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WHERE ARE WE? WHERE ARE WE? HOW DID WE GET HERE? HOW DID WE GET HERE? WHERE ARE WE GOING?WHERE ARE WE GOING?
WHERE ARE WE? HOW DID WE GET HERE?
WHERE ARE WE GOING?
NARUC Telecommunications Education SessionJuly 15, 2007
Slide Slide 33
OverviewOverview2:00 Introduction. Hon. Tony Clark, North Dakota, NARUC
Telecommunications Committee Chair and Savant
2:10 How to Tell the POTS from the PANS? Dr. Douglas Sicker, University of Colorado
3:10: A Brief History of the Universe (of U.S. Telecommunications Policy), Bob Rowe (formerly honorable)
4:15 “Now What Do We Do?” Discussion facilitated by telecommunications celebrities
ETCs and Capital Hill activity. Hon. Phil Jones, Washington State
USF and Intercarrier Compensation. Hon. Ray Baum, Oregon Special access. Hon. John Burke, Vermont Video franchising. Hon. Daryl Bassett, Arkansas
5:00 Wrap Up. Hon. Tony Clark
NARUCTelecommunications Law & Policy Primer
July 2007
Bob RoweSenior PartnerBalhoff & Rowe
Slide Slide 55
OverviewOverview
Introduction Early History Communications Act of 1934 to MFJ MFJ to the 1996 Act The Act and its Implementation Recent Developments and Policy Issues Roles and Challenges for State
Regulation
Introduction
Slide Slide 77
Some Candidate ThemesSome Candidate Themes Interplay of anti-trust (ex post) and economic
regulation (ex ante) Monopoly – competition continuum Jurisdictional tensions and resolutions
Approaches to federalism Commerce clause
Litigiousness “Lawyers behaving badly”?
Universal service Consistent goals over time, pursued through
varying/evolving means Investment and deployment concerns Disruptive effects of technology and economic
models on then-current regulatory regimes Different approaches to and assumptions about
consumer desires and consumer protections
Slide Slide 88
Retail Rates*Rate base/Rate of
Return*AFORs *Price cap
CustomerCustomer educationConsumer protectionRetail service quality
Universal ServiceCustomer support – Low IncomeLoop support – High Cost Fund
E911 * Schools & libraries * Rural health care
Wholesale*Rates *Terms *Numbering/LNP *Service quality
*Interconnection/unbundling *Structural/non-structural safeguards
General consumer law*Securities* Uniform Commercial Code*General contract law* Bankruptcy*Anti-trust *Common law (torts/common carriage)
Form•Contested case•Tariff•Rulemaking•ADR•Auctions •Collaboration•Contract•Implicit consensus
Forum•Legislature•Agency•Court•Standards body•Private dispute resolution
“The policy pyramid”
LevelInternationalNationalRegional StateLocal
State of nature – Hobbes v. Rousseau
Slide Slide 99
Stages, Policy and Financial PerspectivesStages, Policy and Financial Perspectives
Early History
Slide Slide 1111
Mann-Elkins Act of 1910 Gave interstate jurisdiction to the Interstate
Commerce Commission Treated Telcos as “common carriers”
Early goal was to promote “universal service”
The term was created by AT&T CEO Theodore Vail in the early 1900s
AT&T’s slogan in 1908: “One Policy, One System, Universal Service”
A telephone within an arm’s reach of a chicken every pot!
Early HistoryEarly History
Slide Slide 1212
US v. AT&T US v. AT&T – Round I– Round I The Rise of AT&T
Through business savvy, it developed a robust long distance network, providing the inter-city connection for locally owned telcos
AT&T would only interconnect its long distance network with that of local telcos owned by it
The US sued to block AT&T’s purchase of a regional long distance company in Oregon in 1913, arguing anti-trust type issues
AT&T responded with the “Kingsbury Commitment,” a letter from AT&T’s VP Nathan Kingsbury to the US which ultimately led to a consent decree that required AT&T to do the following
AT&T required to divest Western Union AT&T had to provide interconnection to independent
phone companies AT&T had to stay-out of the “radio” business
Slide Slide 1313
The Early YearsThe Early Years
Willis-Graham Act of 1921 Allowed AT&T to flourish, watering-down
many of the Kingsbury Commitment’s requirements
AT&T continued its dominance in the local and long distance markets
Small cooperatives and locally-owned local telcos began appearing throughout the country
Slide Slide 1414
Rates & Implicit SubsidiesRates & Implicit Subsidies State regulation of telcos
State regulation began as early as 1907 in Wisconsin and New York
Focused on local rate setting utilizing the “rate of return” methodology
Most states regulate carriers as either “price cap” or “rate of return” Price Cap = inflation index – productivity offset =/-
exogenous factors Rate of Return: Revenue requirement = rate base x RoR
+ Expenses BOCs are Price Cap at the federal level Most rural telephone companies are “rate of return” carriers
Approximately 1,300 ILECs Universal Service
Many rural ILECs are cooperatives, outside of state commission jurisdiction
Slide Slide 1515
Rural and Urban AreasRural and Urban Areas
Approximately 1,300 incumbent local telephone companies in U.S. RBOCs serve majority of rural copper lines “Rural” ILECs serve most of remainder
Source: Department of Agriculture
Slide Slide 1616
Rate & Implicit SubsidiesRate & Implicit Subsidies
Early regulation allowed for the creation of subsidies between different classes of customers to help create ubiquitous and affordable service
Rates for business customers were generally higher to help keep rates for residential customers lower, often below the cost of providing the service
Intrastate long distance toll and intrastate “access charges” were higher than cost and higher than interstate rates
Later, vertical services became a subsidy source– e.g. Caller ID, last call return, call-blocking, etc.
Slide Slide 1717
Rates & Implicit SubsidiesRates & Implicit Subsidies Rate setting required apportionment of a telco’s
costs between intrastate and interstate spheres In 1930, the US Supreme Court ruled that costs of interstate
and intrastate telecommunications plant had to be separated to determine the adequacy of interstate and intrastate rates Smith v. Illinois , 282 U.S. 133 (1930)
--e.g. some fraction of a local telephone companies costs had to be allocated to state with the remainder allocated to interstate jurisdiction
Separations requirement recognized in Section 221 of the Communications Act of 1934
Separations essentially requires two sets of books for a single asset
Telcos have “traffic sensitive” costs and “non traffic sensitive” costs
Traffic sensitive costs are recovered by metered or per minute of use charges (e.g. per minute long distance toll rates)
Non-traffic sensitive costs may be recovered through flat-rated charges (e.g. flat monthly charges for basic local phone service)
In 1947, NARUC and the FCC developed a “Separations Manual” which assigned “non-traffic sensitive” costs to either state or federal state rate bases
Slide Slide 1818
Rates & Implicit SubsidiesRates & Implicit Subsidies
Federal-State Joint Board on Separations established pursuant to the Communications Act of 1934 to determine how costs are allocated between federal and state jurisdiction
In 2001, the FCC adopted a 5-year freeze of jurisdictional separations at then current levels In 2006, FCC released an order extending the freeze
and seeking comment on the future of separations FCC and Joint Board currently examining the
role of jurisdictional separations in a technologically evolving telecom market
Slide Slide 1919
Monopoly Model of SupportMonopoly Model of Support Policymakers regulate carriers to ensure policy-based ubiquitous/affordable services in exchange for economic viability of entire enterprise Historically, residential and high-cost rural consumers benefited from a system of enterprise-based internal cross-subsidies
Support included in access and long distance Geographic rate averaging Value-of-service pricing Residual pricing of value added/”vertical” services Rate differentials unrelated to cost differences
System began to fail when certain sources (lines of business) of internal cross-subsidies became competitive LD from approximately 1970 Business in the 1990s/2000s Residential with VoIP in 2000s
Long
Distance
Urban
Rural
Local
Business
Residential
Consolidated monopoly telecomLines of business
Vertical
Basic
Communications Act of 1934 to MFJ
Slide Slide 2121
The Communications Act of 1934The Communications Act of 1934
Communications Act of 1934Established the “Federal
Communications Commission” as the regulator that replaced the “Interstate Commerce Commission”
Telecom regulation seen as government controlled monopoly
“Common carriers” must provide service at “just and reasonable” prices
Slide Slide 2222
US v. AT&T – US v. AT&T – Round 2Round 2
US filed a second anti-trust action against Bell in 1949 (the first resulted in the “Kingsbury Commitment” of 1914)
The basis of the suit was Bell’s monopolization of customer premises equipment
Result was a 1956 Consent Decree (referred to as the “Final Judgment”) that required AT&T to do the following: Divest its equipment manufacturing arm, Western Electric Cancel its exclusive dealings contracts with Western Union
required to acquire its equipment via competitive bidding AT&T would retain Bell Labs but would be required to
license its patents on a nondiscriminatory and reasonable royalty basis
Slide Slide 2323
Beginnings of Competition Beginnings of Competition
The FCC’s Carterfone Decision, 15 FCC2nd 605 (1968), allowed non-monopoly (non-AT&T) equipment attachments for private company networks The beginnings of un-regulated customer
premises equipment (“CPE”) The FCC approved Microwave
Communication, Inc.’s, application to operate a long-distance telephone system between Chicago and St. Louis, 18 FCC 2nd 953 (1969) MCI a “law firm with an antenna”
Slide Slide 2424
Beginnings of CompetitionBeginnings of Competition
MCI decision resulted in a flood of applications from MCI-affiliated companies and others seeking designation as “specialized common carriers”
The FCC concluded that the entry of such “specialized common carriers” into the market would serve the public interest, indicating a pro-competition policy Establishment of Policies and Procedures for Consideration of Application to Provide Specialized Common Carrier Services in the Domestic Point-to-Point Mircrowave Radio Service, First Report and Order, 29 FCC 2nd 870 (1971)
Slide Slide 2525
Beginnings of CompetitionBeginnings of Competition
In 1973, the Bell companies filed tariffs in each state in which MCI sought interconnection to its local networks
The FCC ultimately determined that such interconnection of local facilities to its long distance network was a matter of interstate jurisdiction
Bell Companies subsequently filed these same “private line” tariffs with the FCC
Slide Slide 2626
MCI and Sprint v. AT&TMCI and Sprint v. AT&T
MCI and others, including Southern Pacific Communications, Co. (later renamed Sprint) began filing anti-trust and predatory pricing lawsuits against the Bell System in the mid-1970s
Competitors arguments were based on the “essential facilities doctrine”AT&T was misusing its power over its
local affiliates to have preferential interconnection to local networks
Slide Slide 2727
MCI and Sprint v. AT&TMCI and Sprint v. AT&T
In 1974, MCI won a $1.8 billion jury verdict (at the time, the largest jury verdict in US history) against the Bell Companies for predatory pricing of inter-city access services The jury award was later reduced to $113 million MCI was entitled to interconnect for the full array
of services See MCI v. AT&T, 708 F.2d 1081
Southern Pacific Communications (later Sprint) also sued the Bell Companies on anti-trust issues but with only limited success
MFJ to the 1996 Act
Slide Slide 2929
US v. AT&T – US v. AT&T – Round 3Round 3
In 1974, the US Justice Department filed its own anti-trust suit against the Bell Companies alleging Sherman Act violations
DOJ alleged Bell was stifling competition in the long distance market with a two-pronged approach Discriminatory interconnection and exchange
access policies Predatory pricing subsidized by regulated local
exchange revenues
Slide Slide 3030
US v. AT&T US v. AT&T – Round 3– Round 3 Discovery in the governments case lasted
nearly six years The trial started on January 15, 1981, with
the Honorable Harold Green of the Federal District of the District of Columbia presiding
Bell argued all of its actions had been sanctioned by the FCC and state regulators
After a year at trial, the parties entered into a consent decree that contained four general principles AT&T had to divest its local operating affiliates The local affiliates a.k.a the Bell Operating Companies had
to provide equal interconnection to all long distance providers
It prohibited the BOCs from providing long distance, information service, or customer premises equipment
Freed AT&T from the conditions of the 1956 decree
Slide Slide 3131
Breaking up Ma BellBreaking up Ma Bell Judge Greene made some minor modifications
to this decree and ultimately entered the “Modified Final Judgment” or “MFJ”—the legal instrument that broke-up the Bell monopoly and which is still in effect today Judge Greene wrote of the need to break up the Bell System
because of its “domination of the telecommunications industry in general.”
Judge Greene supervised the implementation of the MFJ which included the following First, the US was divided into LATAs (Local Access and Transport
Areas), geographic service areas Second, AT&T assets, customers and employees were divided
among the corresponding LATAs On December 31, 1983, the transfer of assets was complete, the
BOCs were divided into seven separate regional companies, and Ma Bell was no more
AT&T was freed of obligations of previous consent decrees and allowed to do whatever it wanted, except acquire any of the seven regional BOCs.
Slide Slide 3232
Breaking Up Ma BellBreaking Up Ma Bell
The net result of the MFJ created competition in the long distance (aka the inter-exchange market)
BOCs still retained a monopoly over the local exchange markets
AT&T was allowed to enter into competition with the BOCs, if it chose to do so
BOCs were prohibited from entering the long distance marketOnly allowed to provide intraLATA services
Slide Slide 3333
Competition Begins to Take HoldCompetition Begins to Take Hold Access Charges
The “per minute of use” charges local phone companies charge long distance companies to originate and terminate traffic
Such traffic is known as “access traffic” Ozark Plan (1970) -- state and federal regulators
formalized a policy that long-distance rates should be used to subsidize local service
AT&T paid its local affiliates per minute of use access charges that were much higher than the actual costs associated with originating and terminating such traffic
Local phone companies used this money to carry out the national policy of universal service—e.g. ensuring all Americans, regardless of where they lived, had access to basic telephone service
Slide Slide 3434
Competition Begins To Take HoldCompetition Begins To Take Hold
The MFJ required BOCs to offer “equal access”The ability for all requesting long distance
carriers to connect to the BOC network on a reasonable and non-discriminatory basis
BOCs’ were required to file federal and state access tariffs stating the terms and conditions by which they would offer access services
MFJ resulted in the emergence of robust competition in the long distance (IXC) market in the late 80s through the 90s
Slide Slide 3535
Competitive Access ProvidersCompetitive Access Providers
Beginning in the mid-80s, competitive access providers (CAPs) began appearing in metro areas
CAPs built alternative local networks linked large businesses directly to IXCs, thus bypassing the BOC local network
In 1992, the FCC allowed CAPs to interconnect directly with the BOCs to exchange local traffic Interconnection occurred via “collocation”—the CAP
placed its own equipment within the BOC central office and directly interconnected to BOC facilities
The BOCs were allowed to charge the CAPs cost-based rates for collocation
CAPs treated as “non-dominant” carriers and only regulated lightly by the FCC
State commissions began regulating Expanded Interconnection Order, 8 FCC Rcd 7374 (1993)
The Act and its Implementation
Slide Slide 3737
Competition in the Local Exchange Competition in the Local Exchange In the early 90s, some states began
exploring laws and rules that would allow for competition in the local exchange marketsNew York, Texas, Illinois, California,
othersNARUC local competition project (1994-
96) Comprehensive NARUC report released in
February 1996
Slide Slide 3838
The 1996 Telecom ActThe 1996 Telecom Act
Principles . . . Competition (Section 251)
Open the BOC networks to allow competitors to utilize their network elements to offer competitive services
If the BOCs open their local networks, they would get to compete in the lucrative long distance market (Section 271)
Universal Service (Section 254) Make universal service support explicit Broaden universal service support program to ensure
schools, libraries, and rural health care providers have access to communications facilities
Set up the Lifeline and Link Up program to ensure low income consumers have access to basic communications services
Broadband (to a limited extent)—Section 706
Slide Slide 3939
The 1996 Telecom ActThe 1996 Telecom Act Competition
Section 251(c) of the 96 Act requires the BOCs to “unbundle” network elements
The FCC determines which elements are unbundled based on whether access to such elements is “necessary” and whether competitors’ inability to gain access to such element would “impair” its ability to compete
Unbundling allows competing LECs access to individual network pieces of the BOCs
“local loop” (the copper/fiber facility that connects the end user to the BOC central office) is generally considered one of the most crucial elements needed to allow for competition as it is the most capital intensive facility to construct
“switching” and the “UNE-P” – allowed carriers to resell BOCs service at cost-based pricing
Slide Slide 4040
The 1996 ActThe 1996 Act
CompetitionState commission may set rates for
interconnection, UNES, transport and termination
Wholesale rate formula = retail rates less costs that will be avoided by the incumbent
Slide Slide 4141
The 1996 ActThe 1996 Act Competition
BOC had to allow for collocation and direct interconnection of facilities with competitors
Section 271 of the Act said that if a BOC’s service territory is irreversibly open to competition, then the BOC can enter the long-distance market
BOCs had to meet a 14-point check-list of items listed in the statute
FCC determined if a state’s market was irreversibly open
Statute requires consultation with FCC and DOJ to determine if market is open
First to get 271 approval was Bell Atlantic in New York in 1998; Qwest in Arizona was the final BOC in 2003
Qwest 13 state collaboratives
Slide Slide 4242
The 1996 ActThe 1996 Act
CompetitionCompetitors negotiate interconnection
agreements for UNES and interconnection These Agreements must be approved and filed
with state utility commission If a dispute during negotiations, the state utility
commission serves as arbitratorRural local exchange carriers are exempt
from the unbundling and most of the interconnection requirements of Section 251
Slide Slide 4343
The 1996 ActThe 1996 Act
Universal ServiceStatutory goal is to provide access to
basic and advanced services at reasonably comparable rates for all Americans
Universal service support had to become explicit
Pre-1996 Universal Service support was implicitly recovered through LECs charging per MOU “access charges” that were higher than costs
Slide Slide 4444
The 1996 ActThe 1996 Act
Types of universal service High cost” support to companies serving rural areas “Low Income” support to consumers for Lifeline and
Link-Up programs Connect schools, libraries and rural health care
providers to global network Universal Service fund administered by the
Universal Service Administration Corporation State commissions play role by certifying
carriers as “eligible telecommunications carriers” A carrier must be an ETC to receive USF support
Slide Slide 4545
The 1996 ActThe 1996 Act
Universal ServiceTotal USF $7.3 billion in 2007, up from
$5.3 billion in 2002Schools and Libraries received up to
$2.25 billion per yearLow Income program received about
$800 million in 2006Rural Heath Care program received
about $50 million in 2006High Cost program received $4 billion +
in 2007Most growth attributable to the growth
in the number of competitive providers
Slide Slide 4646
The 1996 ActThe 1996 Act
Universal ServiceFederal-State Joint Board required by statute
to conduct universal service proceedings and make recommendations to the FCC
Two types of “high cost” programs Non-rural carriers receive support based on
economic model Rural carriers receive support based on actual
costs, subject to certain limitations Competitive carriers (mostly wireless) received
the identical level of per-line support as incumbents
Slide Slide 4747
The 1996 ActThe 1996 Act
Universal ServiceThe 1996 encourages states to enact
instrastate universal service programs Many states have legislation Several have implemented programs
Requires all providers of “interstate and international telecommunications services” to contribute to the universal service fund
Carriers recover their contributions via a pass-through to their end user customers
Slide Slide 4848
The 1996 ActThe 1996 Act Broadband
Section 706 states that the FCC and each state commission shall encourage the development of advanced telecommunications services
FCC has continued to take steps to remove regulation from DSL and cable modem broadband services
Current definition of broadband is > 200 kpsFCC currently has a proceeding examining
whether to increase broadband speedsFCC has asserted jurisdiction over
broadband and Internet services
Slide Slide 4949
Competitive ModelCompetitive Model Explicit support mechanisms intended to eliminate internal cross-subsidies
Access systems Federal/state USF programs Access reforms
Competition targets most profitable business lines, eroding profitability & making cross-subsidies unsustainable LD market example
All lines of business must be economically justifiable Allow competition to govern competitive markets Uneconomic regions receive increasingly explicit support Policy support matches policy duties
Long Distance
Urban
Rural (incl. business)
Local
Business
Residential
Explicit Support (USF)
Recent Developments and Policy Issues
Slide Slide 5151
BroadbandBroadband Broadband deployment has become of
paramount importance among policymakers OECD rates the US 14th in the world in
broadband penetration US has the highest total number of broadband
connection of any country in the world Approx. 65% via DSL Approx. 30% via cable modem (U.S. cable broadband
a competitive strength) Others: Wild Blue, WISPs, etc.
Slide Slide 5252
Broadband Subs by TechnologyBroadband Subs by Technology
Cable Modem29%
Fibre + LAN6%
Other2%
DSL63%
OECD Broadband subscriptions, by technology, Dec. 2006
Total subscribers: 198 millionSource : OECD
Slide Slide 5353
Broadband Penetration G7Broadband Penetration G7Thank heaven for ItalyThank heaven for Italy
0
5
10
15
20
25
2001 2002-Q2 2002 2003-Q2 2003 2004-Q2 2004 2005-Q2 2005 2006-Q2 2006
Canada
United Kingdom
France
J apan
United States
Germany
OECD
Italy
Broadband penetration, historic, G7 countries
Source : OECD
Slide Slide 5454
Penetration and Population DensityPenetration and Population Density
0
5
10
15
20
25
30
35
Denm
ark
Nethe
rland
s
Icela
nd
Korea
Switzer
land
Norway
Finlan
d
Sweden
Canad
a
Belgiu
m
Unite
d Kin
gdom
Luxe
mbo
urg
Franc
e
Japa
n
Unite
d Sta
tes
Austra
lia
Austri
a
Ger
man
y
Spain
Italy
New Z
eala
nd
Portu
gal
Irelan
d
Hunga
ry
Czech
Rep
ublic
Polan
d
Slova
k Rep
ublic
Gre
ece
Turke
y
Mex
ico
0
100
200
300
400
500
600
Broadband penetration (subscribers per 100 inhabitants, Dec. 2006)
Population density (inhab/km2, 2005)
Simple correlation = 0.259
Broadband penetration, Dec. 2006 Population density, 2004
OECD broadband penetration and population densities
Source : OECD
Slide Slide 5555
Penetration and Per Capita GDPPenetration and Per Capita GDP
0
5
10
15
20
25
30
35
Denm
ark
Nethe
rland
s
Icela
nd
Korea
Switzer
land
Norway
Finlan
d
Sweden
Canad
a
Belgiu
m
Unite
d Kin
gdom
Luxe
mbo
urg
Franc
e
Japa
n
Unite
d Sta
tes
Austra
lia
Austri
a
Ger
man
y
Spain
Italy
New Z
eala
nd
Portu
gal
Irelan
d
Hunga
ry
Czech
Rep
ublic
Polan
d
Slova
k Rep
ublic
Gre
ece
Turke
y
Mex
ico
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Broadband penetration (subscribers per 100 inhabitants, Dec. 2006)
GDP per capita (USD PPP, 2005)
Simple correlation = 0.649
Broadband penetration, Dec. 2006 GDP per capita, 2005
OECD broadband penetration and GDP per capita
Source : OECD
Slide Slide 5656
VOIPVOIP
Voice Over Internet Protocol (“VoIP”) providersUtilize any broadband connection to
offer basic voice services Revising notions of pricing, geographic
scope Verizon v. Vonage
Verizon sued Vonage for various VoIP patent infringements
Relationship of network to applications Competition over value
Slide Slide 5757
Retail Regulation and Customer ServiceRetail Regulation and Customer Service
Many state commissions and legislators have or are revising their retail regulation systems in response to changing markets and technologies
COLR obligations appearing less economic State commissions revising approaches to
customer service and service quality issues Choice among services seen as a consumer goal
No more “any phone you want as long as it’s a black rotary” Slamming Trouble repair Customer information Implications of bundling of regulated and non-regulated
services
Slide Slide 5858
Intercarrier CompensationIntercarrier Compensation
Intercarrier compensation disputesRural carriers rely heavily on intercarrier
settlement payments (e.g. interstate and intrastate access charges, reciprocal compensation, etc.) for revenues
Phantom Traffic FCC requires carriers to terminate traffic
even if they are unable to bill for it Several proposals at the FCC; some states
have implemented solutions of their own
Slide Slide 5959
Universal ServiceUniversal Service
Universal ServiceThe Joint Board has recommended an
“interim cap” on the level of funding going to competitive ETCs, most of which are wireless providers
The FCC has an open proceeding on long-term reform to the high cost universal service fund
Slide Slide 6060
What is Driving Recent Fund Growth?What is Driving Recent Fund Growth?
High-cost fund (HCF)—ILECs• Virtually unchanged payouts since 2003—no growth once access reforms completed
Low-income program• Up mainly due to offsets of higher SLCs in post-2000 reforms
Rural Health Care• Program size is small at $46 million in 2006• Negligible absolute dollar growth
Schools and Libraries• Capped at $2.25 billion—program has not paid out total cap• Growth is simply because of lower previous payouts
Total Universal Service Fund
HCF—“competitive” carriers• More than $1 billion in funding in 2006 from ~$131 million in 2003—primary source of organic growth
-1.8%
12.3%
96.0%
32.2%
724%
Growth since 2003
-$58 million
$87 million
$22 million
$469 million
$952 million
$ change 2006 v. 2003
USF payments in 2006 approximately $1.47 billion greater than in 2003
Growth in payouts (post-access reforms) has been driven by … $469 million increase in the Schools & Libraries program, accounting
for approximately 32% of the increase (total 2006 payments still below cap)
$952 million increase in payments to CETCs, accounting for approximately 65% of the total increase in funding – growth to continue absent reform
Slide Slide 6161
Evolving Role of WirelessEvolving Role of Wireless The Communications Act of 1934 gave the FCC exclusive
jurisdiction over radio, including wireless telephony services Some states have attempted to regulate wireless providers
E.g. California attempted to implement a set of consumer rights for cell phone users
Section 332 of the Communications Act requires LECs to offer non-discriminatory interconnection to wireless providers
The number of wireless subscribers in the US surpassed the number of wireline access lines a few years ago Sell handsets, not lines
Substitution v. complementarity Some individuals are opting to forego a wireline connection and simply
have a wireless phone Access substitution (“cutting the cord”) versus service substitution
(long distance and second lines) Lee Selwyn (2003) wireline and wireless have different
Functionality Service quality Scope and pricing Cost structure
New technology approaches to wireline-wireless relationship
Slide Slide 6262
What’s Next? What’s Next? Diverse business models allow comparisons
Is broadband a separate network? Approaches to COLR and rural Implications for regulation and policy AT&T is once again the largest local and long distance company in
America – and the largest rural carrier Meaningful cross platform competition
CATV providers are offering telephony services Strong and rapid success Tend to focus on dense areas, but includes smaller towns as well as larger
cities Video products
IPTV- the ability to deliver television content via IP over broadband facilities
Verizon’s FiOS roll-out Most telcos using last-mile copper Need to address backbone network as well Telcos are attempting to get content deals from the media companies
Transactions Sales of rural properties Wireline spins Roll ups of smaller companies
Spectrum the continuing issue
Roles and Challenges for State Regulation
Slide Slide 6464
Sustainable PolicySustainable Policy Sustainability - from the verb to sustain meaning:
to hold up; to bear; to support; to provide for; to maintain; to sanction; to keep going; to keep up; to prolong; to support the life of.
Sustainable competition – Economic conditions for a viable sector over the long term
Innovation
AdoptionGrowth
Is sustainability a policy goal?Is one path more sustainable? Is the answer situation dependent?What will we learn from the experiment?
Slide Slide 6565
Five buckets of policy?Five buckets of policy?Function Needed or
not?Who does it and how?
“The Price is Right”(Retail rate setting)
“Bugsy sent me”(Enforcement)
“Can’t we all get along”(Mediation and facilitation)
Information
Consumer protection
Infrastructure support (e.g. 254, 706)Which functions are needed? How are they best performed? By whom? Do some conflict? (E.g., would a strict Sec. 252 filing requirement for services not required under Sec. 251 discourage voluntarily negotiated or mediated outcomes?)
Slide Slide 6666
Regulatory glide path in converged IP-based world?Regulatory glide path in converged IP-based world?
Slide Slide 6767
Combinatorial paths to reformCombinatorial paths to reform
Legislative •Likely longer•General principles only•FCC implements
FCC •Prolonged•Unpredictable•Compromise•Litigated
State
•Generally shorter•More structured•Multiple venues•Incomplete solutions
Industry solution•Shorter process•More financial focus•Enforcement?
Slide Slide 6868
About Balhoff & RoweAbout Balhoff & RoweBalhoff & Rowe, LLC, is a specialized professional services firm focused on providing financial-regulatory advice. The principals have more than 40 years of experience in advising investors and regulators on complex investment issues. They have provided services to a wide range of communications companies, including incumbents, competitive carriers, wireless operators and cable operators. Additionally, the firms has expertise in energy and other utility services. The services of Balhoff & Rowe include research, think-tank projects, professional facilitation, advocacy efforts, financial and restructuring advice for various companies, carriers and policymakers. The company offers an unparalleled combination of experience, credibility, strategic insight and access in a rapidly changing environment.
Michael J. Balhoff, CFA, Managing PartnerMichael J. Balhoff, CFA, is managing partner at Balhoff & Rowe, LLC. Previously, Mr. Balhoff headed for 16 years the Telecommunications Equity Research Group at Legg Mason, which advised investors about equities in media, cable, wireless, telephony, communications equipment and regulation. Prior to joining Legg Mason in 1989, Mr. Balhoff taught at both the graduate and undergraduate levels. He has a doctorate in Canon Law and four master’s degrees, including an M.B.A., concentration in finance, from the University of Maryland. A Chartered Financial Analyst and a member of the Baltimore Security Analysts Society, Mr. Balhoff has been named on six occasions as a Wall Street Journal All-Star Analyst for his telecommunications recommendations. His coverage of telecom was named by Institutional Investor as the top telecommunications boutique in the country in 2003. He has also testified multiple times before congressional committees, is regularly a featured speaker at conferences for investors and policymakers, and is widely quoted in the media, including television, newspapers as well as communications and business journals.
Robert C. Rowe, Esq., Senior PartnerRobert C. Rowe, Esq., is a senior partner at Balhoff & Rowe, LLC. Previously, Mr. Rowe served as the Chairman of the Montana Public Service Commission which was responsible for regulating telecommunications, electricity, natural gas, water, and some transportation services. Mr. Rowe also served as President of the National Association of Regulatory Utility Commissioners, Chairman of the NARUC Telecommunications Committee, member and state chair of the Federal-State Joint Board on Universal Service, member of the Federal-State Joint Conference on Advanced Services, chairman of the thirteen state Operations Support Systems Collaborative working with Qwest and its competitors to achieve compliance with Section 271 of the 1996 Federal Telecommunications Act, and member of various advisory boards for university-affiliated programs.
Bradley P. Williams, Esq., PartnerBradley P. Williams joined Balhoff & Rowe as a principal in 2005. Previously, Mr. Williams was a member of the Strategic Planning & Business Development group at Lowe’s Companies Inc., the Fortune 50 home improvement retailer. Prior to joining Lowe’s, Brad worked with Mr. Balhoff in the award-winning Telecommunications Equity Research Group at Legg Mason, focusing on incumbent and rural local exchange carriers. Prior to joining Legg Mason, Brad was a co-founder of eSprocket / Beachfire, a venture-backed company that evolved into one of the pioneers in mediation technology solutions for the financial services sector. Previously, he served as a financial executive for Iron Road Railways Incorporated, a Washington, D.C.-based holding company that integrated, through acquisitions, a significant regional freight rail network serving northern New England and eastern Canada. Brad began his career as an investment banker in First Union’s Capital Markets Group. He has a BA in Economics from the University of North Carolina and a JD from the University of North Carolina School of Law.
“Now What Do We Do?”
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If Heisenberg were a regulatorIf Heisenberg were a regulator
“One cannot simultaneously find both the position and momentum of an object to arbitrary accuracy.” -The uncertainty principle
“Policy solutions tend to look simple from a distance, and messily complicated up close.”- Regulatory corollary
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ETCs and Capital Hill activity. Hon. Phil Jones, Washington State
USF and Intercarrier Compensation. Hon. Ray Baum, Oregon
Special access. Hon. John Burke, Vermont
Video franchising. Hon. Daryl Bassett, Arkansas
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“You got to be careful if you don't know where you're going,
because you might not get there.”
