chairman and members of the committee.
Mr. Upton. Thank you very much.
Mr. Misener.
STATEMENT OF PAUL MISENER
Mr. Misener. Good afternoon, Chairman Upton and members of
the committee. My name is Paul Misener and I am Amazon.com's
Vice President for Global Public Policy. I do appreciate very
much being invited to testify today on this very important
matter. Today I am representing not only my own company but
also the Coalition of Broadband Users and Innovators, which is
a collaboration of consumer groups and industry.
Mr. Chairman, unimpeded connectivity is the defining
characteristic of the Internet, which was developed during the
cold war specifically as a means to communicate within the
United States after a nuclear attack on our country. As the
Internet evolved from its military origins to be used primarily
for informational, social and commercial purposes, its
unimpeded connectivity took on a new meaning. Almost overnight
American consumers found they are able to obtain for free or
purchase any information, products or services that other
people made available on the Internet. Thus, consumer access to
Internet content historically has not been blocked or otherwise
impeded by network operators.
The Coalition's sole purpose is to preserve the unimpeded
connectivity of the Internet. We do not believe the network
operators with market power should be permitted to impair
access for any reason other than routine network management,
and we have asked the FCC to adopt specific safeguards so
unimpeded connectivity is maintained as American households
increasingly rely on broadband connections.
Mr. Chairman, there are three key reasons the Coalition
fears impediments to broadband consumer access. First, through
our technical opportunities broadband consumer access is
completely digital and thus, as the FCC has already determined,
service providers can impair connectivity in ways that were
virtually impossible in the narrowband analog dial-up world.
For instance, a consumer attempting to reach the Web site for
Joe's Pizza might find access blocked or impaired by a network
operator that has a contract with David's Pizza, a competitor
to Joe's.
Second, there are economic incentives. Broadband service
providers, especially those that are vertically integrated,
also have clear economic incentives to impair consumer access.
The frequent allegation by some broadband network operators
that an impairment prohibition would hurt investment makes
sense only if these service providers count on profiting from
impairments.
And third, there is market power. For the next several
years while broadband service providers have market power,
competitive forces will not be able to check their technical
opportunities and economic incentives to impair consumer
access. Put another way, absent regulatory intervention,
consumers will have no choice but to accept impairments until
true competition emerges.
The Coalition is aware of current impairments of consumer
access and also has strong indications that strong broadband
service providers are poised to exercise their market power to
impair at will. But even if there were no current problems or
if they were deemed too insignificant to matter, the Coalition
believes that widespread current problems are not a necessary
precondition for Commission action. To the contrary, the FCC by
its very nature is a forward looking regulatory agency that is
responsible not just for evaluating past and current
conditions, but also predicting for future circumstances and
acting in anticipation.
The cable industry itself, notwithstanding its professed
philosophical opposition to anticipatory regulation, has on
many occasions sought government intervention to prevent purely
prospective harms. Congress has already given the FCC the
statutory authority to ban impairments of the sort the
Coalition fears, and the Congressional mandate to the
Commission is clear: Ensure that the Internet remains a viable
source for consumers and adopt policies to promote its
widespread use.
We simply are urging the FCC to meet Congress's directive.
FCC action is needed to prohibit impairments until true
competition emerges. Without Commission action, broadband
service providers with market power will have the technical
opportunities and economic incentives to impair consumer
access. If they were permitted to destroy unimpeded
connectivity in this way, the anticompetitive exercise of
market power by a handful of broadband network operators could
do to the Internet what even a nuclear strike could not.
In conclusion, Mr. Chairman, the defining characteristic of
the Internet is unimpeded connectivity. Americans today may
obtain on-line any lawful information, products or services
available or sold on the Internet without any discriminatory
impairment by network operators. The Coalition's sole purpose
is to preserve this unimpeded connectivity, and we have asked
the FCC to use its existing statutory authority to prohibit
impairments unrelated to legitimate network management until
true broadband access competition emerges.
Mr. Chairman, we now ask that you and your subcommittee
strongly urge the Commission to adopt this important safeguard
to preserve unimpaired consumer connectivity to the Internet.
Thank you again for inviting me to testify. I do look forward
to your questions.
[The prepared statement of Paul Misener follows:]
Prepared Statement of Paul Misener, Vice President for Global Public
Policy, Amazon.com
Good afternoon, Chairman Upton, Mr. Markey, and members of the
Subcommittee. My name is Paul Misener. I am Amazon.com's Vice President
for Global Public Policy. Thank you very much for inviting me to
testify on this important matter. Today I am representing both my
company and the Coalition of Broadband Users and Innovators. I
respectfully request that my entire written statement be included in
the record of this hearing.
Mr. Chairman, the defining characteristic of the Internet is
unimpeded connectivity. Americans today may obtain online any lawful
information, products, or services available or sold on the Internet,
without any discriminatory interference or impairment by network
operators. The Coalition's sole purpose is to preserve this unimpeded
connectivity despite the changing technical, economic, and regulatory
circumstances of consumer Internet access. Unfortunately, the Coalition
has many reasons to fear for the future of unimpeded connectivity,
because providers of broadband consumer access now have the technical
opportunities, economic incentives and, most importantly, the market
power to impair consumer access to Internet content. For these reasons,
we have asked the FCC to use its existing statutory authority to
prohibit any impairments unrelated to legitimate network management
until true broadband access competition emerges. Mr. Chairman, we now
ask that you and your Subcommittee strongly urge the Commission to
adopt this important pro-consumer safeguard to preserve unimpaired
connectivity to the Internet.
ABOUT AMAZON.COM AND THE COALITION
Amazon.com is America's leading online retailer. We are not a
provider of broadband or Internet access service, nor do we have plans
to become one. Amazon.com is a member of the Coalition of Broadband
Users and Innovators (the ``Coalition''), which represents twenty-five
premier online content companies, consumer groups, and consumer
electronics manufacturers who are collaborating to ensure the continued
right of Americans to access their choice of lawful Internet-based
information, products, and services, including by the attachment of any
compatible device to the network. Amazon.com and the rest of the
Coalition share the goal of this Subcommittee, the FCC, and the
Administration to promote widespread consumer broadband deployment, and
we want the companies that provide it to succeed. In my company's case,
the Internet is the way our customers reach our store. On behalf of our
customers and company, we certainly want to encourage the deployment of
consumer broadband access and, just as certainly, do not want to do
anything to discourage it.
UNIMPEDED CONNECTIVITY IS THE DEFINING CHARACTERISTIC OF THE INTERNET
Mr. Chairman, unimpeded connectivity is the defining characteristic
of the Internet. The Internet and its predecessor network were
developed during the Cold War specifically as a means to communicate
within the United States after a nuclear attack on our country. In
contrast to the contemporary telephone network, which relied on
maintaining direct physical connections between points in
communication, novel ``packet switching'' technology allowed Internet
communications between two points to be maintained even if intermediate
lines were destroyed. In short, not even a nuclear strike could impede
the Internet's connectivity.
As the Internet evolved from its military origins to be used
primarily for informational, social, and commercial purposes, its
unimpeded connectivity took on a new meaning. Almost overnight,
American consumers found they were able to obtain for free or purchase
any information, products, or services that other people made available
on the Internet. Thus, consumer connectivity--i.e., access to Internet
content--historically has not been blocked or otherwise impeded by
network operators.
CBUI'S SOLE PURPOSE IS TO PRESERVE THE EXTANT UNIMPEDED CONNECTIVITY
Mr. Chairman, the Coalition's sole purpose is to preserve the
unimpeded connectivity of the Internet. We believe Americans deserve to
retain their longstanding ability to obtain for free or purchase any
lawful information, products, or services that other people make
available on the Internet and to use compliant devices. We do not
believe that network operators with market power should be permitted to
impede connectivity for any reason other than routine network
management. For example, we believe that broadband service providers
with market power should not be permitted, other than for purely
technical or legal reasons, to block or impair access to Websites that
espouse unpopular political ideas or that sell products in competition
with entities that might want to pay network operators to block or
otherwise interfere with such access.
Although it may be self-evident, the issue of the unimpeded access
that the Coalition seeks to preserve is distinct from the ``open
access'' matter that has been under consideration by policymakers for
several years. The open access question is whether and how broadband
service providers should be required to allow unaffiliated ISPs access
to broadband network infrastructure. Some members of the Coalition are
strong advocates of open access for ISPs, while other members oppose
it. Like some other members, including Amazon.com, the Coalition itself
has no position on the matter, has not lobbied on it, and is not here
to testify about it.
Rather, the Coalition has asked the FCC to adopt specific
safeguards so that unimpeded consumer connectivity to the Internet is
maintained as American households increasingly rely on broadband
connections. We have made this request in the context of the
Commission's more expansive consideration of the regulatory status of
consumer broadband, particularly offered by cable modem and DSL service
providers. It bears mentioning what we are not suggesting. For example,
we certainly are not suggesting that broadband network operators be
subject to extensive, common carrier-style regulation with, for
example, entry/exit rules, universal service obligations, rate
regulation, et cetera. To the contrary, the Coalition merely seeks a
narrow rule under existing FCC authority that would ensure that
consumer expectations from the narrowband access world would carry
forward to the broadband era by barring impairments based on criteria
such as content type or source, yet permit differential pricing or
other restrictions based on purely capacity-related network management
considerations. Please allow me to explain.
Contrary to some misinformation about what the Coalition seeks, we
firmly believe that broadband service providers have legitimate reasons
to seek to manage demands on their network infrastructure by even a
small number of users. Such high-bandwidth users impose significant
investment and maintenance costs on service providers and, in the view
of the Coalition, should be charged accordingly. Why should one
customer who sends only a few emails a week be charged as much as
someone who watches Internet-delivered high definition videos all day
long? Thus, we believe broadband service providers should be allowed to
charge their customers on the basis of how many bits they receive or
transmit over a given period so that they may manage their networks in
a technically efficient manner. One way would be to offer tiers of
service--e.g., ``Gold, Silver, and Bronze''--based on bits transmitted
per month. The expensive Gold level service might provide unlimited
bandwidth, while the less expensive Silver and Bronze levels would
allow only limited monthly uploads or downloads. Once a consumer signs
up for a particular level of service, however, she should be able to
use it as she sees fit; network operators should not, within clearly
defined bandwidth limits, be able to impair a consumer's access to
particular information, products or services.
Moreover, current service provider practices, like making
promotional arrangements with third parties for advantageously
positioned banner ads or links on the initial, or ``start-up'' page
would be permitted to continue. The intent of the FCC rule we seek
would not be to prohibit these or similar reasonable private
contractual arrangements but, rather, to ensure unimpeded consumer
access. And, of course, the Coalition certainly has no problem with--
and greatly appreciates--broadband service providers' efforts to
prevent unlawful conduct on their networks.
THERE ARE THREE KEY REASONS TO FEAR IMPEDIMENTS TO BROADBAND CONSUMER
ACCESS
Mr. Chairman, there are three key reasons the Coalition fears
impediments to broadband consumer access. The providers of broadband
service have technical opportunities, economic incentives, and
marketplace advantages unavailable to narrowband carriers and Internet
service providers. And the vigorous protestations of broadband service
providers against any non-impairment rule, coupled with their complete
refusal to foreswear discriminatory impairment practices, make the
Coalition deeply concerned that these service providers actually plan
to impair consumer access in the ways we fear.
Technical Opportunities. Broadband consumer access is completely
digital and, thus, as the FCC already has determined, service providers
can impair connectivity in ways that were virtually impossible in the
narrowband, analog dial-up world. The most obvious impairment is
blocking access to certain information, products, and services. For
instance, a consumer attempting to reach the website for Joe's Pizza
might find access blocked or impaired by a broadband service provider
that has a contract or other business relationship with David's Pizza,
a competitor to Joe's. Other likely impairments include the insertion
of ``pop-up'' advertisements or slower delivery rates based on a
consumer's intended type or source of information: A consumer, while
accessing an online MP3 file, for example, could be deluged with pop-up
advertisements from competing online music sources or could find the
download to be particularly slow, merely because she was not pulling
the content from a source that had a business relationship with her
broadband service provider. As the Washington Post analogized,
``[i]magine the outcry if a local phone company started preventing
customers from calling Lands' End to place an order and redirected
their calls to L.L. Bean, which had paid the phone company to be the
exclusive purveyor of down jackets to its customers.''
In addition to these commercial impairment concerns, of course,
there are serious free speech problems with allowing network operators
to block or filter, at their whim, access to political, religious, or
other material on the Internet. It is not hard to imagine, for example,
how a service provider might be pressured to obstruct access to sources
of ``hate speech'' or information about a particular religious or
political viewpoint, regardless of whether their individual subscribers
want access to that content but, of course, consumer-controlled filters
are not problematic.
In sum, as the FCC itself has said, ``it is technically feasible
for a cable operator to deny access to unaffiliated content or to
relegate unaffiliated content to the `slow lane' of its residential
high-speed Internet access service.''
Economic Incentives. Broadband service providers, especially those
that are vertically integrated, also have clear economic incentives to
impair consumer access to certain Internet-based information, products,
and services. The economic incentive is obvious when the service
providers have collateral businesses in competition with other
Internet-based enterprises. A broadband service provider that also
holds the rights to audio or video products, for example, likely would
seek to discourage its customers from accessing the audio or video
products of a separate company. The unaffiliated content could be
blocked, slowed, or deluged with advertisements for affiliated content.
But broadband service providers need not have an ownership interest in
a collateral business to have an economic incentive to impair consumer
connectivity: third parties can be expected to contract with these
service providers to introduce impairments designed to hurt their
competitors. David's Pizza would gladly pay a network operator to
impede access to the Joe's Pizza website.
Market Power. For the next several years, while broadband service
providers have market power, competitive forces will not be able to
check their technical opportunities and economic incentives to impair
consumer access to various Internet-based information, products, and
services. Put another way, absent regulatory intervention, consumers
will have no choice but to accept such impairments until true
competition emerges. Currently, two-thirds of U.S. households have
access to only one broadband provider or none at all. And, yet, as
everyone who has observed the evolution of the wireless industry will
recall, even two service providers in an area do not produce true
competition, particularly when the friction costs of switching between
them makes reconsidering a prior choice difficult and expensive. Yet
the number of households with three or more broadband service providers
is miniscule. The Coalition anticipates, of course, that the market
eventually will become truly competitive. But it simply is not
competitive now.
The fact that broadband service providers are vigorously fighting
against even a very narrowly tailored prohibition of impairments almost
certainly means that they fully intend to impair consumer access.
Indeed, the frequent allegation by some broadband network operators
that such a regulatory prohibition would hurt investment makes sense
only if these service providers count on profiting from impairments.
If, as the broadband service providers claim, they are not currently
impairing consumer access, and they have no plans to do so in the
future, then why do they so strenuously oppose a rule that bans such
impairments?
The Coalition is aware of current, albeit modest, impairments of
consumer access, and also has spotted strong indications that broadband
service providers are poised to exercise their market power to impair
at will. Several cable operators recently had terms in their subscriber
agreements that explicitly banned ``virtual private networks,'' which
are merely software arrangements that establish secure communications
among groups of network users, yet place no special burdens on the
underlying broadband network. When Coalition members and others showed
these terms to the FCC, the cable operators hastily modified their
subscriber agreements in a way that concealed the prohibition on VPNs,
yet reserved the right to ban them at any point in the future. We
cannot help but conclude that these operators merely are trying to mask
their intentions while the Commission evaluates the regulatory status
of broadband.
Equally significantly, cable operators say they could block access
to gaming sites. But this cannot be for the reason that gaming sites
are more bandwidth-intensive; they simply are not. Perhaps it is only
because so-called ``gamers'' greatly value that capability and could be
forced to pay extra, even though they use no additional bandwidth.
Lastly, cable operators have said that consumers cannot attach a device
unless it meets with the operators' approval, regardless of what
industry-wide approvals the device manufacturer may have. Imagine
someone who wants to make a telephone having to obtain permission from
each Verizon, BellSouth, SBC, Qwest, Alltel, and a few hundred other
telephone companies. That has been unthinkable since the mid-1970s;
yet, absent FCC action, consumers who want to buy devices in the cable
broadband world will be at the mercy of their network operators.
The cable industry has dismissively characterized the Coalition-
requested FCC safeguard as ``a solution in search of a problem'' but,
for the foregoing reasons, the problem is evident; no search is
necessary.
WIDESPREAD CURRENT PROBLEMS ARE NOT A NECESSARY PRECONDITION FOR FCC
ACTION
But even if there were no current problems, or if current problems
were deemed too uncommon to matter, the Coalition believes that
widespread current problems are not a necessary precondition for FCC
action. To the contrary, the FCC, by its very nature, is a forward-
looking regulatory agency that is responsible not just for evaluating
past and current conditions but also for predicting future
circumstances and acting in anticipation.
Notwithstanding its professed philosophical opposition to
anticipatory regulation, the cable industry itself has on many
occasions sought regulation to prevent purely prospective harms. For
example, the industry asked Congress to ban telephone companies from
entering the cable market because it feared that, in the future, the
telcos would attempt to leverage their market power to cable's
detriment. Later, and again because it anticipated harms from telephone
companies, the cable industry successfully lobbied the FCC to adopt
safeguards requiring telcos to provide competitors access to basic
services on a nondiscriminatory basis. Just as the cable industry often
has requested and received regulatory checks to future use of market
power, the Coalition seeks the same protection for broadband consumers.
THE FCC ALREADY HAS THE STATUTORY CHARGE AND AUTHORITY TO BAN
IMPAIRMENTS
Mr. Chairman, Congress already has given the FCC the statutory
charge and authority to ban impairments of the sort the Coalition
apprehends. The mandate to the FCC is clear to ensure that the Internet
remains a viable source of information, products, and services for
consumers, and that the FCC should adopt policies to promote its
widespread use. We simply are urging the Commission to accept the same
responsibility in did when it ruled in the seminal Carterfone case,
which established that consumers can attach devices to the network, and
in the Computer inquiries, in which it adopted prophylactic rules
involving the Bell system because the dominant network operator had
opportunities and incentives to discriminate. But, as distinct from
these cases, the rule we envision would have a light touch and involves
a straightforward declaration of network neutrality, not prescriptive
filings that these other rules entailed.
Title I of the Communications Act gives the FCC the authority to
promulgate rules to carry out the goals and provisions of the Act in
the absence of explicit authority, so long as such rules are reasonably
``ancillary'' to existing Commission statutory authority and are
directed at protecting or promoting a statutory purpose. This authority
was validated by the Supreme Court over 30 years ago and many times
since.
There are two specific provisions of the Communications Act--
Sections 230 and 706, both established in the Telecommunications Act of
1996--that give the FCC the policy direction sufficient to address the
discriminatory impairments the Coalition apprehends. Section 230 of the
Act makes it ``the policy of the United States to promote the continued
development of the Internet and other interactive computer services and
other interactive media; to preserve the vibrant and competitive free
market that presently exists for the Internet and other interactive
computer services, unfettered by Federal or State regulation; and to
encourage the development of technologies which maximize user control
over what information is received by individuals, families, and schools
who use the Internet and other interactive computer services.''
The Coalition's request that the FCC proscribe impediments to
consumer Internet connectivity certainly would ``promote the continued
development of the Internet,'' because Internet development is driven
largely by the availability to consumers of the content and devices of
their choice, and regulatory certainty from the Commission would spur
investment by content providers and device manufacturers. Moreover, FCC
action would ``preserve the vibrant and competitive free market that
presently exists for the Internet,'' because a free market simply
cannot exist without the consumer choice that FCC action would
safeguard. Conversely, if broadband service providers were permitted to
impair consumer access at will, the Commission would have manifestly
failed Congress' directive to preserve the current vibrant free market.
Section 706 of the Act requires the FCC to ``encourage the
deployment on a reasonable and timely basis of advanced
telecommunications capability to all Americans . . . by utilizing, in a
manner consistent with the public interest, convenience, and necessity,
price cap regulation, regulatory forbearance, measures that promote
competition in the local telecommunications market, or other regulating
methods that remove barriers to infrastructure investment.'' The Act
defined this advanced telecommunications capability to cover all high-
speed services that ``enable[ ] users to originate and receive high-
quality voice, data, graphics, and video telecommunications.''
Clearly, the FCC action proposed by the Coalition would be a
``regulating method[ ] that remove[s] barriers to infrastructure
investment,'' because infrastructure includes not only that employed by
broadband service providers, but also consumer infrastructure (the
devices consumers attach to the network to receive advanced services);
and the Internet-based information, products, and services to which the
Coalition seeks to preserve consumer access. It is noteworthy that the
Commission relied on Section 706 in its 2000 decision extending the
rules allowing consumers to install over the air reception devices,
finding that consumer access ``foster[s] the deployment of advanced
telecommunications services.'' The same undoubtedly is true for
broadband: unimpaired consumer access to Internet-based information,
products, and services drives the deployment of advanced services.
FCC ACTION IS NEEDED TO PROHIBIT IMPAIRMENTS UNTIL TRUE COMPETITION
EMERGES
FCC action is needed to prohibit impairments until true competition
emerges. Without such action, and for all of the foregoing reasons,
broadband service providers with market power will have the technical
opportunities and economic incentives to impair consumer access to
Internet-based information, products, and services.
Although perhaps subtle at first, the resulting change to the
fundamental character of the Internet would be nothing short of radical
and tragic. No longer would Americans be able to obtain for free or
purchase all the myriad content they have grown accustomed to receiving
at home. The Internet would metamorphose from being the ultimate
``pull'' medium, in which consumer choice is paramount, to being yet
another cable TV-style ``push'' medium, where gate-keeping service
providers decide what content Americans are allowed to obtain. By
destroying unimpeded connectivity, the anti-competitive exercise of
market power by a handful of broadband service providers would do to
the Internet what even a nuclear strike could not.
The Coalition asks, therefore, that Congress urge the Commission in
the strongest terms possible to preserve in the broadband era the
unimpeded connectivity that has enabled the Internet to flourish to
date. More specifically, the FCC should be urged to adopt a narrowly
targeted rule that would, until true competition emerges, effectively
bar broadband service providers from impeding consumer access to
Internet-based information, products, and services. The exception to
the rule would be purely capacity-based pricing or restrictions that
would require high bandwidth subscribers to pay more in order to
compensate service providers for the additional investments necessary
to accommodate such use. In other words, discriminatory impairments
must be banned, but bit rate-based pricing, such as ``gold-silver-
bronze'' tiering, and other purely network management limitations,
should be permitted. Otherwise, unimpaired consumer connectivity will
be lost.
CONCLUSION
In conclusion, Mr. Chairman, the defining characteristic of the
Internet is unimpeded connectivity. Americans today may obtain online
any lawful information, products, or services available or sold on the
Internet, without any discriminatory impairment by network operators.
The Coalition's sole purpose is to preserve this unimpeded connectivity
despite the changing technical, economic, and regulatory circumstances
of consumer Internet access. Unfortunately, the Coalition has many
reasons to fear for the future of unimpeded connectivity, because
providers of broadband consumer access now have the technical
opportunities, economic incentives and, most importantly, the market
power to impair consumer access to Internet content. For these reasons,
we have asked the FCC to use its existing statutory authority to
prohibit impairments unrelated to legitimate network management until
true broadband access competition emerges. Mr. Chairman, we now ask
that you and your subcommittee strongly urge the Commission to adopt
this important safeguard to preserve unimpaired consumer connectivity
to the Internet.
Mr. Upton. We appreciate all of your testimony this
afternoon.
Mr. Tauke, I want to talk about Verizon's potential
investment in broadband and I thought you did a very good job
talking about the industry's efforts. But assuming that the
broadband piece of the Triennial Review delivers on its
promise, what type of investment in broadband can we expect
from Verizon in the next 12 to 18 months?
Mr. Tauke. The head of our telco operations within Verizon
has said to analysts on Wall Street that he has a billion
dollars ready to start spending on fiber to the home. This
would be a change in the direction which Verizon has pursued
their broadband up until now where we have essentially focused
on the expansion of DSL services and capability. We are now in
an aggressive program to bring DSL to 80 percent of our
customers by the end of the year. Then we hope that if the
rules get in place, that we will be able to launch our fiber to
the home or fiber to the premises initiative in early 2004.
But what does it take to start that spending? Essentially
two things. One, we need to know what the Triennial Review says
and, second, what tells us what we do or don't have to do
relating to the unbundling of the network. And second, we need
to know what the other rules are. Those would be the rules that
would presumably be articulated in the definitional proceeding
that is currently at the FCC. If we can get those things done,
then the money can start to flow.
Mr. Upton. What would you say would be the time line at the
point that the FCC makes those decisions in terms of when
Verizon would announce such capital spending?
Mr. Tauke. Two quarters from the time the decisions are
made until you begin to place the orders, begin the deployment
and so on. In order to jump-start the process back in early
March after the FCC voted on the Triennial Review we started
the process of working with manufacturers so we could set some
standards, and other carriers and set some standards for the
deployment of fiber. We have been doing what we think we can in
order to move this forward. So we have perhaps shortened that a
little bit, but it is going to be at least 4, 5 months before
anything can move before a decision is made by the Commission.
Mr. Upton. Your testimony indicated that Verizon had spent
$18.5 billion and dropped to $12.5 billion for this. Is that
per year?
Mr. Tauke. Per year.
Mr. Upton. So you are saying that should we get these
decisions from the FCC, you would raise that $12.5 to $13.5
billion, a billion dollar boost within 2 quarters?
Mr. Tauke. I don't want to say what the capital budget is
going to be next year because it depends on a variety of
factors. We just don't know what the capital budget will be
next year. We do know that if the decision had come earlier
this year, there was the money ready to spend in the magnitude
of $1 billion over the course of a year into fiber. But
presumably, once you start deploying fiber you begin to put
more resources into it as time goes by. There would be some of
those resources which would come from traditional or previous
capital spending that is redirected and hopefully there would
be some additional spending that could go into the wireline
network. But obviously that depends on a variety of factors.
One of the problems we have right now is that Wall Street
makes it very clear they want you to pay down debt rather than
to invest in infrastructure. And this is really, in my view at
least, a bad thing for the country especially at a time when we
need investment and infrastructure, we need more capital
spending and we need more jobs.
So one of the things that could help the Wall Street
attitude turn around is what the FCC does. If it turns around
more rather than less, then we have more flexibility. If the
FCC is ambiguous and leaves a lot of uncertainty and Wall
Street doesn't think these are good investments, then we have
less flexibility to move forward.
Mr. Upton. Dr. Pepper, that seems to put you a little bit
on the hot seat. Mr. Tauke indicated in his statement that this
is his fifth time before the subcommittee and as much as he is
a good guy and we would like to have him here a number of times
in the future, we would like to see the FCC finish the job that
is before them. And as I indicated in my opening statement, we
are prepared to have another hearing when Congress returns
after Labor Day. And at least from this member's standpoint I
would like the decisions to be done, but I wonder if you could
tell us where that time line is going to be.
Mr. Pepper. Well, Mr. Chairman, we hear you loud and clear,
and I can tell you that there are no people who would rather
see the Triennial Review completed than the people at the FCC.
In fact, even on a late Monday afternoon in July, I can tell
you that there is staff right now, today, this afternoon back
there working to get it done.
Mr. Upton. Is it going to be done by Labor Day?
Mr. Pepper. I certainly hope so.
Mr. Upton. Okay. Mr. Markey.
Mr. Markey. Thank you very much. The reality is that if
there was no prospect of Tom Tauke having to appear before our
committee at all ever in the future, it would reduce
dramatically the compensation he would receive from Verizon. So
there is a direct correlation between his appearance before us.
Paranoia of executives above him in the corporation does
determine it to a certain extent.
Let me ask this, Dick Notebaert, remember him, former great
CEO of Ameritech. I had this great hearing here in 1994. All
the CEOs sat out here from the then seven Bells as they were
then seeking to be properly included in the Telecommunications
Act. And here is what Dick Notebaert said, which I believe was
right on point. He said, quote, the open access and
interconnection requirements placed on the telephone companies
should be applied to the cable companies. The asymmetrical
application of these provisions will frustrate the development
of an integrated network of advanced networks. If we are to
realize the full potential of the information highway, all
telephone and cable networks should be open and unbundled. If
some networks are opened and others are closed, we risk
creating a tangle of private toll roads and not an open
highway. With mandatory interconnection and equal access,
customers on one network will be able to reach other networks.
Open access requirements also encourages the robust development
of niche information providers who can deliver their product
with little or no capital investment. As the Nation makes the
transition to a system of multiple networks, competition can be
safeguarded if all information providers are guaranteed access.
Now that was 1994. Very prescient testimony as we were
voting on the Telecommunications Act of 1994, which morphed
into the Telecommunications Act of 1996. Now Mr. Tauke and Mr.
Sachs, you offer similar services and you both want to be
deregulated. And I would like you to speak, however, to Mr.
Notebaert's point. Was he totally wrong, Mr. Tauke, back in
1994 in his testimony? And then I will go to you as well,
Robert.
Mr. Tauke. Actually I agree with Notebaert and I agreed
with him in 1994 and I agree with him today as I understood
what he just said. We believe in open networks. And you could
find quotations from me of 3 or 5 years ago suggesting that the
FCC should take steps to ensure that there are open networks on
the cable side.
What has happened since? Well, what has happened since is
we have seen the marketplace at work as we had predicted; that
the market would drive companies to have open network
facilities because consumers would require that, and that is
what we are seeing. The cable side does not have any regulatory
requirement though to open their networks, but there has been a
steady, strong and steady momentum for open networks on the
cable side and they have many more ISPs provided over cable
today than they did a few years ago. So we see the momentum in
that direction.
Now, I think it is also important to understand that we at
least do not think that Title I means closed networks. In our
view Title I is a title of the act under which the FCC can set
some rules, including some rules for openness,
nondiscrimination if they want to. Our recommendation to the
FCC is that they lay out some core principles such as open
networks, access for all consumers to any part of the Internet,
but they don't need today to lay out all of these precise
rules.
Mr. Markey. Robert, do you agree with Tom that you are
going to continue to increase the number of ISPs with no
pressure, especially if the Bells no longer had any
requirement? That is one of the attractive things increasingly
about the Bells is that all the competitors can get on there as
well. Maybe the cable industries should have competitors on as
a way of making you more attractive as well. So was Dick
Notebaert wrong back in 1994?
Mr. Sachs. Mr. Notebaert defines open access as multiple
ISPs. Mixed in that was the discussion of access to any
information and any content. What has happened is that cable
operators have offered choice of ISPs in a number of
situations. But I think the market itself is questioning the
viability of that model. You have seen Microsoft and AOL, two
of the leading ISPs change their business model in the last
year where they are focused on providing high quality broadband
and unique broadband content rather than simply being an ISP
that is reselling cables platform.
The other point I think is worth making, if the regulation
that Mr. Notebaert sought of cable in 1994 had been put in
place in the 1996 act, we would not have seen the dynamic
growth that has occurred in our industry. Today, there are more
than 12 million cable modem customers and half that number of
DSL. So the fact that cable was not regulated as he suggested
and is totally open from a consumer's standpoint, I think does
call into question the wisdom of what Mr. Notebaert offered
back then.
Mr. Markey. Mr. Nelson, could you give me a brief
commentary on what you just heard?
Mr. Nelson. I should indicate that this idea of either
going, as Mr. Tauke says, to all out regulation or deregulation
is not the only choice that Congress or FCC has. There are a
number of intermediate steps. We advocate that as the FCC is
doing the Triennial Review, you take a market-by-market
analysis and in some markets there may be a need to deregulate
broadband and others there won't be. But the forbearance
provisions that Mr. Jones referred to should be applied. They
should not be waived and not be through a sleight of hand
ignored by the FCC by this change of classification.
Mr. Upton. Mr. Tauzin?
Chairman Tauzin. Thank you, Mr. Chairman. I want to go to
Mr. Davidson's testimony and see if anybody disagrees with him
on a couple points. Commissioner Davidson pointed out to us
that of the four major competing broadband delivery platforms,
cable, DSL, satellite and wireless, DSL is the most regulated
platform. Anybody disagree with that? I see no hands.
He goes on to say that Economics 101 teaches us that where
two products are substitutes for one another, competition is
not sustainable, where a substitutable product is subject to
asymmetrical regulation. Anybody disagree with that? I see no
one disagreeing.
He goes on to point out that if we continue this process of
regulating one of the competitors heavily and leaving the
others generally unregulated, the competition suffers and
therefore consumers suffer. Anybody disagree with that?
Anybody? Can we adjourn the hearing?
I mean basically that is what we are talking about. We are
talking about a world where broadband service has substitutable
products on different platforms, I mean coming from the air,
satellites, some coming from wires on the ground, some coming
perhaps from terrestrial wireless services. Substitutable
products regulated very differently. And if Commissioner
Davidson is correct, somebody has a huge advantage here at the
expense of the other.
I want to follow up on a thought now. Mr. Markey proposes
following Mr. Notebaert's testimony that what we ought to do is
regulate them all the same, just regulate them more than the
least regulated entity cable. Mr. Dingell and I propose
regulating them all less so that there is a deregulated
competition going on. I think Commissioner Davidson seems to
favor that proposition. Commissioner Nelson said there is
something in the middle. There is something in the middle is
what we got. All we got is regulating some of the parties to
this competition and not others.
Now, Commissioner Nelson, what is the status of competition
in Michigan? What percentage of the consumers in Michigan use
cable's broadband services as opposed to DSL? Do you have the
numbers?
Mr. Nelson. Yes. Approximately in Michigan we have over
400,000 cable modem.
Chairman Tauzin. 472,405.
Mr. Nelson. Approximately over 120,000----
Chairman Tauzin. It is 111,182, according the FCC, DSL
subscribers, and that includes CLECs. It is 4 to 1. Isn't that
approximately correct, 4 to 1 cable over DSL?
Mr. Nelson. Of that DSL, Mr. Chairman, about 90 percent is
in the incumbents' hands.
Chairman Tauzin. I saw you complain about that. But in
regards to the overall competition among these different
platforms, cable is winning 4 to 1 in Michigan. Does that say
to you that Commissioner Davidson has got it right, that cable
has a huge advantage over DSL because DSL is the most regulated
platform whether it is provided by a CLEC or the ILEC? Does
that tell you maybe he has got it right?
Mr. Nelson. Not necessarily.
Chairman Tauzin. Tell us why not.
Mr. Nelson. Well, first of all, I believe that there are a
number of reasons why cable regulation has evolved separately
from DSL regulation. You have local franchises involved. Some
local franchises authorize more than one competitor and that is
the case in many cities in Michigan right now. So you do have
that competition amongst cable providers.
Chairman Tauzin. Do you know how many places in America
have two cable companies?
Mr. Nelson. Mr. Sachs may know that. I don't.
Mr. Sachs. Fewer than 5 percent.
Chairman Tauzin. 95 percent of the cable market is a single
provider. And in Michigan they got four times as many
subscribers as the telephone providers of broadband. You don't
think that is troublesome? You don't think it makes the case if
you regulate the dickens out of DSL and you don't regulate
cable that consumers, money, investors will flow to the least
regulated?
I am at a crossroads. I have tried with Mr. Dingell and I
have done this to get Congress to adopt a deregulated approach
for equal and fair treatment for good competition and so far we
couldn't get the other body to even take it up even though we
passed it on the House floor. Is it time for us to say to Bob
Sachs and the others, it is time for us to start regulating
cable the same way we regulate DSL? Is that the only answer? I
would hope not.
Mr. Nelson. I don't think it is the only answer.
Chairman Tauzin. How can State commissioners, with the
exception notably of Commissioner Davidson, take the view that
you guys should market to market, keep regulating one provider
so differently than another? I will tell you something, Mr.
Tauke, the day you really win this battle, the day we don't
have this disparity in regulation, this asymmetrical regulatory
structure that favors one competitor over the other, the day
that is over and you don't have to come back here, you get the
biggest golden parachute from Verizon you ever saw. I mean
seriously. How long do we keep this game up before we do for
the American public what they are entitled to and that is give
them the right to choose from similarly regulated entities and
let the best service win? Let the one that offers Americans the
most open access, the best content, the best interactivities,
the faster speeds, the more competent service, the more
reliable service, the more dependable service. It is a simple
story. As long as you let two stores come into town without the
government interfering, one of those stores is going to win
over the other because he offered better products at better
prices and better attitudes, too. But as long as the government
is in the business of saying one store is going to be heavily
regulated and the other won't, we can predict what people are
going to do, they are going to go to the store that is least
regulated and so will investors.
Mr. Jones. I just wanted to point out that our concern--we
actually don't have a dog in this fight, which is the mass
market residential fight. We are concerned that there is only
one store in the business market. And so the worry we have is
that whatever may be done on the mass market side to
deregulate, if you reclassify the transmission you are going to
throw the baby out with the bath water.
Chairman Tauzin. You mean the business market can't access
cable modems and DSL simultaneously?
Mr. Jones. Cable modems don't serve the business market.
Chairman Tauzin. But cable modems could. In broadband I
will bet you the cable industry would love to service a
business model along with a residential model. You don't think
so?
Mr. Jones. The FCC has already found they don't and they
have some severe technical problems in doing so because
business customers need upstream capacity, security and
reliability that the cable modem network----
Chairman Tauzin. If I can go back, however, the business
market is, however, usually competitive.
Mr. Jones. Not for the end user connection.
Chairman Tauzin. By all our analysis it is usually
competitive. It is the residential consumer market that is
suffering right now because the residential consumer in
Michigan generally uses cable over DSL because cable is less
regulated and cable can afford to make bigger investments and
they do a better job than the telephone company, which is so
heavily regulated. Is that so complicated?
Mr. Jones. But that is only in the mass market that those
statistics are being drawn from.
Chairman Tauzin. We come out of the mass market, too. I
think I used up my time.
Mr. Upton. Gentleman, Mr. Davis is recognized for 5
minutes.
Mr. Davis. Thank you, Mr. Chairman. I willl start with my
question to Dr. Pepper.
Is the pending Ninth Circuit decision on classification of
cable modem ultimately something the FCC needs to take into
account before you reach the conclusions we have been talking
about here today?
Mr. Pepper. We are obviously watching that very carefully.
That decision of course, as you know, addresses questions in
the cable context and a challenge to our declaratory reliance
on the cable side. We are continuing to proceed with our
analysis on the wireline broadband proceeding and the
definitional issues there because again there are differences
between the two. But we are watching the court very carefully
as we proceed internally with both proceedings.
Mr. Davis. I guess I am still not clear on what you are
saying. Is there any reason why the Commission needs to wait
for the Ninth Circuit decision before you reach conclusions on
this issue?
Mr. Pepper. Well, on the cable side that is where the
challenge has been and the case has been briefed. We are still
moving forward continuing to do the analysis internally at the
staff level on the wireline side. The Commission does not have
a proceeding or a recommendation in front of it to vote on yet
and the staff is continuing its analysis while we watch the
Ninth Circuit and wait for its decision. We don't know yet when
that is going to be.
Mr. Davis. Do you intend to wait for the Ninth Circuit
decision before the FCC acts then?
Mr. Pepper. Probably not. Well, it depends upon how quickly
they act. But the Ninth Circuit also is--you know, I talked to
my colleagues and they have pointed out that the Ninth Circuit
sometimes takes over a year or 2 years to issue its decisions.
Mr. Davis. I would like to give Mr. Sachs an opportunity to
respond to the points that were raised earlier by Mr. Jones in
terms of what we might reasonably assume would be the
availability of cable modem service to the types of users he
was describing.
Mr. Sachs. Historically cable systems were built to pass
residential neighborhoods, not office parks, not downtown
businesses. But as our networks are expanding, we are in a
position to serve smaller and medium sized businesses. And as
the cable modem technology itself is improved so that we can
offer usage sensitive and tiered pricing arrangements,
increasingly the small business market will be attractive to
us.
If I could comment for 1 second on the question of the
Ninth Circuit, we would hope that the Commission would not wait
for that three-member panel to decide. I think most observers
believe that there will be further appeals to the full Ninth
Circuit and eventually to the Supreme Court. And normally,
where there are ambiguities in statutes and some which would
allow different and reasonable interpretations, the Court would
defer to the expert agencies. So in this case, we would hope
that that would be the outcome in the Ninth Circuit, but
certainly that the FCC should not forebear from reaching a
decision because there is a case that has two more levels of
appeal ahead of it.
Mr. Davis. Can you be more specific as to when the changes
in cable modem service you just described might be available in
the marketplace to some of these end users?
Mr. Sachs. I would be happy to supplement my testimony in
writing. So we will talk to our member companies and will give
you specific information on that.
Mr. Davis. Mr. Jones, any further comment you want to make
on this? You are welcome to talk about the availability of this
service.
Mr. Jones. Actually I wanted to respond to the notion of
cable serving small and medium sized businesses. It is a
twofold problem. Problem No. 1 is that cable networks generally
were not built to reach the areas where most businesses are
located. For example, the FCC concluded in its 2002 broadband
report, high speed cable modem service is primarily available
to the residential market rather than the business market.
Cable networks were originally deployed to provide video
programming and other programming services to residences
throughout the United States. While some residences are located
in areas where there are large and small businesses alike, most
businesses were originally and still are not wired for cable
services.
So it is not even a question of upgrading the facilities.
They are not even there. To the extent that they are there,
recent testimony by Cox in Rhode Island illustrates exactly
what is going on in these upgrades is that they are selecting
very targeted business opportunities and they are by no means
ubiquitous. The problem with the facilities that CLECs have is
that they need a ubiquitous alternative. If the Title II
regulation at least as to the business market is eliminated and
they are not able to get those ILEC and user connections to
compete in that business market, they will be left with no
reasonably priced, reasonable quality service alternative and
they will go out of business and the small business market will
suffer greatly. In fact, Joe's Pizza and David's Pizza,
mentioned by Mr. Misener earlier, will be paying much higher
bills for broadband connections.
Mr. Davis. Does anyone else want to comment on this
particular point, availability of cable modem services and
alternatives?
Mr. Tauke. Thank you, Mr. Davis. When you look at the
broadband market and look at residential customers you see
cable as the dominant provider. When you look at the business
provider, downtown Washington, it is not cable that is the
primary competitor. There are a number of other facilities
based providers, some of what are represented by Mr. Jones, but
also companies like AT&T and MCI.
My office is on 13th and I. I think that 13th street, 12th
street have been dug up at least 10 times over the last 2 years
to lay fiber by one company or another. If you go into
Manhattan, the competition in the business market is severe. It
is, you know, very robust, and lots of facilities based
providers.
I just observed--we don't know what the FCC decided in its
Triennial Review for sure, but looking at the press release, we
know these issues are addressed in the Triennial Review. We
believe that if a business, let us say Joe's Pizza, is served
by a copper wire, any carrier can come purchase that copper
loop, put its DSL on that copper loop and serve the customer.
If we replace that copper loop with a fiber loop, then they
have the opportunity to build the fiber loop too and therefore
we don't expect that we will have to provide that fiber loop to
them. However, we may want to provide capacity to them. You
don't have to have regulation to do it. We could provide and we
want to provide capacity to other carriers on our network. If
you are a network provider you want to sell capacity. The
question is whether you need a lot of regulation to make that
happen. In the wireless world and the long distance you don't
have that regulation and you have a robust wholesale business.
We think that will happen here, too.
Mr. Davis. I assume that you would agree that Joe's Pizza
on 13th Street, notwithstanding the road being torn up, has
benefited from the type of competition you just described?
Mr. Tauke. Joe's Pizza is benefiting from facilities based
competition.
Mr. Davis. And you are suggesting that if you were
reclassified to an information service then perhaps the terms
under which you make your facilities that these CLECs might not
change very much?
Mr. Tauke. Not to be picky, but to be clear. First, Title I
is not just an information service. Title I is where we have
private coverage. We have CPE. There are a number of things
regulated under Title I. Doesn't mean that it is an information
service.
Two is that this issue of whether or not you have to share
the network on an unbundled basis is a Triennial Review
decision, as we see it, and as we understand what the FCC is
saying they are going to say that trumps the definitional
issue. So if they decide we have to provide it that way,
unbundle it, we are going to have to do that. That issue is in
a sense in the Triennial Review.
Now what was your question?
Mr. Davis. I think you have made your point. Let me go back
to Dr. Pepper. All right, Mr. Chairman, time flies by.
Mr. Upton. Mr. Shimkus, who deferred with his opening
statement, gets an extra 3 minutes.
Mr. Shimkus. Thank you, Mr. Chairman. And just before I go
on my questions, I would say that Chairman Tauzin did a very
good job addressing the State commissioners. And I think it
would be incumbent upon all of us to go to the FCC and find out
our ratio as far as residential connectivity. I know at home I
am on a cable modem service. I was on--I had other services,
but that was meeting the needs of mine right now. And I bet you
I will find out the same story in the State of Illinois and I
look forward to doing that.
Mr. Baker has been sitting there quietly, and I have a
couple of questions because it really does tie into all of this
debate. I wasn't here when the Telecom Act was written or
passed. I am a product of coming afterwards. And when I first
got here, trying to figure it out, I always thought that the
intent was multiple competition inside the pipes. And evolution
is that we hopefully will have multiple pipes providing the
competition, hence the number in Michigan of cable over phone
service and the like. EarthLink has advocated open access
requirements for cable operators and telephone companies. Do
you advocate similar government mandate, open access
requirements for your electric company associates in the Power
Line Communication Association to hopefully roll out the
broadband power line.
Mr. Baker. We have not taken that position.
Mr. Shimkus. Why not?
Mr. Baker. Among other things, power line communications or
broadband over power lines, as the FCC calls it, are still in
the trial stages. And I know a lot of times when we talk about
broadband access, people sort of run to a list of different
platforms over which consumers can get Internet access. But in
point of fact DSL and cable between them account for over 98
percent of all broadband connections in the United States. And
we can talk about satellite and talk about fixed wireless and
we can talk about power line communications, but there is a
rounding error in terms of a means of providing broadband
connections to consumers.
Mr. Shimkus. We are not even in the power line yet. There
is--you are not in a position to penetrate between the two
providers right now, is that correct?
Mr. Baker. That is correct.
Mr. Shimkus. So how long will we be until we broadband
power line?
Mr. Jones. It is in the trial stages and hopefully we will
see commercial deployment in the next 12 to 18 months. Again we
are talking trials while DSL and cable providers are signing up
on the order of a million customers a month between the two of
them at this point.
Mr. Shimkus. Let us say you are available to commercially
roll out between 12 and 18 months. Would you rather roll out
under an environment where you had to go through the regulatory
scheme of the wireline or the unregulated scheme of the cable
industry?
Mr. Jones. I would rather we didn't have to deal with these
many regulations. We have to distinguish between what sectors
in the market are competitive and which are not. Once we get to
an environment hopefully where there are three or four
broadband pipes that consumers have available to them, then it
becomes less crucial to ensure that each of those pipes has--is
an open platform because then consumers will have greater
choice in who is providing the broadband. But in the situation
today where there are essentially two broadband pipes that
serve consumers where many consumers have available only one or
the other of those two pipes, where the cost of switching
between those two pipes, those two platforms is very high
because of customer premises equipment costs, because of
termination fees, you develop a situation where there are two
broadband pipes at best available to most consumers and
therefore two broadband providers, and that is a far, far
different environment than what has made the Internet so
ubiquitous.
Mr. Shimkus. Let me ask this question, with all due respect
to the great testimony we have. I am an old--I keep saying in
this committee I am an old instrument with the acronym of KISS,
keep it simple, and it is not politically correct to tell you
what the last S is. Keep it simple.
I think it is a pretty simple answer. If you want to roll
out a competitive market product, and you have got two
competitors and one is regulated and one is not, I would think
I would want to enter the market as an unregulated entity. Does
anyone disagree with that? You disagree?
Mr. Baker. No, but I am saying I am not entering their
market.
Mr. Shimkus. The point is does not EarthLink, aren't you a
member of the Power Line Communications Association broadband?
Mr. Baker. Yes, we are.
Mr. Shimkus. Isn't it one of the main purposes to promote
broadband power line deployment?
Mr. Baker. Yes.
Mr. Shimkus. If you want to enter the broadband market, and
you are going to do it through the electrical wires and you are
going to compete with the telephone and the cable, would you
rather do that unregulated or regulated?
Mr. Baker. I would rather do it unregulated.
Mr. Shimkus. I yield back my time.
Mr. Upton. The gentleman from New York, Mr. Engel.
Mr. Engel. Thank you. Thank you, Mr. Chairman. My good
friend from Massachusetts was--gave us a quote before, and I
wasn't on the committee in 1994 but it just strikes me that the
one thing missing from that quote is when you add in the profit
motive, you know, we--you run smack into the free-rider
problems. Why spend billions of dollars for investment when you
can rent something for a lot cheaper? I am wondering if Mr.
Sachs would like to comment on that.
Mr. Sachs. Our companies, since 1996, have invested more
than $75 billion of private risk capital in upgrading networks
for multiple purposes, to meet satellite competition, to offer
new broadband services, enter markets which were unproven with
respect to public demand for high-speed data services.
It is understandable to me why EarthLink, which has not
made this investment, would want the government to allocate a
portion of Cable's pipe to EarthLink. The reality is that
EarthLink has been able to negotiate business arrangements with
the three largest companies in our industry. With Charter
Communications going back 5 years, with AT&T, the predecessor
to Comcast in several markets, and by virtue of the consent
decree that AOL Time Warner had entered into in a number of
Time Warner markets.
It is perfectly understandable why EarthLink would want the
government to intervene on its behalf in private business
negotiations. But to the entrepreneur who is looking at
investing money, taking risk, it is unacceptable to suggest
that somebody else, who is not willing to take that same risk,
should have all the benefits of that investment.
Mr. Engel. Thank you. Mr. Tauke, can you cite--you
mentioned several reasons why you believe things should be
deregulated. Can you cite a few specific regulations that
Verizon has to follow that cable does not have to follow when
providing high speed services?
Mr. Tauke. Well, one of them that we are just talking about
was nondiscriminatory access to all Internet service providers.
That is a requirement that we have. We have requirements
relating to the structure of our business under the Computer
Inquiry 3 Rules, which we are required to live with that the
cable industry does not have to live with. We, at the current
time, have unbundling requirements for our network that the
cable does not have for its network.
So there are a lot of, whole host of telephony regulations
that are very severe that apply to our broadband activity
today.
Mr. Engel. But actually in both your testimonies, and I
read both Mr. Sachs' and Mr. Tauke's testimonies, you are
actually though, there is a convergence of interests here. I
want to just say that I support the Chairman's remarks. I was,
I am a strong supporter of Tauzin-Dingell.
When I entered Congress, I thought regulation was the way
to go. The more I am on this committee, I have a 180-degree
opposite feeling about it. And I do feel that competition
actually plays out. So it seems to me that there is a
convergence of interests here.
I was interested in your testimony, Mr. Tauke. I am quoting
between 2000 and 2002 over annual investment by wireline
telecommunication carriers, including Verizon, declined from
$104 billion to $42 billion, spending on new equipment down 19
percent. So on and so forth. I am wondering if you could expand
on the reasons for that. You did talk a little bit about it,
but I am wondering if you could do that.
You also say in your testimony Wall Street is skeptical of
increasing capital spending in telecommunications, and instead
is awarding cutbacks in investment. You mentioned that in
response to a question. In the telecommunications industry, I
am quoting from you, a significant factor is investors believe
that the regulatory rules simply make it nearly impossible to
realize any return from investments in new technologies and
services. We need to reverse these trends for the good of the
economy, the industry and consumers.
I just want to give you a chance to expand on that a little
bit.
Mr. Tauke. Thank you, Mr. Engel.
First, I think you have to understand that in our industry
today, we are in a transition in the wireline side of the
industry. The voice traditional, voice telephony over the
traditional wireline network is a rapidly shrinking business.
So you have to adjust and make new investments to provide new
capabilities and new services, new capabilities in the
infrastructure, and new services to the consumers. Our problem,
at the moment, is that that adjustment is being stymied by
regulation because we don't know what the rules are. And as
these rules oppress your ability to make this investment, it
means reduced jobs and economic harm, but it also means the
consumers aren't getting the benefits of this transition to a
new network and the services it can provide.
It is very hard--these are risky investments. I mean
everybody will tell you this is a risky marketplace we are
entering into. It is a new, undeveloped market. It is not a
mature market. So as a result, it is, in our view, wrong for
the government to have the rules that were written for a
mature, highly developed market apply to this new market that
we have new investment in and which is still very uncertain.
And when you do apply those kinds of rules, you really reduce
the possibility of getting investment in that new market and in
that new infrastructure.
So I guess our bottom line is we need clarity of what the
rules are. The rules should be the light regulatory touch until
you see how this market develops.
Mr. Engel. Thank you. I believe my time is up.
Mr. Upton. Time is expired. Mr. Stearns.
Mr. Stearns. Thank you, Mr. Chairman.
First of all, let me welcome and thank Mr. Davidson for
coming as Florida Public Service Commission. We welcome you
here; appreciate your testimony.
I was reading on your opening statement where you mentioned
that a Wall Street Journal article said that telecom investment
is down 75 percent since the year 2000. There have been more
than 1,000 telecom bankruptcies, the market has witnessed a 9-
year low in venture capital investments. And there is a 28-year
low in initial public offerings. This is as of July 1, 2003.
Let me ask you, you have mentioned the roles of States in
broadband deployment in your opinion, how have the various
State laws affected broadband deployment? I guess both good and
bad. And maybe have Mr. Nelson talk about it too, because, you
know, we have all indicated here, Mr. Tauzin has made the point
eloquently, that this regulatory uncertainty has created a
desire in the minds' of investors to hold off. And so just in
tune with that, what do you think that the States' rights role
should be?
Mr. Davidson. Thank you, Congressman.
As I set forth in my testimony, I think the States do have
a fundamental role here on the supply side, on the demand side,
and on removing any State-specific, city-specific,
municipality-specific barriers to deployment of new networks.
A key problem, in my opinion, is that companies in all the
different modes face this patchwork of different State rules,
which from a planning standpoint is hard to deal with. It is
hard to calculate how do we measure this investment risk when
we may face a good situation in Florida, and I think companies
do, and we may not face the same type of situation in another
State.
So States certainly impact the planning process. I think--
--
Mr. Stearns. You don't think they would create regulatory
uncertainty, this States' right regulation that you are talking
about?
Mr. Davidson. Oh, my view is that a uniform national policy
is much better than a patchwork of different State policies. I
think State-by-State regulations would create additional
regulatory and investment risk.
Mr. Stearns. Okay. Mr. Nelson do you have--want to comment?
Mr. Nelson. Thank you, Congressman. I believe we can have
both. I think State initiatives, like the ones I described for
Michigan, where we have financial incentives that are made
available to not only providers but users of broadband, a very
light-handed regulatory approach will work very well in
Michigan. In addition, tearing down the right-of-way access
barriers, as we have done in Michigan, has been heralded by
TechNet as a very significant step.
But at the same time, I think you could look at regulation
in some respects, some States have been very successful in
using Section 251 of the Federal Act to deploy line sharing.
Line sharing is somewhat up in the air now because of the FCC
Triennial Review order and court review, but it has worked very
well in many States. And they can use regulation or more light-
handed regulation, as we do in Michigan, to promote broadband,
and both work.
I think you can have national guidelines, but also the
laboratories of democracy in each State should be able to
deploy broadband as they see fit.
Mr. Stearns. Dr. Pepper, let me have you elaborate on the
record on why you believe that regulating broadband services,
such as Title II common carrier services, would undermine
investments in such services and the facilities used to provide
such services. I guess the question is, what is it about, this
Title II regulation that serves as a disincentive to
investment? Maybe you could give us a capsuled version.
Mr. Pepper. All regulations have cost. And we are very
aware of that. And you know, the approach that we are taking is
that--you know, the presumption we have a nascent market. The
market is growing very rapidly. We have firms entering these
markets. And the presumption is that we should wait and see how
the market develops before imposing these costs. And frankly,
if problems develop, we have the ability to address those
problems. But at the moment, what we are seeing is entry--as
Chairman Tauzin pointed out--nationwide happens to be three to
two. For every three cable modem service customers, there are
only two DSL customers. So we see this as a market that is
growing. We see this as a market that, in fact, is one that we
believe we should not impose burdensome costly regulations that
are going to create disincentives to investment, unless there
is the demonstrable, specific, identifiable problem. And at the
moment what we see, frankly, is, you know, our competitors
moving into the market to compete.
Mr. Stearns. Thank you, Mr. Chairman.
Mr. Upton. Mr. Walden.
Mr. Walden. Thank you, Mr. Chairman. My apologies for being
late. I took the fastest plane that would cross the country and
got here as soon as I could.
Dr. Pepper, I have a question for you and hopefully you
will be able to address this. I was with a group of radio
engineers a while back who expressed some real concern about
whether or not the idea of putting broadband on power lines,
basically, has been well-vetted from a technical standpoint as
it relates to interference on some bands. Is the Commission
looking at that? Have you looked at that? What have you found?
Mr. Pepper. Yes, Congressman. We actually have a proceeding
looking specifically at that question at the moment. There are
issues having to do with radio emissions from power lines, but
one of the things that we have been, you know, talking to the
power line industry about is how to mitigate noise emissions.
There also were questions about, frankly, how far those
emissions go from the wires themselves, especially on the high
tension wires. The falloff appears to be very, very severe. So
it drops off very quickly. But those are precisely the kind of
questions that we currently are looking at in our power-line
proceeding.
Mr. Walden. Are you also looking at the noise that is
generated on the AM band, AM broadcast band?
Mr. Pepper. All of those are related, those questions, yes.
Mr. Walden. I have not had time to get through all the
testimony in the little time I have been here, I do have one
question, I represent a very, very rural district. I would be
curious to hear from the various panel members who are in the
business of deploying broadband or access to broadband, what do
you do to get broadband into, I am talking, very remote areas?
Or are these communities going to be left off the latest
highway?
Maybe we start with the FCC. From your standpoint, what, in
your rulings, are going to guarantee folks in any district
aren't going to be left behind again?
Mr. Pepper. Congressman, under Section 706 that others have
referred to earlier this afternoon, we periodically look at the
deployment of broadband, especially in rural areas. And so we
are monitoring this very carefully. What we are finding are
several things.
One is that the--some of the smallest cooperative,
cooperative telephone companies, the little co-ops, the
littlest of the little, they indeed are making the investments
in broadband in many places, but not everywhere. We also
recently have had a joint event with the Rural Utility Service
at the Department of Agriculture.
Of course, Congress has made, I think, it is $1.4 billion
available for rural--for loans in rural America for broadband
specifically. We are working very closely with the Department
of Agriculture.
We are working on issues and proceedings that will make
more spectrum available because, frankly, getting wires out to
some of the farmhouses and the ranches, that is tough. Using
wireless technologies, we believe actually may be the answer
for the least dense areas. And so we, in fact, are working with
not only companies that have licenses to provide wireless
services, but also with the community that they call WISPs or
Wireless Internet Service Providers, many of whom are using
some of the wireless devices like Wi-Fi. This getting broadband
out to rural America is very very important. It is very high on
our agenda.
Mr. Walden. Anyone else?
Mr. Nelson. Yes, Congressman. I believe the National
Telecommunications Cooperative has filed comments in the docket
on what we are talking about, that urge that the Commission not
change its designation of broadband wireline services to
information services. Because it would, in their view, be
detrimental to rollout. And in rural areas, they indicate that
one of these issues involves the authority of the States to
authorize new entrants. This would be jeopardized if it was
deemed an information service.
Mr. Walden. Mr. Tauke.
Mr. Tauke. I think it is interesting to note that in rural
areas that are served by the thousand or so small independent
telephone companies, that actually the broadband rollout in
those areas is very rapid. And one of the reasons--I believe
there are several reasons, but one of the reasons is they
operate under a very different regulatory regime. So they have
the ability to make this transition in networks more easily
than companies that are highly regulated. They also have
support, financial support, low-interest loans and so on that
help with that.
Second observation I would make is that we don't know
exactly how technology is going to develop, wireless, Wi-Fi,
maybe power lines, various other things. I think in a couple of
years it would be appropriate to make an assessment, as this
market develops, whether or not there is a problem in rolling
out in rural areas, because there may be some need for
additional assistance. I just don't think we know yet.
Mr. Sachs. Congressman, if I could comment briefly. Cable
today has about 97 percent of the homes in America and more
than 80 percent of those are upgraded for broadband today. And
we also represent smaller cable operators. And there are
companies like Midcontinent in the Dakotas and Sjoberg Cable in
Minnesota that are providing service to communities with as few
as 100 people today.
It may seem counterintuitive, but with the higher degree of
satellite penetration in these smaller communities, operators
are looking to upgrade, plant and extend it as deeply as
possible, because then it creates the potential not only to
offer video services, which alone were uneconomical, but to
overlay that with cable modem service and potentially voice
over IP may well change the economics there. I think we will
know the outcome there within the next several years.
Mr. Jones. Congressman, I wanted to point out to the extent
that these buildouts actually don't take place and regulators
need to rely on universal service subsidies, if the
transmission component of incumbent broadband is reclassified,
universal service subsidies will not be available. It will no
longer apply to these services because they will no longer be
telecommunications services, which are the subsidized services
in the Act, they will be telecommunications. Those are not
subject to the subsidy.
And the Supreme Court has held that the FCC lacks the
authority to fix that problem. When you change the categories,
you are stuck with them. And Title I can't help you out.
The other thing, I think, to be said about this is, to the
extent you have rural carriers that are not RBOCs, that are
widely deploying these facilities, they are benefiting from
some cost allocation programs, NECA pooling and so forth, that
currently apply that will also go away if you reclassify these
services. So not only do the possible subsidies of tomorrow
disappear, but the subsides of today that are allowing those
rural carriers to deploy their networks will also go away.
Mr. Walden. Thank you, Mr. Chairman.
Mr. Upton. Thank you. I know members have just a couple
more questions. So let me just start, I want to follow up on
one of Mr. Engel's questions to Mr. Tauke with regard to the
regulations that you all comply with that the cable company
does not. You cited a number of them. Do you know what the cost
is to Verizon?
Mr. Tauke. No, Mr. Chairman, I am afraid I can't give you a
sense of the cost. Essentially, while cable is able to do
business with business-to-business arrangements with all of the
other players in the Internet, we file tariffs, and we have to
have everything approved through the FCC process, and so it
is--it costs in terms of your inability to enter the market,
capture the market, compete effectively, what--so that is the
big cost. The actual cost of compliance, I am sure is
significant, but it pales in comparison to the lost opportunity
to fully engage in the market.
Mr. Upton. In Commissioner Davidson's testimony, he says
this: An industry that faces 50 potentially divergent
jurisdictional approaches to broadband will have less of an
incentive to invest than would an industry that faces a more
uniform deregulatory national policy. Does anyone want to
comment on that other than Mr. Davidson? Agree, disagree? No
one disagrees? Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman.
One of the disadvantages of having served on this
subcommittee for 27 years is that I am too well aware of the
high-hypocrisy coefficient which exists in much of the
testimony that we hear which raises what we call the risibility
coefficient, to use a Tony Blair word, in terms of my reaction
to that testimony. And I remember the cable industry, and you
should have been here Eliot, they were--it was kind it was
compelling. It was a tear-stained bit of testimony back here in
1978 how this nascent cable industry needed to have
nondiscriminatory access to all the telephone poles of another
industry because they weren't going to build their own
telephone poles. And not only did they want nondiscriminatory
access, they wanted preferential rates. They wanted the
telephone company to subsidize them, the cable industry.
And I being just a knee-jerk liberal that I am, I went for
this cable industry. They needed help. They were kind of like
the Amazon.com for the EarthLink of its time. They needed some
help in the nascent so they could provide new services. So I
went along with it. You might notice, to this day, there still
is no cable pole going down the street. And that is all right,
you know, because they didn't want to really buildup.
And as many of the witnesses here know, I could go down a
long litany list of other--we will call them asymmetries which
both industries enjoy right now. If I did, I would consume all
of the time that I have and it would not leave time for a
question. But nonetheless, I just would want to point that out.
And the fact that the cable industry is unregulated does lead
to the 40 percent cashflow, which its industry does in fact
enjoy, which no other industry in America can really quite
compete with, and much of that is because they have unregulated
rates, which does lead to an awful lot of private risk capital
money to go to a business like that. But because it is totally
unregulated with no real competitors, as someone pointed out,
that only 5 percent of America really has competitors. That
does lead to an awful of lot of risk capital going to a
nonrisky investment, you know, because risk capital doesn't
like risk. That is really the paradox and almost Orwellian way
they try to describe themselves. That is not who venture
capitalists are. They don't like the ``ad'' in the ``venture'',
if you know what I mean. So they don't really go there. And the
cable industry has become a very attractive, unregulated
monopoly in almost every community in America. But I just put
that in as a historical, a little observation right now.
So I would like to go to kind of the Amazon.com and the
EarthLink, you know, kind of what happened after the Telephone
Act passed players in the marketplace today so that perhaps you
could comment on Mr. Notebaert's observations back in 1994 on
the equal access and interconnection and nondiscrimination and
these advance networks, and what it means to your companies,
and hundreds of other companies like your companies, who from
the perspective of the concern that most people seem to have
here that we are looking for more companies and more growth,
you are the growth. We are still going to have the Bells, and
we are still going to have the cable companies, but you are the
new name, so could you give us your comments Mr. Misener?
Mr. Misener. Thank you, Mr. Markey, very much.
In some senses, it is less important what it means to our
company as it does what it means to our customers. We really
want our customers, both existing and future, to be able to get
access to our site in an unimpeded fashion. If they had many
choices of service providers, network operators, in between
them and us, it would fine for them to choose the one that they
thought best. But to the extent there is little, if any,
competition in that pipe between them and us, they deserve to
have this unfettered access to whatever content, be it ours or
eBay's or anybody else's on line. I think there is an important
subtlety that has been discussed here just momentarily, and it
has to do with this unimpaired access idea. In reference to
cable broadband service providers, Mr. Sachs in his testimony
said, ``All offer unfettered access to Internet content.'' We
disagree and for reasons that I explained in my written
testimony, there are some examples. But notice what he didn't
say. He did not say that cable will continue to offer
unfettered access. In fact, he has never said that cable will
continue to offer this unfettered access. It seems to me Mr.
Markey----
Mr. Markey. Can we ask him right now? Will you offer
unfettered access to competitors in the future, Mr. Sachs?
Mr. Sachs. We represent a large number of companies, large
and small. And I have not seen any indication or any evidence
whatsoever that these companies have either in the past not
offered unfettered access or have any intention in the future
of not offering----
Mr. Markey. So can you make that promise for the future so
that Mr. Misener can get a good night's sleep tonight?
Mr. Sachs. I would make a representation to you if I had,
you know, my--all my companies, you know, before me here, but I
was going to say, in all the discussions that I have been privy
to, in all the explanations of their business plans, there is
no indication whatsoever of any desire to limit access. It is a
little hard to make a blanket representation for an industry
that has undergone consolidation and change with numerous
players as to every company's business practices. But there is
nothing----
Mr. Markey. But, see, that is the point, though, from the
perspective of the entrepreneurial information service company
that you are creating an environment here where you are leaving
this hearing telling them and potential risk capital investors
and this is risky to go with these guys because you are saying,
I am not sure I can promise in the future that they will be--so
I would go with you, if I was a risk--if I was a venture
capitalist. I wouldn't go with them because they don't--they
can't be guaranteed.
Mr. Sachs. This is no different than with Amazon.com which
is a great service that we all use, and when you go to that
site, and when you visit that site, you sign up for their user
agreement and their privacy policies, and they reserve the
right to change them without notice to you. I don't think that
it is realistic for any association or company to come before
you and say, ``for the future, forever, there will be no change
whatsoever in our business plans, which may include legitimate
business practices that will change over time depending on how
business models change.'' But what I can say to you, and we
have been in this business now for 7 years, we serve more than
12 million customers, we are available across the country, and
neither Amazon nor any other members of this Microsoft-led
coalition can provide you with any evidence whatsoever of
access.
Mr. Markey. The problem, Mr. Sachs, is right now these
companies have guaranteed access to all the Bell Companies that
Mr. Tauke represents, and they don't have guaranteed access to
you. But at least they know they can go that way, which kind of
does put a pressure on you. If they are over here on this
other, and there is only two pipelines going into homes, and
they are on this other pipeline it gives you a lot of pressure,
it seems to me, to carry them. So if you are saying you are not
going to promise in the future that you are going to carry
them, even if Mr. Tauke and his companies are no longer
required to carry them, that is going to create an awful lot of
investment uncertainty for hundreds, thousands of companies
like EarthLink and Amazon and other companies that did create
most of the job growth in the 1990's. The job growth wasn't
created by the telephone or cable industry. They were created
by these other companies whose names' nobody knew before the
1996 Act passed.
I will let Mr. Baker make a point.
Mr. Baker. I agree with a lot of what Mr. Misener said, and
let me point out that EarthLink is a member of the Innovators.
But as far as ensuring that unfettered access, you know we view
that there are really two ways you can do that. I am speaking
as an individual company right now. No. 1, you can say the FCC
can provide a rule on Internet providers, namely those
associated with the telecoms or cable companies, that they not
discriminate. The other is to lay the groundwork so customers
can choose among multiple Internet providers on any given
platform, and then that is a market-based solution which is
actually less regulatory. And then if you know, one platform or
one provider, you know, doesn't--you know, blocks access to a
certain site, then the customer is able to vote with their feet
and go to a different provider.
Mr. Markey. Mr. Misener, 10 seconds to respond.
Mr. Misener. It is really consumer access to all the myriad
of content on the Internet. Mr. Sachs's analogy to our privacy
policy not only is incorrect, but it is inappropriate because
Amazon has literally thousands, if not tens of thousands, of
competitors. If a consumer doesn't like what we offer in terms
of service, product, price, whatever, they have elsewhere to
go. They are captive to the single monopolistic service
provider that he represents.
Mr. Markey. Thank you.
Mr. Upton. Mr. Tauke, did you want to say one thing?
Mr. Tauke. Just would encourage the committee, as you are
thinking about this issue, to recognize that when you speak of
the customer experience on the Internet, there are various
layers of companies who are involved in that customer
experience. You have transport providers, you have application
software people, you have operating systems people like the
Microsoft windows, you have firewall people, you have the ISPs
and the content providers. Right now where--I think it would be
fair to say that there is as much concern about Microsoft, for
example, doing something with software to restrict access. Yet,
I haven't heard anybody suggesting that there be regulation of
Microsoft. Certainly, there is concern that an AOL or an
EarthLink, one of the significant ISP providers, will say to
Amazon.com, we don't like Amazon.com, we prefer Barnes and
Noble, and there is no regulation. Never has been anything to
prevent them from doing that kind of thing.
I guess that if you start going down the path of ensuring
that through regulations that the customer is going to have
unfettered access, you are going to start regulating a whole
lot of companies. And the question really that you face is a
classic one: Do you peremptorily regulate before you see how
this market develops, or do you allow the market to develop and
then see if there is regulation needed?
And I would suggest to you, Mr. Markey, when you were the
distinguished chairman of this committee, that you led the
deregulation of wireless in part because you had faith in the
way that market will develop. I think it has been a boon for
the wireless industry. It seems to me that the same thing can
happen here. That doesn't mean you have to give up the
authority to do something down the road if any of these levels,
the transport level, the ISP level, the software levels in any
of them are doing things that are harmful to consumers.
Mr. Markey. If I may just add, the reason that I did
support the deregulation was we were adding in 1993, a third,
fourth, fifth, sixth carrier in each marketplace. But what we
found that was when there were only two, they stayed at analog
and it was still 60 cents a minute. Once we went to digital the
other five got in, it went down to 10 cents a minute and lower.
So two, I have found, in every single industry, it just doesn't
quite get that level of dynamic because you have two highways,
but you have got hundreds of stores. So you can move over to
Amazon.com, to Barnes and Noble, but there are plenty of other
stores as well, but there are only two highways. The shoppers,
the consumers should be king. They should be able to go
anywhere. That is the--Mr. Sachs.
Mr. Sachs. I was going to say, and Mr. Tauke said this on a
panel we were on recently, that if any of our customers found
their access to any Website in any way restricted, his company
would seize that opportunity. We are advertising lightening-
fast access to any content of your choice. And for our
companies to lose that contract with their customers because of
impeding access to one or another Website, just goes against
any good business sense.
Mr. Upton. Mr. Engel.
Mr. Engel. Well, after 27 years on the committee, I almost
feel like I want to ask Mr. Markey a question. But I will do
that in private. I just come from the belief that once the
genie is out of the bottle, that it is very difficult, if not
impossible, to put it back in again, in terms of regulation.
The bottom line, and I think all of us feel the same way
regardless of where we come down on the issue, is we want to
see competition, and we want the consumers to have the best
break. The question is how do we get it?
I think Mr. Tauke said it all when he talked about
preventing investment. To me that is bad for the consumers
because if we don't have expansions, consumers won't get what
they want. I want to, since I feel Mr. Sachs has kind of been
beat up on at the end, I read some of the testimony that Mr.
Tauke had given earlier, I wanted just, Mr. Sachs, to read some
of yours and give you a chance to expand on it. You say
promoting competition rather than regulating competitors should
be the cornerstone of U.S. broadband policy. You also in line
with that say, which brings me to my final point, to the extent
the FCC believes that cable modem and DSL services should be
subject to some version of equivalent regulation, it should
adopt a regulatory parity, that is, the Commission should
remove regulatory constraints, not add new ones.
I thought you might want to comment on that. You have said
it.
Mr. Sachs. First, if I could say I don't feel at all beaten
up on by my friend, Mr. Markey, who I go back with a full 27
years. And I also remember the discussions concerning the Pole
Attachment Act back in 1978, when poll attachments were and
still remain essential.
Mr. Markey. I think Mr. Sachs wrote the language to be
honest with you.
Mr. Sachs. As a staff for this committee, in fact. But fast
forward to the present, and we visited a few months back and
Congressman Markey told me that he felt he had started to
mellow over time. And I do note that. I mean this is a very,
you know, pleasant repartee.
Mr. Engel. Let me just say, Mr. Sachs, you are the only one
in this room that thinks that Congressman Markey has mellowed.
Mr. Sachs. He thought he had mellowed as well. But we
really are--our industry had experience from 1992 through 1996
and then for 3 more years because deregulation of our core
video service didn't take place until April 1999. And we saw
the impact of regulation on this business. Capital spending, at
that time period, averaged $3 to $4 billion a year for the
entire industry. It wasn't until the 1996 Telecommunications
Act and the prospect of deregulation 3 years later, with
respect to our video services, that we were able to raise
capital, and investors were willing to take the risk on this
business. So--and since 1996, that capital investment has
averaged more than $10 billion a year. The contrast is stark.
So given our own experience with very invasive regulation for
that period of time, we came away from that experience
chastened and also with the recognition that we don't want to
come before Congress or the FCC as an industry and seek to tie
up other industries in this sort of regulation. We would rather
compete on every street and for every household's business.
Mr. Engel. Thank you. Thank you, Mr. Chairman.
Mr. Upton. Well, we appreciate everybody's testimony this
afternoon. And we look forward to hearing from some of you in
September, when we hope that this, at least part of this, issue
is over and done with. And I know, Dr. Pepper, if you take that
back to the Chairman, it would be most appreciated.
We will consider this hearing for today adjourned.
[Whereupon, at 5:43 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of the National League of Cities, United States
Conference of Mayors, National Association of Counties, National
Association of Telecommunications Officers and Advisors and
TeleCommUnity
I. INTRODUCTION
This testimony is submitted on behalf of the National League of
Cities (``NLC''), the U.S. Conference of Mayors (``USCM''), the
National Association of Counties (``NACO''), the National Association
of Telecommunications Officers and Advisors (``NATOA'') and
TeleCommUnity (collectively referred to as ``Local Government.''). The
National League of Cities, United States Conference of Mayors and
National Association of Counties collectively represent the interests
of almost every local government in the United States. NATOA's members
include telecommunications and cable officers who are on the front
lines of communications policy development in hundreds of local
governments. TeleCommUnity is an alliance of individual local
governments and their associations, which seeks to refocus attention in
Washington on the principles of federalism and comity for local
governments' interests in telecommunications.
II. LOCAL GOVERNMENT'S UNIQUE PERSPECTIVE
The Subcommittee at its hearing on July 21st chose to limit the
regulatory witnesses from whom it heard to federal and state broadband
regulators. Local government offers this testimony to clarify for the
Subcommittee the numerous roles local government plays in broadband
services such as:
Enforcers on behalf of citizens of customer service and privacy
requirements relating to the provision of services over the
cable system,
Regulators and administrators of cable systems and services,
Extensive users of telecommunications resources,
Developers and promoters of broadband applications,
Economic development agencies in promoting deployment of broadband
facilities,
Trustees, owners, and managers of valuable public property, and
Mediators among competing uses of the public rights of way
As confirmed by all at the hearing, cable modem services are the
most universally available broadband service to residential consumers.
Local cable franchising requirements and enforcement played a large
role in the wide availability of cable modem service as this testimony
will clarify.
Local government also files this testimony to document that it has
unique experiences, wisdom and perspective that must be heard in this
debate if the policies which the Congress creates for broadband
services are to benefit consumers, not merely focus on the treatment of
broadband service.
Finally, the Subcommittee would be well served to be informed of
some of the other challenges local governments face as we seek to
protect consumers in their dealings with cable operators in their roles
as cable providers.
A. How Local Government differs from FCC and state PUCs.
The role of local governments is far more complex than that of the
Federal Communications Commission and state public service commissions
who have traditionally been pure regulators. Local governments have a
significant proprietary interest in the property used by communications
systems to deliver service to end-users. It is well known that wireline
systems use and depend upon public rights-of-way to provide
service.<SUP>1</SUP> But local governments also own and maintain
streetlights, traffic signals, water towers, poles, conduits and other
structures that are used by both wireline and wireless providers to
reach their customers.<SUP>2</SUP>
---------------------------------------------------------------------------
\1\ See Turner Broadcasting System, Inc. v. FCC, 512 U.S. 622, 627-
28 (1994) (``Cable systems, by contrast, rely upon a physical, point-
to-point connection between a transmission facility and the television
sets of individual subscribers. Cable systems make this connection much
like telephone companies, using cable or optical fibers strung
aboveground or buried in ducts to reach the homes or businesses of
subscribers. The construction of this physical infrastructure entails
the use of public rights-of-way and easements and often results in the
disruption of traffic on streets and other public property. As a
result, the cable medium may depend for its very existence upon express
permission from local governing authorities. See generally Community
Communications Co. v. City of Boulder, 660 F.2d 1370, 1377-78 (10th
Cir. 1981).'')
\2\ In Coral Springs, Florida, for example, the City established a
procedure for leasing municipal property for use by wireless providers
for placement of antennas. The City owned several structures that made
it easier for service providers to reach cars passing by the City on
the interstate. Coral Springs, Fla., Land Development Code, Ch. 25,
art. XIV, 2501012.
---------------------------------------------------------------------------
In addition, perhaps more than any other level of government, local
governments are actively engaged in promoting economic development.
Local governments have attempted to promote economic development by
encouraging competition in communications markets. Communities have,
for example, built ``conduit freeways'' in conjunction with public
works projects in order to make it easier for competitors to enter the
market, developed local networks in conjunction with private industry
to promote facilities-based competition, and devised public rights-of-
way policies that protect vital infrastructure, while making it easier
for companies to enter the market.<SUP>3</SUP>
---------------------------------------------------------------------------
\3\ See National Research Council, Broadband Bringing Home the
Bits, National Academy Press (2002), at 206.
---------------------------------------------------------------------------
Economic development is not just about placing hardware in the
ground, however. Consumers will not take advantage of broadband unless
broadband offers beneficial, real world applications.<SUP>4</SUP> Local
governments are developing and promoting applications that take
advantage of the promise of broadband through a variety of initiatives,
including distance learning initiatives, and initiatives designed to
make broadband universally available.
---------------------------------------------------------------------------
\4\ Little Demand For Paid Consumer Online Services, Reports
Jupiter Media Metrix, PR Newswire, May 22, 2002 (``Jupiter's latest
research indicates that there is no obvious killer-app online service
that consumers would pay for,'' said David Card, Jupiter Research vice
president and senior analyst.''); BUSH ADMINISTRATION FOCUSES ON
INCREASING DEMAND FOR BROADBAND, Communications Daily, March 6, 2002
(``Many consumers don't yet see the value of broadband,'' . . . in
Atlanta, price point of zero still wasn't sufficient motivation for
half of consumers.''); Broadband waits for `killer app', analysts say:
Average consumers see no reason to move to high-speed,'' Dallas Morning
News, Sept. 18, 2001.
---------------------------------------------------------------------------
Because local governments are so diverse, and because they work so
closely with the public, local governments--assuming they have adequate
resources--offer the best hope for development of robust e-government
applications. To paraphrase the Communications Act, the goal at the
local level is to ``make available, so far as possible, to all the
people'' in the community ``without discrimination on the basis of
race, color, religion, national origin, or sex,'' rapid, efficient,
advanced communications systems and to encourage the use of these
systems. See 47 U.S.C. 151.
Local governments thus act as trustees/owners/managers of valuable
public property, mediators among competing uses of the public rights-
of-way, economic development agencies in promoting deployment of
broadband facilities, users of extensive communications resources, and
developers and promoters of broadband applications and protectors of
consumer services and privacy. This is not to say the regulatory role
of local government is unimportant or insignificant: local governments
have had traditional responsibilities for protecting consumers and
promoting competition dating back to the beginning of the Republic.
Charles River Bridge at 547. The point is that any Congressional
discussion of broadband services can not simply be about regulation.
Congressional oversight of the FCC treatment of cable modem services
and other broadband service providers vitally affects local governments
in all of their roles.
B. Local Franchising Benefits Cable Operators and Protects Local
Communities and Subscribers.
Local governments <SUP>5</SUP> grant cable franchises as a means
of:
---------------------------------------------------------------------------
\5\ In a small number of states, franchising is performed by a
state agency.
Promoting deployment and competition;
Protecting the public rights-of-way and the vital facilities located
therein;
Promoting localism and viewpoint diversity in video programming and
ensuring that the future cable-related needs of the community
will be met; and
Protecting subscriber privacy rights, enforcing consumer protection
statutes, and ensuring compliance with customer service
standards.
Through the franchising process, cable operators have obtained the
special privilege to semi-permanently use and occupy the public rights-
of-way with over one million miles of cable plant as a means to
annually deliver almost $50 billion worth of cable and other services
to almost 69 million subscribers. In return, cable operators agree to
comply with local government right-of-way regulations, construction
standards, and customer service regulations; to provide rental
compensation, both monetary and in-kind services and facilities; and
agree to provide access channels and support for local public,
educational and governmental (``PEG'') programming, as well as
municipal institutional network facilities and support services.
While cable operators built their broadband systems based on cash
flow from all subscribers, absent a the ability of local government to
enforce its universal service or availability requirements, cable
operators will be free to cherry pick to whom they will offer broadband
services.
C. Local Franchising Promotes Broadband Competition and Deployment.
Local governments grant incumbent cable operators and competitive
broadband providers non-exclusive franchises to use public property to
provide cable service and non-cable services.<SUP>6</SUP> Build-out
schedules, system upgrade requirements, and anti-redlining provisions
have long been among the core franchise conditions negotiated by local
governments.<SUP>7</SUP>
---------------------------------------------------------------------------
\6\ Grants of exclusive franchises, rare in any case, were
prohibited by the 1992 Cable Act. 47 U.S.C. 541(a)(1). New entrants
and incumbent cable operators are using new and upgraded systems to
offer bundled combinations of video programming, Internet access, and
telephone service to increase per subscriber revenues.
\7\ See also 47 U.S.C. 541(a)(3); 47 U.S.C. 541(a)(4)(A).
---------------------------------------------------------------------------
A local government cable franchise regime--i.e., operators and
local governments negotiate franchise requirements, operators pay five
percent franchise fees and provide PEG channel capacity and support,
local governments enforce customer service standards and regulate
rates--has been in place for more than seventeen years and it has been
a highly successful industry model. For example, as of June 2002:
Cable plant reaches 97% of all households.<SUP>8</SUP>
---------------------------------------------------------------------------
\8\ In re Annual Assessment of the Status of Competition in the
Market For the Delivery of Video Programming, MB Docket No. 02-145,
Ninth Annual Report, 17 FCC Rcd 26,901, Table 1 (2002)(``Ninth Annual
Report'') http://gullfoss2.fcc.gov/prod/ecfs/
retrieve.cgi?nativeXorXpdf=pdf&
idXdocument=6513404824
---------------------------------------------------------------------------
80% of all cable plant has been rebuilt since 1996 to be capable of
providing digital services.<SUP>9</SUP>
---------------------------------------------------------------------------
\9\ Ninth Annual Report at 33.
---------------------------------------------------------------------------
There are approximately 16 million cable modem lines deployed,
<SUP>10</SUP> reaching 50 million homes, and serving between
6.9 and 7.4 million subscribers. (It should be noted that the
FCC required cable receive a jump start on this number. Under
the ``social contracts'' the FCC required of Time Warner
systems to deploy modems to all schools.)
---------------------------------------------------------------------------
\10\ FCC Wireline Competition Bureau Industry Analysis and
Technology Division, High Speed Services for Internet Access: Status as
of June 30, 2002 at Tables 1, 2 (``June 2002 High Speed Report''),
available at http://www.fcc.gov/wcb/stats.html (9.2 million high-speed
[200 kbps in one direction] and 6.8 million advanced service [200 kbps
in both directions] lines).
---------------------------------------------------------------------------
In contrast, as of June 2002, ADSL <SUP>11</SUP> and other forms of
broadband which have not generally been subject to local franchise
fees, franchise build-out and anti-red-lining requirements have
deployed only 6.3 million high-speed and advanced service lines to
residential and small businesses, and serve between 3 and 3.3 million
residential subscribers.<SUP>12</SUP>
---------------------------------------------------------------------------
\11\ Asymmetrical Digital Subscriber Line service is faster in one
direction, usually subscriber downloading, and is primary used to serve
residential areas. Symmetrical DSL provides equal speeds in both
directions is typically deployed to serve large businesses.
\12\ June 2002 High Speed Report at Tables 3 and 4.
---------------------------------------------------------------------------
D. Local Franchising and Regulation Protects All Right-of-Way Users.
Cable operators are not the only users of the public rights-of-way.
The public rights-of-way also contain millions of miles of
telecommunications fiber, copper telephone wiring, electrical lines,
and millions more miles of gas, water and sewer pipes and mains.
Automobiles and mass transit, as well as pedestrians and bicyclists,
rely on use of the public rights-of-way as well, often necessitating
installation and maintenance of thousands of traffic control signals,
cameras, and even speed detectors. All told, the combined value of the
public rights-of-way owned (or held-in-trust for public use) by local
governments is over $7.1 trillion.<SUP>13</SUP> And in most cases, it
falls to local governments to exercise both proprietary and police
powers to coordinate and manage these diverse and competing uses,
protect all users from damages by other users, and to prevent waste or
premature exhaustion of this valuable public asset.
---------------------------------------------------------------------------
\13\ TeleCommUnity, ``Valuation of the Public Right-of-Way Asset,''
March 2002, available at http://www.telecommunityalliance.org/images/
valuation2002.doc.
---------------------------------------------------------------------------
E. Local Franchising Promotes Local Programming, Viewpoint Diversity,
and the Community's Cable-Related Needs and Interests.
Local governments negotiate with cable operators to obtain channel
capacity on cable systems for the purpose of presenting primarily
local, public, educational, and government access programming. Cable is
the primary means of communicating with over 76% of all television
households <SUP>14</SUP> and access channels are the primary means of
ensuring that programming content is not exclusively controlled by the
owners of these powerful communications systems. Access channels are
used by a wide range of community groups to carry local community
programming, educational K-12 programming, distance learning courses
for students of all ages, federal and local government programming, and
emergency information alerts.<SUP>15</SUP> (Many Members of the House
of Representative are familiar with PEG channels as they use these
channels to communicate with constitutes while back in the district or
from Washington.). Local governments have also used the franchising
process to bring Internet access to schools and to create municipal
institutional networks (``I-Nets'') to support e-government
initiatives. These institutional networks provide vital redundant
telecommunications infrastructure. For example, some of the New York
City communications infrastructure was destroyed in the September 11,
2001 World Trade Center attack, but the New York I-Net system rerouted
signals as it was designed to do, and provided vital communications
links during the emergency crisis period.
---------------------------------------------------------------------------
\14\ Ninth Annual Report at App. B, Table B-1. This table has been
attached as an Appendix to this testimony.
\15\ ``Public, Educational and Governmental (PEG) access television
channels on cable television systems serve a wide range of community
groups including: the Lions, Kiwanis and Rotary Clubs, the League of
Women Voters, NAACP, AARP, the Urban League, public schools, local
Chambers of Commerce, religious institutions, colleges and
universities, community theaters, labor unions, veterans groups, second
language communities, the disabled, politicians, and political
organizations. Additionally, PEG channels carry programming from NASA,
the US Department of Education, the Organization of American States,
Members of Congress, the National Guard, the US Army, the US Air Force,
the Federal Emergency Management Administration (FEMA), the US
Department of Housing and Urban Development (HUD), and various arts
organizations such as Annenberg/CPB and Classic Arts Showcase.''
Alliance for Community Media, ``About Community Media,'' available at
http://www.alliancecm.org/.
---------------------------------------------------------------------------
F. Local Governments Enforce Customer Service Standards and Privacy
Protections.
Local governments have broad authority under federal and state law
to protect subscriber privacy and to enforce customer service standards
against cable operators.<SUP>16</SUP> Local governments use this
authority to ensure that subscribers receive what they paid for at the
level and quality of service advertised; as incentive to persuade cable
operators to resolve service and billing complaints in a timely manner;
and to make certain that subscriber privacy is protected to the fullest
extent permitted under law.<SUP>17</SUP> The need to protect subscriber
privacy becomes even more important as more broadband services are
offered over cable systems.<SUP>18</SUP>
---------------------------------------------------------------------------
\16\ 47 U.S.C. 551, 552.
\17\ See e.g., Seattle, WA Ordinance No. 12775, available at http:/
/www.cityofseattle.net/cable/customerXservice.htm (customer service
standards, customer credits and privacy policy).
\18\ See e.g., Christopher Stern, ``Comcast Halts Tracking of Its
Subscribers; Privacy Activists Had Criticized Practice of Collecting
Data on Visits to Web Sites,'' Washington Post, Feb. 14, 2002, at E4;
Brigitte Greenberg, ``Privacy Complaints Prompt Change in Comcast Web
Policy'', Communications Daily, Feb. 14, 2002.
---------------------------------------------------------------------------
Cable Modem. Congress empowered local governments to enforce
``customer service requirements of the cable operator,'' not merely
requirements related to ``cable service.'' <SUP>19</SUP> Thus,
regardless of whether cable modem service is classified as a cable,
information or telecommunications service, local governments have
authority to continue to require cable operators to comply with local
customer service standards and consumer and privacy protections,
regardless of the type of service offered.
---------------------------------------------------------------------------
\19\ 47 U.S.C. 552(a). See Comments of Alliance of Local
Organizations Against Preemption at 67-68, In re Appropriate Regulatory
Treatment for Broadband Access to the Internet Over Cable Facilities,
Notice of Proposed Rulemaking, CS Docket No. 02-52, 17 FCC Rcd 4798
(2002), available at http://gullfoss2.fcc.gov/prod/ecfs/
retrieve.cgi?nativeXorXpdf=pdf&idXdocument=
6513198533
---------------------------------------------------------------------------
CONGRESS SHOULD RESPECT LOCAL GOVERNMENTS' AUTHORITY TO COLLECT
COMPENSATION FROM ANY RIGHT-OF-WAY OCCUPANTS.
A. The Fact That A Service Is A Broadband /Information Service Does Not
Affect Local Authority To Manage Public Rights-of-Way or To
Require Franchises.
There are enormous public policy and constitutional issues that
would be raised if the Cable or Telecommunications Act were read to
preempt local authority to charge fees for use and occupancy of the
public rights-of-way just because a service provider offered a
broadband or information service.
Supreme Court precedent makes it clear that the Cable Act must be
read to permit localities to charge fees unless there is no possible
reading of the statute under which such charges could be permitted.
Thus, for example, Gregory v. Ashcroft, 501 U.S. 452, 464 (1991), held
that intrusions on traditional state authority will only be given
effect when a statute's language makes the Court ``absolutely certain
that Congress intended'' such a result. The rule, described by
Professors William Eskridge and Philip Frickey as ``superstrong,''
<SUP>20</SUP> ``increases Congress's political accountability by
forcing it to state explicitly a decision to erode state authority and
reduce the benefits of federalism--such as ``decentralized government
that [is] more sensitive to the diverse needs of a heterogeneous
society [and that] increases opportunity for citizen involvement in
democratic processes' that accrue to the polity.'' <SUP>21</SUP>
Particularly given the impact on basic infrastructure and on the public
of the upgrades associated with providing cable modem service it is
fair to expect that had Congress meant to intrude so extraordinarily
into state sovereignty it would have done so directly--and taken the
responsibility for the results.<SUP>22</SUP> It did not do so, and
therefore the Constitution requires that the Act be construed to
preserve local authority to charge a fee for use and occupancy of the
public rights-of-way to provide information services if at all
possible:
---------------------------------------------------------------------------
\20\ William N. Eskridge, Jr. & Philip P. Frickey,
QuasiConstitutional Law: Clear Statement Rules as Constitutional
Lawmaking, 45 Vand. L. Rev. 593, 623(1992)
\21\ Jack W. Campbell, Regulatory Preemption in the Garcia/Chevron
Era, 59 U. Pitt. L. Rev. 805, 816 (1998).
\22\ The Commission's decision to announce that cable operators
need not pay fees, at the same time that it tells consumers to look to
local governments for protection against cable modem abuses, is an
unfortunate example of a federal agency passing the buck in two
senses--telling consumers to look to local governments for protection,
while taking the bucks from local government required to provide that
protection.
---------------------------------------------------------------------------
Where an administrative interpretation of a statute invokes the
outer limits of Congress' power, we expect a clear indication
that Congress intended that result. See Edward J. DeBartolo
Corp. v. Florida Gulf Coast Bldg & Constr. Trades Council, 485
U.S. 568, 575 (1988). This requirement stems from our
prudential desire not to needlessly reach constitutional issues
and our assumption that Congress does not casually authorize
administrative agencies to interpret a statute to push the
limit of congressional authority. See ibid. Thus, ``where an
otherwise acceptable construction of a statute would raise
serious constitutional problems, the Court will construe the
statute to avoid such problems unless such construction is
plainly contrary to the intent of Congress.'' DeBartolo at 575.
Solid Waste Agency of Northern Cook County v. U.S. Army Corps of
Engineers, 531 U.S. 159, 173 (2001). See also, I.N.S. v. St. Cyr, 533
U.S. 289, 299-300 (2001) (``[I]f an otherwise acceptable construction
of a statute would raise serious constitutional problems, and where an
alternative interpretation of the statute is `fairly possible,' see
Crowell v. Benson, 285 U.S. 22, 62 (1932), we are obligated to construe
the statute to avoid such problems. See Ashwander v. TVA, 297 U.S. 288,
341, 345-48 (1936) (Brandeis, J., concurring); United States ex rel.
Attorney General v. Delaware & Hudson Co., 213 U.S. 366, 408 (1909).'')
B. Collecting Payment for Use of Public Property by Commercial
Enterprises is Sound Public Policy Encouraged by the Congress.
In addition to the arguments that the Congress cannot prohibit
localities from charging fees for the use and occupancy of public
rights-of-way to provide broadband services, it is good public policy
to charge private companies fair value for property used.
Congress has long recognized that requiring communications
companies to pay fair market value for the inputs used in their
business encourages competition and economic deployment of resources.
Spectrum auction, for example, generated huge revenues for the
Treasury, but the effect was to encourage competition and deployment,
rather than discourage it. In its report to the Congress on these
auctions the FCC concluded:
``the competitive bidding process provides incentives for
licensees of spectrum to compete vigorously with existing
services, develop innovative technologies, and provide improved
products to realize expected earnings. In this way, awarding
spectrum using competitive bidding aligns the licensees''
interests with the public interest in efficient utilization of
the spectrum. As one commenter observes, ``[s]uccessful bidders
are those that not only place a high value on the property
relative to other auction participants, but also have the
financial capability to support their bids.'' <SUP>23</SUP>
---------------------------------------------------------------------------
\23\ FCC Report to Congress on Spectrum Auctions, WT Docket No. 97-
150, Report, FCC 97-353, at IV(B)(1997).
---------------------------------------------------------------------------
The same is true with respect to charging for use of public rights-
of-way: allowing localities to charge fair value will not discourage
use of the public rights-of-way if an enterprise is sound; but it will
discourage uneconomic uses.
Indeed, the recent problems in the broadband industry generally
have been exacerbated by over-investment. The last thing the industry
needs is an incentive to misallocate resources.<SUP>24</SUP> Charging
fair market value for the use of rights-of-way will help companies make
more rational investment decisions. As the Third Report notes at 62:
---------------------------------------------------------------------------
\24\ See Brian Leaf, Battling Waves of Woe: Once high-flying
industry getting swamped,'' Crain's Chicago Business, Feb. 25, 2002
(``As companies rushed to install fiber optic cables--the autobahn of
the new economy--they went overboard. Now, the capacity glut has cost
telecom companies billions of dollars, with no foreseeable return on
their investment.''); Jeff Smith, Fiber-Optic Fallout; Billions Were
Wasted in Frenzy to Build Networks, 90% of which lie Dormant, Rocky
Mountain News, May 6, 2002, at 1B; Jon Healey, Telecom's Fiber Pipe
Dream, Los Angeles Times, April 1, 2002, at A1 (``The problem was that
too many companies had the same dream, and they built too many digital
toll roads to the same destination.'')
---------------------------------------------------------------------------
``there has been a recent slowdown in investment caused by the
economic downturn generally, and more particularly, over-
building by carriers, over-manufacturing by vendors, over-
capitalization by financial markets, coupled with unrealistic
market expectations by investors. [Analysts] conclude that,
although it will take some time for the industry to absorb
excess bandwidth capacity and increase utilization of existing
assets, the recent slowdown in investment has not been caused
by a slowdown in consumer demand.''
Charging fees for use of the public rights-of-way prevents what
would otherwise be substantial subsidies running from the public to
broadband operators. The industry consistently underestimates costs
associated with use of the public rights-of-way. The costs involve far
more than the direct costs of overseeing public right-of-way
construction (costs associated with permitting and inspecting, for
example), coordinating public right-of-way construction (police
supervision and traffic control) and responding to construction-related
complaints. Construction reduces the life of the roadway, <SUP>25</SUP>
reduces the space available in the roadway to others, makes
coordination of public projects more difficult (and expensive) and
often damages vital utility infrastructure in ways that may not be
detected until much later. As importantly, construction imposes
significant, uncompensated costs on the public. In some cases, those
costs are as simple (and as significant) as delays in traffic and
damage to vehicles, <SUP>26</SUP> but in other cases, critical access
routes to local businesses are cut off.<SUP>27</SUP> In some cases, the
impact can be fairly described as disastrous.<SUP>28</SUP> The
University of Minnesota has concluded that installation of utility
infrastructure imposes substantial costs on the public.<SUP>29</SUP>
---------------------------------------------------------------------------
\25\ Ghassan Tarakji, San Francisco State University, The Effect of
Utility Cuts on the Service Life of Pavements in San Francisco: Study
Procedure and Findings (1995); IMS, Infrastructure Management Services,
Inc., Estimated Pavement Cut Surcharge Fees for the City of Anaheim,
California Arterial Highway and Local Streets (1994).
\26\ Lyndsey Lawton, Hidden Cost of Road Tear-ups: D.C. Taxpayers
Struck With Bill for Trench-Weakened Streets, The Washington Post,
March 15, 2000, at A1.
\27\ Lyndsey Lawton, Despite Promises, Road Work Still Chaotic,
Only 1 Cut Coordinated Out of 507 Permitted, The Washington Post,
August 13, 2000, at C1; Lyndsey Lawton, Mayor Vows to Bring Order to
Street Work; Longer Moratorium on Trenches Is Possible, The Washington
Post, March 28, 2000, at B1.
\28\ Joanna Glasner, High Bandwidth Bureaucracy, Wired News, March
25, 1999; Rachel Horton, City Urges Conservation After Water Line
Slashed, Irving News, July 11-14, 1999, at 1A.; Rani Cher Monson and
Melissa Borden, 3,600 Lose Emergency Phone Service, Arlington Morning
News, July 16, 1999, at 1A; Stephen C. Fehr, Road Kill on the
Information Highway, The Washington Post, March 21, 1999, at A1; Jim
Hannah and Cindy Schroeder, Fiber-optic cut disrupts business computers
snarled in Kenton Co., The Cincinnati Enquirer, February 28, 2001;
Blake Morrison and Amy Mayron, Buried Stone May Have Caused Break
Submerged Block Diverted Auger to the Side, Piercing Gas Line, St. Paul
Pioneer Press, December 13, 1998, at 1A.
\29\ Raymond L. Sterling, University of Minnesota, Indirect Costs
of Utility Placement and Repair Beneath Streets (1994).
---------------------------------------------------------------------------
IV. NON BROADBAND CHALLENGES FACING LOCAL GOVERNMENT IN OVERSIGHT OF
CABLE OPERATIONS
A. Local Government Rate Regulation Authority Is Limited.
Real competition creates downward pressure on rates.<SUP>30</SUP>
Local rate regulation has been used as a substitute rate restraint
where there is no real competition to protect consumers from
unreasonable rates. Unfortunately, as explained below, local government
actions to ensure reasonable rates for subscribers have been stymied by
illogical FCC rules, interpretations, and unreasonable rate-setting
formulas.<SUP>31</SUP>
---------------------------------------------------------------------------
\30\ Brigitte Greenberg, ``Cable Prices Rise More Than Other Goods
and Services,'' Communications Daily, Jan. 15, 2002, at 6.
\31\ For a fuller discussion of local government recommendations
for rate regulation reform, see Comments and Reply Comments of National
Association of Telecommunications Officers and Advisors, National
League of Cities, Miami Valley Cable Council, Montgomery County,
Maryland, and City of St. Louis Missouri, In re Revisions to Cable
Television Rate Regulations, Notice of Proposed Rulemaking and Order,
MB Docket No. 02-144, 17 FCC Rcd 16,803 (2002), available at
www.fcc.gov/searchtools.html, ``Search For Filed Comments--ECFS,''
Proceeding ``02-144,'' Filed on Behalf of ``NATOA'' and ``National
Association of Telecommunications Officers and Advisors.''
---------------------------------------------------------------------------
In addition, the effectiveness of basic rate regulation is hampered
by the lack of regulation of other service tiers. For example, if a
local government determines that an operator's basic rate is more than
what would be charged if a competitive market existed, the operator can
simply charge more for the unregulated tiers, thereby ensuring that
subscribers will continue to pay the unreasonable rate selected by the
operator. As one operator bluntly stated:
If, during the appeal process and prior to a final decision by
the FCC, Time Warner Cable is required to implement the Rate
Order, it is our intention to provide the ordered customer
refund during 1 billing period. It is also our intention to
adjust our CPST Service tier price by a like amount during that
1 billing period . . . If the Rate Order is implemented, the
only customers who will realize a net refund and/or reduction
in total service price are those 2,930 customers subscribing
only to basic service.<SUP>32</SUP>
---------------------------------------------------------------------------
\32\ ``Time Warner Settlement Letter,'' Letter from Gerald
DeGrazia, Time Warner Cable, to Kent Bristol, Executive Director, Miami
Valley Cable Council (Nov. 5, 2002), attached as Exhibit B, Attachment
14 to Errata to Opposition to Appeal of Local Rate Order, Time Warner
v. Miami Valley Cable Council, (filed Dec. 6, 2002), available upon
request.
---------------------------------------------------------------------------
B. Cable Industry Deregulation has led to Less competition, not Lower
Rates.
Cable rates continue to rise unreasonably because cable incumbents
lack viable wireline competitors, not, contrary to the claims of the
cable industry, because programming costs continue to rise. In the
past, cable operators used their control over a la carte tier pricing
as a means to charge more, not less, per channel. Today, consolidated
cable behemoths are using ownership control of sports and news
programming, predatory pricing tactics, and geographic rate
discrimination as means to drive out wireline competition. Cable
operators should be held accountable for their attempts to evade
current rate regulations, not rewarded with further deregulation.
C. Expanding Cable Operator Control of Programming Is Unlikely to
Reduce Cable Rates.
1. Cable Operators Historically Used A La Carte Pricing to Evade Rate
Regulation.
In 1994, the initial cable rate regulation rules exempted single-
channel ``a la carte'' offerings. Operators began offering a la carte
channels on a single and a la carte tier package basis. The single
channel price, however, was so high that it only made sense to purchase
a la carte channels as a tier package. However, because each channel in
the a la carte tier was technically available as a single a la carte
channel, cable operators claimed that the a la carte tier package was
not subject to rate regulation (as other programming tiers were). On an
ad hoc basis, the FCC permitted this a la carte tier arrangement so
long as six or fewer channels were packaged together.<SUP>33</SUP>
Ultimately, the FCC found no sufficient justification for the tier
restructuring ``other than to avoid rate regulation.'' <SUP>34</SUP>
Despite this finding, however, the FCC neither prohibited this evasion,
nor sanctioned the operators for trying to avoid compliance with rate
regulation rules.
---------------------------------------------------------------------------
\33\ See, e.g., In the Matter of: Adelphia Cable Partners, L.P.,
South Dade County, Florida, Letter of Inquiry, Memorandum Opinion and
Order, 9 FCC Rcd. 7781 (1994) (rejected justification where 32 channels
were placed on an ``a la carte'' tier, although operator was not
sanctioned for the attempted evasion).
\34\ In re Comcast Cablevision of Tallahassee, Florida, Letter of
Inquiry, Memorandum Opinion and Order, 9 FCC Rcd 7773, 15 (1994);
aff'd by full Commission, In re Comcast Cablevision of Tallahassee,
Florida, Application for Review, Memorandum Opinion and Order, 11 FCC
Rcd 1246 (1995).
---------------------------------------------------------------------------
The unfortunate consequence of the FCC response is that it creates
an implicit incentive for cable operators to aggressively interpret the
rate rules to their benefit. For example, an operator with 10 million
subscribers manipulates a rule interpretation to add an additional ten
cents per month to every subscriber bill. In one year, the rate
manipulation has generated $12 million. Even if the ten-cent addition
is denied by a local government in a large jurisdiction with 200,000
subscribers, and the FCC rules on appeal that the ten-cent charge was
unlawful, at worst, the operator would have to refund $240,000 to the
200,000 subscribers. But it will likely keep the other $11 million it
unlawfully collected from other subscribers because the FCC is not
going to assess a separate fine or make the FCC Order apply beyond the
jurisdiction that issued the challenged Rate Order.
2. A La Carte Pricing Could Result in Channel Substitution, Not Lower
Rates.
Cable operators cannot offer every channel on an a la carte basis.
Operator-owned programming interests may affect decisions as to which
channels will be offered as part of a package or as an a la carte
channel. Congress should be concerned about channel substitution. For
example, assume in New York City that Cablevision agrees to carry YES
Network, drop ESPN from its expanded-tier programming, and make ESPN
available as a separate a la carte channel. If there are no substantial
savings in programming costs between YES and ESPN, or if programming
cost savings are not passed onto subscribers, then the subscriber who
did not want sports programming would see no price reduction, and the
subscriber who wanted ESPN will have to pay the same price to receive
ESPN-less programming or a larger price to receive the same programming
with ESPN.
D. Cable Operators Have Not Presented Verifiable Programming Cost Data.
Verifiable programming cost and revenue data is needed to evaluate
the impact of programming costs on cable rates. Notwithstanding the
fact that a Justice Department investigation and an informal SEC
inquiry related to the accuracy of operator-reported data are currently
pending, <SUP>35</SUP> Congress should require the cable industry to
provide specific information about all channel programming costs,
programming launch fee revenue, and corporate allocation of volume
discounts.
---------------------------------------------------------------------------
\35\ Riva D. Atlas and Geraldine Fabrikant, ``Large Cable Operator
to Restate its Results for 2000 and 2001'', New York Times, Nov. 20,
2002, at C1.
---------------------------------------------------------------------------
Actual Programming Costs. Cable operators submit only their basic
tier channel programming costs to local governments as part of the rate
regulation process and do not routinely submit any programming costs to
the FCC. Thus, cable operators do not disclose to any regulatory body
what they are paying for most of their programming.
Accounting Treatment of Launch Fee Revenue. Cable operators
receive substantial ``launch fees'' from programmers--i.e., fees for
adding new channels to cable systems, for advertising new channels on
existing channels, in program guides, on or with subscriber bills, and
for other channel launch-related services--but do not uniformly treat
them as programming revenues which offset total programming costs.
Allocation of Volume Discounts. Cable operators often delay or
refuse to comply with local government requests to disclose terms of
their programming contracts, thus making it difficult to determine how
volume discounts are allocated. In at least one instance, franchise-
level reported programming costs were greater than the operator's
actual costs because the operator negotiated volume discounts for
programming, but charged its local franchises as if no discount had
been obtained, booking the difference as profit for the corporate
parent. According to the 2001 Annual Report Comcast filed with the SEC:
``[O]n behalf of the company, Comcast secured long-term
programming contracts . . . Comcast charged each of the
Company's subsidiaries for programming on a basis which
generally approximated the amount each subsidiary would be
charged if it purchased such programming from the supplier . .
. and did not benefit from the purchasing power of Comcast's
consolidated operations.'' <SUP>36</SUP>
---------------------------------------------------------------------------
\36\ See Comcast Cable Communications, Inc., Form 10-K Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Fiscal Year Ended December 31, 2001, at 42 (filed March
29, 2002) available at http://www.sec.gov/Achives/edgar/data/1040573/
000095015902000190/cable10k.txt.
---------------------------------------------------------------------------
E. The Effect of Programming Cross-Ownership Remains Unknown.
Without actual programming cost data, it is also difficult to
evaluate what effect cable operator cross-ownership of programming
networks has had on increases in programming costs and cable rates.
Cable operators could be recovering programming fees from subscribers,
while also benefiting from fee increases through their programming
network ownership agreements. The FCC reported: <SUP>37</SUP>
---------------------------------------------------------------------------
\37\ Ninth Annual Report at 135.
Combined, four of the top six cable operators hold ownership
interests in 72 of 92 satellite-delivered programming networks.
AOL Time Warner has an ownership interest in 39 networks, i.e., 13%
of all national programming networks.
Cox has an ownership interest in 25 networks, i.e., 8% of all
national programming networks.
Comcast has an ownership interest in 9 networks, i.e., 3% of all
national programming networks.
Cablevision has an ownership interest in 5 networks, i.e., 2% of all
national programming networks.
Liberty Media has an ownership interest in 41 networks, or 13% of all
national programming networks.
Comcast has an ownership interest in several regional sports
programming channels, and sports programming has been cited as
major source of programming fee increases.
Local governments urge the Subcommittee to take steps to protect
subscribers from potential abuses of a la carte pricing, to ensure
transparent and equitable accounting treatment of programming costs and
revenues, and to investigate how cable operator cross-ownership of
programming affects subscriber rates.
F. Without Wireline Competition, Cable Rates Will Continue to Rise.
At the July 21st hearing, there was reference made to competition
for cable. In response to a question from Chairman Tauzin, Mr. Sachs
indicated that less than five percent of cable operators face head-to-
head competition with wireline competitors.
In separate studies, both the GAO and the FCC found that cable
rates are lower in areas where competing cable service is available
from a second wireline provider than in areas where there is no
wireline competition. The GAO study found cable rates to be 17% lower,
and the FCC found rates were 8% lower, where a second wireline
competitor exists.<SUP>38</SUP> However, according to the FCC, only 2%
of the 33,246 cable community units have competition from more than one
wireline provider.<SUP>39</SUP> The seven largest cable operators,
which account for 83.8% of all cable subscribers, <SUP>40</SUP> are
incumbents that do not compete against each other. The largest of these
is Comcast with over 21 million subscribers, and the seventh largest is
Mediacom with 1.5 million subscribers.<SUP>41</SUP> In contrast, the
three largest competitive cable providers, <SUP>42</SUP> which compete
in the same markets against the largest cable operators, are RCN with
426,700 subscribers, WideOpenWest with 310,000, and Knology with
124,700.<SUP>43</SUP>
---------------------------------------------------------------------------
\38\ United States General Accounting Office, Telecommunications
Issues in Providing Cable and Satellite Television Service, Report to
the Subcommittee on Antitrust, Competition, and Business and Consumer
Rights, Committee on the Judiciary, U.S. Senate, at 9, GAO-03-130
(2002)(``GAO 2002 Study''), available at http://www.gao.gov/cgi-bin/
getrpt?GAO-03-130; In re Statistical Report on Average Rates for Basic
Service, Cable Programming Service, and Equipment, Report On Cable
Industry Prices, MM Docket No. 92-266, 17 FCC Rcd 6301, Table 6 (2002)
(``2002 Cost Report''). This table has been attached as an Appendix to
this testimony.
\39\ Ninth Annual Report at 115.
\40\ Ninth Annual Report at App. B, Tables B-1, B-3. Comcast and
AT&T are counted as single operator. The combined percentage of AT&T,
Time Warner, Comcast, Charter, Cox, Adelphia, Cablevision, and
Mediacom's share (64.16%) of all MVPD subscribers (89,890,641) equals
57,673,835, which is 83.8% of 68.8 million cable subscribers.
\41\ Ninth Annual Report at App. B, Table B-3. Comcast's share of
89,890,641 MVPD subscribers is the sum of AT&T's 14.75% plus Comcast's
9.46% as reported in June 2002. Mediacom reported 1.76%.
\42\ These cable providers or overbuilders prefer to be called
``broadband providers'' as they provide competitive video programming,
Internet access, data and telephone services.
\43\ Ninth Annual Report at 117 and n.354. RCN reported 506,700
basic subscribers as of June 2002, but the FCC noted the current number
of subscribers is 80,000 less due to a sale for cash in August 2002 of
certain RCN systems in New Jersey. RCN Corp., ``RCN to Receive $245
Million for Non-Strategic New Jersey Cable Systems'' (press release),
Aug. 27, 2002.
---------------------------------------------------------------------------
1. DBS Service Does Not Constrain Cable Rates.
Both the GAO and FCC have determined that the provision of DBS
service does not have any effect on cable rates.<SUP>44</SUP> The
National Cable Television Association (``NCTA'') submitted statements
to the FCC stating that market power is restrained to the extent that
there are competitive alternatives available to which customers could
turn if a cable operator attempted to raise its prices.<SUP>45</SUP>
Local governments offer the following factors as possible explanations
as to why DBS does not present a true ``competitive alternative'' for
the customer and thus does not restrain cable prices:
---------------------------------------------------------------------------
\44\ GAO 2002 Study at 9; 2002 Cost Report at Table 6. GAO found
that cable operators respond to DBS competition by adding more
channels. GAO 2002 Study at 10.
\45\ Ninth Annual Report at n.432.
Non-Interchangeable Equipment. Wireline competition may be more price
competitive than DBS against incumbent cable service because it
is easier for customers to switch between wireline competitors
using cable modem and set-top boxes than it is for customers to
switch between dish systems and cable boxes.
Provision of local channels. In the GAO study, 47% of respondents
cited the ability to receive local broadcast and cable channels
from the same provider as a major reason for selecting cable,
and DBS providers confirm that provision of local broadcast
channels increases subscription rates.<SUP>46</SUP> Yet local
broadcast channels are offered by DirecTV or Echostar in only
62 of 210 television markets and local channels are offered by
both providers in only 41 markets. In addition, DBS does not
carry local PEG programming.
---------------------------------------------------------------------------
\46\ Ninth Annual Report 62. Echostar claims provision of local
channels makes DBS service competitive with cable service. Sixty
percent of DirecTV subscribers purchase the local channel package.
---------------------------------------------------------------------------
G. Consolidated Cable Incumbents Are Using Aggressive Marketing to
Eliminate Wireline Competitors.
Competitive broadband providers, including nascent cable system
overbuilders, have complained of incumbent cable operators using
aggressive marketing tactics--including deeply discounted introductory
rates, e.g., $24.95 per month for 200 channels compared to $77.90 per
month in the neighboring community without wireline competition; cash
bonuses, e.g., $200 to switch to the incumbent's cable service and
another $200 to switch to the incumbent's Internet service; and
forgiveness of old debt owed by subscribers to the incumbent--to drive
these small competitors out of the market entirely.<SUP>47</SUP> It is
also unclear whether the neighboring community's rates are being
increased to offset the discounted price offered in the competitive
neighborhood.
---------------------------------------------------------------------------
\47\ See Comments of Scottsboro (Alabama) Electric Power Board
(``SEPB'') in the Notice of Inquiry in CS Docket No. 01129, at 5,
Appendix B (Aug. 3, 2001) (``SEPB Comments''). In a surrounding
community with no competition, the incumbent offered 150 channels for
$77.90. See also, In re Annual Assessment of the Status of Competition
in the Market for Delivery of Video Programming, CS Docket No. 01-129,
Comments of Knology, Inc. to the Notice of Inquiry, 4-5 (filed late,
Nov. 20, 2001); In re Applications for Consent to the Transfer of
Control of Licenses Comcast Corporation and AT&T Corporation,
Transferors to AT&T Comcast Corporation, Transferee, MB Docket No. 02-
70, RCN Telecom Services, Inc., Written Ex Parte Comments in Response
to Comcast (filed Aug. 27, 2002); In re Applications for Consent to the
Transfer of Control of Licenses Comcast Corporation and AT&T
Corporation, Transferors to AT&T Comcast Corporation, Transferee, MB
Docket No. 02-70, RCN Telecom Services, Inc., Written Ex Parte and
Accompanying Declaration (filed Aug. 14, 2002).
---------------------------------------------------------------------------
Although the reasons may not be clear, the results are: cable
prices go down when there is wireline competition; cable prices do not
go down when there is no wireline competition or when there is
competition only from non-wireline providers. Any legislative attempt
to reduce cable rates should focus on encouraging wireline competition.
Any legislative reform of programming requirements should examine how
cable operators may be using control of programming to discourage
competition before considering how to give cable operators more control
over programming.
H. FCC Policy Implementation Has Led to Unreasonable Rates and is
Impeding Competition.
The FCC has not adopted regulations that ensure reasonable rates.
The FCC has ignored absurd consequences and been generally unresponsive
on consumer issues. And the FCC is permitting cable operators to abuse
their monopoly power in a manner that harms competition for cable and
broadband services. Additional Congressional oversight of the FCC is
necessary to promote the wireline competition necessary to produce
lower cable rates.
I. FCC Rate Regulation Rules Do Not Ensure Reasonable Rates.
An entire hearing could be, and should be, devoted to the numerous
ways in which the FCC has failed to establish or interpret rate
regulation rules in a manner that ensures reasonable rates for
subscribers. Here are but a few examples:
Advertising Revenues Do Not Offset Costs. Regulated rates are
calculated to permit the operator to earn a reasonable profit
from operation of the cable system. The FCC rate formula
permits the operator to recover system operation costs from
subscribers, but prohibits offsetting costs with any revenues
earned from selling advertising on the system. For example, in
2002, subscribers paid over $10 billion in regulated rates for
basic service. Cable operators collected an additional $2.8
billion in ad sales--i.e., 25% to 26% of what they recovered in
basic rates--but none of the $2.8 billion was used to reduce
the regulated basic rate.<SUP>48</SUP>
---------------------------------------------------------------------------
\48\ Ninth Annual Report at Table 4. Table 4 has been attached as
an Appendix to this testimony; 2002 Cost Report at Table 1. Table 1 has
been attached as an Appendix to this testimony. Basic Service is 38.0%
of combined $28.492 million in 2002 Basic Service Tier and Cable
Programming Service Charges, based on 2001 Average Monthly Rates of
$12.84 for Basic Service Tier and $20.91 for Cable Programming Service.
``Advertising sales'' as used herein refers to all non-cable revenues,
which includes $2.503 billion in advertising revenues and $284 million
in home shopping network commissions for 2002. See Texas Coalition of
Cities For Utility Issues v. FCC, 324 F.3d 802 (5th Cir. 2003).
---------------------------------------------------------------------------
Operators Are Permitted to Collect 11.25% Interest. An operator
estimates its costs for the year and calculates a projected
rate. At the end of the year, if the operator charged less than
its actual costs, the operator can recover the difference plus
an FCC-mandated 11.25% interest rate from subscribers. However,
if subscribers are owed refunds, under the FCC rules, the
operator pays the I.R.S.-mandated rate, which is currently
6%.<SUP>49</SUP>
---------------------------------------------------------------------------
\49\ FCC Form 1240, available at http://www.fcc.gov/mb/mbform.html;
47 C.F.R. 76.942(e).
---------------------------------------------------------------------------
Operators Are Permitted to Inflate Aggregated Equipment Rates.
Congress permitted operators flexibility to calculate equipment
rates at any level, <SUP>50</SUP> e.g., by franchise, region,
state, company-wide, etc., but the FCC implementing rules do
not require any consistency within these calculations. Thus,
for example, an operator determined that equipment costs were
higher to serve a specific cluster of Ohio communities than the
aggregate equipment costs for the entire state. The operator
then calculated the equipment rates for those Ohio communities
using only the higher costs and excluded the remaining lower
cost areas. But when the operator calculated the rates for the
rest of the state, it included the higher cost clustered
communities in its calculations, thus increasing the aggregate
rates for the rest of the state as well.<SUP>51</SUP>
---------------------------------------------------------------------------
\50\ 47 U.S.C. 543(a)(7)(A).
\51\ Declaration of Garth Ashpaugh at 17-22, attached as Exhibit
C to Errata to Opposition to Appeal of Local Rate Order, Time Warner v.
Miami Valley Cable Council, (filed Dec. 6, 2002), available upon
request.
---------------------------------------------------------------------------
J. FCC Inaction Impedes Local Government Efforts to Ensure Reasonable
Rates.
FCC inaction and delays make rate regulation less effective,
encourage operators to use the FCC appeals process as a means for
running out the clock, and ultimately deny subscribers the protection
from unreasonable rates that Congress intended. For example:
The FCC does not require the cable operator to refund overcharges if
the FCC considers the overcharge to be de minimis.<SUP>52</SUP>
---------------------------------------------------------------------------
\52\ See, e.g., In re King Video Cable Company Valley Springs,
California, Benchmark Filing to Support Cable Programming Service
Price, Memorandum Opinion and Order, 10 FCC Rcd. 1707, 8 (1995); In
re King Video Cable Company Jackson, California, Memorandum Opinion and
Order, 10 FCC Rcd. 1706, 8 (1995).
---------------------------------------------------------------------------
After 1996, the FCC arbitrarily decided to dismiss any pre-1996
complaints regarding non-basic tier rates on grounds that the
1996 Act would deregulate non-basic tier rates beginning in
1999.<SUP>53</SUP> The final irony is, the reason there were
any pre-1996 complaints still unresolved after deregulation of
the non-basic tier, was because the FCC had not ruled on these
appeals in a timely fashion. For example:
---------------------------------------------------------------------------
\53\ See, e.g., In re Prestige Cable TV, Order Dismissing Rate
Complaints, Order, 12 FCC Rcd. 21,103, 4 (1997).
---------------------------------------------------------------------------
In a survey of FCC rate orders issues in 2000, the average time
between the filing of rate order appeal and the release of
an FCC order was 63.7 months--more than five years!
<SUP>54</SUP>
---------------------------------------------------------------------------
\54\ Based on an audit of all Cable Service Bureau decisions
related to enforcement of, 47 U.S.C. 623(c) Regulation of Unreasonable
Rates, as reported in the Federal Communications Commission Record
between January 1, 2000, and December 31, 2000. Of 36 reported
decisions, 7 did not specifically mention the date of the initial
complaint or date of order granting review of Local Franchising
Authority decision.
---------------------------------------------------------------------------
On April 16, 2003, the FCC finally remanded for further evidence
two rate orders originally appealed on September 21,
1995.<SUP>55</SUP>
---------------------------------------------------------------------------
\55\ In re TCI of Pennsylvania, Inc., Appeals of Local Rate Orders
of the City of Pittsburgh, Pennsylvania, CSB-A-0181 & CSB-A-0304,
Memorandum Opinion and Order, DA 03-1151 (rel. Apr. 16, 2003) available
at http://hraunfoss.fcc.gov/edocsXpublic/attachmatch/DA-03-1151A1.doc.
---------------------------------------------------------------------------
In 2002, the Enforcement Bureau sua sponte overturned a 1999 Cable
Bureau Order rejecting an operator's refund plan. Instead, the
Enforcement Bureau accepted the refund the operator thought it
owed and dismissed the case on grounds that it was not
worthwhile to issue a new refund order (since, post-
deregulation of non-basic tiers, the cable operator would be
able to raise non-basic service rates to recover the amount of
any basic service refund ordered).<SUP>56</SUP> In effect, the
FCC let the cable operator run out the clock and subscribers
ended up footing the bill.
---------------------------------------------------------------------------
\56\ In re Marcus Associates Application for Review, Order, File
No. EB-02-TC-087 (2002), available at http://hraunfoss.fcc.gov/
edocsXpublic/attachmatch/DA-02-3546A1.doc.
---------------------------------------------------------------------------
K. The FCC Creates Unreasonable Rates By Refusing to Revise Rate
Regulation Rules to Prevent Absurd Results.
In some instances, an original FCC interpretation of federal law
may create absurd results because of changed market circumstances, or
unscrupulous application by operators. In almost no instance has the
FCC reviewed its policy to determine whether the FCC policy continues
to further the goal of Congress to ensure reasonable rates. For
example:
Boston Effective Competition & the LEC Test. In 1996, Congress
permitted effective competition to be declared when a local exchange
carrier (``LEC''), i.e., local telephone service provider, began
providing video programming service. This LEC test did not require any
specific system build-out or subscriber penetration benchmarks to be
met. In 1998, against a backdrop of seemingly limitless
telecommunications capital financing, the FCC decided to accept
franchise agreements with build-out requirements as showing that
competition was present everywhere in a community, in lieu of requiring
the entire LEC system to be built-out. In 2001, the Cable Bureau
declared effective competition to exist in Boston based on a franchise
granted to RCN. The City asked the FCC to reconsider, providing
evidence that RCN was available in only a few of the City's
neighborhoods, its financing had dried up, and that RCN would not be
able to meet the franchise benchmarks. The City suggested that in the
changed telecommunications climate, franchise agreements could not be
substitutes for actual build-outs. In 2002, the FCC affirmed the
effective competition decision, reasoning that RCN's financial troubles
would simply mean that it might take an extra year to build-out its
system. One month after the FCC decision, RCN asked the City to convert
its franchise agreement into an OVS license without a build-out
requirement. The City residents no longer have the benefit of rate
regulation, and RCN does not serve many more neighborhoods than it did
in 2001.<SUP>57</SUP>
---------------------------------------------------------------------------
\57\ In re Cablevision of Boston, Inc., Petition for Determination
of Effective Competition, Application for Review of Determination of
Effective Competition in re Cablevision of Boston, Inc. (filed Aug. 20,
2001); In re Cablevision of Boston, Inc., Petition for Determination of
Effective Competition, Application for Review, Memorandum Opinion and
Order, 17 FCC Rcd. 4772 (2002); Open Video System Certification
Application of RCN BecoCom, LLC (filed April 18, 2002), available at
http://www.fcc.gov/mb/ovs/rcnbos.doc.
---------------------------------------------------------------------------
L. Local Government v. FCC Level of Service to Subscribers.
Local governments are concerned that the FCC is unnecessarily
collecting fees from subscribers to cover the cost of regulation no
longer performed by the FCC, while simultaneously cutting the revenue
streams of the local governments which now have greater franchise
administration costs and needs for revenue streams.
In 1994, Congress required regulatory agencies to recover the cost
of regulation from the regulated industries. At the height of rate
regulation, the FCC calculated its costs as $0.49 per
subscriber.<SUP>58</SUP> The FCC no longer regulates the CPST, no
longer has a Cable Bureau, and there are 9.1 million more subscribers
than there were in 1994; in effect, the FCC added $33.7 million to
subscribers' bills in 2002 in return for little to no cable rate
regulation.<SUP>59</SUP>
---------------------------------------------------------------------------
\58\ 47 U.S.C. 159(a); 47 C.F.R. 1.1155; In re Implementation
of Section of the Cable Television Consumer Protection and Competition
Act of 1992: Rate Regulation, Fourth Order on Reconsideration, 9 FCC
Rcd. 5795, 9, 12, nn.28, 35 (1994) (``Fourth Reconsideration
Order'').
\59\ Third Report at App. B Table 1; Ninth Annual Report at App. B
Table B-1.
---------------------------------------------------------------------------
In contrast, local governments now regulate more companies in the
public rights-of-way, and assist consumers with more complaints about
more services. Yet through its Cable Modem Order, for 2002, the FCC
permitted cable operators to use the public rights-of-way to generate
an additional $5.6 billion in cable modem revenues, while
simultaneously reducing the rent paid by cable modem providers to local
governments by $280 million.
Consider the experience of Montgomery County, MD, with just under
206,000 cable subscribers, as an example of the misallocation of
resources and revenues: <SUP>60</SUP>
---------------------------------------------------------------------------
\60\ These comparisons are based on 2002 Quarterly Report data
released by the FCC's Consumer and Governmental Affairs Bureau,
available at http://www.fcc.gov/cgb, and from complaint report
information available upon request from the Montgomery County Office of
Cable and Communications Services.
The FCC collected just over $100,000 in regulatory fees from
Montgomery County cable subscribers; Montgomery County
collected $600,000 less from cable operators in lost cable
modem franchise fees.
Among 68.8 million cable subscribers nationwide, the FCC handled 2143
complaints and inquiries about cable rates and billing, i.e.,
about 3 billing and rate complaints or inquiries per 100,000
subscribers. Montgomery County's cable office handled 1107
cable rate and billing complaints and inquiries, i.e., about
500 per 100,000 subscribers.
Among the 6.6 to 7.4 million cable modem subscribers, the FCC handled
26 complaints and inquiries about cable modem service for the
entire year, or 4 complaints and inquiries per million cable
modem subscribers. Among 35,000 cable modem subscribers,
Montgomery County handled 396 complaints and inquiries about
cable modem service, or 1 per 100 cable modem subscribers.
M. The FCC Should Prevent, Not Promote, Cross-Subsidization.
The FCC's rate regulation rules are harming not only subscribers,
but broadband competition as well. First, the FCC's rate regulation
rules force cable subscribers to subsidize broadband deployment by
cable operators. Under the FCC's rate regulation and equipment rules,
cable operators have been permitted to recover the cost of upgrading
their systems by raising the regulated rates of all basic
subscribers.<SUP>61</SUP> These upgrades have enabled cable operators
to provide Internet access and telephone service, and the FCC rate
regulation rules permit cable operators to raise the rates of basic
subscribers to pay for these upgrades, regardless of whether the
customer subscribes to anything other than basic cable.
---------------------------------------------------------------------------
\61\ See, e.g., In re Social Contract for Time Warner, Memorandum
Opinion and Order, 11 FCC Rcd. 2788 (1995).
---------------------------------------------------------------------------
Second, the FCC's rate regulation rules are not just resulting in
higher cable rates for basic subscribers; the FCC's rules are also
providing a built-in rate subsidy to cable system operators, thus
providing the cable industry with an artificial cost advantage over DSL
and other competitive broadband providers. In contrast to cable rate
regulation, in the mid-90s the FCC did not permit the telephone
companies to increase the federally-controlled rates of basic telephone
subscribers to recover the cost of providing video service over phones
lines (i.e., ``video dial tone'' service).<SUP>62</SUP> Today, cable
modem has twice the number of subscribers and almost three times the
number of access lines as ADSL.<SUP>63</SUP> By permitting one
industry, but not another, to cross-subsidize from its captive rate
payers, the FCC is manipulating competition between different forms of
broadband service in a manner that Congress did not authorize.
---------------------------------------------------------------------------
\62\ See e.g., In re Telephone Company-Cable Television Cross-
Ownership Rules, CC Docket No. 87-266 and RM-8221, 10 FCC Rcd 244, 247
(1994), available at http://www.fcc.gov/searchtools.html, ``Search For
Filed CommentsXECFS,'' DA/FCC Number ``94-269.''
\63\ June 2002 High Speed Report at Tables 3 and 4.
---------------------------------------------------------------------------
Finally, because the FCC rules permit cable operators to charge
more than they could in a competitive market--and the FCC has done
nothing to encourage wireline competition to cable systems--there will
always be room for the cable operator to offer a discount on basic
cable rates (something that should not be possible if the FCC regulated
rate was producing the rate that would be offered in a competitive
market). Thus, cable operators are offering discounts on video
programming cable service as a promotional benefit to encourage
purchase and installation of cable modem service. These higher cable
system build-out fees and cable-cable modem cross-market promotions may
provide additional explanations as to why cable service rates continue
to increase.
Local governments urge Congress to increase its administrative
oversight of the FCC to eliminate practices that hinder efforts to
achieve reasonable subscriber rates and practices that hinder
competition.
CONCLUSION
Local governments act as: trustees, owners, and managers of
valuable public property, mediators among competing uses of the public
right-of-way, economic development agencies in promoting deployment of
broadband facilities, users of extensive communications resources,
developers and promoters of broadband applications, and protectors of
consumer services and privacy.
Congress should act to protect these many vital roles of local
government and in so doing Congress will also protect consumers.
Specifically, Congress should:
Clarify the cable modem service is a cable service subject to Title
VI thereby ensuring cable modem consumers privacy and consumer
protection
Congress should also:
Require operators to disclose actual programming costs.
Review whether the 1994 a la carte tier pricing rules lead to
lower rates before implementing a la carte pricing in 2003.
Instruct the FCC to implement rate regulation rules in a manner
that prohibits unreasonable rates, eliminates absurd
results, and reflects today's competitive markets.
Table 4: Cable Industry Revenue and Cash Flow: 1998-2002
From In re Annual Assessment of the Status of Competition in the Market For the Delivery of Video Programming, MB Docket No. 02-145, Ninth Annual
Report, 17 FCC Rcd 26,901, (2002)(``Ninth Annual Report'') at 15.
--------------------------------------------------------------------------------------------------------------------------------------------------------
2001-
1998 1999 98-99 % 2000 99-00 % 2001 00-01 % 2002 2002 %
Total Total Change Total Change Total Change Total Change
--------------------------------------------------------------------------------------------------------------------------------------------------------
Basic Subscribers (mil.)...................................... 66.1 67.3 1.8% 68.5 1.8% 68.6 0.1% 69 0.6%
Revenue Requests (mil.)....................................... -- -- -- -- -- -- -- -- --
Basic Service and CPST Tiers.................................. $21,831 $23,135 6.0% $24,729 6.9% $27,031 9.3% $28,492 5.4%
Premium (Pay) Tiers........................................... $4,758 $4,696 -1.3% $5,115 8.9% $5,617 9.8% $5,533 -1.5%
Pay-Per-View.................................................. $514 $721 40.3% $751 4.2% $993 32.2% $1,143 15.1%
Local Advertising............................................. $1,675 $2,000 19.4% $2,430 21.% $2,430 0.0% $2,503 3.0%
Home Shopping................................................. $175 $205 17.1% $239 16.6% $260 8.8% $284 9.2%
Advanced Analog and Digital Tier.............................. $445 $919 106.5% $1,088 18.4% $2,365 117.4% $3,379 42.9%
High-Speed Internet Access, Cable Teleph. & interactive svcs.. $133 $542 307.5% $1,164 114.8% $2,835 143.6% $5,602 97.6%
Equipment and Install......................................... $2,631 $2,424 -7.9% $2,451 1.1% $2,463 0.5% $2,491 1.1%
Total Revenue (mil.).......................................... $32,162 $34,642 7.7% $37,967 9.6% $43,994 15.9% $49,427 12.3%
Revenue Per Subscriber........................................ $486.57 $514.74 5.8% $554.26 7.7% $641.31 15.7% $716.33 11.7%
Operating Cash Flow (mil.).................................... $14,900 $15,597 4.7% $15,674 1.1% $16,683 5.8% $18,806 12.7%
Cash Flow Per Subscriber...................................... $225.42 $231.75 2.8% $230.13 -0.7% $243.19 5.7% $272.55 12.1%
Cash Flow/Total Revenue....................................... 46.3% 45.0% -2.8% 41.5% -7.8% 37.9% -8.7% 38.0% 0.3%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Appendix B, Table B-1: Assessment of Competing Technologies
From In re Annual Assessment of the Status of Competition in the Market For the Delivery of Video Programming,
MB Docket No. 02-145, Ninth Annual Report, 17 FCC Rcd 26,901, (2002)(``Ninth Annual Report'') at 75.
----------------------------------------------------------------------------------------------------------------
Technology Used June-98 June-99 June-00 June-01 June-02
----------------------------------------------------------------------------------------------------------------
(1) TV Households.............................. 98,000,000 99,400,000 100,801,720 102,184,810 105,444,330
Percent Change................................. 1.03% 1.43% 1.41% 1.37% 3.19%
(2) MVPD Households............................ 76,634,200 80,882,411 84,423,717 87,830,074 89,890,641
Percent Change................................. 4.06% 5.54% 4.38% 4.60% 1.79%
Percent of TV Households....................... 78.20% 81.37% 83.75% 86.42% 85.25%
(3) Cable Subscribers.......................... 65,400,000 66,690,000 67,700,000 68,500,000 68,800,000
Percent Change................................. 1.95% 1.97% 1.51% 1.18% 0.00%
Percent of MVPD Total.......................... 85.34% 82.45% 80.19% 77.99% 76.54%
(4) MMDS Subscribers........................... 1,000,000 821,000 700,000 700,000 490,000
Percent Change................................. -9.09% -17.90% -14.74% 0.00% -30.00%
Percent of MVPD Total.......................... 1.30% 1.02% 0.83% 0.80% 0.55%
(5) SMATV Subscribers.......................... 940,000 1,450,000 1,500,000 1,500,000 1,600,000
Percent Change................................. -19.14% 54.26% 3.45% 0.00% 6.67%
Percent of MVPD Total.......................... 1.23% 1.79% 1.78% 1.71% 1.78%
(6) HSD Subscribers............................ 2,018,200 1,783,411 1,476,717 1,000,074 700,641
Percent Change................................. -7.15% -12.07% -17.20% -32.28% -29.94%
Percent of MVPD Total.......................... 2.65% 2.20% 1.75% 1.14% 0.78%
(7) DBS Subscribers............................ 7,200,000 10,078,000 12,987,000 16,070,000 18,240,000
Percent Change................................. 42.66% 39.97% 28.86% 23.74% 13.66%
Percent of MVPD Total.......................... 9.40% 12.46% 15.38% 18.30% 20.29%
(8) OVS Subscribers............................ 66,000 60,000 60,000 60,000 60,000
Percent Change................................. 2100.00% -9.09% 0.00% 0.00% 0.00%
Percent of MVPD Total.......................... 0.09% 0.07% 0.07% 0.07% 0.07%
----------------------------------------------------------------------------------------------------------------
Notes:
(i) Some numbers have been rounded.
(ii) The total number of MVPD households is likely to be somewhat less than the given figure since some
households subscribe to the services of more than one MVPD. See 1994 Report, 9 ICC Rcd at 7480. However, the
number of households subscribing to more than one MVCP is expected to be low. Hence the given total can be
seen as a reasonable estimate of the number of MVPD households.
(iii) The decline in OVS subscribers since 1998 reflects the conversion of some OV4 systems to franchised cable
systems over the last three years.
Appendix C, Table C-1: MSO Ownership in National Video Programming
Services
From In re Annual Assessment of the Status of Competition in the Market
For the Delivery of Video Programming, MB Docket No. 02-145, Ninth
Annual Report, 17 FCC Rcd 26,901, (2002)(``Ninth Annual Report'') at 80-
82.
------------------------------------------------------------------------
Programming Service Launch Date MSO Ownership (%)
------------------------------------------------------------------------
Action Max......................... Jun-98 AOL Time Warner (100)
American Movie Classics............ Oct-84 Cablevision (60)
Animal Planet...................... Oct-96 Liberty Media (39.2),
Cox (19.7)
(a) Max............................ May-01 AOL Time Warner (100)
Black STARZ!....................... Feb-97 Liberty Media (100)
Canales (6 digital channels) *..... Oct-98 Liberty Media (90)
Cartoon Network.................... Oct-92 AOL Time Warner (100)
Cinemax............................ Aug-80 AOL Time Warner (100)
CNN................................ Jun-80 AOL Time Warner (100)
CNN en Espanol..................... Mar-97 AOL Time Warner (100)
CNN Headline News.................. Jan-82 AOL Time Warner (100)
CNN International.................. Jan-95 AOL Time Warner (100)
CNNfn.............................. Dec-95 AOL Time Warner (100)
Comedy Central..................... Apr-91 AOL Time Warner (50)
Court TV........................... Jul-91 Liberty Media (50),
AOL Time Warner (50)
Discovery Channel.................. Jun-85 Liberty Media (50),
Cox (24.6)
Discovery Civilization............. Oct-96 Liberty Media (25),
Cox (12.3)
Discovery en Espanol............... Aug-98 Liberty Media (50),
Cox (24.6)
Discovery Health................... Jul-98 Liberty Media (50),
Cox (24.6), Comcast
(20)
Discovery HD Theatre............... Jun-03 Liberty Media (50),
Cox (24.6), Comcast
(20)
Discovery Home & Leisure........... Oct-96 Liberty Media (50),
Cox (24.6)
Discovery Kids..................... Oct-96 Liberty Media (50),
Cox (24.6)
Discovery Science Channel.......... Oct-96 Liberty Media (50),
Cox (24.6)
Discovery Wings: The Aviation and Jul-98 Liberty Media (50),
Adventure Channel. Cox (24.6)
E! Entertainment................... Jun-90 Comcast (50)
Encore............................. Apr-91 Liberty Media (100)
Encore Action...................... Sep-94 Liberty Media (100)
Encore Love Stories................ Jul-94 Liberty Media (100)
Encore Mystery..................... Jul-94 Liberty Media (100)
Encore True Stories................ Sep-94 Liberty Media (100)
Encore WAM! America's Youth Network Sep-94 Liberty Media (100)
Encore Westerns.................... Jul-94 Liberty Media (100)
5Star Max.......................... May-01 AOL Time Warner (100)
FoxSports (2) channels............. Various Cablevision (50)
FoxSports Latin America............ Nov-96 Liberty Media (50)
G4 Video Gaming Network............ Jun-02 Comcast (94)
GEMS International Television...... Apr-93 Liberty Media (100)
Golf Channel....................... Jan-95 Comcast (91)
Hallmark Channel (formerly Odyessy) Oct-93 Liberty Media (32.5)
HBO................................ Nov-72 AOL Time Warner (100)
HBO Latino......................... Nov-00 AOL Time Warner (100)
HBO 2.............................. Oct-98 AOL Time Warner (100)
HBO Signature...................... Oct-93 AOL Time Warner (100)
HBO Comedy......................... May-99 AOL Time Warner (100)
HBO Family......................... Dec-96 AOL Time Warner (100)
HBO Zone........................... May-99 AOL Time Warner (100)
Home Shopping Network.............. Jul-85 Liberty Media (20)
In Demand.......................... Nov-85 Comcast (55), AOL Time
Warner (33), Cox (11)
Independent Film Channel........... Sep-94 Cablevision (60)
International Channel.............. Jul-90 Liberty Media (90)
More MAX........................... Aug-91 AOL Time Warner (100)
Movie Plex......................... Oct-94 Liberty Media (100)
Much Music USA..................... Jul-94 Cablevision (75)
Outdoor Life Network............... Jul-95 Comcast (100)
OuterMax........................... May-01 AOL Time Warner (100)
Ovation: The Arts Network.......... Apr-96 AOL Time Warner (4.2)
PIN (Product Information Network).. Apr-94 Cox (45)
Prevue Channel..................... Jan-88 Liberty Media (51)
QVC................................ Nov-86 Comcast (57), Liberty
Media (43)
Sci-Fi Channel..................... Sep-92 Liberty Media (20)
Sneak Prevue (TV Guide)............ May-91 Liberty Media (12)
Starz!............................. Feb-94 Liberty Media (100)
Starz! Cinema...................... May-99 Liberty Media (100)
Starz! Family...................... May-99 Liberty Media (100)
Starz! Theater..................... Mar-96 Liberty Media (100)
Style.............................. May-99 Comcast (50)
TBS................................ Dec-76 AOL Time Warner (100)
TLC (The Learning Channel)......... Nov-80 Liberty Media (50),
Cox (24.6)
Thriller Max....................... Jun-98 AOL Time Warner (100)
Turner Classic Movies.............. Apr-94 AOL Time Warner (100)
USA Network........................ Apr-80 Liberty Media (20)
Viewers Choice 1-10 and Hot Choice Nov-85 Cox (20), AOL Time
(11 multiplexed channels). Warner (17)
WE................................. Jan-97 Cablevision (60)
WMAX............................... May-01 AOL Time Warner (100)
------------------------------------------------------------------------
Sources: NCTA, Directory of Program Services, Cable Developments 2002 at
29-141.
Liberty Media Corp. at http://www.libertymedia.com/ourXaffiliates/
videoXprogramming.htm
Table 1: Average Monthly Rate, by Component (Competitive and Non-
Competitive Groups Combined)
From In re Statistical Report on Average Rates for Basic Service, Cable
Programming Service, and Equipment, Report On Cable Industry Prices, MM
Docket No. 92-266, 17 FCC Rcd 6301, Table 6 (2002) (``2002 Cost
Report'') at 8.
------------------------------------------------------------------------
July 1, July 1, 12-Month Percent
2002 2001 Change Change
------------------------------------------------------------------------
Basic service tier (BST)........ $12.57 $12.84 $0.27 2.1%
Cable programming service tier $18.88 $20.91 $2.03 10.8%
(CPST).........................
Total programming services (BST $31.45 $33.75 $2.30 7.3%
and CPST)......................
Equipment (set-top box and $2.97 $3.24 $0.27 9.1%
remote control)................
Programming and equipment $34.42 $36.99 $2.57 7.5%
combined.......................
Number of local channels........ 14.1 14.5 0.4 2.8%
Number of satellite channels.... 42.2 44.9 2.7 6.4%
Total channels on BST and CPST.. 56.3 59.4 3.1 5.5%
Programming rate per satellite $0.797 $0.801 $0.00 40.5%
channel........................
Programming rate per channel $0.591 $0.600 $0.009 1.5%
overall........................
------------------------------------------------------------------------
Table 6: Comparison between Competitive Strata and the Noncompetitive Group
From ``2002 Cost Report'' at 11.
----------------------------------------------------------------------------------------------------------------
Wireline DBS Low Non-
Date Overbuild Overbuild LEC Penetration Municipal Competitive
----------------------------------------------------------------------------------------------------------------
Average Monthly Rate
July 1, 2001............................... $34.03 $37.13 $35.03 $34.30 $24.35 $37.13
July 1, 2000............................... $31.45 $34.25 $32.55 $32.57 $23.40 $34.54
Number of Channels
July 1, 2001............................... 56 53.3 65.3 52.9 51.4 59.3
July 1, 2000............................... 52.7 46.5 62.4 49.5 50.8 56.2
Average Rate per Channel (Programming Only)
July 1, 2001............................... $0.587 $0.727 $0.489 $0.663 $0.447 $0.603
July 1, 2000............................... $0.578 $0.761 $0.483 $0.674 $0.437 $0.594
----------------------------------------------------------------------------------------------------------------
[GRAPHIC] [TIFF OMITTED] T9000.001
[GRAPHIC] [TIFF OMITTED] T9000.002
[GRAPHIC] [TIFF OMITTED] T9000.003
[GRAPHIC] [TIFF OMITTED] T9000.004
[GRAPHIC] [TIFF OMITTED] T9000.005
[GRAPHIC] [TIFF OMITTED] T9000.006
[GRAPHIC] [TIFF OMITTED] T9000.007
[GRAPHIC] [TIFF OMITTED] T9000.008
[GRAPHIC] [TIFF OMITTED] T9000.009
[GRAPHIC] [TIFF OMITTED] T9000.010
[GRAPHIC] [TIFF OMITTED] T9000.011
[GRAPHIC] [TIFF OMITTED] T9000.012
[GRAPHIC] [TIFF OMITTED] T9000.013
[GRAPHIC] [TIFF OMITTED] T9000.014
[GRAPHIC] [TIFF OMITTED] T9000.015
[GRAPHIC] [TIFF OMITTED] T9000.016
[GRAPHIC] [TIFF OMITTED] T9000.017
[GRAPHIC] [TIFF OMITTED] T9000.018
[GRAPHIC] [TIFF OMITTED] T9000.019
[GRAPHIC] [TIFF OMITTED] T9000.020
[GRAPHIC] [TIFF OMITTED] T9000.021
[GRAPHIC] [TIFF OMITTED] T9000.022
[GRAPHIC] [TIFF OMITTED] T9000.023
[GRAPHIC] [TIFF OMITTED] T9000.024
[GRAPHIC] [TIFF OMITTED] T9000.025
[GRAPHIC] [TIFF OMITTED] T9000.026
[GRAPHIC] [TIFF OMITTED] T9000.027
[GRAPHIC] [TIFF OMITTED] T9000.028
[GRAPHIC] [TIFF OMITTED] T9000.029
[GRAPHIC] [TIFF OMITTED] T9000.030
[GRAPHIC] [TIFF OMITTED] T9000.031
[GRAPHIC] [TIFF OMITTED] T9000.032
[GRAPHIC] [TIFF OMITTED] T9000.033
[GRAPHIC] [TIFF OMITTED] T9000.034
[GRAPHIC] [TIFF OMITTED] T9000.035
[GRAPHIC] [TIFF OMITTED] T9000.036
[GRAPHIC] [TIFF OMITTED] T9000.037
[GRAPHIC] [TIFF OMITTED] T9000.038
[GRAPHIC] [TIFF OMITTED] T9000.039
[GRAPHIC] [TIFF OMITTED] T9000.040
[GRAPHIC] [TIFF OMITTED] T9000.041
[GRAPHIC] [TIFF OMITTED] T9000.042
[GRAPHIC] [TIFF OMITTED] T9000.043