How to change telecom policy in two easy court cases

Dec. 1, 2000

A Verizon victory in Supreme Court case 99-1244 would extend the economic life of copper loops and diminish the incentive to replace them.


No one defends and advances the interests of incumbent phone companies better than Verizon, and its skillful legal argument may lead to longer economic life for copper loops while letting the incumbents quietly step away from common-carrier obligations.

In October, the Supreme Court heard case 99-1244, GTE vs. the FCC, where the incumbent phone company (now Verizon) maintains that the FCC is confiscating or "taking" GTE's and other local phone companies' private property, an act that violates the Fifth Amendment of the U.S. Constitution. If the Court agrees, then it must overturn the FCC's Total Element Long-run Incremental Cost (TELRIC) methodology, which sets the prices competitors pay for use of incumbents' facilities and the amounts of universal-service subsidies for high-cost telephone service areas. A Verizon victory would mean higher prices for the incumbents' competitors, making legacy networks more valuable, extending the economic life of copper loops and diminishing the incentive to replace them.

Case 99-1244 stems from a decision by the U.S. 5th Circuit Court of Appeals that TELRIC is not a confiscation of private property. But in another case involving GTE, the 8th Circuit Court recently found that TELRIC is a confiscation. The Supreme Court's decision will settle the conflicting rulings of the 5th and 8th Circuit Courts.

The Supreme Court's agreement with GTE would not be life-threatening to the growth of truly broadband facilities in local markets (see Lightwave, November 2000, p. 26); however, the damage will be potentiated if the 4th Circuit Court finds for GTE in yet another case where Henrico County, VA, attempted to "create" or "force" (depending on your opinion) open access on cable Internet service, a variation of cable-TV service governed by the Cable Act of 1984, according to AT&T. GTE says a telecommunications service is being provided by AT&T, and it should be regulated just like incumbent phone companies, whose networks are used by Internet service providers such as America Online and EarthLink Inc. GTE's legal argument is directed by its general counsel, John Raposa, who said, "regulation is based on the service provided, not on the technology used...cable modem Internet access and DSL [service] are functionally equivalent services."

GTE's counselors ably begin the company's legal brief with the premise that "a central tenet of the Communications Act is competitive and technological neutrality" and then turn quickly to exploit the ambiguities of the Telecommunications Act of 1996, which the Supreme Court describes as "a model of ambiguity or indeed self-contradiction" (see Lightwave, April 1999, p. 20).

For example, the law defines telecommunications services as "the offering of telecommunications for a fee directly to the public, to be effectively available directly to the public, regardless of the facilities used." The notion of neutrality also extends to advanced telecommunications capability, which is defined "without regard to any transmission media or technology."

Andrew Schwartzman, head of the Media Access Project, added another dimension to the dispute, claiming the case "involves First Amendment issues" because people use the Internet as "a means of expression." Apparently, he worries about AT&T restricting the free speech of Internet users because cable providers have the right to censor content by editing it or deleting it at their discretion, unlike common carriers. AT&T has its own view of free speech and told the Court that "cable operators...are like publishers of electronic magazines...they select programming...Whether [it is] HBO, CNN, or an interactive online cable service that has Internet access features...the Supreme Court has repeatedly held that these activities...are exercises of editorial discretion that are protected by the First Amendment." GTE countered, telling the Court the editorial right applies only to "one-way delivery of video programming" and that in the 1984 Cable Act, Congress clearly recognized that cable operators were capable of providing "non-cable communications services," which would be subject to the same regulation as "like services offered by competitors."

These arguments may have been persuasive with the judges. Kristan Van Hook of the OpenNet coalition observed that "all three members of the [appeals] court expressed substantial skepticism with AT&T's position." Whatever the 4th Circuit Court's decision is, it will be appealed to the Supreme Court. It is an open question whether that institution can untangle the knot formed by the 1984 Cable Act, 1996 Telecom Act, and First Amendment. The Court is sure to be legally well informed, but it will not necessarily be professionally well informed about the commercial and economic aspects of the case. A final decision by the Court won't come before January 2002, but the whole matter may require new legislation, perhaps the most appropriate way to resolve the issue.

GTE's legal maneuvers are aimed at achieving the same status for cable Internet services and DSL services-regulate both or deregulate both-the theme of Verizon's president, Ivan Seiden berg, when he spoke at the National Press Club in September: "We're playing this game by two sets of rules...We're trying to upgrade our networks with broadband capabilities while operating under...rules that restrict our revenues and devalue our [assets]... Cable is permitted to leverage its monopoly... lock[ing] up programming, Internet access, instant messaging, [and] intellectual property."

Uniform treatment would create a dilemma for Congress and the entire country. If "functionally equivalent" services must be treated in "like" manner regardless of the transport method, then private carriage and common carriage cannot coexist: Cable Internet service must be reclassified as a common carriage, or DSL Internet services must become private carriage-the country can't have both. According to Seidenberg, "Content and transport are becoming inseparable, as we see with AOL-Time Warner, AT&T and Excite@Home, and Microsoft's investments in cable and satellite systems." If Verizon's argument is followed to its logical conclusion, then satellites, free-space laser-optic communications, and every other form of wireless communications will face the same dilemma: A wireless technology using an unregulated portion of the radio spectrum to deliver Internet services could be classified as common carriage.

However, the notion that content and transport are inseparable is actually a trap formed from two equally necessary conditions: delivery systems must be capacity-constrained and content origination must be monopoly-controlled. Slacken the capacity constraints or prevent monopoly in content origination, and separability is restored. The best way to preserve separability is a national door-to-door fiber network; the line's owner could never create enough content to fill the fiber, even if monopoly control applied to content origination. Also, the Internet is based on common carriage-content and transport are separable. How else would millions of residential and small businesses be "online?" Re cent history suggests that Internet content, not Internet transport, is the best avenue for entrepreneurs and economic growth: Common carriage is a more potent economic force than private carriage.

It is tempting to conclude that cable Internet services should be regulated as telecommunications services, but the analysis is incomplete because it ignores the comparative investment activities of the cable and telecom industries. Corpor ate investment behavior is certainly relevant to the formation of national telecom policy, as Verizon's Seidenberg said in his speech: "It's time to stop playing tomorrow's game with yesterday's equipment."

Yes it is, but when the incumbents push DSL as "broadband" infrastructure, they literally are using yesterday's equipment to deliver "21st century" services. They are doing the same thing at the Supreme Court in case 99-1244, arguing that yesterday's cost, not the FCC's forward-looking TELRIC cost, is the proper basis for interconnection pricing and universal service funding. The result could be perverse: The country may end up with private carriage on outdated plant because the incumbents consistently choose to rely on old plant, tweaking it rather than building new high-speed infrastructure. In contrast, cable operators have a history of bringing fiber into their distribution plant much faster than the incumbents. The cable Internet providers say they will rapidly build new infrastructure. There's time for the cable side to perform, and if it doesn't, it knows what will happen.

Stephen N. Brown writes on public policy in telecommunications. He can be contacted by e-mail at [email protected] or telephone: (615) 399-1239.