NTIA BROADBAND DEPLOYMENT ADVISORY

ALTS RESPONSE TO

NTIA REQUEST FOR COMMENT ON DEPLOYMENT

OF BROADBAND NETWORKS AND

ADVANCED TELECOMMUNICATIONS SERVICES

There has been widespread discussion among the telecommunications industry, regulatory agencies, the administration, and the Hill over the proper regulation of broadband facilities and the best way to encourage deployment of those facilities and advanced services to the American public. The Association for Local Telecommunications Services (“ALTS”) is the leading trade association representing facilities-based competitive local exchange carriers (“CLECs”). ALTS submits these comments highlighting that the most efficient means to encourage broadband deployment is to promote facilities-based competition.

A. What should be the primary policy considerations in formulating broadband policy for the country? Please discuss the relative importance of the following: access for all; facilities-based competition; minimal regulation; technological neutrality; intra-modal competition; inter-modal competition; and any other policy consideration.

The primary policy consideration in encouraging deployment of broadband facilities should be the promotion of facilities-based competition. Competitive local exchange companies (“CLECs”) invested over $56 billion in constructing new broadband telecom networks since the passage of the Telecommunications Act of 1996. The CLECs were the first companies to introduce DSL into the marketplace, and developed many other innovative technologies based upon the unbundling rules set out to enforce the 1996 Act. The best way to advance the deployment of broadband technologies is to enforce the current policies that promote facilities-based competition.

ALTS believes that the amount of regulation should be tailored to the amount of competitive facilities in the marketplace. For instance, regulation of facilities should be utilized to the extent necessary to prevent anti-competitive behavior and monopolization of the market by incumbent local exchange carriers (“ILECs”). As facilities-based competition increases and ILECs no longer enjoy market power in the local telecom market, reducing regulatory oversight will be appropriate. Until such competing facilities and services are fully available, however, regulation and enforcement is necessary to ensure that competitors have access to the ILEC bottleneck facilities in order to provide competing services to consumers and promote the deployment of broadband technologies.

Competition policy should not favor one form of technology over another or one mode of broadband access over another. Regulatory policies should not be aimed at selecting winners and losers in the marketplace, but should encourage competition among the broadest range of providers. Most importantly, intra-modal competition between must be promoted regardless of the level of inter-modal competition between LECs, wireless providers, and cable modem providers. For instance, DSL was first deployed by Covad by adding its own electronics to the copper loop provided by the ILEC. A policy that focused only on inter-modal competition might have denied the American consumer the tremendous benefits of this technology. Further, without intra-modal competition for DSL-based and other advanced services, the best one could hope for is a duopoly with ILECs and cable modem providers as the only providers of broadband services to residential customers. The scenario would be even bleaker for small business customers, which have no access to cable modem facilities and will, therefore, be subject to the unregulated monopoly power of the ILECs. Since competition is the best engine to drive broadband deployment, , the ILECs must continue to make available unbundled network elements to competitors.

B. How should broadband services be defined? Please discuss (1) what criteria should be used to determine whether a facility or service has sufficient transmission capacity to be classified as “broadband;” (2) how the definition should evolve over time; and (3) the policy implications of how the term is defined.

In interpreting Section 706 of the Telecommunications Act, the Federal Communications Commission (“FCC”) has defined “broadband” facilities as those capable of providing lines or wireless channels with information carrying capability in excess of 200 Kbps upstream and downstream.[1] Because the FCC’s definition has been in place for several years and the industry is accustomed to its use and it has become the basis of reporting requirements, regulation, law and policy, it is appropriate to maintain this definition rather than reconsider the issue. To revise the definition would likely lead to additional years of regulatory uncertainty which could disrupt business plans.

C. Several studies indicate that the rate of deployment of broadband services is equal to or greater than the deployment rates for other technologies. What is the current status of (1) supply and (2) demand of broadband services in the United States? When addressing supply, please discuss current deployment rates and any regulatory policies impeding supply. When addressing demand, please discuss both actual take rates and any evidence of unserved demand. Please also address potential underlying causes of low subscribership rates, such as current economic conditions, price, cost-structure, impediments to the development of broadband content, or any other factor. To what extent has the growth in competition for broadband and other services been slowed by the existing rates and rate structures for regulated telecommunications services?

Several recent surveys indicate that supply has grossly outpaced demand for broadband services. For example, the National Telephone Cooperative Association (“NTCA”) recently released a survey of its members indicating that low take rates for broadband services may not justify expansion of those services to additional customers.[2] Sixty percent of the customers of survey respondents have access to broadband services (200 kbps downstream) now and 69% are expected to have access by the end of 2002, yet only a small percentage of customers actually subscribe to broadband services today.[3] According to the survey, 4% of customers with access to cable modem broadband, 3% of customers with access to DSL, and 2% of customers with access to wireless broadband subscribe to those services.[4] Because most of NTCA’s members are rural telecom providers, this data indicates that supply is not a major concern in rural areas. NTCA suggests that the major barriers to their members offering broadband services include long loop lengths, high cost of deployment, low demand, and lack of cost-effective equipment scaled for smaller companies.[5]

Two recent consumer surveys found similar results regarding the low demand for high-speed Internet access throughout the country. The Information Technology Association of America (“ITAA”) released a white paper, stating that while the majority of Americans have access to broadband services, many are hesitant to subscribe to them.[6] In a random survey of 1000 American voters, two-thirds had broadband availability but only one-fourth of those with availability subscribed to a broadband service.[7] ITAA suggests that lack of content is the primary reason for the demand lag and highlights that the recent increases in prices for ILEC DSL services has further reduced demand for those services.[8] As would be expected in a noncompetitive market, the ILECs increased their monthly rates for DSL services shortly after competitors began experiencing financial difficulties and declaring bankruptcy. This is clearly not the behavior of players in a competitive marketplace, but is classic monopolist behavior, raising prices after competitors have been driven from the market.

Hart Research/The Winston Group separately surveyed 806 consumers and found 40% were uninterested in obtaining high-speed Internet access and 36% were interested but not at the current prices.[9] Even after the interviewer explained some of the benefits of high-speed access, 59% of those surveyed still showed just some or very little interest in subscribing to the services.[10] When asked what policies should be promoted regarding broadband deployment, 74% supported policies that would “[e]ncourage competition among various DSL companies in each market, even if it means DSL is not available in some hard-to-reach rural and inner-city areas” whereas only 25% supported “[a]llow[ing] one company to build and maintain all DSL networks in a region and have unregulated ability to set rates/conditions as long as it makes DSL available in all areas of the region, including hard-to-reach rural and inner-city areas.”[11]

These studies should lead regulators to conclude that a broader competition policy promoting facilities-based competition for all services should not be sacrificed for the sake of rapid broadband deployment to areas where consumers will not subscribe. There is no benefit to artificially stimulating availability of broadband to consumers that have little or no interest in the services, while there is great risk in adopting policies that limit competition or competitive access to necessary facilities. Competitive choice is optimal for consumers because it allows them to reap the benefits of lower prices and better quality services.

Moreover, even if a supply side deficit existed in the deployment of broadband, one of the reasons for this deficit is the anti-competitive behavior of the ILECs. While the ILECs claim that regulatory obstacles impede their deployment of broadband facilities, it is more accurate that their own actions impede the deployment of competitive broadband services to consumers. Thus, although they claim there is a supply shortage for retail broadband services, the real supply shortage results from their poor provisioning of wholesale services.

The ILECs’ continued refusal to comply with the unbundling requirements of the Telecommunications Act and the inadequate enforcement of those provisions has contributed to the low rate of deployment of competitive broadband services. ILECs have found every conceivable mechanism to preclude CLECs from reaching end-user customers by denying or otherwise slow-rolling and overcharging CLECs for interconnection and access to network elements. Oftentimes, CLECs are simply denied access to broadband facilities, such as DS-1 or DSL-capable loops, which are necessary to reach end-user customers under the guise that the ILECs have “no facilities” available. Too often, the ILEC modus operandi has been to inform the CLEC that it does not have facilities available for the CLEC to provide services to end-user customers, while, at the same time, the ILEC is already providing or marketing similar services to those very same customers, relying on these very same, allegedly nonexistent, facilities. In the event that the ILEC does provide facilities to the CLEC, obtaining such facilities is typically an unnecessarily and painstakingly time-consuming, costly process. For example, while ILECs are obligated by the Telecommunications Act to provide network elements to CLECs at cost-based rates, the ILECs will typically compel the CLEC to purchase such facilities as tariffed services, identical to the requested facilities but at significantly higher rates.

In some areas, CLECs are thwarted from providing services because they cannot gain access to necessary loop facilities or to remote terminal facilities in order to collocate their equipment. Where CLECs have deployed broadband facilities by collocating in an ILEC central office, they are in many cases unable to obtain line sharing or loop qualification data in order to market and provision their broadband services to customers. Deployment of CLEC broadband services would greatly benefit from more strict enforcement of the FCC’s unbundling requirements. The rare times that the ILECs are actually penalized for their intransigence or failure to abide by their market-opening obligations are simply treated as mere costs of doing business and a small price to pay to maintain monopoly control. In the end, these provisioning problems have forced many competitive carriers to delay their roll-out of broadband services, or in some cases declare bankruptcy, rather than fulfill their plans to deploy their networks to provide broadband services.

D. Should government adopt as a goal “access for all” to broadband service? What would be the costs of such a goal? What policy initiatives, if any, should be considered to achieve that goal? Are there areas or persons that are unlikely to be served through marketplace forces?

The best method to achieve “access for all” is to adopt and enforce policies that promote facilities-based competition and eliminate the ILEC market power. Competitive providers were the driving forces behind the widespread deployment of advanced services and they will continue to drive the development of new technologies. Fearing they would cannibalize their existing T-1 revenue stream, the ILECs delayed introduction of cheaper DSL technology, and made access to DS-1 loops, other facilities, and combinations of such facilities unnecessarily cumbersome at best, until CLECs began marketing DSL-based and other advanced services in earnest:[12]

Although DSL technology has been available since the 1980s, only recently did local telephone companies begin to offer DSL service to businesses and consumers seeking low-cost options for high-speed telecommunications. The incumbents’ decision finally to offer DSL service followed closely the emergence of competitive pressure from … the entry of new direct competitors attempting to use the local-competition provisions of the Telecommunications Act of 1996 to provide DSL over the incumbents’ facilities.[13]

Because the ILECs “were getting great rates from T-1 lines, and consumers were buying highly profitable second and third lines for their slow-motion modems and their fax machines, [they] kept cheaper DSL on the shelf for a decade.”[14] By allowing the ILECs to maintain an unfettered monopoly, regulators can virtually assure a slowdown in broadband technological advancement.

Not only have CLECs offered diverse products to customers, but they also provide higher quality service to customers, especially Internet Service Providers (“ISPs”). CLECs initiated allowing ISPs to collocate in their central offices, allowing ISPs to offer better services to more customers, and the entry of CLECs into markets has given “consumers greater choice, lower prices and faster access to new technologies.”[15] The United States Internet Service Providers Association (USISPA) recognized that ISPs have been poorly served by the ILECs and that “CLECs’ services and network facilities are far superior to comparable ILEC services and facilities prior to the enactment of the 1996 Telecommunications Act.”[16]

The history of emerging competition in the long distance market foreshadows the possibilities for local telecom competition. When MCI began offering competitive long distance services, it focused on the small business market where it could obtain margins that justified its business plan. As its market share and revenues grew, it expanded its customer base to include residential customers. Even though MCI began by reselling some of AT&T’s long distance services, there are now several, competing facilities-based long distance networks. Similarly, CLECs have typically begun establishing a footprint with mostly business customers. Some CLECs have focused on serving residential customers at the outset, and many others intend to do so when it becomes more economically viable to do so. There is no market failure for local service competition where CLECs now offer services primarily to business customers in dense population centers rather than to residential customers in more sparsely populated markets.

A lesson may be learned from MCI’s success in the long distance market: competition spurs competition. By continuing to promote facilities-based competition in the local market, regulators will spur additional innovation and competition. For example, increasingly CLECs are adopting new technologies that allow the deployment of innovative products in the marketplace. One new technology is voice over IP, which integrates voice and data communications over a single T-1. This technology permits CLECs to deploy an always-on broadband connection to small business customers, thus, allowing them to use the same services used by big business users at affordable prices. This is the type of innovation contemplated by the Telecommunications Act of 1996 and which CLECs are bringing to the market.

Universal service funds should not be used to subsidize broadband access to high cost or low-income areas. As noted above, demand has not reached the level where broadband access should be considered a necessity for a majority of consumers. Until a large percentage of consumers do subscribe to broadband services, they should not be subsidized by additional universal service funds. However, to the extent that any policies or mechanisms are adopted or implemented to promote “universal access” to broadband technologies, any such policies or mechanisms should be implemented on the federal level and should be fully portable to competitive providers.

E. Do the interconnection, unbundling, and resale requirements of the Telecommunications Act of 1996 reduce incumbent local exchange carriers' (ILECs') incentives to invest in broadband facilities and services?

1. Are their investment disincentives attributable to the regulated rates for interconnection, unbundled network elements, and resold services?

2. To what extent are those disincentives due to ILECs' uncertainties about their ability to recover the added network costs needed to accommodate potential requests from competitors? What are the magnitude of those additional costs? What mechanisms could be used to share the risks of those costs efficiently and equitably among ILECs, competitors, or users?

3. To what extent are the returns on ILECs' investments in new infrastructure uncertain? Is the uncertainty of gaining an adequate return on each infrastructure improvement (attributable in part to other firms' ability to use those facilities to offer competing services) significant enough to deter investment?

4. What are the principal strengths and weaknesses of the FCC's total element long run incremental cost (TELRIC) methodology? What changes could be made to render TELRIC an effective deterrent to the exercise of market power and conducive to efficient infrastructure investment? Would it be possible to construct an alternative methodology that would not depend on cost information controlled by regulated firms?

The FCC’s TELRIC methodology is the proper pricing methodology for unbundled network elements as it provides flexibility for appropriately pricing all future elements. Section 252(d)(1) of the Telecommunications Act provides for the prices for network elements to be “based on cost” and “include a reasonable profit.” TELRIC allows the ILECs to recover their costs plus a reasonable profit if and when they choose to build fiber optic networks. To the extent that build-out of new, more robust networks is a riskier economic proposition for them, TELRIC pricing guidelines may incorporate a higher cost of capital than that used to calculate the cost of traditional copper networks, compensating the ILECs for the riskier nature of the build-out. Furthermore, because TELRIC is a forward-looking pricing methodology it may result in higher rates where the costs of deploying new fiber are greater than the costs of maintaining the old copper.

There is no reason to discard the FCC’s TELRIC methodology merely because the ILECs claim they need higher rates in order to deploy newer technologies. The proper consideration is whether TELRIC allows ILECs to recover their costs and preserves their incentive to make future investments that are economically efficient. The ILECs have never proven that the TELRIC formula produces prices below their costs, even though they have had many opportunities to attempt to do so in state cost proceedings. In fact in oral arguments on the ILECs’ appeal of the TELRIC formula, the Supreme Court justices faulted the ILECs for never producing evidence that the state rates were below their costs. Without more concrete proof that the FCC’s methodology is inaccurate, there should be no modification of the methodology. Regulatory certainty is vital to the industry and maintaining TELRIC pricing principles is the best way to ensure certainty.

The alternate pricing scheme proposed by the ILECs would presume a standard of “commercially reasonable prices” for network elements. However, in a market controlled by a provider with market power, there are no “commercially reasonable” rates because there is no competitive market to establish the rates. Since competitors have no alternative to the last-mile facilities of the ILECs, they would have no negotiating leverage to bargain down the rates. In fact, the antitrust laws are based on principle that rational owners of monopoly facilities will not charge economically efficient wholesale prices for the use of those monopoly facilities. Thus, deregulating the ILECs’ UNE rates would give them the ability to raise prices high enough to price competitors out of the market and re-monopolize the market. The ILECs’ claim that this could not occur is pure folly.

Moreover, merely deregulating the ILECs would not provide incentive for them to roll-out better broadband services to more consumers. “Monopolies act predictably -- they reduce supply, raise prices, and have little incentive to invest in new technology.”[17] The ILECs have already shown their propensity to behave like monopolists because they suffer no consequences. As evidenced by their delay in offering DSL-based and other advanced services, they will protect their higher profit services at the expense of providing more cost-effective, more innovative and potentially better services to consumers. Moreover, as shown by Verizon’s and SBC’s increase in DSL rates as their competitors went out of business, the ILECs are not interested in providing low-cost broadband options to consumers; they are motivated to obtain the highest monopoly profits. If they are allowed to operate as an unregulated monopoly, that is just what they will do.

Furthermore, it is not sufficient for regulators to obtain promises of deployment from the ILECs because their history shows they will not follow through on those promises without guarantees of high returns on their investments. The ILECs must take the same market risk as their competitors – that they may deploy facilities but be unable to obtain enough revenue to make that investment profitable. Their competitors have no guarantee that they will be successful as they build their networks, and regulators should not protect the ILECs by adopting policies that ensure them monopoly returns on their investments.

The ILECs have consistently made promises to regulators about deploying technologies in order to gain regulatory approval for mergers; however, they have consistently broken those promises.[18] Based on statements in the ILECs’ annual reports, “[b]y 2001, over half of America's households should have been rewired with fiber optics; [however,] none of these statements proved to be true, even though state and federal laws were changed to give the Bells more money for construction.”[19] For example, despite strong financial performance and a flexible regulatory framework in Pennsylvania, BA-PA (now Verizon) failed to increase investment in its network.[20] Additionally, SBC — the Bell company that now owns three of the original seven Bells —promised to compete in 30 additional major markets outside of its region within 30 months of the SBC-Ameritech merger.[21] SBC claimed that it needed further capital from the merger with Ameritech in order to enter other local markets and compete against the other Bell Companies. While the SBC-Ameritech merger was consummated in October 1999, SBC has yet to compete in those markets outside of its region. Under the merger conditions placed on SBC by the FCC, it is liable for voluntary penalties for failure to enter the 30 out of region markets; however, SBC has not paid any penalties for its failure to compete.

F. Some have suggested that a regulatory dividing line should be drawn between legacy “non-broadband” facilities and/or services and new “broadband” facilities and/or services. Is this a feasible approach? If so, how would it work?

1. What effects would changes in the regulatory structure for broadband services and facilities have on regulation and competition with respect to voice telephone and other non-broadband services?