POWELL BLAMES CLEC MONEY WOES ON LENDERS, BAD BUSINESS PLANS

Regulators have “some culpability,” but overreaching by high- yield capital markets and companies themselves is more to blame for financial difficulties facing CLEC industry, FCC Chmn. Powell said in 2nd installment of Communications Daily interview. First part ran Tues (CD May 22 p2). “I think high-yield money went chasing unsound business fundamentals,” he said. Some companies were “short-term from the beginning… designed to get bought” or to take advantage of reciprocal compensation, Powell said.

Powell said managerial changes being made at FCC were extremely important as agency worked to gain more independence from industry it oversees. Unless there are enough technology experts on its staff, FCC will be at mercy of industry experts pushing their own self-interest, he said. “My concern is more and more companies are very technologically sophisticated and… are very good at advocating and spinning views of technology.” He said “if you don’t have a good technical foundation yourself, it’s hard to catch the sleights of hand.”

Powell also outlined his views on spectrum policy, emphasizing need to find ways to add flexibility to that policy and importance of role of technology. FCC has had several initiatives under review in that area, including proposals on secondary markets and software defined radio. Interagency nature of spectrum planning also has received increased attention lately as Commerce Dept., Defense Dept., NTIA and FCC hone in on decisions for making more spectrum available for 3G and other advanced wireless services. Following is part 2 of transcript of Powell’s interview -- Edie Herman, Mary Greczyn

Q: Some say the FCC shares part of the blame for the financial problems facing competitors because regulatory uncertainties have deterred investment. Do you have views on the relationship between regulation and investment?

A: There are a lot of things that are the consequence of ending a hundred years of regulated monopoly. One of them is as you release the rein of state-sanctioned monopolizing and go into a competitive environment, the regulators don’t guarantee things in the rate base anymore. These new carriers have got to go out and make their own money or cover their own costs. I think that many of them have a lot to learn about the right way to do that. I think that the government, too, has an obligation to learn how its decisions intersect with these markets. Now in the current meltdown I think it’s very convenient to point to the government.

Q: The government has to take some of the blame doesn’t it?

A: The government does have some culpability, but I think if there are 10 reasons why CLECs are in trouble, regulation might be the tenth. I would agree with the point of regulatory uncertainty. Whenever the government takes too long or doesn’t reach a decision, I think that uncertainty is way worse than any decision it makes. So I would argue there are a number of things that probably went on longer than they should have. If you look at my statement in reciprocal compensation the first time two years ago I complained about us not deciding about compensation then. However, the capital markets deserve a lot of culpability. I think high-yield money went chasing unsound business fundamentals. I've talked to a lot of CEOs who knew what they were about to do was not the right thing to do and they had to do it anyway. They had to grow too fast. They had to get too many markets. Their networks weren’t ready for it. They knew it. But the high-yield capital market demanded that they do it. I think that’s the central problem, but other things happened, too. I think that a lot of competitive companies entered the market on really inefficient and short-term business models. The other thing was regulatory arbitrage, cream-skimming, reciprocal compensation, arbitrage between different compensation mechanisms.

Q: Do you think there were companies out there that based too much of their business plans on arbitrage?

A: Some were short term from the beginning. Many of them were designed to get bought. Many of them were designed to take advantage of reciprocal compensation until it was gone. You know, why not? It’s practically a cash machine. And I think that the government, and the capital markets, incented that negative behavior. I think government policy was a little too generous in incenting quick models. I think resale is valuable, UNE-P [unbundled network element platforms] is valuable. But at the end of the day it’s my personal belief that resale and UNE-P are good entry strategies to a point, but you've got to have a plan to go to something longer and more viable. I personally believe that you have to have more facilities of your own before you're really offering a differentiated product at a better price over a long period of time to consumers. I think we probably bent a little more in the direction of resale than facilities because everybody was really anxious to get competition. And it led to a lot of litigation. I mean talk about uncertainty, we spent three years on Iowa Utilities [court case before 8th U.S. Appeals Court, St. Louis] because of things like UNE-P. I don’t disagree with UNE-P as a vehicle, but you know it wasn’t in the statute like that. It was sort of a creative combination of the Commission. But you know part of what I get paid for, is we have to do the hard medicine stuff now. Reciprocal compensation, collect access charges, call locations remand, intercarrier compensation. This is our duty, to make sure whatever competition does come in is real and lasting. And I think that if you talk to the CLECs who are succeeding and are going to succeed and have at least some degree of a facilities plan, they'll say that this is what they need.

Q: You have mentioned in the last few months the need for a national spectrum policy. That wouldn’t be something that would be on the FCC’s shoulders alone. Where do you see the FCC’s role? How fundamental a shift would there have to be in getting more flexibility?

A: It seems that you will find no one now who doesn’t say let’s have a better national spectrum policy. I think there’s still a lot of thinking to go on about what that means. So as long as you have divided authority, I think what you're talking about is important, but it’s probably increased coordination and cooperation and slightly better long-term planning. And I think that there’s a lot of opportunity to improve that and I think that we're working hard on that. But that’s a lot to do with process and procedure. Your other question though is really the one that is on the table, which is if what you mean by national spectrum policy is a more efficient way for spectrum to get to its highest and best uses, you would have to talk about a fundamentally different way of allocating in the first place. And that may mean a more property-like or market flexibility model. I think technology would be a part of it, that helps make spectrum frequency bands less critical than the equipment. It might be innovative technologies like ultra-wideband or other things that put a premium on sharing as opposed to ‘I need an allocation.’ I think those things are exciting for that reason. And it may mean the driver’s license model which is here’s your license, here are the technical conditions but we don’t tell you what to do. And let’s just jump to the future. If we had that, I think that there'd be less anxiety about a national spectrum policy because the policy would basically be that the government doesn’t have to coordinate and Tom Wheeler and CTIA could go find their spectrum for 3G more flexibly in the market. But the problem is, there’s a market failure here and it’s something people don’t think about. A lot of the value input is taken out of the market by the government. It’s just like how the government can direct oil prices if it does certain things. The government as a user affects market conditions pretty dramatically.

Q: Can the government change its needs?

A: Spectrum is such a powerful way to do things, there’s no doubt that there will be government functions that need those things as well, very importantly. And I've been a soldier. You're not going to tell me I can’t have a radio on the battlefield, I hope. I hope you're not going to tell me I can’t guide the missile that’s flying over my head so it doesn’t land on me. These are important things, but I think part of what national spectrum policies will mean is that there is somebody who really is challenging, that every use someone wants to make is the most optimal way of doing it. You know I come out of the defense world a little bit myself and I wouldn’t begin to second-guess some admiral’s claim that this is needed for war fighting. But should somebody [be] in the loop? Probably, because DoD’s uses are very critical, but they're probably like broadcasters. Why should they have any interest in giving anything up? They're self-interested, too. They're not a commercial player. They're a privately held entity. And if I was DoD, you'd have to come looking hard before I would just voluntarily hand over anything I had. And I just think that somebody in that loop has to be able to sort of act as an honest broker, look into that environment and say wait a minute, why do you have to have this for that purpose? Are you really taking more than you need? Does the ship really have to have this kind of communication as opposed to that kind of communication? That’s something that the FCC can’t get near. And I just think that that’s why they've become such a central role for either the Commerce Department or the Presidency somewhere. Because you're talking about the FAA and you're talking about DoD. Somebody’s got to be able to look past the presentation.

Q: You've said you have concerns about placing issue- oriented conditions on mergers. Does that mean we will see less of that under your chairmanship?

A: My view is much more of an antitrust one. If I find harm as a consequence of the combination, I don’t have any problem with a condition that attempts to mitigate that identified harm. What I have a problem with is this kind of a situation: The combination creates harm A, but the conditions don’t have anything to do with harm A. It’s just a condition that we like, so in some kind of odd sense we think it just outweighs harm A. My problem with that is it means harm A still harms people. My concern is with using the kind of advantage of a merger to push bigger policy questions that are more effectively done in a rulemaking. It has a lot to do with the propriety of that process. People will say he doesn’t believe in mergers with conditions or whatever. I think it’s more like I don’t really think transactions are the place for substantive policymaking. You'll find consumer groups and others with the same complaint because mergers are an adjudicatory proceeding. The only parties are the companies. These conditions are often just kind of negotiated one on one with the company, with limited public comment. I mean there are a whole lot of things you can criticize about doing it that way. I just have a little bit of a tighter view of what you're supposed to do. And I think you're supposed to find the harm first. You're supposed to consider whether it can be mitigated at all. And if it can be mitigated, the conditions should be about doing that. There’s another side to this. [Imposing conditions] means you never block a merger. Right? Because you'd never have to block a merger, it’s a wonderful approach. You just start working on enough conditions that you can sell that it’s okay. You never have to have the courage to say this is just harmful. Boom! You know sometimes in antitrust we would look and say there’s nothing going to solve the harm here. This agency’s never going to do so under this process.

Q: You have spoken about the need to reform agency processes. How is that going?

A: It’s a really important story. I am very proud of about the managerial reform we're pursuing. I think the communications space is becoming more complicated and less certain. When you make a rule, you hope it will remain viable for a long period of time, that it doesn’t become irrelevant tomorrow because technology eliminated it. We're trying to convert our thinking to knowing how to make thoughtful decisions against an uncertain future rather than trying to drag up crystal balls, see the future and then regulate it in advance, which I think is often what’s pushed. I also think that companies have real interest in pushing the latter because what companies want us to base our decisions on is the way they want the world to come out. That’s what company representatives are paid to do. They want to advance their vision of the universe by getting the government to be a party to that vision and then regulate in a direction that they have decided they want to go.

Q: Do you and your staff spend a lot of your time on managerial tasks?

A: We spend a lot of our day just managing, working on our strategic planning, our budget planning, our resource allocation, how we measure productivity, how we're going to serve consumers better. With my background in management, I love those kinds of activities as much as all these issues. I really do. It gets trite, but I think about it a lot like a basketball team or an Army. You can build a team in an organization that’s trained and disciplined and has the right weapons. I want the people here trained with the assets and the tools they need so that whatever comes, they'll be able to engage it and win more than they lose. That’s what coaching a basketball team is like. That’s what a company commander who trains 150 guys to fight does. You can’t script the battle. People have to be prepared. They have to know what to do when certain things start to happen, and you hope that it comes out. That’s my approach to it.

Q: Does your plan to add more engineers stem from a desire to be more independent in making decisions on technology issues? Is this also part of an effort to make decisions faster, more efficiently?

A: Probably both. We have to be able to reserve enough independence to make fair, independent decisions involving companies or industries without their having too much influence in their basic understanding. My concern is more and more companies are very technologically sophisticated and more have realized that, just as lawyers master the art of advocating issues and spinning them, top technologists are very good at advocating and spinning views of technology. I think if you don’t have a good technical foundation yourself, it’s hard to catch the sleights of hand. We have lawyers who are very good at this in the policy area. They can say wait a minute, what you failed to say was this. But we have a hard time if somebody with a technical background is doing that to us. I've seen that become an issue more and more. In four years I've been across the table from some of the world’s best. I mean I've talked to Bill Gates on instant messaging. I've listened to Steve Case’s version of what will happen. I mean these are the barons of this field. And I tell you if I had to go one on one about how to see the world with people of that caliber, we better get some horses in the stable to help with that. You suddenly become kind of susceptible to being blown about by self-interested people.

Q: And what about the timing issue?

A: I also think it comes at great cost of time. I'd say the same thing about certain parts of our merger review, based on the way we're resourcing our intellectual base of talent. I'll tell you half the time people are learning what this stuff is. If it’s a big technology, you know you're watching people go to school for six months before they can even start to have opinions about what’s right or wrong. And that does take a long time. I can give you all kinds of examples. On instant messaging, watching people figuring out what it was or it wasn’t. It took a long time. That is true of things like interactive TV as well. Mergers are another example. We don’t have a huge stable of antitrust lawyers. We get a big merger and sometimes you've got months of people learning the basics of an economic theory. What is predatory pricing really? People get out their antitrust books and their merger guidelines and are now learning it as they go. Sometimes I know enough to know we're not good enough at it.