COMMUNICATIONS INDUSTRY OFFERS WISH LIST OF TELECOM ACT CHANGES

If communications lobbyists could go back in time and rewrite Telecom Act, Bell companies would be first to grab their pens, with broadcasters close behind, according to interviews by staff of Communications Daily. We asked industry representatives, Capitol Hill officials and others what they would change if they could rewrite Act with benefit of 5 years’ hindsight. Cable representatives appeared least likely to want change, having won deregulation, capital and entry into telecom business through Act. Views of CLEC interests ranged from structural separation for Bell companies to stricter enforcement.

There’s “one big thing,” Verizon Senior Vp Edward Young said: Easing Sec. 271 rules for data services, Bells’ primary campaign on Capitol Hill last year. “I would have walled off advanced services, Internet services and converging services from old style regulation,” Young said, using wireless service as model. If that had been done, there would be “more services, more competitive pricing, more penetration” in advanced services, he said. “I'm talking about DSL, fiber to the curb, wireless broadband.” No one understood how widely Internet would be used when Act was written 5 years ago, he said.

Young said he also wished Congress had set “date certain” for Bell interLATA entry rather than basing entry on complex Sec. 271 checklist. When Act was written, Bells thought they could live with Sec. 271 approach, Young said. “We thought we could quickly make a showing” that local markets were competitive enough to justify long distance entry. Young put some of blame for slow Bell entry on overly strict FCC implementation of checklist requirements, saying it was clear that FCC under then-Chmn. Reed Hundt put in place “a regime favoring new entrants” by requiring Bells “to demonstrate to an unprecedented degree” that their networks were open. “We record millions of metrics to prove in theory what already exists in practice,” he said.

Date certain idea was proposed in debate over Telecom Act but it was rejected by Congress, telecom experts noted. However, there was another option for Bells then, other than Sec. 271, said Ernest Kelly, pres. of Assn. of Communications Enterprises (Ascent), trade group for telecom resellers and other competitive companies. There was “great debate” over whether Bell entry into long distance should be triggered by local market share, he said. Idea was that Bells could enter market once competitors reached certain percent of local market. ILECs “roundly resisted” idea and “in hindsight that may have been a mistake for them,” Kelly said. “It’s hard to say, but if the threshold had been low enough, some Bells would have been in business sooner,” he said. At very least, it would have been “easier and more effective” but “at the time, most Bells thought they would be long distance in a year or 2” under Sec. 271.

It’s doubtful anyone would have suggested interLATA restrictions should continue beyond 5 years and “no one would have ever contemplated there would be entry in only 4 states,” Qwest Senior Vp Steve Davis said. He also would set date certain for interLATA entry and would have exempted Internet services from Sec. 271. He also questioned whether Congress contemplated use of complex operations support system (OSS) testing for small states such as those served by Qwest’s U S West unit. It seems “extreme process” for Bells to go through in states other than biggest ones such as N.Y. and Tex., he said. There isn’t “significant” competition from large carriers such as AT&T and WorldCom in states such as Neb. and Wyo. so it seems unnecessary to prove one’s OSS system can handle huge volumes, he said.

With advantage of hindsight, Davis said he also would have done something to restrict FCC from instituting its strong pick- and-choose (PAC) rule. PAC rule lets competitor opt into any part of interconnection agreement that ILEC makes with any other competitor. Qwest, which is noted for innovative agreements with competitors such as McLeod, finds PAC rule discourages “business- to-business deals,” Davis said. Negotiating business deals requires give and take, he said, each side offering something. However, if another competitor can walk in and take part of deal without making corresponding concession, it’s harder to strike those deals, Davis said.

Any speculation about what could have been done differently has to be couched in awareness that Telecom Act, like any legislation, was based on compromise, said Ascent’s Kelly. Going back now and revising it might end up with same kind of imperfect document based on conflicting views, he said. That given, Kelly said he would make 2 changes: (1) Mandating specific rate “in the 30% range” for wholesale discounts offered by Bells when leasing facilities to CLECs. (2) Setting “one ubiquitous” standard for making unbundled network element (UNE) platforms available to competitors. By leaving standards and rates to state regulators, there’s “no uniformity” on either of those issues, he said.

AT&T Gen. Counsel James Cicconi said hindsight had shown Bell companies should have been required to structurally separate their retail operations from part of their companies that control transmission lines. “The Bells have every opportunity to hamstring potential competitors” because they control facilities competitors must use to reach customers. “The natural impulse is to try to hang onto a monopoly,” he said. Only solution is to require retail unit to lease facilities under same prices and terms as competitors, as Pa. PUC plans to require, Cicconi said. That would quickly “end the debate about costs” as Bells learned they couldn’t compete without lowering prices, he said. As it is, 5 years have gone by and residential and small business customers still don’t have choice, he said. “We have to decide if we're really serious about tackling the last monopoly bastion in America,” Cicconi said. “Five years after the Telecom Act, 96% of residential and small business customers have no choice.”

CompTel Pres. Russell Frisby also would opt for separating Bell retail and wholesale operations. “The basic premise of the Act was you can incent the Bells to open their markets by offering them long distance entry,” but that proved wrong, he said. “You can’t incent a monopoly to give up its market.” Absent structural separation, Frisby would have strengthened Act’s enforcement clauses. Fines recently paid by SBC and Verizon were “simply rounding errors” for such large companies, he said. “There is no real stick in the Act.”

Congressional Aides Look Back

“We should have focused more on how the convergence of technologies affects the FCC’s ability to regulate,” said aide to House Commerce Committee ranking Democrat Dingell (Mich.). He said “our one mantra” when drafting Telecom Act was “we have to make sure like services are regulated in a like manner,” but that’s not how things turned out. Aide to Telecom Subcommittee ranking Democrat Markey (Mass.) said he would add “prohibition on horizontal Bell mergers.” He also would have “beefed up the enforcement provisions” to help FCC oversee opening of local telephone market.

ALTS Pres. John Windhausen, who helped write Act as Senate Commerce Committee aide, would have clarified jurisdiction between FCC and states because industry “lost 2 years in litigation over who was in charge.” He said Congress was so “pressed for time” that details such as that fell through cracks. “It would have been great if we had devoted one extra day to setting the jurisdiction.” He said he also would have clarified UNE language because, “to be honest, I don’t think the UNE platform was really the intention of Congress.” Congress envisioned UNEs’ being used to supplement facilities-based competitors but it was concerned that ILECs might give competitors UNEs that didn’t work together, for example, because they were different protocols, Windhausen said. To avoid that problem, Act included sentence mandating that network elements be provided in way that carriers could combine them, he said. That sentence is basis of UNE platform as alternative entry strategy, which Congress didn’t anticipate, Windhausen said.

Like Markey staffer, Windhausen would have imposed penalties on Bells that didn’t adequately open their local networks. He said Bells had proposed penalties as alternative to Sec. 271 checklist but “it would have been great if Congress took both” routes and added penalties for violating market-opening requirements of Sec. 251. “We assumed Bells wanted to get in so badly they would do whatever it took to open their markets,” he said. Windhausen said he also wished Congress had added “greater review process” for Bell company mergers. “Antitrust laws are designed to prevent monopolies from happening” but aren’t “strong enough” to consider mergers by companies that already are monopolies, he said.

“If we made one mistake in 1996, it’s that we did not reform the FCC at the same time we reformed the law,” House Commerce Committee Chmn. Tauzin (R-La.) said: “As a result, the agency has created roadblocks to competition in both the telephone and broadband markets.” He urged Congress to “save the self- congratulations until we complete the job of deregulation.”

Precursor Group CEO Scott Cleland, who likened Telecom Act to “the Maginot Line” between French and German armies, said law “should have been more flexible and forward-looking.” Instead of naively assuming that local phone competition would develop like long-distance market, Congress should have looked more carefully at differences between 2 markets, he said. While long distance business requires relatively little new equipment and capital and has high price elasticity, he said, local phone business requires large outlays of capital on new equipment and has “dismal price elasticity.” In addition, he said, long distance rates “were artificially high” and could be cut easily with competition while local rates were “artificially low” and had to rise for profits to be made. “To bring competition to the average consumer, you need to raise their bill by 50%,” he said. “That’s why almost all competition has occurred in the business segment, where rates were too high.”

Cleland said he also would have urged Congress to be “less specific” in regulating rival industries and “more technology- neutral.” Instead of spelling out specific regulations for phone, cable and other legacy technologies, he said, he would have had Telecom Act set broad policy principles or parameters that could apply equally well in digital era. “We have structured our law and regulations around old analog technologies,” he said. “The law needs to be upgraded for integrated broadband digital technologies.”

Broadcasters Would Seek Clarity

Broadcasting executives, unhappy with way that Telecom Act provisions were interpreted by former FCC Chmn. Hundt and William Kennard, said they would have pressed Congress for more precise language on digital must-carry mandates, DTV receiver standards and newspaper-broadcasting cross-ownership. In particular, NAB Pres. Edward Fritts said, he would have liked to have seen Congress spell out cable operators’ obligation to carry DTV signals during nation’s digital transition. “We thought it was pretty clear when it went in,” he said.

Fritts said he also wished Congress had stretched out DTV transition beyond current 2006 deadline, especially for TV stations in smaller markets. While 180 digital stations are operating in 62 markets, he said, timetable may be too tight for many stations to meet. “It took 24 years to go from black-and- white TV to color,” he said. “We probably should have used history as a guide.”

Fritts hastened to add that he didn’t favor major overhaul of Telecom Act, just “some tweaks around the edges on digital broadcasting.” While not perfect, he said, legislation “has been a resounding success” for broadcasters and “the positives far outweigh the deficiencies.” He expressed some surprise, though, that Act had led to more and quicker consolidation in industry than he had expected. “There clearly has been a terrific change in the landscape for broadcasters,” he said.

Cable executives, quite pleased with way Telecom Act deregulated most rates, enabled them to enter high-speed data and local telephony markets and generated capital investments for plant upgrades, said they would change very little in law. But even they would tinker with legislation if given chance. NCTA Pres. Robert Sachs said he would have favored complete rate deregulation for cable operators, even for their lowest broadcast basic tiers, so that they no longer had to worry about rate monitoring by nation’s 30,000 local franchising authorities. Congress left that tier regulated as lifeline service while deregulating higher service tiers in March 1999.

Sachs said Congress also might have set “brighter line as to what constitutes effective competition” between cable operators and such rivals as DBS. With DBS penetration surging past 15% nationally, he said, some sort of objective, measurable standard like that would have allowed FCC to determine quickly when there was effective competition, further freeing cable from regulation.