Telecom regulatory policies lag behind technology

Washington, intent on pushing a top-to-bottom overhaul of telecommunications law, appears to be heading into a legislative process that could significantly delay development of the broadband network base that is the foundation for the digital communications era.

Cable and telephone companies alike now have access to the technical means to establish the digital communications platform, whether in competition or in cooperation. But the federal government is much farther away from consensus than many officials will admit. There is still confusion on most of the relevant points, from universal service and open platforms, to the sorting out of federal, state and local lines of authority.

TURF WARS IN WASHINGTON STYMIE POLICY DEVELOPMENT

The contrast between marketplace readiness and government bottleneck was starkly apparent at the cable industry’s Western Show convention in Anaheim, CA, earlier this month. On the exhibit floor vendors displayed an unprecedented array of the technology required to make digital communications a reality, from $10 million asynchronous transfer mode (ATM) broadband routers to interactive consumer interfaces of every description. (For more on the Western show, see p. 18.) But in the panel discussions on government policy, turf-sensitive officials made clear the range and difficulties of issues that must be dealt with before they can act on the rules that are essential to massive deployment of the technology.

Administration delays proposals. The latest signal as to just how factionalized the regulatory battle might become was delivered prior to the convention by officials of the Clinton administration. Backing away from earlier indications that they would act immediately to provide policy input on various Congressional initiatives, they instead declared they would present their own legislative proposals after the first of the year.

“I know there’s no such thing as a perfect bill,” says Larry Irving, assistant secretary of commerce and chief of the National Telecommunications Information Administration. But he made clear that he believes the Administration can come closer by forging one on its own than it can through negotiating revisions of bills already in the hopper.

A multitude of sticking points. The divisions among policymakers cut across party lines and, to some extent, spheres of influence. Beneath a widely held preference for competition over regulation, there is very little consensus at all.

Key points of disagreement concern:

• The priority to be attached to facilities competition.
• The degree to which state and local authorities are to be pre-empted by the federal government.
• The conditions under which telephone and cable companies will be allowed into each other’s business.
• Means for ensuring continuation of universal service.
• The extent to which the definition of universal service should be expanded.
• The role of government in the setting of standards.
• And, perhaps most contentious of all, the degree to which broadband network platforms should be open to all service providers.

In other words, virtually every point that matters in the reshaping of telecom policy is a bone of serious contention among government officials. The disagreement extends across virtually every unit of government, from the Clinton administration down to the National Association of Telecommunications Officers and Administrators — the organization of cable franchise overseers.

State’s rights. The conflict and confusion extends even to relations between the federal and state governments. This was evident in Anaheim, when Daniel Fressler, president of the California Public Utilities Commission, upbraided Irving over Congressional passage of a provision pre-empting states in cellular regulation. The measure, slipped into last summer’s Budget Reconciliation Act passed with little or no debate.

“That was an exercise in pre-emption that has had a chilling effect,” Fressler said, calling the maneuver led by Rep. Ed Markey (D-MA), House telecommunications subcommittee chairman, “an act of political brutality which is going to be difficult for us to live with.” While Irving defended the measure, he quickly acknowledged the sensitivities on the subject, including those of the ex-governor of Arkansas who runs the White House. With regard to an eventual Clinton telecommunications bill, he said, “no decision has been made at any level with regard to federal, state or local responsibilities.”

House and Senate favor open competition. In general, House and Senate leaders on telecommunications issues appear to be concerned first of all with creating a regulatory regime that invites facilities competition (two wires into the house) with a minimum amount of supervision at any level of government. In their eyes, facilities competition becomes the primary justification for pre-empting state rules.

In late November, Rep. Markey and Rep. Jack Fields (R-TX) presented legislation along these lines. The Markey/Fields proposal is very similar to an earlier initiative undertaken by the Senate telecommunications subcommittee chairman Daniel Inouye (D-HI) and ranking minority member John Danforth (R-MO). In both cases, states would be forced to permit open competition to entrenched telephone monopolies and the federal ban against telco ownership of cable services would be removed.

At a Washington forum in mid-November, Gerry Waldron, Irving’s successor as senior counsel for Rep. Markey’s subcommittee, made a case for letting cable and telco forces go at each other over separate facilities. “Facilities competition may not be the most efficient approach where costs are concerned,” he said, “but it’s the way to go if you want maximum benefits to customers.”

Clinton makes universal access top priority. However, the Clinton administration is approaching the entire telecommunications policy question from a different angle. “For the administration we have not made a decision and intend not to make a decision as to whether or not we’re headed to a two-wired world,” Irving said. “What we’re trying to head toward is a competitive world, and that competition might be facilities based and it may be something other than a facilities-based competition.”

Irving added, “We believe there is probably a role at some point in the future for more entrants in the telephone market. We believe there is definitely a role at some point in the future for more entrants into the cable television or the video provision marketplace. But if you start asking us whether it’s two wires, three wires, five wireless providers — that’s a discussion we’re not getting into.”

Instead, the Clinton administration’s focus will be on achieving competition through open access to the network. At the mid-November meeting in Washington, Mike Nelson, senior advisor for science and technology policy at the White House, said universal access of service providers, down to the individual, is “essential to real competition.”

“We don’t want to see a situation where only a few people can get on line,” Nelson said.

“We have to have an open system,” echoed Irving. “That is a very important philosophical underpinning in the administration as we move forward. We want universal service, but we also think we have to have an open-access system.”

USING PROFITS FROM CONTENT TO PAY FOR THE INFRASTRUCTURE

But many people in and out of government in Washington believe this is the wrong emphasis. In a recent discussion, James Mooney, a consultant and former president of the National Cable Television Association, commented, “It’s very naive to expect these (telephone and cable) companies not to give their primary programming focus to services which they think will generate the revenue necessary to make this a business. The classic common carrier model just won’t work here. You’re going to have to let the facilities providers use their own facilities.”

This is what the pending House and Senate bills would do, with the stipulation that, for the first five years of broadband operations, the local exchange carriers would be limited to using 25 percent of the network capacity for transport of services in which they hold a proprietary interest. This is a long way from what Irving is talking about.

“We don’t believe anybody should be able to control the flow of information to the American people,” Irving said. “The common carrier model probably doesn’t work for cable or telephony as it exists today, but it did serve some very important purposes.”

A raft of complex problems for operators. Whatever common carrier model the administration intends to introduce, it will have a raft of complex problems to address that would otherwise be left to the marketplace in the competitive model favored on Capitol Hill. Ed Horowitz, senior vice president of Viacom International and president of its broadcast television division, doesn’t trust the competitive model, but his list of concerns suggests why the open access provisions could be extremely difficult to put in place.

“The bottlenecks in the digital environment can be at the server,” Horowitz noted. “Whose server are you on? Who owns the operating system? Do I have to pay $10 to Microsoft to get my application to every user and to get on that system? Will that server be open at the same price to everyone? If I need a million bits for my $100-per-month service, do I pay the same as someone who needs a million bits for their $2-per-month service?”

Horowitz enumerated similar areas of concern with respect to the network switches and customer terminals. He questioned whether telephone and cable companies should be able to “buy 10 million boxes” at discount costs and then tell service providers that, if they don’t want to pay the proprietary toll, they can put their own device into the home. It would have open access to the network, but it would be hard to compete.

“Is that open competition?” Horowitz asked. “I suggest not.”

Time to rethink legislation that limits RBOCs? Just to make things even more complex, the cable-telco debate is also saddled with the issue of court restraints on Bell operating company freedoms stemming from the Consent Decree in the AT&T breakup. Two House leaders have introduced a bill to eliminate these restrictions, which cover manufacturing and long-distance services, and have won Markey’s support for weaving these issues into those addressed by his legislation.

IN THE ABSENCE OF LEGISLATION, INDUSTRY STRIVES FOR SOLUTIONS

Against all of this action, some industry executives are calling for a more immediate solution. They would retain consideration of the whole range of issues as a priority but would address the immediate business opportunities opening up in telecommunications. Metropolitan Fiber Systems, a leading telecommunications supplier of so-called alternate access services, has called on the federal government to order states to allow competitors to interconnect with telco facilities at all points in the network, thereby supporting the flow of local exchange traffic among all facilities providers. This is a trail already blazed by state regulators in Illinois and New York.

“From a public policy standpoint the focus shouldn’t be on the telephone companies per se but on the telephone subscribers,” said Andrew Lipman, vice president for MFS. “As long as no residential or small business subscriber is impaired by a high level of competition, then competition should be encouraged.”

“The cable companies are too limited in network capability to take very much business away from the telephone companies right now,” noted a leading cable executive, asking not to be named. “But, if you give them the opportunity, you’ll see the process moving forward while everything else is sorted out. A simple law preventing exclusive franchises in telephony just like we have for cable franchises would get the ball rolling.”

The enticement is large where cable is concerned, even if the initial payoffs might be small. As noted by Tom Gillett, president of Gillett/Lehman, a telecommunications consulting company, local telephony is an $88 billion annual business while cable is a $20 billion business. “If Ameritech wins 30 percent of the cable business in its territory and cable wins 30 percent of Ameritech’s business, it turns out Ameritech’s revenues will go down by 22 percent and cable’s will go up by 86 percent,” Gillett said.

“We’re in a position to launch telephone competition, which means turning our networks into advanced platforms that would support every digital application you can think of,” said a senior cable executive, who asked to remain anonymous. “Imagine, here’s a revenue opportunity that could transform our networks immediately and would drive the telcos harder in the direction of upgrading theirs, and we can’t put that gear to use in most states under current law.”

The threat of facilities competition has already driven several telephone companies to accelerate network expansion, and, of course, the opportunity to compete is drawing telephone investors into cable. But the caution light flashing in Washington suggests that, if competition isn’t the cure-all, whatever the regulatory answer turns out to be is likely to be a long way off.

Fred Dawson