On Feb. 20th, 2003, the FCC culminated its second Triennial Review by announcing its plan for the telephone and DSL-based broadband networks. In essence, the plan allows competition in narrowband local phone services, but denies all but the wish for meaningful competition in broadband connectivity. The effect is that we are likely to have even fewer ISPs and less choice in broadband providers, more restrictions and less innovation in DSL service, and no real hope for faster (fiber) deployment.
Much of the controversy centers on rules for Unbundled Network Elements (UNEs). Four main points are of interest (each discussed in more detail below) are:
Under 47 USC § 251(d)(2)(B), the FCC must decide which network elements should be unbundled (and which ILECs must make available to CLECs). In 1999, the FCC had redefined "market impairment" as a basis for unbundling elements. In United States Telecom Ass'n v FCC, 351 U.S. App. D.C. 329, 290 F.3d 415 (May, 2002), the court considered the FCC's implementation of the Local Competition Order (requiring ILECs to lease a variety of network elements, explained below, to competitors) and the Line Sharing Order (requiring unbundling of parts of the copper loop for DSL competitors). Both orders were remanded to the Commission for reconsideration. The court determined that the guidelines didn't take into account "alternative elements outside the incumbent's network." Furthermore, "the Commission decided to make its unbundling requirements (except for two elements) applicable uniformly to all elements in every geographic or customer market."
As to almost every element, the Commission chose to adopt a uniform national rule, mandating the element's unbundling in every geographic market and customer class, without regard to the state of competitive impairment in any particular market. As a result, UNEs will be available to CLECs in many markets where there is no reasonable basis for thinking that competition is suffering from any impairment of a sort that might have the object of Congress's concern.
The FCC's 1999 order had defined a copper wire (like the kind coming into most homes and many businesses) as having two parts: a lower-frequency portion used to carry analog circuit-switched voiceband transmissions, and a high-frequency portion, above the voiceband, which allows a digital signal to travel on the line at the same time.
The FCC didn't take into account, however, the broadband competition from non-LECS such as cable, and to a lesser extent, satellite. The DSL market, according to this court, is already competitive in many areas (therefore not impaired), and the FCC didn't properly explain why unbundling the high-speed portion of copper lines was needed. The DC Circuit ruled that the FCC's generic UNE rules did not do a sufficiently detailed "impairment analysis."
Over-reacting to this and other conservative court decisions, and choosing to ignore the needs of the high-speed access market it just helped to create, the FCC's Order on Remand has a presumptive finding of no economical or operational market impairment, defined by whether "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." 
The states can rebut this finding within 90 days; if they do not, local circuit switching ("a key ... element for business customers served by high-capacity loops") will no longer be unbundled. Under the FCC's new rules, DSL-based ISPs like Covad and Earthlink, will be transitioned off of their use of the high-capacity portion of the network within three years. This translates to higher rates and/or unavailable access for competing DSL-based ISPs. Of the 19M current broadband subscribers, 6.8M use DSL; and of those, the four RBOCs control 87.8% of the market. Given past ILEC behavior, it's hard to imagine a reason why the ILECs wouldn't put competing DSL providers out of business in short time.
The FCC's direction under Commissioner Powell supports "Intermodal" competition, a facilities-based view of telecommunications. The 1996 Act does not specify a facilities-based market:
For the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available, so far as possible, to all the people of the United States, ... a rapid, efficient, nationwide, and world-wide wire and radio communication service with adequate facilities at reasonable charges...
Rather, it encourages the idea of promoting competition and free markets, not protecting one industry at the expense of another. "Intermodal" refers to competition between cable operators, wireline telephone companies, providers of wireless telecommunications services and satellite communications firms. Commissioner Powell hails this free market concept: "Thus, if you are truly committed to serving the public interest, bet on a winner and bet on market policy." Citing Powell's view of the public interest, however, Robert McChesney said,
He is a nice, sincere guy. He is also a figure resolutely opposed to the very notion of the public interest. I think he believes that government is evil and that business will automatically regulate itself. It's a free-market faith, and since it is a faith, it requires no empirical verification.
Indeed, when asked at his first news conference for his definition of "the public interest,"
Powell joked, "I have no idea." The term can mean whatever people want it to mean, he said. "It's an empty vessel in which people pour in whatever their preconceived views or biases are." His job, he claimed, is making sure that the public benefits, "and not necessarily the industries or the barons" who have a stake in FCC decisions. Beyond that, he said, "I don't know. I am still trying to figure it out."
Responding to the FCC's proposal for intermodal competition, several public interest groups charged the FCC with violating the 1996 Act and creating bad public policy that would "allow facilities owners to discriminate against rivals or among content providers, deregulate the Bells allowing them to withhold access to advanced telecommunications functionalities of their networks, and perpetuate broadband monopolies that would subject consumers to higher prices and fewer choices."
Pitting one monopoly ILEC against one monopoly cable company (in many geographic areas) for broadband services denies real broadband competition such as that which we've seen over the last few years. To be sure, the little guys' days are numbered.
Who decides if a CLEC would be economically or operationally impaired without access to a particular UNE? Under the new plan, states do. Commissioner Kevin J. Martin, in his press statement about this Review, hailed,
During my time at the Commission, I have witnessed first hand the helpful role that the states have played in our mutual goal of implementing the Telecommunications Act. I believe that the states are best positioned to make the highly fact intensive and local "impairment" determinations required by the Court of Appeals.
Commissioner Martin refers the states to the FCC guidelines and roadmaps (to be published soon) for analyzing their markets, but Chairman Michael K. Powell expressed concern that the guidelines won't help.
Two consequences are clear: First, the states and Public Utility Commissions (PUCs) are often ill-funded and not entirely ready to properly deal with this sudden increase in responsibilities. They will need to develop rules and procedures for dealing with UNE issues.
Second, the implementation of standards and access will vary widely from state to state. This is divergent from an earlier-stated intent: "Major objective of 47 USCS §§ 151 et seq. is to grant Commission sufficient authority to insure that regulatory policies relating to common carrier services will be developed and administered in uniform, consistent manner. Re Establishment of Interstate Toll Settlements, FCC 83-180 (Adopted Apr. 27, 1983)."
Some states fully support the monopoly stronghold of the ILECs (e.g., IL, SC). In contrast, other states have taken active roles in setting the terms and conditions on which incumbent telecom carriers must provide access to their networks to CLECs, including municipalities. Chairman Powell perhaps summed this situation up best when he said,
The nation will now embark on 51 major state proceedings to evaluate what elements will be unbundled and made available to CLECs. These decisions will be litigated through 51 different federal district courts. These 51 cases will likely be decided in multiple ways - some upholding the state, some overturning the state and little chance of regulatory and legal harmony among them at the end of the day. These 51 district court cases are likely to be heard by 12 Federal Courts of Appeals - do we expect they will all rule similarly? If not, we will eventually be back in the Supreme Court of the United States to resolve any conflicts - the same Court that vacated our excessively permissive unbundling regime in 1999. This process will take many years and will hardly be the quieting and stabilizing regime that was so craved by a rocky market.
Indeed. The legal battles began almost immediately. The Washington Post reported that:
The major regional phone companies yesterday promised a court fight to overturn rules governing competition for local telephone service that were approved last week by the Federal Communications Commission.
Two of the four former Bell companies, SBC Communications Inc. and BellSouth Corp. also renewed promises made after the vote that they would not invest in new, high-speed Internet networks unless the local telephone rules are scuttled.
The Bells are seeking a complete, unregulated monopoly which would allow them to limit the effects of changing technology, indefinitely avoid meaningful quality improvements (such as the faster, better and cheaper computing technology that much of today's communication relies on), and reducing costs for home and business customers. It's hard to imagine a better way to discourage a lively, competitive telecommunications future.
Ostensibly to encourage the investment in and development of broadband (DSL and fiber-to-the-home) services, the FCC says that the fiber lines - which ratepayers have long been funding and which ILECs have long promised to deliver - don't have to be shared. Furthermore, as fiber elements are incorporated into the copper network, these hybrid networks don't have to be shared either. Here again, the FCC is supporting the monopoly advantage over competition mandated by the 1996 Act.
One might reasonably ask how a DSL competitor will survive if they don't have access to the existing phone network. It is unrealistic to assume that competitors will be willing or able to invest in building entirely new infrastructure. This is a daunting task in the best of circumstances, and is simply not practical given the capital markets' current view of telecom ventures. The Bells' networks were funded by regulated rates during a time when competition was not a realistic threat. Competitors today, however, have no such regulatory protection and, therefore, vastly inferior access to the necessary capital. Additionally, they don't have a strong basis for resale or UNEs guaranteed by the 1996 Act to offset the ILEC's monopoly advantages.
The Office of Advocacy of the Small Business Administration, in February 2003, warned that the FCC's announced actions would have "a drastic effect on small businesses," especially competitive local carriers (CLECs). In a paper called "The Future of the Regional Bells," consumer advocacy group NetAction examined the monopolistic abuses and consequent failure of competition to arise in such an environment. Furthermore, pro-consumer groups such as TeleTruth and others have pointed out that the ILECs have long charged ratepayers for broadband networks and services that we will never receive. State PUCs may well be required to increase staff to handle growing administrative duties imposed by the FCC, but staff increases will not begin to equal the layoffs from CLECs, ISPs, and equipment manufacturers to come.
We don't have an entirely unregulated communications monopoly yet; but the Bells are working on it. For example, SBC has already begun disconnecting user DSL services when they chose another local phone provider; tying services (a common monopoly strategy) is in their plans. This isn't new: SBC has a long history of being uncooperative, as do other ILECs.
We have learned over time that monopoly incumbents must be regulated more than new entrants if we want to encourage competition to take hold. (Examples: trucks vs. trains, cellular vs. landline telephones, digital broadcast satellite vs. cable...) Under the guise of promoting competition, the FCC is enabling the telecommunications industry to stand still. The FCC is operating as if technology is static and the existence of a monopoly doesn't change a market's competitive nature. Bottom line: We can expect to get less in terms of services and choices, and expect to pay more (monopoly rents) for it .