DEPARTMENT OF COMMERCE
NATIONAL TELECOMMUNICATIONS AND INFORMATION ADMINISTRATION
Washington, D.C. 20230
In the Matter of
Deployment of Broadband Networks and
Docket No. 011109273-1273-01
COMMENTS OF COMPETITIVE TELECOMMUNICATIONS ASSOCIATION
The Competitive Telecommunications Association ("CompTel"), by its attorneys, hereby responds to the request by the National Telecommunications and Information Administration ("NTIA") for comments on a series of issues regarding broadband deployment and policy in the United States. See Notice, Request for Comments on Deployment of Broadband Networks and Advanced Telecommunications, Docket No. 011109273-1273-01, rel. Nov. 19, 2001 [hereinafter "NTIA Notice"]. These comments amplify and expand upon the letter submitted to FCC Chairman Michael Powell regarding CompTel’s vision of how government can foster ubiquity in high-speed data services.
A recurring issue in the Notice is whether the legislative regime established by Congress in the Telecommunications Act of 1996 is antithetical to broadband investment by incumbent local exchange carriers ("ILECs"). Specifically, the questions posed by NTIA seem to focus on "last mile" telecommunications facilities devoted to the carriage of high-speed/high-bandwidth data traffic for use by primarily analog voice communications customers (the so-called "mass market") and not America’s unquestionably competitive, diverse, and robust high bandwidth "backbone" network. Thus, it is these formerly-described facilities on which CompTel will focus its analysis and comments.
Similarly, CompTel, while attempting to answer NTIA’s comments with the most focused and targeted manner, will not attempt to define an economically meaningful market without any indication of the level of specificity of analysis sought by the NTIA. This said, it is clear that the NTIA has not been unaffected by suggestions by the Bell Operating Companies ("BOCs"), which have proposed various modifications to this regime in an effort to increase their "incentives" to invest in broadband infrastructure. CompTel submits that this policy debate is fundamentally misguided at many different levels.
· The best way to ensure optimal broadband supply and demand is to ensure a fully competitive telecommunications marketplace. New laws are not necessary. Congress already adopted the necessary statutory provisions in Section 251(c). In a competitive environment, ILECs make the maximum efficient infrastructure investment because they have no alternative; CLECs make the maximum efficient infrastructure investment if they have TELRIC-based access to existing resources; and broadband demand is optimized as prices are lowered to competitive levels.
· The Notice inadvertently omits to address the need for diverse, redundant broadband investment by non-incumbent carriers in order to make our public telecommunications infrastructure less vulnerable to terrorist attacks.
In his recent book, The Future of Ideas, Lawrence Lessig argues that the Internet represents a type of public "commons" that maximizes innovation and growth. Professor Lessig warns that the Internet is being balkanized and leashed – and ultimately stripped of its capacity to operate as a "commons" – according to the proprietary interests of various industry participants. CompTel submits that Congress wrote Section 251(c) of the Telecommunications Act of 1996 to function as a telecommunications "commons." Congress intended for all carriers to be able to access the ILECs’ local exchange networks at cost-based rates – either by obtaining functionalities through unbundled network elements ("UNEs"), or on a resale basis – in order to promote competition and innovation in the local services sector. The ILECs’ monopoly local exchange network was to be a neutral platform that all carriers could access to provide and develop services for subscribers.
The ILECs’ proposals – purportedly designed to promote their own broadband infrastructure investment –are an overt effort to kill the telecommunications "commons" created by Section 251(c). New entrants would be forced to pay premium rates to access the local exchange network, and their use of it would be severely limited by restrictions on the availability or use of UNEs. At the end of this proceeding, NTIA should recognize the fundamental importance of preserving and implementing the telecommunications "commons" in Section 251(c) to promote maximum efficient competition and investment in broadband facilities and services.
The Notice asks parties to address several primary policy considerations, including the importance of facilities-based competition. CompTel also addresses one issue that the Notice does not raise – the national security implications of our broadband infrastructure.
Facilities-Based Competition. CompTel agrees with the oft-expressed belief that the U.S. Government should encourage facilities-based competition. However, CompTel disagrees with the views expressed by the ILECs in several respects.
First, it is counter-productive to attempt to build our national infrastructure by requiring new entrants to build their own networks to provide services from the outset. As even Verizon concedes, "[b]uilding network components before a customer base has been established . . . places a strain on capital resources and may eventually lead to failure." Indeed, none of the BOC "new entrants" into the interstate, interexchange market have chosen to replicate the facilities of established providers to service the needs of their still-nascent interLATA customer bases. Likewise, few companies (especially smaller businesses) will be interested in entering the market if they must make such an enormous up-front capital investment to inefficiently serve
relatively small customer bases. Particularly given the scarcity of capital investment over the past two years in the telecommunications industry, a policy requiring full facilities-based entry from the get-go is the functional equivalent of a policy against new entry. The U.S. Government should recognize that it is a time-tested business strategy for carriers to acquire capacity and facilities through lease or resale in order to assemble a customer base, establish a revenue stream, and attract capital for expansion. Carriers then substitute their own network capabilities and functionalities on an incremental basis over time when and as it makes sense to do so. Through this approach, a carrier who enters the market initially as a pure resale provider can develop over time into a significant facilities-based carrier. For this process to work effectively, it is critical that carriers have the freedom to enter the market initially through the use of network capabilities and functionalities provided by others. In the case of local services, this requires rigorous enforcement of the interconnection, unbundling, local resale and pricing provisions in Sections 251 and 252. Congress adopted these market-opening provisions precisely because it was recognized to be impractical for any new entrant to duplicate the pre-existing ILEC network as a precondition of local market entry.
It is not a matter of speculation whether permitting new entry based on leased elements and resale will promote the development of facilities-based alternatives for customers. This approach already has been successfully implemented in the long distance market. Many carriers entered the market as pure resellers and transformed themselves over time into predominantly facilities-based carriers. The result is that the United States has a robust and diverse nationwide long-haul backbone network that is the envy of the world. That network would never have come into existence if the U.S. Government had sought to discourage or prevent new entrants from initially operating on a resale or leased-functionality basis.
Although the ILECs argue that local entry through resale or UNEs should be discouraged, the ILECs themselves do not embrace such an imprudent business model when they are new entrants. When the ILECs enter the out-of-region interLATA market, they do not first build-out their own interLATA networks and then seek to obtain the customers and traffic necessary to fill those networks. Rather, the ILECs lease network capacity from pre-existing carriers with the intention of building their own infrastructure when and to the extent that it makes economic and operational sense to do so. (It is worth noting that Verizon is the largest long distance reseller in the country today.) The ILECs who argue that new entrants should be required to build their own networks know that the result of such a misguided industrial policy will be to make new local entry prohibitively expensive and burdensome. Certainly, the U.S. Government should not be fooled by the ILECs’ arguments. The ILECs are not, and never have been, interested in promoting competition. When the ILECs argue that the U.S. Government should demonstrate a preference for facilities-based competition, it is because the ILECs know that their proposals, if adopted, will kill competition altogether.
Second, the goal of the U.S. Government should be to promote the maximum efficient amount of broadband investment by all industry parties. Unfortunately, the debate often has been framed in terms of providing sufficient incentives for broadband investment by ILECs. (The Notice inadvertently falls into this trap in Question E, as noted below.) NTIA should not ignore the impact of its policy deliberations upon the incentives of non-incumbent carriers to invest in broadband infrastructure. The proposals the ILECs proffer in an effort to "incent" their own investment would, if adopted, significantly reduce the incentives for non-incumbent carriers to undertake broadband investment. The ILECs view this debate as a zero-sum game where their investment is gained at the sacrifice of investment from other parties. CompTel fundamentally disagrees with this analysis. The U.S. Government should adopt policies that promote broadband investment by all parties, not a select class of carriers (ILECs) who request preferential treatment. As Senator Paul Douglas is reported to have said, "[i]t is far better for government to try to preserve and to restore competition and thus obtain a largely self-regulating economic system than to permit monopoly and then try to control and regulate it. If the latter course is taken, there is grave danger that the monopolists will in the long run control and regulate the government."
A win-win approach to broadband investment already exists. In CompTel’s view, such an approach is embodied in the market-opening provisions of the Telecommunications Act of 1996. Those provisions enable non-incumbent carriers for the first time to gain access to the ILECs’ monopoly local exchange networks (which, it must not be forgotten, were bought and paid for by captive U.S. consumers through decades of monopoly rents) in order to gain the market foot-hold necessary to justify their own broadband facilities. Contrary to the ILECs’ views, this same regime provides them the greatest possible incentive to engage in further investment – namely, the fear of losing customers and revenues to competitors. History shows that competition is the single greatest spur to ILEC investment. The U.S. Government cannot hope to maximize efficient investment if it implements policies that undermine competition.
Third, it is essential to recognize that carriers who provide services in part or wholly over the facilities of other parties play a valuable role in delivering the benefits of competition to U.S. consumers. As noted above, the ability to build a business on a resale or leased-functionality basis is often an important stepping-stone towards facilities-based operations. Further, even carriers who have no plans to build-out their own networks perform the important function of offering stiff retail local competition to the ILECs. When carriers provide services based on ILEC-supplied UNEs, they can provide innovative new services and capabilities. The ability of these providers to obtain the necessary access to the ILECs’ local networks is particularly important for residential and small-business customers. Competing carriers using the so-called UNE Platform have delivered savings to subscribers across the United States that can be measured in the tens of millions of dollars. While promoting the development of alternative facilities is important, it should not obscure the important public interest benefits delivered by carriers who use existing facilities and services to provide competitive retail local services to U.S. consumers.
National Security. CompTel respectfully submits that NTIA should add at least one more policy objective to those listed in the Notice. This country should adopt the laws and regulations necessary to protect the national security of the United States in the face of ongoing terrorist threats. The tragic events of September 11 illustrate that our telecommunications infrastructure may be vulnerable to terrorist activities, and that this infrastructure plays a key role in helping the nation cope with and recover from future attacks.
National security requires the United States to adopt laws and policies to promote alternative infrastructure investment by non-incumbent carriers. In order to limit the scope and duration of any outages caused by future attacks, there should be multiple facilities-based networks built, owned and operated by carriers other than the ILECs. Non-incumbent carriers have natural incentives to minimize their reliance upon the ILECs’ monopoly networks. The lesson learned by the industry over the past several years is that those business plans which depend least upon ILEC networks and cooperation are the least vulnerable to disruptions caused by ILEC misconduct. As a result, all competitive LECs have a strong incentive to migrate away from ILEC capabilities as soon as it makes economic and technical sense to do so. By promoting non-incumbent investment, the U.S. Government can maximize the efficient development of the type of network infrastructure necessary to minimize the impact of terrorist attacks upon the United States.
It should be noted that the development of competitive alternatives over the past five years helped our nation to cope with and recover quickly from the terrorist attacks of September 11. Competitive carriers were critical to ensuring that the massive volume of wireline and wireless calls within the United States as well as to overseas locations were able to be connected during the September 11 tragedies and their immediate aftermath. CompTel member companies contributed assets without charge (e.g., fiber optic capacity; switching capacity; servers; generators; wireless telephones; prepaid calling cards) and found ways to complete millions of calls at a reduced level of profitability or even at a loss. Restoration efforts would have taken much longer without the direct assistance of CompTel member companies, including AT&T and WorldCom. What is important is not just that these efforts were made, but that these companies were in a position to participate in this effort due to the success of the market-opening provisions of the Telecommunications Act of 1996. Ensuring a vibrant competitive industry should be a key aspect of any future planning on public telecommunications network security in the United States.
Investment by non-incumbent carriers is especially important because these entities have the incentive to aggressively explore and implement "disruptive" technologies. While these technologies are unattractive to ILECs because they tend to render embedded plant less valuable or even obsolete, they have the significant advantage of making our public networks less vulnerable to attack. One example is the deployment of soft switch technology. While the ILECs have largely ignored this development, competitive carriers are actively seeking to integrate this technology into their networks. One of the benefits of soft switch technology is that it mitigates and disperses the choke points in the network. Should any node go down for any reason, this technology helps to ensure that the maximum number of customers, including many of those previously served directly by the affected node, can continue to receive uninterrupted service. This technology has obvious implications for public telecommunications network security, and the only way to ensure the implementation of this technology is to establish incentives for further investment by non-incumbent carriers.
By contrast, future ILEC investment will not make our nation less vulnerable to terrorist attacks. Unlike competing carriers, the ILECs have no natural incentives to maximize the development of alternative networks or to deploy "disruptive" technologies, such as DSL or soft switches, that minimize the value of embedded plant. The ILECs’ current networks are designed with multiple choke points that increase our vulnerability to terrorist attacks. If past is prologue, future investment by the ILECs is almost certain to be incremental in nature as a means of providing maximum returns on existing investments according to a relatively short timescale. The ILECs have resisted rather than embraced "disruptive" technologies (e.g., soft switches) which could reduce the revenue streams from their embedded infrastructure. Further, the types of innovative technologies and applications that are needed to reduce our vulnerability to terrorist attacks are unlikely to be subject to control by a single industry player. Because the ILECs historically have refused to invest in technology or applications that they cannot control, the ILECs are poor candidates for the type of investment that this country needs to enhance the security of its telecommunications networks. In sum, future ILEC investment is unlikely to result in any meaningful reduction in our nation’s vulnerability to future terrorist attacks, and therefore the U.S. Government should develop laws and policies to promote non-incumbent investment.
In order to promote non-incumbent infrastructure investment, the U.S. Government must aggressively and vigilantly enforce the existing market-opening provisions in Section 251(c) of the Telecommunications Act of 1996. Further, new entrants must continue to have cost-based access to the ILECs’ monopoly local exchange networks through TELRIC-based rates so that they can establish the customer base and revenue stream necessary to attract capital for infrastructure investment. It must be emphasized that this is a process which will lead over time to alternative facilities-based networks and a decline in our vulnerability to terrorist attacks. It will not happen overnight, as new entrants initially may require significant interaction with the ILECs’ networks and capabilities. If the FCC and other government agencies remain vigilant to enforce the statute, such dependence will decline over time as new entrants build out their own facilities and capabilities in order to minimize their vulnerability to ILEC misconduct. Ultimately, competition will deliver alternative networks that utilize the most efficient technologies to minimize our vulnerability to future terrorist attacks.
The Notice asks parties to discuss supply- and demand-side aspects of the broadband industry. On the supply side, there has been an unprecedented deployment of broadband facilities over the past five years. New entrants have contributed significantly to the massive broadband build-out in the United States. As a result of this deployment, a large majority of American homes and businesses now have access to broadband services from telephone companies, cable companies and wireless providers. While broadband deployment has slowed recently due to economic and marketplace conditions, some deceleration in broadband deployment was inevitable following the massive investments over the last five years. While agreeing that the U.S. Government should adopt and implement policies that encourage the efficient deployment of broadband facilities, CompTel does not believe that we face a broadband deployment crisis today that justifies draconian legislative and policy "fixes."
To the extent there are any problems in the broadband market today, they are on the "demand" side. While 85% of Americans have access to broadband services, the take rate is barely at 12%. Millions of local loops are now DSL-ready, but the vast majority of them are not being used for broadband services due to high ILEC prices. Carriers have invested $90 billion in cross-continental fiber-optic long-haul networks, but a mere three percent of that backbone is in use today. A recent study by Hart & Winston (see Attachment C) confirms that millions of Americans do not purchase broadband services at today’s prices but would become subscribers were prices reduced. While CompTel does not support policies designed to force consumers to take services regardless whether they would use them productively, CompTel believes that there is significant pent-up demand for a wide range of broadband services. In order to ensure that this demand is satisfied, the U.S. Government can and should adopt policies to ensure that consumers have access to advanced services when they have a need for such services and the willingness to pay a reasonable fee for them.
CompTel has several specific recommendations for further action by the Government to promote efficient broadband demand. These recommendations stem from CompTel’s strong belief that the U.S. Government must take actions now to revive the spirit of entrepreneurship necessary to revitalize the competitive telecommunications market in this country. First, the U.S. Government should actively promote investment by non-incumbent entities. As we demonstrated above, such investment will help promote the security of our telecommunications networks. For the same reasons, non-incumbent investment will tend to bolster demand by creating innovative new services and applications. Many subscribers do not take broadband services today because those services do not yet enable sufficient applications to justify the expenditure. Relying upon ILEC investment is highly unlikely to generate an
explosion of new services and applications. By contrast, non-incumbent providers have an incentive to explore and roll-out "disruptive" technologies, and that includes the types of applications and services that will stimulate demand.
Second, the ILECs for years have tied their local voice services with their xDSL products. A customer that wishes to obtain xDSL service from the ILEC while obtaining local voice service from a competing carrier is rejected by the ILEC. Were there numerous alternative providers of xDSL services in the market today, these tying arrangements would not be so destructive. However, the promise of xDSL competition has dimmed significantly over the past two years, and now the ILECs often are the only xDSL alternative for the vast majority of subscribers. Unfortunately, the FCC has declined to take the steps necessary to promote consumer choice. The U.S. Government should take immediate action to end these anti-competitive tying arrangements in order to permit subscribers to obtain xDSL and local voice services from the providers they choose.
Third, the lack of advanced services competition has resulted in monopoly pricing by ILECs. Once the ILECs succeeded in eliminating their xDSL competitors through shoddy provisioning and other misconduct, the ILECs immediately raised rates by $10/month. The solution to this problem is to adopt policies that promote the rebirth of competitive alternatives to the ILECs’ xDSL product offerings. The first step should be to undertake vigorous enforcement of the market-opening provisions in Section 251(c) against ILEC foot-dragging and misconduct. Further, the FCC should move aggressively on rulemaking initiatives that will enable new entrants to provide retail broadband services in competition with the ILECs’ monopoly xDSL products. The primary flaws in today’s market – monopoly prices and a lack of innovation – are the price that this country must pay for permitting the ILECs to monopolize the wireline portion of the broadband market. A competitive market environment is the only practical and effective solution to the demand-side problems that plague the broadband industry today.
Fourth, CompTel endorses broadband policies that ensure competitors have access to the buildings where their customers are located. As a member of the Smart Buildings Policy Project (SBPP), CompTel endorses the building access and redundancy requirements devised by SBPP for federally owned or leased buildings. Our members support policies that require at least two physically separate means of entering a building to provide telecommunications services, at least two physically redundant local networks and reasonable and non-discriminatory access to the entry points and utility spaces needed to provide services to customers in each building.
This question explores whether the incentives of the ILECs to invest in broadband facilities are reduced by the interconnection, unbundling and resale requirements in Section 251(c)(3).
Part One. The ILECs have undertaken a massive public relations campaign to convince decision-makers in Washington, D.C. that they have no incentive to invest in broadband facilities and services if they are forced to give competitors access to their networks (particularly through UNEs) at TELRIC-based prices. In fact, the opposite is true. In fact it is instructive to note that, when contemplating investments that would make SBC and Verizon the two largest ILECs in the country, these BOCs could have chosen to invest their money in purchasing "underpriced" UNEs as new entrants outside of their traditional territories – instead they paid handsome premiums to become sellers of these same "underpriced" network facilities by purchasing the incumbent LEC rather than choosing to enter de novo. The ILECs have the greatest incentives to invest in broadband facilities when UNE rates are TELRIC-based, and they have the fewest incentives to invest in broadband facilities when UNE rates are above TELRIC levels.
As history confirms time and time again, ILECs gauge their investment decisions based upon the level of competition they face. When ILECs possess an uncontested monopoly, their investment is limited, protective and incremental. Particularly under a price cap regime, the ILECs will invest cautiously in an effort to maximize revenues from existing facilities and resources. The ILECs will avoid or delay any new investment that could jeopardize an existing source of revenues. As Professor Lawrence Lessig notes, "[t]he natural desire of any company is to find ways to protect its market." The ILECs are particularly loathe to develop or implement so-called "disruptive" technologies. However, when ILECs face competitive new entry into a previously protected line of business, they typically respond with new investment, new services, and lower prices all to the benefit of American consumers. Once they conclude that their established products and revenue streams may be undercut by new competitors, the ILECs will set aside their defensive posture and seek to quarry new products and revenues from the market.
As one example of this ILEC behavior, the ILECs have had access to xDSL technology for many years. They refused to deploy this technology because it would undercut their T-1 products and revenue streams. The result is that millions of Americans were denied access to advanced telecommunications services for many years, and many other subscribers were forced to pay higher T-1 rates for dedicated access, solely to protect the ILECs’ monopoly revenue streams from existing product lines. However, once Congress imposed collocation obligations on the ILECs, data CLECs ("DLECs") emerged who began to develop xDSL technology and offer new xDSL products to consumers. In response to DLEC competition, the ILECs began for the first time to aggressively deploy their own xDSL products and to invest heavily in new infrastructure. At the height of the DLEC "threat," SBC announced the roll-out of Project Pronto, a $6 billion infrastructure investment in next generation digital loop carrier ("NGDLC") technology designed to ensure that 80% of SBC’s customers would have access to xDSL-based advanced services. With less fanfare, other ILECs began similar infrastructure deployment efforts. However, as the DLEC industry began to implode 18 months ago – due to a combination of factors, including the economic downturn, excessive collocation costs, ILEC wholesale provisioning problems, a scarcity of capital investment, and a failure by the FCC to enforce the Act, or its own rules – the DLEC "threat" diminished and the ILECs returned to their old business-as-usual approach. In particular, SBC began to slow-down the roll-out of Project Pronto, and other ILECs also scaled back their infrastructure investment plans. Predictably as well, the ILECs immediately raised retail rates for their xDSL products when subscribers’ access to competitive alternatives disappeared.
Similarly, the experience of CompTel members in competing against the ILECs offers confirmation that the ILECs invest primarily in response to competition. Numerous CompTel members – e.g., Advanced Telcom Group ("ATG"), IP Communications, ITC^DeltaCom, and New Edge Networks – have focused their service offerings in second-tier, third-tier and other under-served markets. For years prior to the initial entry by a competing carrier, the ILECs ignored these markets and failed to make any significant new broadband investments there. However, once a new entrant came onto the scene, the ILECs responded immediately with new investment and the roll-out of new services. This marketplace experience confirms that the primary "incentive" necessary to spur ILEC investment is the existence of competitive market forces.
The establishment of TELRIC-based rates is critical to ensuring that ILECs have an incentive to engage in efficient broadband investment. When ILECs charge TELRIC-based rates, new entrants are able to construct and implement business plans to enter the local market to compete against the ILECs. Sustained competitive entry will ensure that the ILECs invest aggressively in new infrastructure and develop new services. However, as rates rise above TELRIC levels, new entry diminishes and the ILECs have fewer incentives to engage in risky investment in new technologies or infrastructure that could jeopardize existing monopoly revenue streams from legacy services and products. TELRIC-based rates create the greatest incentive for ILEC investment because they encourage competitive new entry, which historically has proven itself to be the single greatest incentive for ILEC investment.
The lessons we have learned about TELRIC apply more broadly to the full range of market-opening provisions in Section 251(c). Just as the ILECs have attacked TELRIC pricing, the ILECs repeatedly have proffered the bogus argument that the unbundling and other statutory requirements create a disincentive for them to invest in broadband infrastructure. They argue that without those network sharing obligations, they would invest larger sums more aggressively in such infrastructure. However, this theory has already been tested, and it has failed, based on the previously noted BOC decisions to expand by acquiring other BOCs with these same obligations, rather than taking advantage of the supposed opportunity for their out-of-region entry to be subsidized by other ILECs with unbundling obligations.
The bottom line is that a competitive market environment creates a compelling incentive for ILEC investment that overrides whatever incremental disincentives may be created by TELRIC rate levels and network sharing requirements. This leads to the conclusion, which may be counter-intuitive to some, that the ILECs’ investment incentives are less when they have larger margins and more unfettered control over their own assets.
Parts Two and Three. The ILECs argue that TELRIC-based rates discourage them from investing in new broadband infrastructure and services because they achieve inadequate margins and they must share their investment with competitors. That argument does not withstand scrutiny.
First, TELRIC-based rates offer a sufficient up-side reward to provide ILECs with a meaningful incentive for efficient investment. As the FCC recently informed the U.S. Supreme Court:
"TELRIC is designed to compensate incumbents for their full forward-looking costs of providing network elements; to enable competitors efficiently to enter the market and to acquire expertise, capital, and a customer base, while providing incentives for them to construct their own facilities where doing so makes economic sense; and ultimately to afford consumers the benefits of retail rates that reflect competitive market pricing."
Section 252(d)(1)(B) expressly provides that TELRIC-based rates may include a "reasonable profit," and all TELRIC-based rates developed by state regulators since 1996 have included a substantial profit component for the ILECs. Although the ILECs have argued for years that the TELRIC methodology constitutes an unlawful "taking" of their property without just compensation, they have never been able to demonstrate that actual prices set under TELRIC (or any other pricing methodology) has resulted in an unauthorized "taking" of their property. Moreover, it should not be forgotten that TELRIC pricing benefits ILECs because it ensures that their networks are efficiently loaded by the marketing and other activities of competing carriers. TELRIC enables ILECs to maximize their revenues and profits as wholesale providers of telecommunications capacity and functionalities.
When the ILECs put aside their posturing, it is clear that they believe TELRIC rates offer a sufficient return to make major infrastructure investments. Under the current TELRIC regime, the ILECs have invested billions of dollars in new infrastructure. The ongoing proceeding in Illinois regarding SBC’s Project Pronto provides an excellent example of the incentives the ILECs have under the current TELRIC regime to make significant new broadband investments. SBC documents introduced into evidence in that proceeding confirm that the cost savings through improved network efficiency would by themselves pay for Project Pronto. Particularly when combined with cost savings and the likely revenues earned from its own retail offerings, SBC would earn more than enough wholesale revenues using TELRIC-based rates to justify the roll-out of Project Pronto in Illinois.
The past, present and ongoing ILEC roll-out of broadband infrastructure in the United States is further evidence that TELRIC implementation by state regulators has not harmed the ILECs’ investment incentives. Over the past five years, most state regulators have imposed some type of TELRIC-based pricing, and the ILECs have responded by investing billions of dollars in infrastructure during that time period. If one gives credence to what the ILECs do rather than what they say, there should be no concern that TELRIC-based pricing will undercut the ILECs’ incentive to invest in broadband facilities.
Second, the fact that the ILECs must share their network with competing carriers is an incentive, not a disincentive, for their continued investment in broadband infrastructure and services. The ILECs will make further investments under competitive market conditions not because they want to, but because they have to. If the ILECs shy away from this investment, competing carriers will have an even greater incentive to step up their own infrastructure investments. The ILECs are only hurting themselves if they pull back from further investments due to network sharing obligations. The ILECs understand this phenomenon only too well. The ILECs are seeking to pare back or even eliminate their network sharing obligations under the Telecommunications Act of 1996 because it will reduce the network investment they will be required to make in order to sustain profitable operations on a going-forward basis.
If we assume for the sake of argument that fully competitive market conditions will always exist, it might be possible to argue that the ILECs will have more incentive to invest in broadband infrastructure if they can charge above-TELRIC prices, or indeed if they have no network sharing obligations at all. But one cannot reasonably assume that competitive market conditions will always exist. To the contrary, the existence and vibrancy of competitive market conditions depend critically upon the implementation of TELRIC pricing and meaningful network sharing obligations for the ILECs. Without TELRIC pricing and network sharing, local competition will not thrive (and may even vanish altogether), with the result that overall investment in broadband infrastructure and services will be significantly less than at the present time.
Third, NTIA cannot reasonably and fairly analyze the impact of the TELRIC standard on broadband deployment without considering its impact on the incentives for competitive carriers to make broadband investments. As the price of accessing the ILECs’ local networks increases, the incentive of competitive carriers to make broadband investments decreases sharply. With above-cost access rates, competitive carriers will find it difficult or impossible to enter the market or, if they already have a foothold, to sustain entry. They will be forced to rely entirely upon their own facilities to provide services, with the result that new entry will be deterred, particularly from small companies who cannot afford the up-front capital cost of entry. At most, entry or expansion will be narrowly limited to a few densely populated urban business areas where a build-out strategy would seem most feasible. Modifying the TELRIC methodology to increase the cost of accessing the ILECs’ local exchange networks will create powerful disincentives for competitive carriers to construct alternative facilities. This result, while harmful to U.S. consumers and our national security, is the ILECs’ fondest desire – the elimination of facilities-based competition.
The history of broadband deployment in the United States shows that competitive carriers have been the first to roll-out broadband services in hundreds of markets across the country. In many secondary and tertiary markets, competitive carriers remain the only broadband provider, as the ILECs have simply ignored these markets in favor of larger cities and urban areas. For example, CompTel member company Advanced TelCom Group is the only broadband provider to business customers in various cities in California, Maryland and Oregon, including Calistoga, Sebastopol and Healdsburg, California; Frederick and Hagerstown, Maryland; and Ashland, Bend, Medford, and Redmond, Oregon. In order to ensure that all of America receives diverse access to a full suite of broadband services, the U.S. Government should ensure that competitive carriers continue to have incentives to participate aggressively in this market segment nationwide.
TELRIC-based rates are particularly essential for UNEs. As noted above, Congress designed Section 251(c) as a type of telecommunications "commons" to promote competition and innovation. The UNE regime is a critical component of Congress’ design. By purchasing network functionalities at TELRIC-based rates, new entrants obtain both the technical and economic ability to develop new products and services by using the existing ILEC local network infrastructure. Increasing rates above TELRIC levels would destroy the ability of new entrants to innovate and deploy new services and products to compete against the ILECs’ local exchange monopoly.
The ILECs are implementing one of the most disingenuous public relations campaigns in the history of our country. They are seeking legislative and regulatory changes for the ostensible purpose of promoting their own investment in broadband capabilities, when they know full well that adoption of those proposals will result in less investment by themselves while eliminating the possibility of investment by competing carriers. The regime adopted by Congress in 1996 – TELRIC-based prices for interconnection, UNEs and collocation – is the regime that maximizes incentives for efficient infrastructure investment by ILECs and CLECs alike because it is the only regime that would establish the competitive market environment necessary to spur all entrants to put forth their best effort to achieve success.
Part Four. No significant modifications are needed to the TELRIC methodology adopted by the FCC in 1996. It should be emphasized that the FCC did not implement a pure TELRIC approach to pricing. Rather, in a significant concession to the ILECs, the FCC agreed to accept the existing placement of the ILECs’ wire centers when developing TELRIC-based rates. That concession had the effect of increasing the rate levels that would be produced by the FCC’s TELRIC rules. Further, despite the dedicated efforts of state regulators to develop TELRIC-based rates, implementing the FCC’s TELRIC rules is not an exact science, and the UNE rates in many states have reflected a de facto TELRIC-plus standard. As proof of this phenomenon, one need look no further than the UNE rate reductions that Bell Companies have accepted in order to obtain FCC approval of their Section 271 applications. The reality is that UNE rates in many if not most states are significantly higher than a true TELRIC methodology could justify. It is the competitive carriers – not the ILECs – who are entitled to complain that the TELRIC methodology should be modified to produce more efficient, market-driven outcomes.
While the FCC’s TELRIC rules are not perfect, they have served the useful purpose of establishing rate levels that are within hailing distance of what is necessary to ensure the efficient deployment of resources and competitive pricing of telecommunications services. The principal goal of the FCC, NTIA and other agencies should be to work with state regulators to ensure that the initial UNE rates are lowered to reflect cost trends in the industry as well as a more faithful adherence to underlying economic principles. This will not be an easy process, as witnessed by the belabored proceedings in one of the most progressive states (New York) to implement long-overdue UNE rate reductions. Further, the U.S. Government should be reluctant to make any changes in the TELRIC rules because such changes could result in new, lengthy and costly state-by-state proceedings to establish new rate levels. Particularly given the perilous state of many competitive carriers at the present time, the mere existence of state-by-state proceedings, regardless of their outcome, would severely undermine competitive market conditions.
In sum, the TELRIC methodology is the correct approach to achieve the objective of ensuring an efficient level of infrastructure investment. The FCC found in 1996, and it remains true today, that the TELRIC rules are the best methodology we can devise to establish rates that send efficient signals to marketplace competitors – incumbents and new entrants alike – regarding investment and pricing. The U.S. Government should not attempt to tinker with the TELRIC rules in order to promote additional infrastructure investment, particularly given the compelling factual basis for concluding that there is no supply-side crisis today in the broadband industry. Rather, the U.S. Government should continue to promote TELRIC pricing in order to help correct the demand-side problems that have arisen from the re-monopolization of the broadband industry by the ILECs.
This question asks whether separate regulatory regimes should be adopted for the ILECs’ "legacy" network and their "broadband" network. The answer is no because they are both the same network. The ILECs do not build and operate two separate networks. Rather, they operate a single, integrated network. Given the widely-noted trend towards convergence, it should be expected that the ILECs will continue to expand and upgrade their network as an integrated whole.
It is impossible to meaningfully segregate the "broadband" and "legacy" portions of the ILECs’ physical networks. As a result, any laws or policies which seek to impose differing requirements on the ILECs’ "broadband" and "legacy" networks would be fatally arbitrary and serve no purpose except to generate expensive litigation and regulatory proceedings as parties seek to clarify, challenge and defend a non-existent (or at best blurred) boundary line between "broadband" and "legacy" networks. Further, making such a false distinction would provide an unfortunate incentive for the ILECs to re-engineer their networks in order to create the illusion of separate "broadband" and "legacy" networks. In addition, such a distinction would give the ILECs an incentive to accelerate the deterioration of their "legacy" networks (to which its competitors would have mandatory access) while focusing their efforts on their "broadband" networks (which they feel should be off-limits to competitors). The end-result would be to skew network development, generate inefficient investment, and undermine broadband competition. The U.S. Government should not seek to distort the broadband marketplace through misguided regulatory intervention lacking any foundation in the real world.
The Notice asks parties to address local issues affecting broadband deployment that should be addressed by federal policies. One of the primary inhibitors to the deployment of broadband networks and services is the lack of reasonable and nondiscriminatory access by broadband providers to public rights-of-way. Instead of getting service to customers in a timely fashion, broadband providers are finding themselves trying to negotiate through a maze of local permit and licensing arrangements that are unrelated to local governments’ legitimate authority to protect the public safety and welfare.
CompTel recently released a set of policy principles (see Attachment D) addressing local regulation of public rights-of-way. These principles are consistent with the requirements of the Telecommunications Act of 1996 for the removal of all legal and regulatory barriers to entry. Among the principles:
In conclusion, CompTel respectfully requests NTIA to undertake initiatives to facilitate broadband deployment that are consistent with the comments presented herein.
Competitive Telecommunications Association
Robert M. McDowell
Vice President and
Assistant General Counsel
Carol Ann Bischoff
Executive Vice President and
Vice President Regulatory Affairs
1900 M Street, N.W., Suite 800
Washington, D.C. 20036
Robert J. Aamoth
Randall W. Sifers
Kelley Drye & Warren, LLP
1200 19th Street, N.W.
Washington, DC 20036
December 20, 2001