Before the
National Telecommunications and Information Administration
Washington, D.C.
____________________________________
)
In the Matter of)
)
Request for Comments on Deployment)Docket
No. 011109273-1273-01
of Broadband Networks and Advanced)
Telecommunications)
)
____________________________________)
COMMENTS OF VERIZON COMMUNICATIONS
“Government’s role
. . . should be to facilitate the deployment of new technologies by removing
any unnecessary roadblocks to that deployment.”
“[P]olicies that promote
rational facilities investment should be pursued.”
“[I]t is important
to try to regulate comparable services in a manner that does not interfere
with marketplace outcomes.”
-- NTIA
Administrator Nancy Victory,
December 6, 2001
“I believe strongly that broadband should exist
in a minimally regulated space.Substantial
investment is required to build these networks and we should limit regulatory
costs and uncertainty.We should
vigilantly guard against regulatory creep of existing models into broadband,
in order to encourage investment.”
--FCC
Chairman Michael Powell
October
25, 2001
Introduction and Summary
The formulation and implementation of a uniform
national policy governing broadband services is perhaps the most economically
significant regulatory challenge facing the United States.The
pro-competitive, deregulatory framework for broadband that Assistant Secretary
Victory and Chairman Powell identified in the quoted remarks is exactly
what the country needs today.Now
the Government must turn their words into concrete policy changes.
Nationwide deployment of broadband infrastructure
would generate economic and consumer benefits estimated to be worth as
much as $500 billion each year.The
economy needs this unique stimulus even more now that the largest economic
expansion in American history has come to a close.After
a period of ever-accelerating growth, the pace of new broadband connections
has slowed dramatically since the beginning of the year. The
Government should act quickly to remove artificial impediments to the timely
and efficient deployment of broadband infrastructure and to provide a regulatory
environment in which various technologies can compete with one another
for the delivery of broadband content and applications.Current
federal policy thwarts these important goals by discouraging investment
in broadband facilities and distorting competition.
Although
still in its youth, the broadband market is already marked by robust, facilities-based
competition.Telephone companies
are minority players in the market, which is dominated by incumbent cable
modem operators.New technologies
– satellite and terrestrial wireless – have entered the marketplace and
are expected to gain significant market shares in the months and years
ahead.But while there are numerous
broadband technologies and services that compete head to head, further
deployment of current and future generations of broadband will require
substantial additional investment on the part of all providers.
Yet, among all these competing technologies and
providers, only the telephone companies, with a minority share, are subject
to burdensome common-carrier regulations that were developed for circuit-switched
narrowband local voice services.These
regulations increase the telephone companies’ costs, magnify the risk of
new investments, and deny them the flexibility to enter into innovative
marketing and pricing arrangements that would better serve consumers and
provide an opportunity to recover investments.By
contrast, despite controlling some 70% of the broadband market, cable modem
providers are substantially free from regulation, as are providers of satellite
and terrestrial wireless services.Unlike
telephone companies, these other players in the market may price their
services as they choose, without filing tariffs, and they are under no
obligation to make their services or facilities available to competitors
at prescribed rates.
This disparity in regulation is not simply unnecessary
and unfair, but also counterproductive, because it undermines the telephone
companies’ incentives to expand their broadband offerings – for example,
by deploying DSL capability at remote terminals outside their central offices
– or to invest in new technology, such as fiber-based services, which have
the potential to increase transmission speeds and reduce costs.This
does not suggest that country needs an “industrial policy” favoring telephone
companies over other broadband providers or even favoring the broadband
industry over other industries.Rather,
it suggests that the Government should remove regulatory deterrents to
investment and allow market forces to shape the development of broadband
services and facilities.
Perversely, regulations that were designed to spur
competition in the narrowband market have the opposite effect in the broadband
arena:by hampering telephone company
investment, the regulations allow cable operators to preserve and even
extend their dominance.As a result,
the current regulatory environment risks snatching defeat from the jaws
of victory as a marketplace that is now competitive becomes less so, with
cable companies continuing to increase their market share at the expense
of other competitors that are artificially handicapped.
The extension of narrowband voice rules to broadband
data services has often happened reflexively, through “regulatory creep,”
rather than through conscious, considered policy choices.Now
is the time to reverse the creep and formulate a uniform, rational broadband
policy for the nation.Prior experience
with wireless telephony, customer premises equipment, and information services
(including the Internet itself) all provide concrete marketplace evidence
of the benefits that will flow from a policy that allows the market to
drive investment in new broadband technologies and services without investment-deterring
regulatory constraints.In each of
those cases, adoption of market-driven policies created an environment
in which competition flourished, subscribership rose, quality improved,
and prices dropped.
The two overarching themes of the new, truly national
broadband policy should be: (1) allow the market to drive efficient broadband
deployment by removing artificial regulatory obstacles to investment, and
(2) treat all broadband providers alike.
The first step in establishing a national broadband
policy is to determine the appropriate regulatory classification for broadband.In
doing so, it is critical, both as a matter of law and sound policy, that
all competing services be regulated alike, rather than being subject to
disparate regulation based on the history or parentage of the entity providing
them.Historically, the FCC has treated
broadband services as common carrier services subject to Title II of the
Communications Act when provided by telephone companies – and only when
provided by telephone companies.To
the extent the FCC continues to apply Title II to some providers in the
future, it necessarily must do so for all.
The more logical way to implement a new national
broadband policy, however, would be to declare that the broadband facilities
and services fall under Title I of the Communications Act regardless of
who provides them.The FCC at one
time did so for cable services and still does both for computers and other
forms of customer premises equipment and for the Internet and other information
services.Under this new scheme,
the nature of the service, rather than the nature of the entity providing
the service, would determine what regulations apply.This
is the surest method of preventing narrowband voice rules from being applied
inappropriately to the broadband data world.
Of course, even if the Commission were to classify
broadband as common carriage subject to Title II regulation, it still has
authority to remove many of the key regulatory impediments to broadband
investment and deployment.On the
retail side of the business, the Commission can and should eliminate tariff
and pricing regulations for broadband and should instead allow all providers
to experiment with different and innovative pricing schemes such as those
that prevail in the cable industry and on the Internet.On
the wholesale side, the Commission likewise has authority to eliminate
investment-deterring unbundling requirements and other requirements (such
as collocation in remote terminals) that inflate operational costs, introduce
added technical complexities, and deter broader deployment.
In the absence of a new, truly national deregulatory
policy, broadband deployment in general, and DSL deployment in particular,
will likely continue to stagnate.Millions
of consumers will remain beyond the reach of competitive broadband services.The
regulatory status quo is deterring investment in broadband facilities,
cementing the supremacy of cable modem providers in the marketplace, and
stunting economic growth.It is time
for a change.
***
The following Comments discuss the structure and
dynamics of the broadband market and the urgent need to remove regulatory
obstacles to investment in broadband infrastructure.The
Comments draw upon and incorporate three comprehensive analyses, which
are attached as exhibits.In Exhibit
A (pdf) economists Robert W. Crandall and Charles L. Jackson examine
the importance of broadband deployment to the nation’s economy.In
Exhibit B, economists Alfred Kahn and Timothy
Tardiff explain why the application of narrowband voice regulations
to broadband data services is counterproductive and inhibits effective
competition in the broadband market.Exhibit
C is a fact report describing in detail the state of broadband network
deployment and the trends affecting the market.Finally,
Exhibit
D is a table indicating where in these Comments Verizon has addressed
the various questions posed by the NTIA in its Request for Comments.
Discussion
I. Broadband
Has the Potential To Create Enormous Consumer Benefits, But Massive Investments
Will Be Needed To Realize that Potential
Verizon strongly concurs in the Administration’s
belief, expressed by Assistant Secretary Victory in opening the recent
National Summit on Broadband Deployment, that “new technologies and the
deployment of high-speed networks are crucial to promoting America’s economic
growth and our nation’s social well-being.”One
recent study estimated the economic and consumer benefits of widespread
broadband deployment at some $500 billion each year.The
economy desperately needs the kind of major economic stimulus that rapid,
widespread broadband deployment could foster, but such deployment is expensive
and risky.Moreover, as discussed
below, the current regulatory environment for telephone companies magnifies
both the expense and the risk, thus deterring investment and postponing
indefinitely the economic and social improvements that widespread deployment
would bring.
A. New
Investment in High-Speed Networking Is Needed To Re-Kindle Economic Growth
As explained in more detail in the study by Robert
W. Crandall and Charles L. Jackson attached, the record-breaking economic
boom of the 1990s was fueled by innovation in information technology and
the Internet.A steep decline in
the price of information technology equipment led to massive investments
in that technology, which not only provided businesses and consumers with
more computing power at lower prices but also enabled the development of
new applications for information technology that were not even imaginable
a decade ago.
Labor productivity in the U.S. economy nearly
doubled between the first and second halves of the decade.Various
distinguished economists, including Federal Reserve Board Chairman Alan
Greenspan, have independently reached the conclusion that most of the remarkable
increase in labor productivity was attributable to information technology.Merely
investing in better, faster computers was not enough to spark economic
growth, however.Instead, the evidence
suggests that networking those computers together was the main enabler
of the boom.An important explanation
for the sudden acceleration in productivity and economic growth after 1994
is the Internet, which opened up a whole new universe of information, entertainment,
and e-commerce opportunities.
The average number of hours of household Internet
use rose dramatically beginning in 1994, but the rate of growth in Internet
use is slowing.The
slowdown is attributable, at least in part, to users’ frustration at trying
to use innovative new network applications at the slow speeds allowed by
ordinary dial-up connections.What
the economy needs now, as unprecedented growth has given way to recession,
is the stimulus that would result from high-speed networking – the
high-speed networking that local broadband connections could provide.Rekindling
economic growth will be difficult unless the economy encourages deployment
of the infrastructure required to continue the information technology revolution.
B. The
Broadband Market Is Distinct from the Narrowband Market and Is Characterized
by Robust Competition
“Broadband,” “advanced services,” and various
other terms have been used to refer to services that transfer data faster
than standard dial-up modem technology (so-called “narrowband” technology).Verizon
proposes the following definition as the basis for the Administration’s
policymaking:A broadband service
is one that, using a packet-switched or successor technology, includes
the capability of transmitting information that is generally not less than
384 kilobits per second in at least one direction or 56 kilobits per second
in both directions.Examples include
Digital Subscriber Line (“DSL”) services and Frame Relay services or Asynchronous
Transfer Mode (“ATM”) services, which may be accessed with speeds of at
least 56 kbps.
The proposed market definition encompasses both
residential and business users because the same broad deregulatory policy
framework can and should be applied to all broadband users.Of
course, larger businesses typically demand different services at higher
price points than do residential and smaller business users.Services
marketed chiefly to larger business customers include Frame Relay, ATM,
and Gigabit Ethernet,
while residential users are more likely to demand DSL or cable modem service.One
unifying characteristic of these broadband services is that telephone companies
have no historical facilities bottleneck and instead are deploying these
services for the first time – just as others can do and are doing as well.Indeed,
as discussed below, cable companies, satellite companies, and terrestrial
wireless companies are all building new broadband facilities.
Every government agency to have considered
the question has found that broadband services constitute
a separate and distinct product market from narrowband services.For
example, in reviewing the AOL-Time Warner merger, both the
FCC and the FTC recognized the distinctiveness of broadband.
The Department of Justice
did likewise when reviewing the AT&T-MediaOne merger.
There is no mystery to this
distinction.Broadband
allows consumers to do many things that are simply infeasible
over narrowband, including – to name just a few – downloading
movies and music, telecommuting, online gaming, streaming
video, and distance learning.Demand
for broadband (as distinct from narrowband) services will
increase in the future as additional broadband-dependent applications
emerge.
Not only is broadband a separate market; as discussed
below, it is a market characterized by robust competition both within and
among competing delivery technologies.
1. Four
Competing Technologies
Currently, four main technologies are being used
to provide broadband services to consumers: cable modem, DSL, satellite,
and fixed terrestrial wireless.While
these technologies overlap and compete today, cable companies are the dominant
incumbents in the broadband business, with existing broadband-capable infrastructure
reaching most U.S. homes.As of
September 2001, there were 6.2 million cable modem subscribers in the U.S.,
compared to 2.8 million residential DSL subscribers, and 100,000 broadband
satellite and fixed wireless subscribers.
a) Cable
Modem
Cable television networks pass more than 90% of
the 105 million households in the U.S., and approximately three-quarters
of all households passed by cable are passed by networks that now have
the two-way capabilities needed for cable modem functionality.According
to analysts, cable modem service is actually being offered today to between
50% and 66% of all U.S. homes.The
nation’s seven largest cable operators – AT&T Broadband, Time Warner,
Comcast, Charter, Cox, Adelphia, and Cablevision – serve more than 80%
of all cable subscribers, and approximately 95% of all cable modem subscribers.
Cable not only has a large lead over other broadband
technologies, but it also continues to add new subscribers at a faster
rate.Over
the past year, cable has increased its market share of new subscriber additions.Even
before cable operators began this latest growth spurt, the FCC predicted
that cable operators would continue to serve the majority of residential
broadband customers until at least 2004,
and industry analysts expect cable to maintain a considerable lead over
DSL and other broadband technologies for the foreseeable future.
b) Digital
Subscriber Line
DSL is provided
over the existing local telephone network by connecting digital modems
over copper loops to the central office, and then ensuring that those loops
are free from various electronics (e.g., load coils) that are needed
to provide voice service but inhibit the provision of data services.One
reason DSL has fewer subscribers than cable is that it is available to
fewer potential subscribers than cable.Analysts
estimate that cable modem service was available to between 50% and 71%
of U.S. households as of first quarter 2001 and that it will be available
to between 66% and 77% of U.S. households by the end of 2001.By
contrast, analysts estimate that DSL was available to between 34% and 43%
of all households as of first quarter 2001, and that it will be available
to approximately 45% by the end of 2001.
Changing this means increasing beyond the current
45% level the percentage of customers who are addressable by DSL.In
order to increase the number of addressable lines, significant added investment
is needed to deploy more broadband-capable equipment to more locations.For
example, in areas served by long copper loops, it is necessary to deploy
in remote terminals outside the central office, thus shortening the distance
to the end user.The needed upgrades
include building new or retrofitting existing physical locations, deploying
necessary equipment (DSLAMS, Digital Loop Carrier Systems, fiber cross-connect
panels), rearranging the existing network to connect to the new equipment,
updating operations support systems, and constructing new fiber-optic transmission
facilities.It will therefore take
billions of investment dollars for DSL to significantly expand the reach
of DSL services beyond today’s levels.
Furthermore, while DSL is a competitive way for
telephone companies to enter the broadband business, it is not an end-state
technology.In order to provide ubiquitous
broadband over the long term, telephone companies will likely need to replace
a great deal of their copper distribution plant with fiber optics – another
multi-billion-dollar investment proposition.As
discussed below, companies will not make the gigantic investments needed
to upgrade their networks unless the regulatory regime makes it reasonable
for them to take that risk.
c) Satellite
and Terrestrial Wireless
Broadband satellite services are provided using
the same constellation of Direct Broadcast Satellites (“DBS”) that currently
provide video services to more than 17 million subscribers.These
geostationary satellites operate in the Ku-band and have broad geographic
footprints that enable them to provide service to virtually all U.S. homes.Until
recently, satellite broadband used a telephone line as the upstream return
path.In late 2000, two satellite
providers – StarBand and Hughes – began providing two-way broadband services.In
the next few years, several additional two-way broadband satellite services
using the Ka-band are expected to become available.
Terrestrial wireless uses high-frequency spectrum
to transmit signals to a stationary transceiver up to several miles away.The
main fixed wireless services provided to residential customers use the
Microwave Multipoint Distribution System (“MMDS”), which uses spectrum
in the 2.4 GHz band.WorldCom and
Sprint own most MMDS spectrum in the United States, and have commercially
deployed MMDS in a handful of markets.Several
companies also plan to offer residential broadband services using unlicensed
spectrum bands, including the 2.45 GHz Industrial-Scientific-Medical (ISM)
band and the 5.8 GHz Unlicensed National Information Infrastructure (UNII)
band.In
addition, the FCC recently authorized the creation of a new Multipoint
Video and Data Distribution Service (“MVDDS”), which will be licensed on
a nationwide basis to share the 12.2-12.7 GHz band with DBS and other satellite
operators.
Although both two-way satellite and fixed wireless
are new technologies with very small market shares at present, they are
expected to grow rapidly and take share from the cable modem and DSL operators
in the coming years.According
to one report, “[t]wo-way satellite broadband Internet access will
be the fastest growing single-access technology. . . .This
rapid growth will reflect the introduction and aggressive marketing of
several high-profile satellite Internet services to the residential market
during the 2002 to 2004 period, as well as the continued expansion of the
installed base of satellite dishes in U.S. households for satellite TV
broadcast services such as DirecTV.”
2. Robust
Competition Within and Between Delivery Technologies.
Competition in the broadband market is robust.The
FCC has noted with approval “a continuing increase in consumer broadband
choices within and among the various delivery technologies,” which indicates
that “no group of firms of technology will likely be able to dominate the
provision of broadband services.”Each
of the four main delivery technologies competes head to head with the others
in a single broadband market.All
four are functionally similar:they
all provide Internet access at comparable speeds.In
addition, as the FCC has recognized, broadband services using different
technologies are available at similar prices.
Equally significant, the service providers clearly,
and appropriately, view one another as direct competitors. Time
Warner and AOL have touted the “significant actual and potential competition
affording consumers adequate choice across existing and emerging [broadband]
platforms.”The
recent refusal of cable companies to sell advertising time to phone companies
to promote DSL service confirms that cable modem providers perceive DSL
providers to be their direct competitors.
Moreover – and more important – consumers view the
technologies as interchangeable.Recent
survey results confirm the opinions of industry analysts who describe broadband
consumers as “platform agnostic.”In
essence, consumers want broadband functionality, and they do not care what
kind of hardware or software is used to implement that functionality.
In view of consumers’ indifference between delivery
platforms, competition among different delivery modes is more valuable
than competition among service providers within a given mode.Intermodal
competition is by nature facilities-based and hence more likely to lead
to innovation.Intramodal competition,
by contrast, has for the most part not been facilities-based competition.It
focuses more on the price for using a given pipeline to the customer rather
than on service quality or innovation.Only
through facilities-based competition will the market adapt to meet consumers’
needs, both in terms of the types of services and in terms of efficient
delivery to different types of customers.span
class=MsoFootnoteReference>[43]
C. Regardless
of Whether Growth is Supply-Constrained or Demand-Constrained, Government
Should Let the Market Work To Bring Better Services to More Customers
Although broadband markets are competitive and
generally healthy, that does not necessarily mean that all is well looking
forward.Only about 9% of consumers
use broadband services.While
many more customers say they want service, the pace of new connections
has slowed dramatically since the beginning of the year.During
the first two quarters of 2001, there were, on average, only 1.2 million
new cable modem and residential DSL subscribers combined, compared with
nearly 1.5 million in the fourth quarter of 2000.DSL
has experienced a more dramatic slowdown than cable.Indeed,
by the second quarter of 2001, the number of new DSL installations had
shrunk to less than 60% of what it had been six months earlier.The
total number of subscribers added by satellite and fixed wireless technologies
also fell by 50% from the first quarter to the second quarter of this year,
from 40,000 to 20,000 new quarterly additions.If
the broadband market is to remain competitive over the longer term, the
regulatory environment must be conducive to the enormous investments that
competing providers must make to take on the cable modem incumbents.
Because the broadband market is still in its infancy,
no one yet knows what the most popular application for broadband services
will be.Some commenters in these
proceedings may argue that the relatively low take rates for broadband
are due to lack of demand rather than lack of supply.The
question whether the constraint is one of supply or one of demand is of
little relevance to the formulation of an appropriate, growth-oriented
national broadband policy, however.Like
Assistant Secretary Victory, Verizon believes that, in the broadband market,
“policy responses should not be driven by consumer adoption rates [but
by] facilitat[ing] the deployment of new technologies by removing unnecessary
roadblocks.”No
one can know exactly how demand and supply in the broadband market will
evolve, but the market will eventually bring supply and demand into balance
if the regulatory environment does not artificially impede its development,
as today’s does.
As economists Alfred Kahn and Timothy Tardiff explain
in their attached declaration, the country needs, first, a deregulatory
national broadband policy that will allow market forces to work with the
least amount of distortion; and second, a level regulatory playing field
among competing broadband suppliers, so that Government does not skew competition
for or against any particular industry or technology.Moreover,
“it is very difficult, perhaps impossible, to forecast how competition
for broadband services will evolve (what technologies will emerge, how
successful each will be, what proportion of consumers will choose to subscribe,
and how frequently and for what purposes they will use the services).”Because
“[n]o one can possibly know the ultimate size of the market and how it
will be supplied,” the Government’s task “is to remove all remedial hindrances
to the competitive market’s giving us the definitive answers.”
This policy approach is consistent with Assistant
Secretary Victory’s recent remark that the Government’s role “should be
to facilitate the deployment of new technologies by removing any unnecessary
roadblocks to that deployment.Then
it’s up to the market — both in terms of carriers’ decisions to deploy
and consumers’ decisions to subscribe.”Verizon
concurs entirely with this view.
II. The
Current Regulatory Environment Discourages the Needed Investments
The most striking feature of the broadband regulatory
environment today is that cable modem, satellite, and terrestrial wireless
providers are substantially unregulated, while incumbent LECs’ activities
in the broadband arena have been subjected through regulatory creep to
many legacy regulations designed for the very different narrowband voice
market.As one prominent industry
observer has noted, “current Federal telecom policy is fundamentally deflationary
and unintentionally discourages investment and economic growth.”Applying
federal telecom policy to the development and deployment of broadband similarly
discourages investment and economic growth.
A. Regulations
Designed for Traditional Voice Services Have Been Extended to Broadband
Through Regulatory Creep
Traditionally, the Government has taken a hands-off,
deregulatory approach to data services and the Internet.Within
the broadband sphere, providers of cable modem, satellite or terrestrial
wireless service operate in a completely deregulated environment.They
may price their services as they choose, without filing tariffs, and they
are under no obligation to make their services or facilities available
to would-be competitors at prescribed rates.
In stark contrast to the completely deregulated
universe in which cable modem and wireless broadband services operate,
telephone companies face a raft of unnecessary, burdensome, and illogical
regulation imported from the local voice market.Often,
these requirements have been imposed reflexively, through regulatory creep,
rather than through conscious or considered policy choices.Among
the requirements not faced by cable, satellite, or wireless broadband providers
are regulations that limit telephone companies to providing cost-based
tariffed transport services -- thus preventing experimentation with innovative
pricing strategies and alternative revenue models – and that subject retail
services to unbundling and other obligations under the so-called Computer
III rules.On
the wholesale side, telephone companies are subject to unbundling obligations
and other requirements such as collocation outside central offices (at
remote terminals) that compel them to allow competitors to use their networks
at artificially low rates, inflate operational costs and technical complexities,
and require costly operations support systems capabilities that are otherwise
not needed.The problem is compounded
by the threat of still further regulations, such as the possibility of
being required to provide unbundled access to DSL-capable line cards at
remote terminals, provide unbundled access to new fiber distribution plant,
or maintain copper plant where fiber has been added to their networks.
These wholesale and retail regulations were designed
to regulate the telephone companies’ control over what were thought to
be essential or “bottlneck” facilities in the traditional voice telephone
market.But the so-called “incumbent”
LECs are not incumbents in the broadband market; they are new entrants
trying to challenge the dominant cable modem operators, who have about
twice as much market share as the telephone companies. As Professor Kahn
and Dr. Tardiff observe, “[w]hatever merits regulations such as these have
in facilitating efficient competition for traditional telephone services,
they are both unnecessary and counterproductive when applied to broadband.”The
regulations are unnecessary because competitors do not require access
to the telephone company facilities in order to provide broadband service.Even
the FCC has recognized that the “preconditions for monopoly appear absent”
in the broadband market.The
presence of robust, facilities-based competition means that there are various
alternative suppliers of these inputs.
As discussed in more detail below, the regulations
are counterproductive because they artificially dampen telephone
company incentives to invest in deploying and upgrading their facilities
to provide broadband services.The
effect of this asymmetric regulatory tax on telephone companies is to slow
the development of the broadband market as a whole and to preserve artificially
the current dominant position of cable modem providers.Consequently,
a marketplace that is now competitive can be expected to become less so,
as cable companies’ market share continues to increase at the expense of
telephone companies, which provide most of the competition today.Perversely,
regulation that was designed to spur competition in the narrowband market
will have precisely the opposite effect in the broadband market and will
enhance the ability of cable companies to exercise market power that a
deregulated market might otherwise erode over time.
B. Unbundling
and Other Wholesale and Retail Requirements Deter Critical Investments
In Broadband Facilities
The net result of importing wholesale and retail
regulations from the local voice market into the broadband sphere is to
deter telephone company investment in broadband facilities and services.This
in turn reduces the competitive pressure on cable modem service providers
to improve their service offerings, thus hindering development of the market
as a whole.On
the wholesale side of the business, current regulations raise telephone
company costs and magnify the already substantial risk of investing in
broadband technologies and services.On
the retail side, the regulations prevent telephone companies from entering
into innovative marketing and pricing arrangements and from charging market-based
rates for their services.
1. Wholesale
Regulations Increase Riskiness of Broadband Investments
The FCC’s wholesale regulations allow CLECs to
free-ride on successful telephone company innovations at artificially low,
cost-based rates, while forcing telephone company shareholders to bear
the full costs of any investment that fails.If
new facility or service offerings lose out to the competition, the telephone
companies can recover none of the costs in the FCC’s system of regulated
charges for their network elements.Yet
if new offerings are successful, the telephone companies would risk having
to make them available immediately to competitors at rock-bottom prices.The
grotesquely disparate treatment of investment successes and failures eliminates
the incentive to undertake costly and risky investments in innovation.
a) Unbundling
and Other Wholesale Requirements Inhibit Investment and Competition
Numerous observers have noted the negative effect
that requirements such as these have on the incentive to invest.AT&T
Chairman C. Michael Armstrong, for example, has emphasized that there would
be no incentive for an incumbent to invest in broadband services and facilities
if competitors could use that network without placing their own capital
at risk:
[I]t would inhibit industry growth and competition.No
company will invest billions of dollars to become a facilities-based broadband
services provider if competitors who have not invested a penny of capital
nor taken an ounce of risk can come along and get a free ride on the investments
and risks of others.
[58]
Professor Kahn and Dr. Tardiff
reinforce this point and also explain the detrimental impact on facilities-based
broadband competition:
The current broadband regulatory scheme as applied
to [telephone companies] appears to be designed not to provide incentives
for them to compete against cable modems and other facilities-based providers
but to provide [competitors] an opportunity to get a piece of the action
by free-riding on their facilities.The
fact is, however, that greater public benefits flow from facilities-based
competition than from the efforts of competitors reselling the [telephone
company] facilities, taking advantage of regulatorily-created opportunities;
and it is precisely that facilities-based competition that the present
rules both distort and discourage.
Similarly, Justice Stephen
Breyer underscored the negative effects of the wholesale sharing regime
on facilities-based competition in his concurring opinion in Iowa Utilities
Board:
Increased sharing by itself does not automatically
mean increased competition.It is
in the unshared, not in the shared, portions of the enterprise that
meaningful competition would likely emerge.Rules
that force firms to share every resource or element of a business
would create not competition, but pervasive regulation, for the regulators,
not the marketplace, would set the relevant terms.
b) Cost-Plus
Rate Regulation Is Counterproductive
Another legacy of narrowband voice regulation
that makes no sense in the rapidly developing, already competitive broadband
marketplace is the requirement that telephone companies must charge regulatorily
prescribed rates that are based on the cost of providing broadband transport
service, instead of allowing rates to be set by demand and supply.All
broadband providers should be allowed to charge commercially reasonable
rates. As things now stand,
the best the telephone companies can hope to do on their broadband operations
is to recover their original costs (and less under TELRIC),
while their shareholders must pay for any shortfall and for any investments
that fail.But in the absence of
market power, there is no need for this onerous restriction.The
market itself, not regulators, should discipline telephone company pricing
decisions.
To make matters worse, the FCC has prescribed
a methodology for setting wholesale rates that systematically undercompensates
incumbents, thus further discouraging investment.The
so-called TELRIC methodology calculates the cost of network elements based
on the cost of a hypothetical, optimally efficient network that no one
would ever build.The methodology
consistently produces rates that are lower than the actual incremental
costs faced by suppliers in the marketplace.As
one prominent industry observer recently noted, “no company, incumbent
or competitor,” who built a facility network and charged the TELRIC price
could “ever hope to earn a return on their investment.”
The result of the TELRIC pricing scheme is that
neither telephone companies nor their competitors has an incentive to build
new facilities to provide broadband service.“Why
should a competitor invest capital if they can lease the incumbents’ network
without risk at a lower cost than even the competitor could build it for?Why
should an incumbent invest to upgrade its plant if it will be forced to
resell it [for] less than it costs to provide it?”Professors
Areeda and Hovenkamp have concluded that when the Government forces a company to
“provide [a] facility and regulat[es] the price to competitive levels,
then the [prospective entrant’s] incentive to build an alternative facility
is destroyed altogether.”In
short, TELRIC is a counterproductive, deflationary, wrongheaded methodology
for the broadband market.
2. Retail
Regulation Skews Competition and Discourages Investment
Rate regulation is equally pernicious on the retail
side of the business.Because the
telephone companies are minority players in the broadband market, they
have no market power to exercise.Where
there is no potential for monopoly-type abuses, competitors should be free
to charge market rates without filing tariffs.And
in charging market rates, telephone companies should be free to experiment
with innovative pricing schemes of the type that cable modem companies
and Internet companies are already using – for example, rates based on
a percentage of the customer’s revenue generated using the service.Allowing
some competitors to develop new revenue models to recover the costs of
broadband deployment, while making telephone companies stick to regulated,
tariffed rates, needlessly tilts the competitive playing field against
telephone companies, once again discouraging investment.
The sheer newness of the broadband market provides
a separate ground for refraining from rate regulation.As
Professor Kahn and Dr. Tardiff observe,
New services offer customers additional alternatives
not available to them previously.Their
introduction is fundamentally a competitive rather than a monopolistic
phenomenon, even though they may be distinctive and the innovator may be
in a position to earn supernormal profits from them.To
deny an innovator the rewards of being first would inhibit innovation,
and it should not matter for these purposes whether the innovator is an
incumbent telephone company, an incumbent cable television provider, or
a new entrant.
There is no guarantee that
telephone companies will succeed in the broadband marketplace, but where
they succeed they deserve to be rewarded for making the massive investments
necessary to bring success.Although
it is too soon to know what pricing formulas will be successful as the
market develops, telephone companies should be free to experiment with
different revenue models, just as their competitors are doing.Regulating
the telephone companies’ retail rates distorts their investment decisions,
handicaps them in the marketplace, and ultimately retards the growth and
development of the market as a whole.
3. The
Harmful Impact on Investment Incentives is Not Merely Hypothetical
Both wholesale and retail regulations decrease
telephone companies’ incentives to invest in broadband facilities and services.These
regulations are already affecting telephone company investment decisions
in such key areas as deployment of DSL capability in remote terminals and
replacement of copper plant with fiber.
a) Deployment
of DSL Capability in Remote Terminals
As noted above, large new investments are needed
in order to increase the number of loops that qualify for DSL service.In
particular, deploying DSL capability at remote terminals outside of central
offices can shorten loop length and increase the number of DSL-addressable
lines.In a recent letter to Chairman
Powell, Verizon explained that “one of the key reasons that Verizon to
this point has significantly constrained deployment of DSL capability in
[its] remote terminals” was the uncertainty regarding whether line cards
in remote terminals that can be used jointly for voice and broadband DSL
services would have to be unbundled, and whether collocation of other providers’
line cards at the remote terminals would be required.
Providing DSL service through remote terminals
already costs significantly more than providing DSL service through a central
office.This cost difference would
be even greater if telephone companies were required to provide unbundled
access to line cards at remote terminals, or to try to find some way to
allow line cards of other carriers to be collocated there (which may not
be feasible).Collocation obligations
would require these companies to incur extra costs to prepare, power, and
condition larger remote terminals with space for potential collocation
that may never be used; would increase operational costs and complexities;
and would require development of costly new operations support system capabilities.
Because of these concerns, Verizon has to this point
significantly constrained deployment of DSL capability at remote terminals.
b) Deployment
of Fiber
Fiber deployment will
be similarly affected.The existing
rules make it operationally harder, riskier, and more costly for telephone
companies to upgrade their networks by adding fiber.As
noted above, while telephone companies are relying on DSL technology to
enter the broadband market, DSL is not an end-state technology.Successive
generations of broadband will require pushing fiber still further into
the field through Fiber to the Home (“FTTH”) or other architectures.The
current regulatory environment is even more problematic for these new architectures
than for DSL.For example,FTTH
relies on shared electronics in the central office and a shared passive
optical distribution network to provide broadband services to many end-users.Mandating
unbundled access to the data architecture in such a system would require
that individual fibers, splitters or other equipment be dedicated to specific
carriers, thus undermining the economics of the shared architecture, which
assumes that facilities costs will be spread over multiple users.Undbundling
of FTTH would also create enormously complex technical, practical, and
operational problems.For instance,
physical access by competitors to the distribution fiber and passive splitting
devices in the field could potentially disrupt existing services to other
customers.And once again, operations
support systems would have to be augmented to administer multiple carriers.
Moreover, still further
uncertainty is generated by the possibility that telephone companies might
be required to maintain copper plant in areas where fiber feeder or distribution
facilities are deployed, which would further reduce the incentive to deploy
fiber.A telephone company’s annual
cost to maintain copper loop plant would include both capital expenses
(depreciation, cost of capital, federal/state income taxes) and operating
expenses (maintenance, repair, testing, administration).If
a telephone company were required to maintain duplicative fiber and copper
feeder networks without regard to business considerations, the economic
rationale for deploying fiber broadband capability would be undermined:for
instance, fiber-based Digital Loop Carrier (“DLC”) costs more to deploy
initially but has lower life-cycle operating costs than the current copper
network.There is little point in
incurring the higher up-front costs for DLC, however, if the higher operating
costs of copper feeder must be incurred in any event.
As this discussion shows, the chilling effects of
current regulation and the overhand of still further possible requirements
on telephone company investments are neither speculative nor remote; they
are real and immediate.Federal policy
(or the lack thereof) is a significant deterrent to investment in broadband
facilities, stunting economic growth, and cementing the supremacy of cable
modem providers in the marketplace.It
is time for a change.
III. New
National Broadband Policy Should Remove Regulatory Obstacles to Investment
and Deployment
The nation plainly needs a uniform national broadband
policy.Verizon respectfully submits
that the twin touchstones of that policy should be:(1)
to allow the market to drive efficient broadband deployment by removing
artificial regulatory obstacles to investment, and (2) to treat all broadband
providers alike.
These twin touchstones echo Assistant Secretary
Victory’s recent comments that“it
is important to try to regulate comparable services in a manner that does
not interfere with marketplace outcomes” and that “competition should be
promoted using a technology-neutral paradigm.”FCC
Chairman Powell has likewise recommended that the Commission move to “some
degree of less regulation” in the broadband market that would be “not so
technology centric.”“We
need these things harmonized,”he
said.“Otherwise,
we’re penalizing a competitive technology simply because of its legacy.”
Once again, Professor Kahn and Dr. Tardiff sum things
up well, “[t]he newness of the service, its reliance on risky technologies,
the rapid expansion of the market and the leading position of unregulated
suppliers all strongly suggest that the FCC’s general disposition to keep
its hands off the Internet has been fundamentally correct.”That
general deregulatory disposition should now be extended to all the players
in the broadband market.
Of course, this is also the best means of ensuring
widespread deployment of broadband in an economically efficient manner. As
Chairman Powell recently noted, “Government is a notoriously bad investor,”
and “a developing market needs the cues provided by consumer free choice.”The
wiser course is to allow market mechanisms to increase penetration rates
through the deployment of new technologies.Different
locations may be more economically served by different technologies, but
the best way to achieve the efficient distribution is for the Government
to get out of the way and let the market work.
Significantly, this does not mean that the Government
should engage in any kind of “industrial policy” favoring telephone companies.Rather,
the Government should end the de facto industrial policy favoring
cable modem operators that is embodied in the current asymmetric regulatory
scheme.The Government cannot rationally
maintain Title II regulation for telephone companies that provide broadband
services at the same time that it declines to impose similar obligations
on the dominant providers in this market.If
incumbent cable companies do not control a bottleneck broadband access
facility, and therefore do not need to be regulated when they provide broadband
services, then new entrant telephone companies, with only about half as
many broadband subscriber lines, need not be regulated either.Conversely,
if telephone company broadband services are to be regulated under the common
carrier regime, all competing broadband services should be subject to the
same set of rules.
No less an authority than the Department of Justice
has recognized that “[a]pplying different degrees of regulation to firms
in the same market necessarily introduces distortions into the market;
competition will be harmed if some firms face unwarranted regulatory burdens
not imposed on their rivals.”Telephone
companies are not asking for guaranteed success in the market or even a
leg up on the competition; they just want a level playing field.Experience
shows that the market will pick winning strategies and technologies if
regulators will get out of the way and allow the market to work.That
is the aim of Verizon’s proposals here.
Importantly, Verizon does not propose to use additional
regulatory freedom to adopt a closed network model (as cable modem, satellite,
and terrestrial wireless broadband providers have done).On
the contrary, there can be significant value in maintaining a wholesale
business that allows other providers to reach their customers over Verizon’s
network.And the availability of
an open network competing with the cable incumbents may well create competitive
pressure for cable companies to open their systems to more providers as
well.Verizon has suggested, for
example, that it could offer a service at its central offices to other
providers so that they could reach their customers over Verizon’s network
at commercially reasonable rates.
A. Broadband
Should Be Regulated Under Title I of the Communications Act
The first step in establishing a national broadband
policy is to determine the appropriate regulatory classification for broadband.In
doing so, it is critical, both as a matter of law and sound policy, that
all competing services be regulated alike, rather than being subject to
disparate regulation based on the history or parentage of the entity providing
them.Historically, the FCC has treated
broadband services as common carrier services subject to Title II of the
Communications Act when provided by telephone companies – and only when
provided by telephone companies.To
the extent the FCC continues to apply Title II to some providers in the
future, it necessarily must do so for all.The
more logical way to implement a new national broadband policy, however,
would be to declare that the broadband facilities and services fall under
Title I of the Communications Act regardless of who provides them.
The FCC has previously taken this approach successfully
for other then-emerging technologies and services.For
example, three decades ago in the case of the fledgling computer industry,
the Commission classified computers and other customer premises equipment
as subject to Title I, thus allowing the Commission to adopt a truly national
deregulatory policy that left competitive markets to competitive actors.Likewise,
by classifying so-called “enhanced” services as subject to Title I, the
Commission was able to adopt a similarly deregulatory policy that prompted
the growth of what today are known as information services and the Internet.The
Commission even took this approach with cable service itself in the early
days of that industry.Recognizing
that cable service did not fit into the then-existing regulatory categories
of Titles II or III, the Commission asserted jurisdiction over cable under
Title I, and the Supreme Court upheld this approach.The
same considerations support regulating the nascent broadband under Title
I today.And these precedents illustrate
that the Commission has the legal authority to do so.
Traditionally, the Commission imposed common carrier
regulation on services in order to counteract market power in the underlying
transport market.By
contrast, “[i]n markets where competition can act in place of regulation
as the means to protect consumers from the exercise of market power, the
Commission has long chosen to abstain from imposing regulation.”As
demonstrated above, the broadband market is already competitive, and telephone
companies have no market power in that market.Hence,
there is no need to subject telephone company broadband services to the
Title II common carrier regime.And
there is certainly no justification for doing so while declining to impose
the same requirements on all other providers, including the dominant incumbent
cable modem providers.Ample precedent
supports the proposition that the key consideration in determining which
regulation should apply to a given service is the nature of the service
itself – not the character of the entity providing it.Or,
to put it another way, it has long been established that telephone companies
can be common carriers for some purposes but not others, and telephone
companies have long provided a broad array of non-common-carrier services,
including information services and customer premises equipment.Consequently,
there is no inconsistency in treating telephone companies as common carriers
in the narrowband voice market but not treating them as common carriers
in the broadband market, given the very different economics and competitive
dynamics of the two markets.
Furthermore, to the extent that telephone companies
offer broadband transport bundled together with information services like
Internet access, the bundled service already qualifies as and is currently
treated as a Title I Information service.Indeed,
under the terms of the 1996 Act, a bundled transport-and-information service
offering is, as a legal matter, an information service, and the company
providing it does not “provide” telecommunications but instead “uses” telecommunications
to provide its information service.
B. Alternatively,
If Broadband Continues To Be Regulated Under Title II of the Act, the FCC
Should Avoid Regulations that Hinder Investment and Deployment
Even if
broadband services continue to be treated as subject to Title II – in which
case broadband services from all providers would have to be so classified
– the FCC has the authority to refrain from applying to broadband facilities
and services many of the narrowband voice rules that are inappropriate
for broadband.
1. Section
10 of the Act Requires Retail Forbearance
The Government
should forbear from all price and other “retail” regulation ofbroadband
services, regardless of provider.This
would include eliminating requirements such as those imposed under Sections
201 and 202 to provide services under tariffed, cost-based terms and conditions
as well as indirect regulation, such as imputing revenues from or allocating
costs to broadband services.In addition,
the Commission should decline to extend to broadband services the unbundling
and other requirements of its Computer III rules and other similar
requirements designed for the narrowband world.In
short, the Commission should allow the competitive marketplace to regulate
the broadband services provided by telephone companies, just as it does
at present for those provided by cable companies, satellite companies,
and fixed wireless operators.
There
can be little question that the Act’s forbearance requirements are met
here.Under the Act, the Commission
must forbear from applying any regulation or provision of the Act to a
telecommunications carrier or telecommunications service if:
(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.
To determine
whether forbearance is appropriate for broadband services, the Commission
need resolve only a single question:Does
any provider control a bottleneck facility?If
the answer is no, then the market can be trusted to ensure that charges,
practices, and classifications are reasonable and to guarantee that consumers
remain free to choose among providers.In
such a circumstance, forbearance would be decidedly “in the public interest”
because it would eliminate the costs of regulatory compliance and would
permit telephone companies the flexibility to respond quickly to marketplace
requirements.And, as shown above,
the Commission has repeatedly concluded that there is no bottleneck and
that the market is fully competitive.
More specifically,
forbearance here meets the forbearance standards that the Commission has
previously established.First, the
Commission has held, in granting a petition under section 10, that “competition
is the most effective means of ensuring that the charges, practices, classifications,
and regulations with respect to [a telecommunications service] are just
and reasonable, and not unjustly or unreasonably discriminatory.”Competition
is robust in this market, and there is nothing to suggest that a telephone
company with its share of the market could charge unjust or unreasonable
prices or engage in unjust or unreasonable practices.
Second,
for the same reason, common carrier regulation is not “necessary for the
protection of consumers.”Instead,
the opposite is true – consumers are best protected by allowing the marketplace
to provide them with a robust choice of services from a variety of competing
providers.Enforcement of the pricing
provisions of Title II is not necessary to constrain the prices that the
telephone companies charge for broadband services – competing providers
provide that constraint.This competitive
marketplace is more than adequate to protect consumers.
Moreover,
in applying section 10(a)(2), the Commission has noted that “the fundamental
objective of the 1996 Act is to bring consumers of telecommunications services
in all markets the full benefits of competition.”The
record shows that current regulation stifles rather than stimulates investment
in advanced services, the exact opposite of the situation that protects
consumers.
Third, in
determining whether forbearance is “in the public interest” under section
10(a)(3), the Commission must “consider several factors, including benefits
to consumers and whether forbearance will promote competitive market conditions.”The
evidence shows that imposition of Title II pricing regulation on one class
of competitors while leaving the rest free of regulation skews, rather
than promotes, competition.In granting
other petitions, the Commission has held that the public interest test
of section 10 is satisfied when forbearance would make the petitioner “a
more effective competitor.”Verizon
has shown that regulation adds costs to its services, and the Commission
has found that the avoidance of unnecessary cost is also in the public
interest.
Fourth,
section 706 of the 1996 Act explicitly mandates the use of “regulatory
forbearance” to remove barriers to infrastructure investment and to encourage
the deployment of broadband capability on a reasonable and timely basis
to all Americans.As
shown above, the current regulatory scheme is obstructing investment in
broadband infrastructure and delaying deployment.In
these circumstances, the Commission must forbear.
2. Section
251(d)(2) Permits Wholesale Deregulation
In the wholesale portion of the market, the Government
should refuse to impose one-sided unbundling requirements on telephone
company-provided broadband services or to subject those services to investment-deterring
TELRIC pricing schemes.As noted
above, the section 251 regime was designed as a transition from a monopoly
world in local voice telephony to a world in which there was facilities-based
competition.The application of that
regime to the broadband market is unnecessary and counterproductive.
Moreover, the Commission cannot rationally maintain
this regulatory regime at the same time that it declines to impose similar
obligations on the dominant providers in this market.If
cable operators do not control a bottleneck broadband access facility,
as the Commission has found, then the telephone companies, with half the
broadband subscriber lines, surely do not control such a facility either.
The Commission has authority to eliminate (or forbear
from application of) the unbundling requirements of section 251 in at least
three circumstances:when the “necessary
and impair” standard of section 251(d)(2) has not been met; when the Commission
has determine that the competitive nature of the broadband business obviates
the need for unbundling; and when section 271 authority has been granted.
a) “Necessary
and Impair”
Section 251(d)(2) provides that, in determining
what network elements should be unbundled, the Commission shall consider,
at
a minimum, whether:
(A)access
to such network elements as are proprietary in nature is necessary; and
(B)the
failure to provide access to such network elements would impair the ability
of the telecommunications carrier seeking access to provide the services
that it seeks to offer.
The Supreme Court has determined that, in applying
this provision, the Commission must consider “the availability of elements
outside the incumbent’s network” and may not indulge in an “assumption
that any increase in cost (or decrease in quality) imposed by denial
of a network element” requires unbundling.The
Court held that a competing carrier is not “impaired” simply because it
earns less profit when it does not have access to a network element.
Subsection (B) specifically refers to impairment
with respect to “the services that [a competitive carrier] seeks to offer.”Hence,
the Commission may apply the “necessary and impair” test on a service-by-service
basis and may conduct a separate inquiry for broadband services.Indeed,
the FCC has in the past recognized the appropriateness of conducting a
service-specific inquiry.
The FCC should recognize that, in the already competitive
broadband marketplace, other providers simply cannot be impaired in any
competitively meaningful sense by the inability to obtain access to unbundled
elements of telephone company networks.Given
the extensive competition for broadband services — including multiple last-mile
networks other than those operated by the telephone companies — there is
no basis for imposing an unbundling requirement.
b) “At
a Minimum”
In fact, the Commission may rely on the competitive
nature of the broadband marketplace as an independent reason — separate
and apart from the impairment inquiry — not to impose unbundling requirements.As
the italicized portion of the statute quoted above indicates, the necessary
and impair standard is what the Commission must consider “at a minimum.”The
Commission has concluded that this phrase permits it to consider other
factors in determining what network elements must be unbundled.
Whatever else this may mean,the
fact that the broadband market is already competitive must be a relevant
factor to consider.Indeed, the
FCC has expressly noted that, in applying section 251(d)(2), it may consider
“[w]hether unbundling of a network element promotes facilities-based competition,
investment, and innovation.”Given
the strong evidence that the broadband market is competitive and that unbundling
requirements will stifle facilities-based competition, investment, and
innovation, the Commission may decline to order unbundling in the broadband
market under section 251(d)(2).
In fact, the FCC has in the past relied on the “dynamic
and evolving” nature of the advanced services market (i.e., the broadband
market) in refusing to mandate unbundling of packet switches (a key type
of broadband facility) in certain instances, even where it found that an
“impairment” may exist.
c) Forbearance
Authority
Additionally, section 10(d) provides that the
FCC may forbear from applying the wholesale requirements of sections 251(c)
and 271 once those provisions “have been fully implemented.”Whatever
else the “fully implemented” standard may mean, it most certainly is satisfied
wherever a telephone company has received permission to provide long-distance
service pursuant to section 271.Meeting
the 14-point competitive checklist of section 271(c)(2)(B) specifically
requires satisfying all of the requirements of these sections.Therefore,
sections 251(c) and 271 necessarily have been fully implemented in any
state in which a BOC has been granted section 271 relief. In such states,
the Commission may forbear based on a straightforward determination that,
in view of the robust competition in the broadband market, the wholesale
regulations are (1) not necessary “to ensure that the charges, practices,
classifications, or regulations . . . are just and reasonable,” (2) “not
necessary for the protection of consumers,” and (3) “consistent with the
public interest.”Indeed,
for all the reasons outlined above, continuing to impose these requirements
affirmatively harms competition and disserves the interests of consumers.
C. The
Nation Needs a Truly National Broadband Policy
Providing a truly national policy entails
paring back counterproductive regulations and avoiding artificial distinctions
between broadband services based on the history or parentage of the entity
providing them; it also entails cutting through the thicket of state and
local regulations that stand in the way of rapid, efficient deployment
of broadband facilities.
Establishing
a truly national broadband policy is entirely consistent with FCC precedent.Broadband
services are used primarily to access the Internet, a function that the
Commission has found to be predominantly interstate in nature.It
is the Commission’s responsibility to establish policies for the provision
and enhancement of these services, and these policies will preempt inconsistent
state rules.The Commission has taken
just this approach with respect to several other sectors of the telecommunications
industry, including customer premises equipment (“CPE”), information services,
and wireless services.
In each
of those cases, the Commission established a deregulatory national policy
and preempted inconsistent regulation on the grounds that such regulation
could impose undue burdens on market participants and would interfere with
the Commission’s deregulatory mission.In
the Commission’s own words:“While
we recognize that states have a legitimate interest in protecting the interests
of telecommunications users in their jurisdiction, we also believe that
competition is a strong protector of these interests and that state regulation
in this context could inadvertently become . . . a burden to the development
of this competition.”The
D.C. Circuit has upheld such decisions, saying that “when state regulation
of intrastate equipment or facilities would interfere with the achievement
of a federal regulatory goal, the Commission’s jurisdiction is paramount
and conflicting state regulations must necessarily yield to the federal
regulatory scheme.”
The principles
supporting adoption of a truly national policy in these cases also require
it here.In the UNE Remand Order,
the Commission repeated the general rule that state requirements could
exceed the federal obligations in connection with a telephone company’s
advanced service offerings.That
conclusion, however, was based on the Commission’s belief that “the Commission’s
national unbundling policy has clearly not discouraged incumbent LECs from
seeking to serve new [advanced services] markets.”Whatever
the accuracy of that observation in 1999, it is plain that the opposite
is the case today – that unbundling requirements can discourage, and have
in fact discouraged, incumbent LECs from making the investments necessary
to bring broadband services to more consumers.The
Government can and should eliminate these and other state requirements
that are hindering development of the broadband market, and should make
clear that the requirements that are removed cannot be reimposed by the
states.
As Chairman Powell has recognized, restrictions
relating to rights of way, zoning, and building codes “are some of the
most vexing problems in bringing new services to consumers.”A
substantial record has been compiled before the FCC showing how state and
local right-of-way restrictions are interfering with provision of all types
of telecommunications services, including broadband, in violation of section
253 of the Act.In
one recent instance, Verizon had to completely bypass a municipality with
a fiber optic cable, at considerable expense, because of unreasonable requirements
the municipality imposed on placement of that cable.In
another case, currently being challenged in court, a city is attempting
to require Verizon to construct ducts with far greater capacity and with
more complexity than it needs (i.e., with an inner duct) and then transfer
ownership to the city without compensation.Before
merging with Bell Atlantic to form Verizon, GTE documented dozens of other
state or local actions or ordinances that inhibited its ability to place
facilities in public rights of way.Such
regulations inevitably increase costs and delay deployment; at their worst,
they can prevent large segments of the public from receiving broadband
services.
D. Prior
Successful Examples of Deregulation Show the Advantages of a Uniform National
Policy
The benefits
of eliminating unnecessary regulations are not merely hypothetical.Prior
deregulatory initiatives relating to wireless telephony, CPE, and information
services (including the Internet itself) all provide concrete marketplace
evidence of the benefits that will flow from deregulating broadband services.
1. Wireless
Telephony
Like the broadband sector today, the wireless
industry in its early years had a limited number of competitors, many of
which faced extensive regulation that created an uneven competitive playing
field.Until the 1990s, the Commission
permitted only two wireless carriers in every geographic market.Even
after additional entrants were allowed, wireless growth remained relatively
slow.Between
1991 and 1993, wireless subscribers grew by 3.6 million per year, and investment
grew by an average of $2.6 billion per year.
In 1993, Congress preempted most state regulation
of wireless and required the Commission to regulate all commercial wireless
services in a similar manner.In
1996, Congress removed the interLATA restriction on the provision of wireless
services by Bell operating companies (“BOCs”), the last significant remaining
restriction separating BOCs and other wireless participants.From
1993 to 1998, wireless telephone subscribership rose from 16 million to
69 million, while the average monthly bill dropped nearly 50%.
Today, there are more than 100 million mobile customers
in this country, paying as little as $15 per month for basic service.In
short, given a deregulated environment for wireless services, competition
flourished, subscribership rose, and prices dropped.The
same results can be expected once the broadband market is deregulated.
2. Information
Services and Customer Premises Equipment
Beginning with its landmark Computer I decision
in 1971, the FCC determined that data processing was a highly competitive
industry not in need of regulation.The
Commission accordingly resolved not to regulate “data processing services
as such.”In
its 1980 Computer II decision, the Commission deregulated the provision
of all computer-enhanced services (as well as of the computers themselves
and other customer premises equipment or “CPE”).The
Commission found that, although it had jurisdiction over enhanced services
under Title I, it would not serve the public interest to subject enhanced
services to traditional common-carriage regulation under Title II because,
among other reasons, the enhanced services market was “truly competitive.”The
Commission did, however, invoke its ancillary jurisdiction under Title
I of the Act to preempt any inconsistent state or local regulation, thus
ensuring that regulation of enhanced services did not materialize at the
local level.
The deregulation of computers and information
services has been one of the most spectacular successes in U.S. economic
history.Competition among providers
of CPE and computers led to major investment, rapid price declines, increased
output, and improved quality.A desktop
PC can be had today for a few hundred dollars that has more computing power
than the most powerful mainframes had just a few years ago.Information
services have undergone a similar boom.The
voice-messaging industry, for instance, has grown at double-digit rates,
and monthly service fees have dropped significantly.But
perhaps the most amazing benefit flowing from the deregulation of information
services has been the advent of the Internet, which has called forth massive
investment, spawned entire new e-commerce industries, and revolutionized
the economics of traditional “bricks and mortar” firms.The
simple fact that CPE and information services are fundamentally unregulated
is responsible in large part for the development of the country’s high-tech
industry, the development of e-commerce, and the extraordinary technology-driven
economic boom of the past decade.
These examples show the extraordinary power of competition
to bring ever better products and services to ever more people ever more
cheaply.The Government should now
unleash the full power of competition in the broadband market.Removing
the existing regulatory deterrents to investment in broadband services
and facilities offers the best hope of increasing the availability of broadband
capability and re-igniting economic growth.
Conclusion
The
Administration should support establishment of a uniform national policy
of deregulation of broadband for all providers.
Respectfully
submitted,
_________________________
Michael E. GloverMark
L. Evans
Edward H. ShakinEvan
T. Leo
VERIZON COMMUNICATIONS INC.J.C.
Rozendaal
1515 North Courthouse RoadKELLOGG,
HUBER HANSEN,
Suite 500TODD
& EVANS, P.L.L.C.
Arlington, VA22201-2909Sumner
Square
(703) 351-38601615
M Street, N.W., Suite 400
Washington,
D.C. 20036
(202)
326-7900
Counsel for Verizon Communications Inc.
December 19, 2001