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Negotiate, Not Litigate -- But File it for Approval
I had planned a definitive, thorough discussion of the recent state demands (CA, MI, KS and counting) that the carriers submit their agreements for approval to the state commissions. A correspondent has beaten me to the punch with a pretty thorough analysis. With permission, I reprint it here:

Since we are dealing with voluntary agreements, the analysis must start with
47 U.S.C. § 251(a)(1), which states:

Agreements arrived at through negotiation

(1) Voluntary negotiations

Upon receiving a request for interconnection, services, or network elements pursuant to section 251 of this title, an incumbent local exchange carrier may negotiate and enter into a binding agreement with the requesting
telecommunications carrier or carriers without regard to the standards set forth in subsections (b) and (c) of section 251 of this title. … The agreement … shall be submitted to the State commission under subsection (e)
of this section.

So the requirement to submit an agreement to state commissions is dependent on whether the agreement is borne from a request for interconnection (or services or network elements) pursuant to section 251. Subsection 252(e)
does require a negotiated interconnection agreement to be submitted to a state commission for approval, but again this assumes the agreement was undertaken pursuant to section 251.

Subsection 251(c)(3) requires ILEC’s to “offer nondiscriminatory access to network elements on an unbundled basis at any technically feasible point on rates, terms, and conditions that are just, reasonable, and nondiscriminatory,” but subsection 251(d)(2) limits the requirement:

In determining what network elements should be made available for purposes of subsection (c)(3) of this section, the Commission shall consider, at a minimum, whether--
(A) access to such network elements as are proprietary in nature is necessary; and
(B) the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer.

This statute, of course, is what the FCC attempted to apply in its Triennial Review Order. The D.C. Circuit Court struck down, among other things, the FCC’s attempted delegation of the statutory analysis to the states with
respect to mass market switching. If the D.C. Circuit Court’s decision goes into effect without any interim or new rules offered by the FCC, the unbundling obligation for mass market switching may go away, at least for
some period of time.

The argument that I think is being made by the ILEC’s is: the voluntary negotiated agreements we are now entering into are to fill the void in the event that USTA II takes effect. Those agreements are not entered into
under section 251 because they relate to network elements that are no longer required to be unbundled by virtue of USTA II. Since the agreements are not made pursuant to section 251, the requirement under section 252 to submit
them to state commissions for approval is not applicable.

While the ILEC’s argument is plausible, there are potential holes in the analysis:

· USTA II has not yet taken effect.

· Even if the USTA II stay expires, interconnection agreements touching upon 251(b) or (c) duties other than unbundling (e.g., interconnection with CLEC facilities and equipment for transmission and routing, 251(c)(2), resale,
251(c)(4), collocation, 251(c)(6)) must still be filed with state commissions for approval. It may be difficult to limit new agreements solely to network elements affected by USTA II.

· Subsection 251(d)(3) explicitly preserves state access regulations that establish access and interconnection obligations of local exchange carriers if they are consistent with the requirements, implementation and purposes of
the 1996 Act.

· Likewise, Subsection 252(e)(3) allows enforcement of state law regarding service quality or other requirements.

Result: Several states likely will assert jurisdiction over these new agreements, destroying hopes of confidentiality or package deals (as a result of nondiscrimination and pick and choose requirements). ILECs faced
with this possibility will tend to offer inflexible one-size-fits-all deals, making agreement with CLECs less likely.

This analysis seems plausible to me, complete with the pessimistic conclusion that contracts will be forced back to a standard-offer tariff, much like the current SGATs, and the related pick-and-choose inflexibility. In particular, I think that the second and third bullitt points of the potential problems will give the contracting carriers' difficulty. It seems clear that the FCC is going to have to provide guidance on this, and quickly.

- posted by Ray @ 4/30/2004 01:34:29 AM

Baseball and Disruptive Technology
Just started reading the new biography of Ted Williams by Leigh Montville on the plane back to Denver. Seems that Tom Yawkey was slow to take a ken to this new-fangled medium, TV:

"I started doing Red Sox games in 1951," broadcaster Curt Gowdy says. "We used three cameras to cover the entire game. One from first base, one from third, one behind the plate. I went to [owner] Tom Yawkey at the end of the season and said, 'I think we could use a fourth camera from centerfield to show the balls and strikes. I think it would be a great addition.'
"Yawkey surprised me. He didn't want it. He said television coverage would become too good. People would stay home from the ballpark. We didn't get it."
[p. 4]

I am not sure there is any profound insight for public policy in the inability of businesses to adapt to new media. I think the market will work this out over time and reward those with the clairvoyance to realize its import and commercial potential.

And, so far, the biography of Williams is quite compelling. It almost makes me able to stand the American League, but of course this was before that Jacobin innovation, the DH.

- posted by Ray @ 4/29/2004 11:45:35 PM

AT&T's Proposal to "Negotiate not Litigate"
The last major carrier to publicly reveal their negotiate not litigate strategy, AT&T released their “roadmap to facilities-based competition” today.

As with any opening offer in a negotiation, it is one that reaches for the stars. (To paraphrase Qwest’s Dick Notebaert at our CEO luncheon yesterday, in the beginning of commercial negotiations “I want to take all of your margin, and you want to take all of mine.”) For instance, the proposal would ensure that UNE-P will stay around for at least another six years and a $1 UNE-P rate increase would be locked into place until, among other things, a batch hot cut process is put into place by RBOCs.

AT&T’s David Dorman is correct in stating that this is a “huge paradigm shift away from business as usual,” but obviously it remains to be seen whether it is only a temporary one. AT&T has the most to lose in a non-regulatory solution, so it likely will be the last to make a deal. In light of Notebaert’s comments at our luncheon yesterday on Qwest’s “near death experience,” its deal with Covad on line sharing and its announcement earlier this week that it will not charge terminating access on pure VoIP providers (a move that, incidentally, could give a boost to the Level 3 Forbearance petition), I view the Qwest/MCI negotiations currently taking place in Denver as the litmus test on whether the larger carriers will be able to avoid another round in the courts.

- posted by Adam @ 4/29/2004 02:41:23 PM

Words I never thought I'd say...
I opened my Senate Commerce Committee testimony this morning: "I find myself in the unanticipated situation of agreeing with every Reed Hundt just said..." My testimony is here. Mr Hundt's is here, and he really did talk sense on the spectrum takeback for wireless broadband.
- posted by Ray @ 4/28/2004 04:02:53 PM

Wireless Customers are Happy
News.com reports that a “whopping 68 percent of cellular customers are generally satisfied with the quality and coverage of their service,” according to a Jupiter Research study released today. Only 10 percent of customers are dissatisfied.

One conclusion from the study is that as long as wireless carriers market themselves as low-cost carriers, they don’t need to provide the best service to compete. Consumer expectations are driving a competitive marketplace? Makes you wonder whether the additional costs imposed on wireless consumers by something like, say, a Consumer Bill of Rights will be worth it. Never mind extending archaic quality of service standards to new services like VoIP.

- posted by Adam @ 4/27/2004 04:56:41 PM

Take Three: Bush on Broadband
Today the President spoke about technology to community college officials in Minneapolis. His speech hit on hydrogen fuel cells and digital medical records before turning to broadband. In addition to support for a permanent ban on Internet access taxes, Bush called for reducing regulatory hurdles to investment, easier access to federal lands to build facilities and standards for broadband powerline.

Drawing on a favorite pastime in Crawford, Bush had this to say: “[w]e’re going to continue to support the Federal Communications Commission. Michael Powell -- Chairman Michael Powell, under his leadership, his decision to eliminate burdensome regulations on new broadband networks availability to homes. In other words, clearing out the underbrush of regulation, and we'll get the spread of broadband technology, and America will be better for it.”

The President asserted “America leads the world because of our system of private enterprise and a system that encourages innovation. And it is important that we keep it that way. See, I think the proper role for government is not to try to create wealth, but to create an environment in which the entrepreneurial spirit flourishes.” He is on to something with that innovation idea. The speech is here. AP and Reuters have coverage. Senator Kerry’s broadband proposals are due out any day.

- posted by Kent @ 4/26/2004 02:38:56 PM

CA PUC Brinkmanship -- Can the States Torpedo 'Negotiate not Litigate'?
The California PUC has laid down the gauntlet to SBC and Sage Telecom to file their interconnection agreement under section 252 of the Telecommunication Act. The letter is here.

To my understanding, both SBC and Sage have refused to do so, Sage going so far as to say it will rescind the agreement if it has to be filed. Qwest and Verizon have also publicly stated that they will resist any directions to file with the states.

I am not wholly unsympathetic to the state position here, to the extent they are inclined to do things by rote. If it looks like an interconnection arrangement, then they think they have the right to review it. However, the states are missing that this insistence on filing -- much like the pick and choose rule -- utterly destroys any incentives for parties to reach privately negotiated arrangements. If everything must be filed and subject to an abstract "non-discrimination" requirement, then nothing can be negotiated in advance by the parties. In the end, the incumbent in particular can do nothing but come up with a single, standard "take it or leave it" standard offer.

Of course, a cynic would say that this is exactly what the states want -- to prevent any private negotiation and keep their hands deeply involved in a regulatory/supervisory process where they dictate the interconnection rights, terms and prices. Oh, wait, I am a cynic.

- posted by Ray @ 4/23/2004 03:29:07 PM

Staff Appreciation Lunch--The Brief Report
Well, if ever a staff deserved appreciation it is the hard-working crew at PFF. How do you think us so-called thinkers put out so much good work and organize so many good events--if I do say so myself. We couldn't accomplish half of what we do without them.

So, we topped off our Staff Appreciation Week, with lunch at our perennial favorite, Lauriol, where they know what to put on the fire when they see us coming. The food was good, of course. The conversation stimulating--"Say, did you do any net protocol conversions last night?" "No, but I caught the tail end of a discussion of UNE-Ps on TechTV!" And the Margaritas....Well, some of the staff may still be in Margaritaville. [Ray was in Denver, sipping his beer and eating his cheeseburgers, while watching the snow fall. His spirit hovered over the Margaritas.]

Thanks to Jane, Becca, Brooke, Andrea, and Marcia and everyone else for your good work and dedication throughout the year.

- posted by Randolph May @ 4/23/2004 03:27:28 PM

Beware of Harvard Internet Docs
According to a recent item in Technology Daily [subscription required], two Harvard doctoral fellows and a media professor from the University of Leipzig in Germany claim that diversity of viewpoint on the Internet is a myth. They cited as evidence (1) individuals' poor knowledge of how search engines operate, (2) the online marketing techniques of various commercial and political entities, (3) the lack of transparency of search-engine technologies, (4) and the unregulated nature of the medium.

Ben Edelman, one of the Harvard doctoral candidates sums of their findings this way: "All these concerns reflect classical questions of media policy and media regulation, market concentration, media power, the protection of minors, the separation of advertising from content and media literacy...These are classical questions and classical challenges coming up with search engines in a new light. Of course, we need to find new ways to address them."

It's been a few months since a new FCC office was created, anyway. What about an "Office for the Regulation of Search Engines To Prevent Market Concentration, Media Power, Protection of Minors, and the Separation of Advertising Content and Media Literacy". There's no reason to leave its mission vague.

But before doing so, I'd love to have the docs over to my place to follow my mouse for 15 or 20 minutes while she crawls around the most astonishingly diverse, most easily accesible medium ever created.

- posted by Randolph May @ 4/23/2004 11:48:45 AM

Bartlett or Gifford?
The opening scene of The West Wing last night seemed eerily familiar to a scene from any day at PFF. In the scene, and the rest of the episode, President Bartlett was speaking of Schumpeterian virtues. The fictitious president quoted creative destruction and the long-run value added through short-run losses in a free market system. The Schumpeter reference was all the more poignant after Ray’s blog the other day. It’s nice to see that the icons of Austrian economics are finally reaching a broader audience than just think tankers and academics.
- posted by Mike @ 4/22/2004 04:57:31 PM

W on Broadband, Take Two
From a speech yesterday:

By being an innovative society and promoting innovation, we'll have lasting prosperity. We're lagging a little bit on broadband technology, the access of broadband technology. And I think we need to kind of accelerate it with good policy and -- particularly good regulatory policy out of the FCC. I think we're getting that from Chairman Powell. I feel comfortable he's got a good and positive vision about how to spread broadband.

- posted by Adam @ 4/22/2004 04:52:17 PM

The Metaphysicians' Club
Well, as my colleague Adam Peters points out below, the FCC has (finally) decided AT&T's petition for a declaratory ruling. The Commission held that AT&T must pay access charges because "the service which AT&T describes is a telecommunications service"--not an information service. It is the right result, I think, under the current rules in which all turns on whether the service is classified as "telecommunications" or an "information service". Until rules are changed in accordance with accepted processes, we live in a system that, thankfully, places a high value on abiding by them.

So right result. The Commission should have acted months ago to provide AT&T the clarification it requested back in October 2002.

But even a casual reading of the FCC's order shows why the advent of VoIP and other IP services will force policymakers sooner rather than later to confront the reality that the old regulatory paradigms no longer make sense. Much of the Commission's explanation for its action rests on the determination that AT&T's service "does not involve a net protocol conversion" or provide "enhanced functionality" or result in a "change in the form or content" of the information as sent and received." Ergo, a telecom service.

Net protocol conversions and changes in form and content? As I pointed out early this year in "The Metaphysics of VoIP", distinctions based on these functional concepts are the stuff of philosophers. Why, just last week at the gathering of my local metaphysical club, we spent the evening discussing what really happens to the form and content of a VoIP call as it experiences numerous protocol conversions and reconversions!

Don't get me wrong. I understand the Commission is playing with the regulatory definitional deck is was dealt in the 1996 Telecom Act, which was lifted from the 1980 Computer II decision. But what the Commission's action on the AT&T petition really illustrates--aside from reinforcing the notion that equity and stability and respect for the law are promoted by adherence to rules until they are changed--is that in today's digital world we need a new paradigm in which regulatory decisions are based on marketplace realities. Then the focus would be on treating services that are substituable from a consumer's perspective in a like fashion--not on whether a net protocol conversion occured.

- posted by Randolph May @ 4/22/2004 04:25:54 PM

Hundt on Kerry’s Broadband Proposals
Yesterday CNET had Reed Hundt on broadband and universal service. He hinted that a Kerry Administration would likely expand universal service to include broadband. Hundt calls for the “necessary public money” to make it affordable in rural and underserved areas. The former chairman also hit on Ray’s fourth prediction: broadband tax credits.

Maybe Kerry should ask Reed Hundt to run a new universal service non-profit, with oversight from the FCC of course, to distribute the revenues from the NextWave auction. The organization would not likely suffer from agency problems and would certainly be able to forestall abuses of its financial largesse.

Or perhaps not.

- posted by Kent @ 4/22/2004 03:39:04 PM

A Distinction without a Difference
The FCC has denied AT&T’s Petition for a Declaratory Ruling that access charges should not apply to phone-to-phone calls with IP transport. While it might have been a good business decision for AT&T to upgrade its network with IP transport from an efficiency standpoint, its decision to stop paying access charges was a regulatory ploy. Chairman Powell noted that AT&T’s service does not add any enhanced functionality for consumers, and future classification decisions “may be guided by the consumer’s perspective in what they are purchasing, in terms of experience or capability.” Added Powell, “[t]o allow a carrier to avoid regulatory obligations simply by dropping a little IP in a network would merely sanction regulatory arbitrage and would collapse the universal service system virtually overnight.”

The decision was not a clean sweep for LECs as the FCC took a pass on the issue of retroactive liability. Indeed, this is the only issue discussed in Commissioner Martin’s statement, which implies that AT&T should be shielded from paying past access charges. Millions of dollars are at stake, so the lawyers will get to bill a bunch of hours on this one.

The FCC has now clarified its views on two of the "easier" issues in the VoIP debate – today’s decision and its prior ruling that pulver.com’s FWD is an interstate information service. 4 of 5 FCC members addressed the need for intercarrier compensation reform in today's order. It’s go time.

- posted by Adam @ 4/21/2004 08:57:14 PM

Blogging from Buckeye
I gave a speech this afternoon hosted by the Buckeye Institute on the "Creative Destruction of Regulation: Principles for State Communications Law." My PowerPoint is here: Buckeye Presentation.ppt. I am generally against Power Point presentations, but the menacing photo of Schumpeter is too good not to display.

The folks at Buckeye--Sam Staley and Joshua Hall-- are great hosts, with a great Ohio-oriented blog. Check it out.

- posted by Ray @ 4/21/2004 03:15:42 PM

Broadband Penetration Surging
The Pew Internet & Life Project has released a report indicating that the number of home broadband subscribers has increased by 60% over the past year, mostly through new DSL subscriptions. Although DSL providers have dropped prices in an effort to close the gap with cable, price considerations do not appear to be driving the broadband migration. Increased performance over dial-up is. 36% of respondents made the switch to broadband at home because their connection "was too slow or frustrating." 26% cited the ability to download files faster. Only 3% said they switched because prices fell to a more affordable level.
- posted by Adam @ 4/19/2004 09:30:57 PM

Inspiration to negotiate not litigate...
The twisted copper pair world might look to the wireless world for inspiration on working out mutually beneficial wholesale agreements. Sprint PCS and AT&T Wireless have just signed a roaming agreement to make their respective wi-fi networks available to one another's customers at airports. Negotiated interconnection agreements in the PSTN world would not mean the end of the wholesale market, just the end of the pervasive regulatory role in the wholesale market.
- posted by Ray @ 4/19/2004 05:22:33 PM

FCC Considering Procedural Modesty
"The FCC is considering breaking a final rulemaking on voice-over-Internet protocol (VoIP) regulation into pieces, rather than releasing a huge order addressing all of the issues raised in the February notice of proposed rulemaking, a top FCC official said today in a speech at a Banc of America Securities LLC VoIP conference." The top official is Jeffrey Carlisle, senior deputy chief of the FCC's Wireline Competition Bureau, as quoted in TR Daily [subscription required] in its April 14 edition.

This sounds like a welcome step in the direction of procedural modesty that might serve the Commission well. In fact, I've said so myself. Indeed, in "New Rules for New Tech", I suggested before the Commission issued its VoIP rulemaking notice that the agency might want to break up consideration of the issues into smaller increments from the get-go and proceed in a more adjudicatory-like fashion, the better to avoid the briar patch of a completely open-ended, everything-is-related-to-everything rulemaking (aka as a "rent seeker's paradise").

It is good to see the Commission's staff thinking about how to avoid getting hung up interminably in a rulemaking proceeding without being able to decide discrete issues on which clarity is needed.

- posted by Randolph May @ 4/16/2004 05:20:13 PM

Pennsylvania PUC on VoIP
Thanks to Jeff Pulver for the pointer to yesterday’s 5-0 vote at the Pennsylvania PUC on VoIP. There was unanimous support for staff to monitor the issue and for the Commission to not to assert jurisdiction. A copy of yesterday’s meeting agenda is here (scroll to page 15.)

The 3-page motion on VoIP has the following nuggets: “At this time, however, I find it more prudent for the Commission to not reach any conclusions regarding jurisdiction over VoIP and to refrain from imposing any regulatory burdens on VoIP providers.”

And…”Although there are instances where regulatory intervention is proper (such as market failure or consumer abuse), regulatory restraint is more prudent until such time as the technology is understood and viable. This Commission should not leap into a regulatory scheme until the full impact on this technology is understood.

- posted by Kent @ 4/16/2004 04:19:14 PM

The Battle is Joined in Ohio – By the PUC!
The Public Utility Commission of Ohio (PUCO) posted this fact sheet yesterday to explain an interim wholesale ruling from March. By way of background, the order has been stayed pending appeals. The state also has the lowest UNE-L rate and third lowest UNE-P rate in the nation.

Typically, the media and message battles are pretty heated in an effort to shape the debate over wholesale regulation. One side says that A is good and B is bad. The other side says the reverse. After enough newspaper, television and radio advertisements, a handful of politicians or community leaders voice support for one position or the other. This is very familiar terrain for anyone who watches telecom policy.

However, it is unique to see the regulators wade into the middle of these industry foodfights. That is what makes the PUCO publication so interesting. Not only does it say “Competition Ohio has been misleading Ohio’s telephone consumers” but it goes on to emphasize, “Competition Ohio is not a consumer advocacy group.” (Emphasis in original.) PUCO essentially calls out AT&T for funding a lobbying effort guised as a consumer protection group.

An earlier blog post on the Ohio ruling provides more detail on the situation. Adam’s analysis of the warring factions hit the nail on the head: “So long as a certain segment anticipates a non-trivial chance to get something for nothing from regulators, they will try to do so.” For the regulatory combatants in Ohio, it must have been a surprise to see a new cost imposed on their efforts to game public opinion. That’s one cost imposed by regulators that I wouldn’t mind seeing more often.

- posted by Kent @ 4/14/2004 03:13:20 PM

Verizon has announced that it will join SBC and Bell South in imposing an additional monthly regulatory (read, USF) fee on DSL service. As these companies previously “absorbed” these costs in an effort to close the broadband gap with cable providers, the new fees are probably not the most politically savvy way to pass along a rate hike.

Viewing truth-in-billing across the telecom industry as a whole, there’s plenty of shenanigans and blame to go around. Last month, NASUCA filed a petition for a declaratory ruling requesting that the FCC prohibit, in essence, carriers from including any line item charges above and beyond those imposed by regulators. Beginning in April 2003, the FCC has allowed carriers to recover administrative and other non-regulatorily prescribed costs through line item charges. NASUCA’s brief describes how wireless and long-distance carriers have taken the bait and are assessing “regulatory assessment fees” or “carrier cost recovery charges” for anything ranging from property taxes to court proceeding costs. According to the brief, “carriers can hide their inefficiencies in line item charges while maintaining and advertising monthly and usage rates that are as low as, or even lower than, their competitors.”

I agree, but line item charges should be limited to taxes such as USF for reasons that depart from those advanced by NASUCA. Explicit surcharges will not allow regulators to hide the ball as USF demand continues to grow, leaving open the possibility that public pressure will be brought to bear on reforming the system before it collapses on itself.

Ultimately, real truth-in-billing can occur only when there is truth-in-regulating. Seven dollars for caller ID service on top of a regulated basic phone line belies any claim that consumers can make informed choices once these billing issues are clarified (assuming, of course, that alert customers don’t just jump ship for VoIP or full wireless substitution instead).

- posted by Adam @ 4/13/2004 11:58:35 PM

Schumpeter in Yellow Pages Markets
The Wall Street Journal [registration required] reports today on increasing competition in the Yellow Pages market. Yellow Book in particular is putting the squeeze on traditionally high Bell profit margins.

This competition, of course, is great for consumers, especially small businesses who advertise in the directories. The story does not mention why margins in Yellow Pages are so high though. In Colorado, at least, the regulators required Qwest's to impute its Yellow Page revenues into local rates. In other words, high Yellow Page margins were (yet another!) source of cross-subsidy to reduce monthly residential rates. Furthermore, when Qwest divested its Yellow Page operation because it found itself, ahem, a little short of cash, it agreed to continue imputing (now non-existent Yellow Page revenue) into local rates. [I still regret I agreed to this regulatory capitulation by Qwest. During the directory sale, the Commission staff and consumer counsel insisted that imputation of revenue into local rates continue. Because of the need for haste in closing the transaction, I reluctantly agreed. However, here is actually an instance of anticompetitive retail pricing--call it predation ordered by the regulator. If only regulators could be held liable for violating the Sherman Act. Call John Windhausen, I've finally found predation, of a sort. But, wait, none of his members opposed this clearly anticompetitive practice anywhere in the Qwest region, so far as I know.]

Back to the story. Very good news that the Yellow Page market is subject to competition. When looking at the margins in this business, it was extremely puzzling why they remained so high for so long. The technology and costs for producing a directory has to have plummeted in the past decade. Network effects must count for the durability of these margins, but even these -- it appears from Yellow Book's success -- don't last long in a digital age.

- posted by Ray @ 4/13/2004 09:08:55 AM

Fearless predictions about the upcoming Kerry broadband speech...
Senator Kerry is giving a speech on broadband this week. My predictions:

1. He'll be for it.
2. He'll be against spam and indecency.
3. He'll be for universal, low cost access for all Americans.
4. He'll offer tax credits for everything the label "broadband" can be attached to.
5. He'll say nothing about the current regulatory morass caused by the Triennial Review and the Ninth Circuit's Brand X cable modem case.

I'm a trained professional -- don't try making these predictions on your own.

- posted by Ray @ 4/12/2004 01:13:03 PM

Utopia fading?
Salt Lake City's mayor appears unwilling to put his taxpayers on the hook to fund Utopia, the most ambitious effort yet of government to get into the broadband business. The Music Man -subterfuge to get government to build broadband networks is happening all over the country, but the could-not-be-better-named Utopia proposal is the most audacious and expensive.

And now for the best parts of the "build it and they will come" plan: there are already two pipes--Qwest's and Comcast's--offering service to Utah residences; the Utopia subscription will be double the retail cost of DSL and cable modem; and, unlike cable, Utopia will have no video product. Sixty bucks a month for 100mbps so espn.com will load at backbone speeds. Sign me up.

Now why wouldn't a mayor want his taxpayers to be on the hook for such an obviously well-conceived business?

- posted by Ray @ 4/12/2004 12:54:46 PM

Competion means you get to compete….Kansas misses the point
“Winback” is what happens in a market where a firm loses a customer to another firm and attempts to lure that customer back. This is called competition. Competition is good – it means rival firms try to lure customers with superior prices, packages and services. This all appears straightforward and obvious. It is not obvious to the Kansas Corporation Commission (KCC).

Last Friday, the KCC put its muscle behind an order to prevent consumers from finding a better bargain in the telecommunications marketplace. The KCC sees the need for regulation to intervene between the consumer and the firm. Mind you, competition was the point of the ’96 Act, but now the KCC is ordering its incumbent, SBC, not to compete without saying “mother may I.”

The KCC first found winback offers are legal under Kansas law and then determined its own authority to review and investigate winback offers. This second feature of the order spells out a new regulation for contracts…er, a new policy. Specifically, the order precludes an ILEC from contacting a lost customer for 30 days, precludes an ILEC from making a special offer to win the business of a new customer, precludes an ILEC from making a special offer to retain consumers who seek a better deal, and limits the length of a contract between an ILEC and a new customer to 12 months. Importantly, these restrictions only apply to one ILEC in the state, SBC.

Writing a partial dissent to the order Cmr. Robert Krehbiel concluded,

[W]hile we concern ourselves with the transition from a regulated to a competitive environment, technological advancements have rendered much of the effort irrelevant or archaic. Unanticipated opportunities for various unregulated telecommunications providers now pose, perhaps, the greatest competition and the greatest challenges for both incumbent and competitive local exchange carriers…[W]e also recognize that competition has presented itself in many different forms, largely beyond the regulatory authority of this Commission, which provides consumers with many different choices. As reality changes, so too must we.

By last summer, approximately 1.5 million access lines were served in Kansas. One out of every five lines was served by a CLEC and almost 18 percent of CLEC lines are facilities based. This is up considerably from the one out of every eight lines served by CLECs in June 2002. (These figures are all from the FCC’s Local Competition Report.)

Meanwhile there are a dozen wireless carriers operating in Kansas serving nearly 1.2 million subscribers. The growth of this market is in double-digits and hit 13 percent last year. Since early 2003, there have been more wireless subscribers than ILEC lines in service. As Cmr. Krehbiel noted, “competition has presented itself in many different forms.”

The whole premise behind extensive winback regulations is supposed market power. But even the motion to initiate the KCC proceeding belies the market power argument. It defines winback with the following language: “A winback offer is a promotional offer or discount that is available to former customers of a LEC that voluntarily terminated their service and subscribed to another service provider.” (Italics mine). Consumers making voluntary choices, and then presented with the option of a better deal, are certainly not victims of predatory behavior. These same consumers must be denied competitive choices from the incumbent SBC? This is something of a “we had to destroy the village in order to save it” reasoning – we had to deny consumers a competitive choice to bring them competition.

In the transition from regulated monopoly to competition, there is a temptation to handicap the incumbent so it cannot compete. This is the “competition policy as market share apportionment” school of regulation and it has an ignominious history. In electricity restructuring, many states ordered an incumbent-financed “shopping credit” to induce consumers to change providers. In long distance, the FCC forced AT&T to continue tariffing its services and hold a price umbrella over new long distance entrants. All of this is in the name of competition, but the bottom line is that regulators deny consumers lower prices, or artificially hold the incumbents’ prices high, to induce market share gains for new entrants.

As a counterpoint, three days after the KCC order the Colorado PUC let a Qwest winback promotion go into effect as a matter of law. Next door, the Centennial State is one up on the Sunflower State when it comes to sensible rules for competition.

- posted by Kent @ 4/12/2004 10:52:06 AM

TV by Internet
Penelope Paturis of Forbes has a piece looking at the Internet as an alternative to cable and satellite as a channel for content distribution. Her conclusion:

"These endeavors may be long shots now, but what happens when the technology gets to the point where most televisions have high-speed Internet connections? Consumers may start wondering why they should pay $100 a month to DirecTV or Comcast for a bunch of channels they never watch, when they can just maintain their broadband connection at $40 a pop and only watch exactly what they want to watch.

"The cable and satellite systems are at the mercy of the programmers that create and distribute the content. You can bet that as soon as the folks with the keys to the content kingdom decide that there's more money online than on-air, online is where they'll be. "

- posted by James DeLong @ 4/9/2004 01:21:03 PM

Ugh. Only Six More Days…
The IRS has seen a bump in the number of individual tax returns filed electronically. Last year, 52,876,000 taxpayers sidestepped the Postal Service with their 1040s. The AP reports that the numbers are running about 5 percent higher this year. Tens of millions of taxpayers also qualify for free e-filing and preparation from one of sixteen commercial tax preparation services.

While the AP story is good news – among other benefits, e-filing lowers the costs of handling a tax return – it doesn’t tell the whole story. The FY 2005 Budget (scroll to page 855) includes figures on the 2004 and 2005 IRS Performance Plan. The expectation is that the IRS will process 59 million individual returns electronically this tax season or about 45 percent of individual returns. That is a jump of nearly 12 percent from last year.

E-filing is another example of efficiency in government brought to you by the digital revolution. Like other digital technologies, it has an impressive penetration rate but it cannot, by itself, transform government. As evidence, despite lower unit costs for processing returns, the budget for the IRS continues to grow. FY 05 numbers are up 3.2 percent or $131,000,000 for the agency.

- posted by Kent @ 4/9/2004 12:48:55 PM

Maybe Jimmy Carter can sit in and observe...or how about the U.N.?
MCI, which usually treats its credibility as a more precious resource (insert Worldcom snicker here, but it's true!), has proposed the dippiest negotiation process for the current "negotiate not litigate" period. MCI wants two state commissioners plus an FCC representative to sit in on the open interconnection agreement negotiation. Surely no lawyerly posturing would take place under these circumstances. Plus, it's hard to see why these spectactor/mediators have any legitimacy. This is a recipe for failure, which may be the point.

Some sort of mediator may well be a good idea. There do seem to be some natural bounds to these negotiations: current TELRIC rates as a floor and resale as a ceiling.

Paradoxically, the FCC and the SG fomenting uncertainty now about the next move with the Triennial should facilitate private negotiation.

- posted by Ray @ 4/9/2004 02:18:59 AM

Skype going handheld...
Skype is taking its VoIP service to PDAs and smartphones. Not sure what this means -- probably not much in the short-term, but it cements that voice is going to become an application even on the wireless platform.
- posted by Ray @ 4/9/2004 02:06:02 AM

$41 Billion Deal
Last week, details of the proposed merger between Cingular Wireless and AT&T Wireless came to light. Tellingly, the FCC review is not likely to be completed until early 2005.

The key lines of the news story:

Telecom observers expect regulators to approve the deal, though they may require divestitures of customers and spectrum in some markets. The application was filed March 18, but it was not made public until late Friday.
Hard to see why the companies’ 45 million subscribers, or millions of shareholders, should have less a say in the companies’ future than a handful of regulators in Washington. Then again, the public interest is the guiding principle of merger review at the Commission unlike the consumer welfare guidelines used during the hoop-jumping at other federal agencies. Perhaps its time for a merger of the FCC, FTC, and DoJ review authority.

- posted by Kent @ 4/8/2004 10:44:31 PM

On Electricity...
I have been reflecting on our electricity forum this Monday, which really was top notch in terms of the presenters and discussion. That said, I cannot help but think that the electric world could benefit from a better historical understanding of the telecom world to avoid repeating the same mistakes.

Competition came to telecom more quickly and more easily, in part because Moore's Law eroded the natural monopoly characteristics of telecom more rapidly; in part also because the telecom rate structure was so out-of-whack with costs that it induced inefficient entry by competitors into the business segment. Also, electricity is tougher because of the load-balancing and lack of storage characteristics of the network. PURPA, though, did the same thing for electricity that the rate structure did for telecom: subsidized the creation of new "competitors" in the generation market.

In telecom, the natural monopoly or "essential facilities" problem came in the last-mile from the switch to the loop. In electricity, it comes in the transmission grid. The question then for regulators is how you mandate access to the last-mile in telecom; and the grid in electricity. In telecom, we have had an experience with this dating really from the
Computer II inquiry and the Open Network Architecture (ONA) rules from the 1980s. Of course, the unbundling rules from the 96 Act are the most ambitious efforts of regulators to define the rules and terms of access to the last mile. In electricity, there are the Open Access Tariffs and OASIS systems and, lately, the terms of the RTOs and finally Standard Market Design. These efforts are still a good 20 years behind similar telecom efforts.

The structural versus behavioral question also enters the picture. The answer to this question probably depends on a predictive judgment: whether or not multiple platforms are going to emerge. For telecom, the predictive judgment (now coming true) is that multiple platforms will emerge to make all aspects of the network competitive. For electricity, the predictive judgment more likely supports a structural remedy because there will not likely be multiple platforms. Therefore, the long-term costs of a structural solution to the transmission grid will probably not be that much more than a behavioral remedy.

In the end, electricity can learn three things from telecom. First, dis-integration costs are non-trivial and potentially quite large. Indeed, they may swamp the benefits you gain from competition. (I shudder to think of the costs of the current telecom OSS systems and their relative dis-use.) Second, public choice or rentseeking pressures and perils will be extremely high because all terms are up for grabs in the regulatory forum. Accordingly, there will be a great deal of investment in rentseeking, and this will be pure social loss. Third, error costs are high and reliance interests will quickly metastacize .

In all, I think this cautions heading into devising access rules with great trepidation, and an inclination toward incrementalism.

- posted by Ray @ 4/8/2004 04:58:22 PM

Today President Bush made two nominations of interest to our research at PFF. Commissioner Suedeen G. Kelly will be nominated for a full term at the Federal Energy Regulatory Commisson. In February the Senate approved Kelly – a former Chair of the New Mexico PSC – to fill a vacancy. The President also named Jon D. Leibowitz for a slot at the Federal Trade Commission. Leibowitz was most recently at the MPAA. The Washington Post has a short story on the appointments.
- posted by Kent @ 4/8/2004 02:27:46 PM

California Dreamin’
Some two-dozen different parties have filed a motion or comments in the VoIP proceeding at the California Public Utility Commission.

Only a handful of petitioners see the need for extensive economic regulation. To wit: The Consumer Protection and Safety Division at CaPUC was both “vexed” and “troubled” by the absence of “utility regulation” or a “consumer bill of rights” for VoIP. With a nod to equitable policymaking, San Francisco officials use the term “fair” seven times in a six-page filing. That is, it is only fair to regulate VoIP because every other service is heavily regulated. The Peninsula Ratepayers Association wants CaPUC to “use its jurisdiction as a basis to force the FCC to confront” universal service.

Hardly is failure in one area a sufficient reason to advocate economic regulation in another. Of course, a different point of view can be found here.

The consistency among petitioners is notable. Participants with interests as varied as Cox, Motorola, Covad, SBC and AT&T all call for the CaPUC to step back until the FCC has concluded its rulemaking. Many call for a total retreat from tentative CaPUC conclusions that VoIP ought to be regulated as a telecommunications utility.

We know that disruptive technologies realign the marketplace. However, they do not necessarily realign the incentives and interests of most regulators.

The VoIP proceeding is a useful signal to policymakers – in capitals across the country – that the knottiest problems are not resolved by asking if a new service ought to be regulated but by asking how to fix current systems like inter-carrier compensation and universal service.

- posted by Kent @ 4/8/2004 11:35:40 AM

On Bundling
After the cable "a la carte" hearings last month, Senator McCain would be well-advised to read Arnold Kling's article on the economics of bundling:

The attempt to criminalize bundling strikes me as opening up a Pandora's Box. Because bundling is so widespread, a paternalistic legislator or court could use bundling as an excuse to interfere in almost any business in America. If the existence of bundling is to be treated as justification for government intervention, then we might as well hand every product and pricing decision over to bureaucrats, and take that as our road to serfdom.

Read the whole thing at TCS.

- posted by Adam @ 4/5/2004 03:24:55 PM

Glass Half Full
SBC and Sage Telecom (a UNE-P provider) have reached a seven-year wholesale provisioning agreement. Wow, private commercial negotiations actually do work.
- posted by Adam @ 4/5/2004 03:09:03 PM

Remember the Alamo Dome!
Or, wait until next year! Or something like that.

First: Congratulations to the Connecticut Huskies, a very talented and deep team.

Second: To the Dukies, thanks for another great season. You did good--and Chris Duhon played with terrific heart all year, but especially when he was hurt the last six games.

Third: I have to agree with the Washington Post's Michael Wilbon, who in his Sunday morning column called the officiating "embarassingly, even unforgettably awful." Wilbon lamented that the officials "should have been taken from the court at the half and replaced during intermission."

I'll say no more. After all, it's just a game with a bouncing ball, a couple of nets hanging on round rims off glass boards, ten guys--and three zebras. As I said, I'll say no more...until next March.

- posted by Randolph May @ 4/4/2004 10:36:15 AM

In Your Heart
No, I'm not suggesting--right now--that in your heart you know I'm right that switching should be removed from the UNE mandate. I'm suggesting that in your heart, deep down, you know you are pulling for that braveband of Blue Devils who face the mighty Connecticut Huskies on Saturday night in the NCAA semifinals. In your heart, deep down, you know you want the Dukies, led by still playing-hurt Chris Duhon, to beat the Huskies. You want Coach K. (Adam--note the correct spelling of his name) to bring home yet one more championship.

So, we'll see. It's time for the trash talkin' to stop. Follow the ball.

PS--Even with our hearts--and, yes, our minds too--now pulled in the direction of San Antonio, it's not too early to begin thinking about the upcoming big game in Annapolis pitting Ray's alma mater tiny St. Johns against the the entire Navy, or at least the entire Naval Academy. I have in mind, of course, the annual croquet match between the two schools. See Ray's March 29 post below. Don't expect any big bonfires afterwards on the winner's campus. Ray assures me that everyone just goes off to the annual Croquet Ball, on a Rocky Mountain-like high contemplating the opening of tiddly-winks season on May 1!

Croquet anyone? Go SJC!
Amidst the celebration of the Blue Devil's ascendancy...ho, hum...a real sport enters the spring season. The St. John's College-Naval Academy Annual Croquet Match is April 24 in Annapolis. Duke probably doesn't even have a croquet team.
- posted by Ray @ 3/29/2004 08:00:28 PM


- posted by Randolph May @ 4/2/2004 06:30:33 PM

As Copps's World Turns
Commissioner Copps is on fire this week. From the Washington Times:
[Copps] told reporters Wednesday that the FCC should review whether soap operas violate the agency's indecency prohibitions, according to Television Week, an industry trade publication.

Mr. Copps, one of two Democrats on the five-member panel, said he stumbled across a racy soap-opera scene while channel-surfing recently.
"It was pretty steamy stuff for the middle of the afternoon," Mr. Copps said.

Since the FCC is on a full-fledged indecency crusade, here’s my two cents. Soaps should now be shown with a ten-second delay. The delaying mechanism can be hardwired into Commissioner Copps’s office. When the passion between the previously-thought-to-be-deceased woman and the guy who may have fathered three illegitimate children becomes too much to handle, the Commissioner can hit a big red button labeled “PUBLIC INTEREST” until the interlude is once again fit for those watching at home.

Absurd? Oh sure. But the same goes for the bipartisan jockeying over indecency since the "nipple seen around the world."

- posted by Adam @ 4/2/2004 04:49:43 PM

More Rural Broadband
Last week, the USDA awarded $11.3 million in community broadband grants, money which was part of a $1.4 billion in loans promised to rural telecoms by Secretary Ann Veneman in 2002. Well, yesterday the USDA was at it again, as the Rural Utilities Service (RUS) announced that no less than $2.211 billion will be made available in loans and loan guarantees to provide broadband to underserved communities.
- posted by Mike @ 4/2/2004 12:50:46 PM

Watch the Rockies and Mets Lose on Your Laptop
Three cable companies have signed on with Major League Baseball to bring MLBTV to broadband. The service even archives previous games so you can replay particularly stinging defeats.
- posted by Adam @ 4/2/2004 12:31:05 PM

Hooray for regulation!
Commissioner Copps's statement on the Brand X en banc denial:

“This is a good day for consumers and Internet entrepreneurs. I look forward to the start of a fresh dialogue on broadband service at the FCC.”

There are many fingers to point in the Brand X litigation. The 9th Circuit for, well, being the 9th Circuit and being hell bent on reaching a decision proper to an administrative agency (over Judge O'Scannlain's prescient objections). The FCC for, well, being the FCC and ducking this issue without asking for a primary jurisdiction referral. Under Brand X, broadband stands at risk to be regulated according to the prescriptive, onerous legacy title 2 common carriage regime.

That Commissioner Copps celebrates this shows him to have no peer in wanting to regulate. Ugh. Combine that with his walkback on the "negotiate, not litigate" letter and he is a real progressive-era relic. (And I don't even mean that as name-calling. He may indeed appreciate that moniker.)

- posted by Ray @ 4/1/2004 06:43:06 PM

The Ninth Circuit has Spoken
And it has declined to undertake a full panel review of Brand X Internet Services v. FCC, which held that cable broadband is part telecommunications and part information services under the Act. No immediate implications, other than more uncertainty and the SG receiving another wave of letters seeking a request for cert.
- posted by Adam @ 4/1/2004 12:30:43 PM

The Dow it is a changin'...
Verizon replaces AT&T in the Dow industrial average. In part, this reflects the disappearance of the long distance market. The respective market caps of the companies is surprising: $100B + for Verizon compared to $15B for AT&T.
- posted by Ray @ 4/1/2004 11:29:57 AM

NARUC's Cards
Not to be outdone, NARUC has followed FERUP with its own response to the FCC request for a 45-day extension at the D.C. Circuit and from the Solicitor General. “NARUC commends the Commission” and the release indicates, “We remain concerned about the important questions of federalism raised in the DC (sic) Circuit’s opinion.”
- posted by Kent @ 4/1/2004 11:15:10 AM

Texas Telecom Hearings
On Tuesday, a committee of the Texas legislature heard invited testimony from a dozen people. They represented the likes of Sprint, Texatel, Covad and Cingular. Last week, the same committee heard from a dozen others. My testimony is here.

Two dozen witnesses to kick off the legislative process is extraordinary. There is every reason to believe that parallel efforts to re-write the state telecom statute and to re-authorize/sunset the state utility commission will continue to attract outsized attention in Texas, and around the country. (That’s one reason why we are fortunate that the Texas Public Policy Foundation recently re-published a PFF study on the issue.)

- posted by Kent @ 4/1/2004 11:11:21 AM

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