Competitive Carriers Lash Out at FCC

The first round of comments on the Federal Communications Commission (FCC)'s proposed rules for reclassifying Internet traffic were released on Friday. Judging by the first glance at those comments, the debate is heating up.

First, some background: In February, the FCC published its "Broadband Notice of Proposed Rule Making," wherein it proposed the reclassification of retail wireline broadband Internet access services as “information services” rather than “telecommunications services." (See FCC Stirs Up Competitive Carriers.)

The bottom line is that if this proposal were to take effect, broadband would be exempt from regulation under Title II, the source of most regulations that apply to RBOCs (regional Bell operating companies). That would give the RBOCs new rights to deny access to their networks -- making it even more difficult for ISPs (Internet service providers) to break into the local loop with broadband data services.

Based on comments submitted Friday, the ALTS (Association for Local Telecommunications Services) and CompTel (Competitive Telecommunications Association), two industry associations representing competitive carriers, have joined forces with long-distance carrier WorldCom Inc. (Nasdaq: WCOM) to oppose the proposal. A group of economists, backed by Verizon Communications Inc. (NYSE: VZ), have banded together in support of it. Verizon had not filed its own comments on the proposal at press time.

The main allegation from ALTS, CompTel, and Worldcom is that the FCC is being influenced to side with the RBOCs.

“A rule that threatens existing competitive services in the name of promoting the current Commission’s ‘central communications policy objective of the day,’ is a bad rule,” they write. “It is a surrender to monopoly blackmail.”

As the controversial Tauzin-Dingell bill lingers in the United States Senate, many experts say that much of the real action surrounding broadband regulation will happen in the FCC, as the commission continues to push for changes in the rules (see Tauzin-Dingell Takes Another Step).

In their filing, ALTS, CompTel, and WorldCom argue that reclassifying Internet services would ensure the continued monopolistic nature of the RBOCs and deprive the undersigned of a piece of the market. They claim that DSL deployments are actually growing at a relatively strong rate, which is proof that the current regulations requiring incumbent carriers to share their facilities with competitors is working. Secondly, they argue that the FCC doesn’t have the real authority to make such rules that would contradict the 1996 Telecom Act.

But the economists argue that the current regulatory environment does not provide incentives for incumbents or new competitive carriers to build out DSL infrastructure. They argue that if RBOCs invest in new infrastructure and the business is profitable, they then have to open those facilities to competition, which kills their margins. And if they build the facilities and DSL flops, they’re stuck with a huge capital expenditure and no revenue.

“You don’t need to have a PhD in economics to see that this is not a good business model,” says Jeff Eisenach, who does have a PhD in economics and is one of those supporting the FCC rule-making proposal. He is president of the grandiosely named The Progress & Freedom Foundation, a policy think tank that gets contributions from telephone, cable, and computer companies. He says new carriers have no incentive to build out networks of their own, because they’re able to get access to facilities below cost.

What’s more, the economists contend that strong competition already exists from alternative technologies, including cable, wireless, and satellite. Unlike RBOCs, cable MSOs (multiservice operators) are essentially unregulated and have poured billions of dollars into upgrading their facilities. The result has been that roughly two thirds of the people in the U.S. accessing broadband get it through cable modems (see FCC Commissioner Weighs In).

“The critical point is that where, as here, a market is competitive, market forces are sufficient to encourage participants to make arrangements that will maximize consumer welfare,” says the filing signed by the economists. “And it is preferable by far that all such arrangements be negotiated on mutually beneficial terms rather than on terms set by regulators.”

Eisenach, who has followed telecom regulation for 25 years, says that if broadband were less regulated, carriers would be building out networks, stimulating growth in other areas such as equipment. But he acknowledges it’s difficult to quantify this. Instead he cites examples.

“Just look at Project Pronto from SBC Communications Inc. [NYSE: SBC],” he says. “They spent something like $2.5 billion to build out a DSL network, and shortly after the state of Illinois said they would require unbundling, SBC killed the project.”

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com