Request For Comments on )

Deployment of Broadband Networks and )Docket No. 011109273-1273-01

Advanced Telecommunications Services )

)

William R. Richardson, Jr.

Lynn R. Charytan

                                                         WILMER, CUTLER & PICKERING

2445 M Street, N.W.

Washington, DC20037

(202) 663-6000

Sharon J. Devine

QWEST COMMUNICATIONS INTERNATIONAL INC.

1020 19th Street, N.W.

Washington, DC20036

(303) 672-2861

Counsel for Qwest Communications International Inc.

December 19, 2001

INTRODUCTION AND SUMMARY……………………………………………………………2

I.THE MARKET FOR BROADBAND TODAY IS CHARACTERIZED BY A VARIETY OF FACILITIES-BASED COMPETITORS, UNCERTAINTY ABOUT DEMAND IN THE SHORT TERM, AND A SUBSTANTIAL HEADSTART BY CABLE MODEM SERVICES.8

II.TITLE II REGULATION OF INCUMBENT LEC DSL PROVIDERS: AN OUTMODED SOLUTION IN SEARCH OF A NONEXISTENT PROBLEM.11

A.The Burdens Imposed by Title II on LECs Alone……………………………………….12

B.These Regulatory Burdens Are Not Appropriate for LEC Broadband Services and 

Facilities……………………………………………………………………………………….19

III.BY REGULATING ALL BROADBAND PROVIDERS UNDER TITLE I, THE GOVERNMENT CAN BEST EFFECTUATE ITS POLICY OF LETTING MARKET FORCES DETERMINE BROADBAND’S FUTURE.24

CONCLUSION…………………………………………………………………………………..31

“No company will invest billions of dollars to become a facilities-based broadband services provider if competitors who have not invested a penny of capital nor taken an ounce of risk can come along and get a free ride on the investments and the risks of others.”

-C. Michael Armstrong

CEO, AT&T

November 2, 1998[1]^/

“[Broadband providers] will divert resources away from offering services competitive with ‘telecommunications’ if the result of providing such nascent competition is — or even might be — oppressive regulatory obligations such as rate regulation, unbundling, mandatory service to all potential customers on demand, or collocation.To the contrary, those firms will have every incentive to avoid deploying their potentially useful resources as ‘advanced telecommunications capability’ . . . if the regulatory consequences of crossing the line into ‘telecommunications’ are vague, potentially onerous, or both.”

-Comcast Corporation

September 14, 1998[2]^/

Request For Comments on )

Deployment of Broadband Networks and )Docket No. 011109273-1273-01 Advanced Telecommunications Services )

Qwest Communications International Inc. (“Qwest”) respectfully files these comments in response to the notice issued in this docket on November 14, 2001.[3]^/Qwest is pleased to have this opportunity to engage in this important dialogue initiated by NTIA, in order to “assist the Administration in developing a domestic telecommunications policy” and to “continue NTIA’s support for removing obstacles to broadband deployment.”[4]^/NTIA’s request for comments is particularly welcome because the time for action — rather than continued deregulatory rhetoric — is now.

The importance of promoting broadband deployment has received attention from the highest levels of this Administration.In recognition of the vital role that broadband technology can play in the U.S. economy, President Bush has recently appointed a panel of prominent executives for the specific purpose of identifying “the best and most cost-effective ways to speed up the development and usage of broadband technology.”[5]^/And as Assistant Secretary Victory has noted, the appropriate role of government in this effort is to “remove impediments to broadband deployment and then get out of the way and let the market work.”[6]^/

As we discuss below, by far the most important such impediments today are regulatory ones:the policies by which certain broadband competitors are hamstrung by asymmetrical regulatory burdens, based on wholly inapplicable presumptions in favor of regulation established to govern monopoly narrowband facilities deployed many decades ago.This regulatory policy operates as a significant disincentive to further deployment of the kind of facilities-based competition among alternative technologies that is essential to promote the availability of broadband in the years ahead.The goals are certain: widespread deployment, innovative services and technologies, and diversity of infrastructure and competitors. And government must take three steps to achieve those goals: (a) rely to the maximum extent possible on market forces, as opposed to regulatory mandates; (b) eliminate asymmetrical regulations that have no place in the broadband market; and (c) promote intermodal, facilities-based competition. As we show below, that approach not only is consistent with, but is required by, existing federal law and policies.

Qwest is one of the Nation’s foremost leaders in the deployment of broadband facilities, and its commitment to broadband reflects a unique combination of perspectives.Qwest has its roots in the 1995 merger of a subsidiary of Southern Pacific Railroad and Qwest Corporation, a digital microwave firm based in Dallas.That merger, combining digital technology with railroad rights-of-way, allowed Qwest’s predecessor to develop and deploy a fast, flexible fiber network across the country that became an attractive facilities-based alternative to incumbent providers.Through its deployment of these facilities, that predecessor grew to become the fourth largest provider of long distance service in the United States by the time of its merger in 2000 with U S WEST, Inc.That merger combined a vibrant long distance business with an established local telecommunications service business in 14 western states.

Today, Qwest continues to provide service as the incumbent local exchange carrier (“LEC”) in that former U S WEST region, which includes Arizona, Colorado, Iowa, Idaho, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming.Qwest also has an active presence as a competitive local exchange carrier in 27 other major markets.At the same time, it remains a long distance carrier outside its region, and maintains a significant portion of the Nation’s Internet backbone.Thus, while it serves a widely scattered, substantially rural footprint of residential and smaller business areas, Qwest also owns and operates 2.6 million domestic miles of fiber.

In fact, U S WEST was itself an early and aggressive deployer of advanced telecommunications services in its region, rolling out broadband services across its 14-state region at a time when cable modem services were offered in only three of its markets.Qwest has since multiplied those efforts, both in its region and nationwide.As of September 30, 2001, Qwest had deployed broadband facilities to approximately 8 millon homes in the western states that comprise its local service area, and had over 450,000 broadband subscribers in that region — as well as an additional 14,000 broadband customers throughout the rest of the Nation.

These broadband investments, however, are not cheap.Qwest has invested hundreds of millions of dollars in building and upgrading its networks across the country in order to provide broadband services.Deploying fiber close to neighborhoods is the only way to provide DSL-based services to more remote locations, and that deployment, through the use of “remote terminals,” will be even more expensive.Nor do these substantial investments come without risk.Whatever the case may be with legacy narrowband services such as voice telephony, the demand for advanced services is still nascent, because the uses and capabilities of these services are still evolving.As a new entrant in many markets, Qwest has long accepted such substantial risks.But they are compounded here by an uncertain, unfair, and uneven regulatory framework built on the premise of a legacy network that has little application to the broadband market.Under that disjointed framework, the government has provided leading broadband competitors (cable modem service providers) with a significant head start — while imposing significant costs and obligations on Qwest’s provision of broadband services and facilities simply by virtue of Qwest’s status as an incumbent provider of services other than broadband.

This country’s cable incumbents currently offer cable modem service free from any federal regulation.There is no little irony to this fact, since they are the dominant providers of broadband service in the market today.[7]^/Wireless and satellite broadband providers similarly offer their services without significant federal regulation.Incumbent LECs, on the other hand, as discussed further below, are required to unbundle and share parts of their broadband networks, sell those piece parts to their competitors at prices that do not allow them to recover their actual costs, make space available in their networks for these competitors, sell their broadband services to those competitors at a discount for resale, and unbundle their broadband transport from any associated information access offering.Thus, while it costs approximately the same amount for Qwest and its cable modem competitors to physically deploy the facilities needed to serve an individual broadband subscriber, these substantial and costly regulatory burdens are borne by Qwest alone.Even Qwest’s cable competitors recognize the obvious deterrent effect such regulations have in compounding the already substantial risks associated with broadband deployment.As AT&T Chairman Armstrong put it over three years ago:

No company will invest billions of dollars to become a facilities-based broadband services provider if competitors who have not invested a penny of capital nor taken an ounce of risk can come along and get a free ride on the investments and the risks of others.[8]^/

To cure this irrational, investment-deterring, and competition-foreclosing regulatory “schizophreni[a],”[9]^/ government must implement — and stop merely talking about — three key principles.

·First, as now embodied in the Telecommunications Act of 1996, the Nation’s telecommunications policy embodies a presumption in favor of competition, rather than regulation, as the way to deploy new services.Accordingly, government should regulate only if there is a demonstrated need to do so in light of a firm’s acquisition of power in this emerging market.

·Second, the only real way to promote broadband deployment is to promote competition in facilities — not competition among providers that simply seek access to the facilities of their competitors.As Supreme Court Justice Stephen Breyer aptly put it, “Rules that force firms to share every resource or element of a business . . .create not competition, but pervasive regulation, for the regulators, not the marketplace, . . . set the relevant terms.”[10]^/

·Third, recognizing that broadband represents a distinct market with many different types of facilities-based, “last-mile” sources of access, the government must treat all providers within that market alike.It must eliminate all asymmetric regulations that incorrectly treat incumbent LECs as if they possess bottleneck control over broadband facilities, when, in fact, new broadband facilities offered by incumbent LECs are simply not the legacy facilities over which highly regulated voice services are provided.As former FCC Chairman William Kennard noted, “All companies are new entrants when it comes to [broadband] services[.]”[11]^/Government must treat them as such.

To achieve all three of these goals, government must abandon the misapplication of the Communications Act’s Title II regulatory burdens to the delivery of Internet access services over DSL platforms, in favor of a more flexible, deregulatory, and symmetrical framework long recognized to be appropriate for other new communications technologies under Title I of that Act.

Both of the last two FCC Chairmen have publicly recognized the force of many of these principles.[12]^/Yet the FCC has still to address the most basic questions about the regulatory classification of broadband services, notwithstanding repeated invitations to do so by courts and policymakers.It has finally undertaken to launch a “more comprehensive review of its broadband policies,”[13]^/ but if its analogous inquiry with respect to cable broadband services is any guide, that review may well take years.[14]^/Ironically, however, inaction on these issues is far more damaging in the context of today’s heavily regulated incumbent LEC broadband services, because the result is perpetuation of the asymmetric regulation that is the single greatest deterrent to broadband deployment.The problem is likely to grow even more acute, and the need for an appropriate regulatory framework more pressing, as broadband providers begin to offer data, video, and voice over a single platform, defying existing regulatory classifications.Until the FCC eliminates the regulatory burdens that apply today exclusively to one class of broadband providers — incumbent LECs — companies poised to finance the substantial long-term investments associated with this new technology will remain largely on the sidelines, particularly in the current economic climate.

In this regard, quick and decisive action is not just good policy.Section 706(b) of the 1996 Act commands the FCC, where broadband is not being deployed “in a . . . timely fashion,” to “take immediate action to accelerate” that deployment — and to do so “by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.”[15]^/Under existing law, the FCC has broad authority to address existing regulatory asymmetry and promote the development of broadband services.NTIA should urge the FCC to act, and to act now.

I. THE MARKET FOR BROADBAND TODAY IS CHARACTERIZED BY A VARIETY OF FACILITIES-BASED COMPETITORS, UNCERTAINTY ABOUT DEMAND IN THE SHORT TERM, AND A SUBSTANTIAL HEADSTART BY CABLE MODEM SERVICES.

Whatever broadband service is, there is no question who the current and potential future providers of broadband are.The cable industry is, far and away, the largest provider of broadband services today with approximately a 60 percent market share. As of the end of 2001, there are estimated to be roughly 7 million cable modem subscribers nationwide, in contrast to 3 million subscribers for DSL services.[16]^/Satellite broadband currently serves about 300,000 subscribers, and there are approximately 60,000 fixed wireless broadband customers.[17]^/

Heavy-handed regulation, particularly asymmetric regulation, has a depressing effect on investment even where current and projected demand for its output is certain and thriving.But the impact on investment is devastating where, as here, there is so much uncertainty about the pace at which demand for the output — broadband services — will continue to grow.As many have noted, broadband has far outstripped prior technologies in the rate of its acceptance.[18]^/Nevertheless, while demand for broadband services continues to grow, the level of that growth has recently flattened out.Qwest, for instance, currently has an average 10 percent “take rate” among those customers to whom its broadband service is available, although the figure is as high as 27 percent in some of its markets.According to an ARS research report issued earlier this month, the overall rate of broadband growth in the third quarter of 2001 was 14.5% —down from the 39.5% growth rate measured in the first quarter of 2000, and the lowest quarterly growth rate since such surveys began.[19]^/

Not coincidentally, the vast majority of the growth in broadband is coming from the one medium that is not hampered by, but is the beneficiary of, the current regime of asymmetric regulation: cable modem services.Cable providers gained 72 percent of all new broadband subscribers during the second quarter of 2001.[20]^/The Yankee Group, a communications industry analysis firm, has estimated that this lead will continue to widen until at least 2005.[21]^/Cable’s dominance in this area clearly has done nothing to bring prices down:to the contrary, cable modem providers recently raised their rates.[22]^/Nor is there evidence that cable modem services are being deployed in anything but the most dense residential and urban areas.[23]^/While EchoStar has suggested that its pending proposed merger would enable it to provide broadband services to target rural areas where cable typically does not extend to broadband capabilities,[24]^/ such satellite deployment is unlikely to alleviate the absence of cable modem competition in those areas.Incumbent LECs, meanwhile, have rolled out broadband service in many areas across the country.[25]^/Qwest, for example,offers DSL services in smaller rural communities such as Pasco, Washington, Bozeman, Montana, and Cheyenne, Wyoming.But technological limitations currently restrain what can be done without the commitment of significant additional resources — resources whose investment is highly sensitive to the risks of regulatory uncertainty and asymmetric regulation.If such regulatory problems were resolved, incumbent LECs could bring their broadband services to additional communities, thereby facilitating intermodal competition in those areas.Government policy should be geared to facilitating the entry of multiple carriers providing service over different platforms and technologies, so that LECs, cable modem providers, satellite providers, and others all compete to serve customers in the same market.

Unfortunately, it appears that the U.S. lags behind other industrialized countries in terms of overall broadband penetration levels.A recent report prepared by the Organization for Economic Cooperation and Development indicates that the United States is behind countries such as South Korea, Canada, and Sweden in terms of homes passed as well as actual subscribers.[26]^/

II. TITLE II REGULATION OF INCUMBENT LEC DSL PROVIDERS: AN OUTMODED SOLUTION IN SEARCH OF A NONEXISTENT PROBLEM.

As one prominent industry analyst observed earlier this year, in the context of broadband, the unbundling requirements create “a monster problem of seriously wrong policy and economics . . . that offers Bells no incentive to deploy new network elements.”[28]^/As long ago as 1998, the FCC recognized that “[t]o provide the advanced services, telephone companies will have to invest in advanced electronics.But the telephone companies have rightly asked, why should we make this new investment if we simply have to turn around and sell this new service — or the capabilities of these advanced electronics, to our competitors?”[29]^/Perhaps the most disturbing aspect of current government broadband policy is that since that time, the FCC has done nothing to address this problem — and, by failing to do so, has made it even worse.

A. The Burdens Imposed by Title II on Incumbent LECs Alone

Cable companies such as AT&T, and resellers of telecommunications services, have argued that as an incumbent LEC, Qwest is subject to all of these requirements when it provides broadband services.With minimal exceptions, the FCC appears to have agreed.Yet the FCC has not imposed any of those regulatory obligations on Qwest’s primary broadband competitors, including the cable modem providers that currently dominate the market.[30]^/This is particularly ironic with respect to cable modem services, given their dominance and incumbency in this service.The results are as follows:

 

Regulatory Requirement	Incumbent LECs	Cable Modem Providers	Wireless	Satellite
Unbundling Obligation?	Incumbent LECs must unbundle and lease to their competitors any facility used for the provision of “telecommunications service,” unless the FCC determines that lack of access to the facility would not “impair” (or be necessary for) the competitors’ ability to provide service.	None	None	None
Wholesale Unbundling Pricing Requirements?	Incumbent LECs must lease facilities at rates based on forward-looking costs that neither allow for recovery even of actual costs nor compensate the incumbents for any risk.	None	None	None
Collocation Obligation?	Incumbent LECs must provide requesting carriers physical collocation at the LEC’s premises at reasonable and nondiscriminatory rates.	None	None	None
Physical Interconnection Obligation?	Incumbent LECs must interconnect their networks with a competitor’s network at any feasible point.	None	None	None
Tariffing Obligation?	Yes.	None	None	None
Resale Obligation?	Incumbent LECs must offer their services for resale and must allow competitors to purchase any telecommunications service the incumbent offers at retail at a “wholesale discount” rate.	None	None; more general resale obligation expires on Nov. 24, 2002.	None
Network Disclosure Obligations?	Incumbent LECs must provide public notice whenever they make changes in their facilities that might affect the mechanics of their required network sharing.	None	None	None

Illustrative though it is, this list cannot possibly impart the full impact of the myriad obligations, and the very real costs they impose on incumbent LECs.The investments necessary to push their broadband services out further beyond existing neighborhoods are already enormous, because of the nature of DSL technology.Transmitting broadband over copper wire cannot work at locations beyond approximately 18,000 feet.To extend broadband to additional neighborhoods, incumbent LECs must deploy thousands of “remote terminals”[31]^/ — structures used to house the electronics that allow them to extend fiber feeder cable out of the central offices and closer to the neighborhoods.
In light of present and possible future FCC requirements,[32]^/ incumbent LECs have had to invest in larger remote terminal cabinets.This not only involves additional material investment expense, but leads to increased right-of-way use and related municipal costs and regulation, as well as local government issues regarding the aesthetics of these larger structures.In addition to space concerns, the incumbent LECs are required to resolve a host of technical issues regarding security and access.In many instances, remote terminal deployment has been delayed due to longer engineering time as such difficulties are resolved.Of course, this delay means a delay in Qwest’s rollout of broadband remote terminal services.All in all, even aside from lost opportunity costs, Qwest has spent approximately $3,400 per remote terminal to prepare itself to accommodate remote terminal collocation, and will have spent millions of dollars by the end of 2001 to deploy 1,481 remote collocation sites.And yet, at this point in time, only 2 of those remote terminal sites are being used by only one of Qwest’s competitors. 

Meanwhile, of course, the same competing cable modem providers in Qwest’s service areas would have been able to deploy whatever facilities they determined were appropriate to serve the particular area, as quickly as they could.Qwest therefore enters the race at a competitive and pricing disadvantage.In addition, Qwest’s multi-million dollar investment in the larger remote terminals is simply stranded investment that likely will never be fully recovered.Such costs must be factored into Qwest’s investment decisions regarding broadband rollout; if the return is not sufficient, then the more rational economic choice would be to invest scarce dollars elsewhere.More capital intensive projects, such as fiber to the curb and fiber to the home, that represent the future of incumbent LEC broadband services, are even riskier investments, particularly given the uncertainty as to how the FCC will regulate them and how consumers will respond.

The TELRIC pricing regime that accompanies the unbundling rules heightens these powerful disincentives to investment.At a minimum, the TELRIC standard precludes incumbents’ recovery of their actual investment costs.Worse, as interpreted by many state regulators, TELRIC limits recovery of costs to those that would be incurred to build and operate a hypothetical, replacement network that combines whatever advantages LECs enjoy now (or enjoyed in the past) with imagined efficiencies and technology that have never been, and are not today, available.[33]^/For example, the Arizona Corporation Commission is proposing to require Qwest to sell loops used to provide both narrowband and broadband services at rates that are based on the cost of a hypothetical replacement network that does not even account for natural and manmade objects such as mountains and paved roads.[34]^/

Furthermore, some state regulators have insisted on using the so-called “standard inputs” from the FCC’s Universal Service docket[35]^/ to establish unbundled network element rates in place of real data relevant to the particular incumbent’s network and service area.Those standard inputs were designed for the limited purpose of addressing the relative allocation of federal universal service funds among states, not for identifying the specific, forward-looking costs of a particular carrier in a particular state.[36]^/In Qwest’s relatively high cost, rural states, using the average figures produced for universal service purposes significantly understates even the TELRIC-based cost of leasing facilities to its competitors.For these reasons, the FCC emphasized almost three years ago that its modeling assumptions for universal service purposes “may not be appropriate to use” in “determining prices for unbundled network elements,”[37]^/ and it has specifically “caution[ed] parties from making any claims in other proceedings based upon the input values we adopt”[38]^/ in the universal service setting.Yet state regulators continue to do just that.Meanwhile, notwithstanding its stated commitment to facilities-based competition in general and desire to promote deployment of broadband facilities in particular, the FCC has not taken any action to correct these states’ misapplications of its TELRIC methodology.

A regulatory scheme that requires the sharing, especially at below-cost rates, of facilities with competitors may fatally undermine new and expanded deployment of services and facilities on two levels.First, it discourages Qwest and other LECs from making the substantial investment in, and incurring the risks associated with, the deployment of facilities capable of providing broadband services.[39]^/For example, Qwest has begun deploying VDSL infrastructure to many customers in and around Phoenix, providing subscribers with a bundled video and high speed Internet access service that competes head-to-head with cable providers’ combined video and cable modem services.[40]^/Indeed, Qwest has already built out its VDSL infrastructure to over 425,000 homes.But as Qwest’s Chairman and CEO recently explained, the regulatory disparity with cable operators and the overall uncertain regulatory climate raises the last remaining obstacle to Qwest’s expanding VDSL to new areas.[41]^/Second, few if any potential new competitors will incur the costs to build their own facilities utilizing today’s technology and efficiencies when they can instead purchase access to those owned by incumbent LECs at rates that reflect the technology and efficiencies of tomorrow.[42]^/As a result, the market risks becoming skewed away from the deployment of new, independent facilities.

B. These Regulatory Burdens Are Not Appropriate for LEC Broadband Services and Facilities.

These principles require government to look before it leaps to a regulatory model that can have such serious consequences for investment.All of the foregoing Title II regulatory requirements stem from the erroneous assumption that the incumbent LEC has monopoly control over a bottleneck facility necessary for the provision of service — a condition that, as we explain below, certainly does not apply in the broadband market.On this same inapplicable premise of bottleneck facilities, all of the Title II rules are designed to ensure intramodal competition, rather than the intermodal, facilities-based competition that should — and, without the current scheme of asymmetric regulation, could — characterize the broadband market.

The incumbent LECs simply are not dominant players in this market; if any providers fit that mold, they are the cable modem providers.As the FCC itself has noted, any power that incumbent LECs maintain over legacy voice communications does not translate into power in the broadband market:[46]^/Former Chairman Kennard concisely noted that “broadband is just a nascent industry.The fact is that we don’t have a duopoly in broadband.We don’t even have a monopoly in broadband.We have a ‘no-opoly.’”[47]^/As one industry observer recently put it, “[i]n the case of broadband, the Bells are the underdog with considerably less market share.Since when do we regulate the underdog and make it tougher for them to challenge the leaders?”[48]^/

Nor is this just a matter of market share; it is a question of what facilities the new providers use to provide their services, and whether access to those facilities is limited in any way. Most new broadband facilities, even when offered by incumbent LECs, are simply not the legacy facilities over which the incumbents exercise any special control.The transmission lines that incumbent LECs hope to deploy to bring broadband to the home and across rural America generally do not exist today.Incumbent LECs will have no more advantages in digging up the ground to lay fiber to provide them than the myriad other providers of fiber throughout the country today.The Commission also has recognized that other facilities used in deploying broadband services — such as packet switches and DSLAMs — are not bottleneck facilities but instead are readily available on the market.[49]^/To the extent such services use the last mile copper loop or other legacy facilities that clearly are subject to section 251, those facilities will remain available for the provision by competitors of basic local exchange service; but some newer broadband service technologies, such as fiber to the home, may be designed to avoid the copper loop altogether.Under such a scenario, adapting regulations to technological change and market developments is critical to avoid deterring such investment in new technologies.

In all events, the goal with respect to broadband deployment should decidedly not be limited to, nor even focused on, intramodal competition.Rather, the goal must be the development of facilities-based, intermodal competition, in which government policy is technologically neutral and allows the market to determine where growth is needed and which facilities and services best meet consumer needs.[50]^/There is no question that intermodal competition brings significant benefits to consumers in the form of accurate price signals and innovation:in Omaha, for example, where Qwest offers a combined video/high speed Internet access service to customers in competition with the cable modem service offered by the incumbent cable provider, the price of broadband services to the consumer has dropped significantly.[51]^/Indeed, no other approach makes sense: as noted above, there are already several different types of broadband service providers using different types of technology, including wireless, cable, satellite, and fiber, each with the inherent ability to provide the “last mile” to the customer.