FCC Blamed for Uncertainty, Capex Drop; Analyst Sees No Title II Impact, Yet

The FCC came under fire from telco officials and other speakers at a Phoenix Center event Tuesday. They said its policies and practices were often too regulatory and capricious, increasing market uncertainty and discouraging network deployment. One group of panelists said the net neutrality order is bad for broadband investment, but an industry analyst disagreed the order was already depressing capital expenditures. Another panel knocked the FCC’s use of enforcement actions and deal conditions to achieve many of its ends. “It’s a bad way to run the railroad,” said Bob Quinn, AT&T senior vice president-federal regulatory.

Commissioner Ajit Pai also criticized the FCC, but lauded a draft order to approve most of a USTelecom forbearance petition, which is on the agency's Dec. 17 agenda (see 1511240070 and 1511250047). "That’s a welcome surprise to those of us who have followed the FCC’s approach to forbearance," he said in a speech. Pai said he hoped an FCC grant of ILEC relief under the petition would herald other steps to ease telco regulations, such as accounting and tariff rules.

FCC regulation and related industry fears inhibit broadband investments, creating tremendous “opportunity cost,” said Frank Louthan, a telecom analyst at Raymond James Financial. He said most of the $65 billion-$70 billion industry spends annually is to keep systems running, not to expand them: “The woodpile is lower than it should be.” Louthan said the FCC doesn’t seem to understand the need to make investment returns. Just the fear of net neutrality regulation has suppressed investment, he said, and the situation “could get substantially worse” with broadband reclassification under Title II of the Communications Act.

The Telecom Act was intended to create competition in a deregulatory environment, said Jeff Lanning, CenturyLink vice president-federal regulatory affairs. But he said the FCC net neutrality order threatened to turn a competitive market into a "regulated monopoly" by treating broadband as a “public good” and discouraging network providers from making money. “Net neutrality is the 1996 act in reverse,” said Lanning, saying he was speaking for himself. The goal isn't investment; it's "fast, free and all-you-can-eat” broadband, he said.

Broadband capital expenditures by major cable and telco providers are down about $3 billion in the first nine months of 2015, said Hal Singer, a Progressive Policy Institute senior fellow, updating a recent mid-year study (see 1509090056). He said the capex drop “strongly” suggests “the regulatory environment is scaring investors,” with Title II particularly problematic. While the FCC has promised to forbear from applying most of Title II to broadband, he said the commission had already effectively imposed some “unbundling” obligations on ILECs through the tech transition order’s wholesale IP replacement duties. Cable investment was higher than telco investment in the 1998-2005 period during which cable broadband was less regulated than telco DSL services were, he said.

Louthan disagreed Title II had caused the recent capex decline, which he blamed on “exogenous” factors. For instance, he said, AT&T capex was affected by its heavy AWS-3 spectrum auction expenditures, DirecTV buy and Mexican investments, while Charter Communications capex is now scaling down after major expenditures coming out of bankruptcy. He said investments might decline further depending on how the net neutrality court challenge is decided, but it’s too early to blame Title II.

Louthan and Singer criticized municipal broadband efforts. Tim Brennan, a University of Maryland Baltimore County economics professor and former FCC chief economist, said municipalities should have the right to undertake broadband efforts as long as they stay within city limits. Yes, cities should have the “right to do something stupid,” Louthan replied, saying most municipal broadband efforts quickly fail because they’re trying to do something that's uneconomical and outside their competence. “Municipal broadband is a really bad thing,” he said.

AT&T's Quinn criticized FCC use of enforcement actions to achieve regulatory objectives better addressed in rulemakings. He cited the proposed $100 million fine of AT&T for allegedly throttling mobile broadband users on unlimited data plans without warning or disclosing what it was doing, a violation AT&T is disputing (see 1506170050). Quinn said AT&T had disclosed its practice for three years consistent with the 2010 net neutrality transparency rules, which were “enhanced” in 2015. He suggested the FCC is pursuing an enforcement action because it’s easier than changing the rules again.

David Redl, chief counsel for the House Communications Subcommittee, said the FCC was seeking to expand jurisdiction through enforcement activity. He said his bosses are also concerned about FCC deal conditions, which he said should be narrowly tailored to address transaction-specific harms.

Mary Brown, a Cisco senior director-government affairs, said industry was partly to blame because company lawyers often like to offer “goodies” to government officials to make deals look more palatable. Quinn said he could deal with the Department of Justice’s demands for specific remedies to address antitrust concerns, but the FCC seeks wide-ranging conditions under its public interest standard: “It’s the waterfront.” Asked by Phoenix Center President Lawrence Spiwak how AT&T could get around such demands, Quinn quipped, “You don’t. I’m the poster child for ‘you don’t get around it.’ I’m the piñata, remember.”

Wilkinson Barker communications attorney Bryan Tramont said the solution was to make commission transaction decisions reviewable in court without going through a review by an administrative law judge. Redl said Congress should “start narrowing the law.” If the FCC can’t interpret a broad mandate in a predictable way, lawmakers should take that authority away, he said. Redl didn't find much comfort in an FCC view that T-Mobile’s zero-rating service Binge On was acceptable “for now” under net neutrality rules (see 1511190045).

Spiwak said the FCC was undermining the role of precedent and the rule of law: The net neutrality order engaged in “more legal gymnastics than Cirque Du Soleil.” Quinn said AT&T has weekly calls between its business people and regulatory lawyers about what the company can do under the net neutrality rules, and has had to shelve many ideas. But he said it was good the FCC had gone through the rulemaking process because critics can challenge the decisions in court and get a “final answer,” unlike in enforcement and transaction reviews. He said he believes the current net neutrality litigation is likely going to the Supreme Court, regardless of who wins at the U.S. Court of Appeals for the D.C. Circuit.

Quinn said he suspected the FCC would extend the comment period again in the special-access rulemaking. He said the FCC had indicated one CLEC's business data was still not available. Quinn lamented that the FCC is looking at 2013 industry data to make a decision in 2016 on incumbent DS1 and DS3 circuit services, which are declining in number. Before the proceeding is done, "this will be the long-distance market," he said. Any serious cost-benefit analysis would show there are “no benefits” and "enormous costs" to re-regulating DS1 and DS3 circuits, he said. “It’s a travesty.”