Incumbent 'wish list' passes House

FCC chairman may outflank Senate with a pair of 'made for ILECs' regulatory reviews.

BY STEPHEN N. BROWN

By Feb. 27, the U.S. House of Representatives was expected to have approved H.R. 1542, the Internet Freedom and Broadband Deployment Act of 2001, the so-called Tauzen-Dingell bill, which amends the 1996 Telecommunications Act so that incumbent telephone companies are free from many constraints that now limit their commercial behavior. For example, the incumbents will no longer need the Federal Communications Commission's approval to offer DSL services that cross state and interLATA boundaries. The bill's passage by the House does not assure victory in the Senate, because most senators know that several leading House Republicans and Democrats strongly opposed the bill. Rep. Billy Tauzin (R-LA) introduced the bill in January 2001 but needed more than a year to pass it because the House Judiciary Committee opposed it, seeing his bill as an attack on state and federal consumer fraud laws that constrain the incumbents.

The House's bipartisan opposition to Tauzin-Dingell sent a signal to the Senate, judging from the lackluster support given to Senate bill S.1126, the "Broadband Deployment and Competition Enhancement Act of 2001," which is the Senate's version of Tauzin's bill. S.1126 is sponsored by Sens. Sam Brownback (R-KS), Mike Enzi (R-WY), and Tim Hutchinson (R-AR). All are junior members, and Brownback is the only member of the Senate Commerce Committee, which is responsible for presenting the bill to the entire Senate. It is significant that the committee's senior Republicans-John McCain, Conrad Burns, and Trent Lott-are not co-sponsors. The committee's chairman, Ernest Hollings (D-SC), has previously opposed Tauzin-Dingell, and there is no indication he has changed his opinion. If Hollings does not support the bill, there's no chance that Senate majority leader Tom Daschle (D-SD) would allow a vote on S.1126.

The surest sign that Tauzin and his allies knew their bill would not soon become law came in late December, when the FCC began docket CC 01-337, Review of Regulatory Requirements for Incumbent LEC Broadband Telecommunications Services, and docket CC 01-338, Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers. FCC chairman Michael Powell said, "I vigorously support" these two reviews meant to examine "whether incumbent LECs...must also be treated as dominant [carriers just because] they use DSL...in competition with cable-modem service providers and other types of platforms." His language implies that the current law discriminates against the incumbents, an opinion perfectly matching language in S.1126: "[The FCC] shall identify in its regulations... disparate treatment among various types of providers of advanced service and high-speed Internet access service or among different technologies...[and] modify its regulations in order to eliminate such difference or disparity in treatment."

Whether the FCC chairman can achieve by rules what Tauzin cannot is a sensitive question. Michael Copps, a long-time member of Hollings' staff before being appointed an FCC commissioner, issued a statement: "[S]ome parties may...conclude that the Commission has a predetermined agenda to remake the competition framework...setting competition policy is the exclusive jurisdiction of Congress...if our proceedings should ever turn into an attempt to undermine the competitive framework that Congress adopted in the 1996 Act, I will-without hesitation-oppose such overreaching." Copps is right-Powell's agenda has the appearance of being "predetermined."

Corning supports the FCC's reviews. The company's president, Wendell Weeks, said in a letter to the FCC chairman: "[W]e have discovered that regulation is a significant hindrance to investments by ILECs [incumbents] in fiber access solutions...As evidenced by SBC's experience...the unbundling, resale, and pricing regulations are discouraging invest ment...having a serious negative impact on the fiber-optics indus try...the commission should decide not to impose unbundling and resale obligations on fiber-based broadband facilities employed by ILECs in new-build and total rehab situations."

Corning's position is understandable because much of its manufacturing capacity is idle, and the financial decline of fiber-network companies makes incumbents a major source of purchases and cash flow. But two issues cast doubt on the proposition that incumbents will substantially increase their purchases if fiber is excluded from unbundling and resale requirements:

Fiber cannot contribute much to the incumbents' well-being because they already have extremely high returns.
DSL is subject to the same "unbundling, resale, and pricing regulations" as fiber, but the incumbents have consistently chosen to invest in DSL loops, not fiber.

The FCC's ARMIS database shows SBC having an 18.9% return on interstate activity in 1999 and a 20.9% return in 2000. The other incumbents have similar returns. For in-state operations, the returns range from 15% to 20%, well above the returns in most other industries. It is not clear how fiber will sustain the incumbents' returns or raise them to higher levels such as 25% or how the whole economy can bear up under the incumbents' returns, which are clearly a burden in America's economy, where fixed-asset and equity returns are nearly 5% and gross domestic product is now growing at 2% annually.

DSL may be even more attractive to the incumbents after the FCC "eliminate[s]...disparity in treatment" of different technologies, freeing DSL and fiber from the regulatory requirements that Corning objects to. The fiber industry's support of the incumbents' regulatory initiative is unlikely to be reciprocated. The only tradeoff that would lift the regulatory requirements, while not granting the incumbents near-total control in local markets, is for the incumbents to limit their market share. But they do not have to do that, because there are few facilities-based competitors and too little capital available to them. Maybe the November elections will break the regulatory stalemate.