TELECOM INDUSTRY URGES REGULATORS TO LEARN MORE ABOUT BUSINESS

“Understand our business,” urged Robert Fragola, vp- regulatory affairs, Cambrian Communications. “We're a construction business first,” digging up streets, he said. After that come numerous “expensive” decisions involving everything from engineering to customer service, he said. “We'd like some consistent rules,” for example on how long it took to get permits from municipalities, and it would help if FCC could provide guidance to state and municipal regulators. Cambrian operates fiber ring-based networks in Washington and N.Y. and has found that one municipality “can slow down deployment of an entire network.” He said his small company was “spending thousands of dollars on regulatory stuff, some of which seems so backward.” Example of regulatory uncertainty clouding industry is fate of colocation rules, Fragola said. Cambrian’s business involves making cross-connects at ILEC central offices and “it’s hard to go to investors on Wall St. when they know cross-connects could be jeopardy” as colocation rules wended their way through court appeals process, he said. “Regulatory certainty would be nice.”

With failure of CLECs, many business lessons were relearned, including realization that customers and revenues still were important, said Michael Spencer, Telco Partners principal. At same time there are regulatory lessons to learn, he said: “Asymmetric regulation demands constant vigilance.” Telecom Act allowed competitors access to incumbent facilities, but making it work needed “tough and timely enforcement, something that has been far from a reality,” Spencer said: “Regulation needs to be an agile process. The FCC must be able to act at a comparable speed to market.” Regulatory cycles are measured in terms of years, while competition plays out in months, he said: “Unfortunately, the ILECs have played for time and won.” Incumbents not only have gained time, they also have had chance to evaluate new network architectures, Spencer said. “In the meantime, the regulatory uncertainly has driven capital away.”

“Technology per se is not a tool to create competitive markets. We were a bit naive at the FCC,” said Stagg Newman, ex- FCC chief technologist, now McKinsey & Co. senior telecom practice expert: “The 3 lessons I'd take away from the time I was there also are 3 major disappointments.” In 1992-1995, Commission promised LMDS as full service wireless alternative to cable and telcos. “Those years saw the first trial in N.Y. Spectrum was allocated, rules established a competitive environment and Teligent and Winstar were launched to great fanfare. Today both are bankrupt,” he said. Second, Newman said, FCC promoted DSL technology. Data CLECs would bring high-speed data to small and medium enterprises and consumers, but “today they are bankrupt.” Third potential for disaster is 3G, he said: “Europe already is in crisis, with carriers billions in debt for spectrum and spending billions to build out networks when the revenue may not be there.” Crisis has been averted in U.S. only because 3G deployment has stalled, he said. “Those in public policy want to do good,” Newman said: “We get lobbied on all sides and it is easy to buy the hype. Policymakers must understand the economics.” Trying to create perfectly competitive environment is mistake, Newman said: “Corporations need to know they can earn on their risks.”

Coordination between FCC and state PUCs is more important than ever because number of Sec. 271 filings is expected to grow, said Jeffrey Carlisle, senior deputy chief of FCC Common Carrier Bureau, who moderated one of panels. Bureau also is heavily involved in arbitrating interconnection dispute in Va. involving Verizon and CLECs such as AT&T and WorldCom, he said. Agency can benefit greatly from advice from states on such joint issues, he said. NARUC Gen. Counsel Brad Ramsay cited 5 areas that could benefit from continued or stepped-up coordination between 2 jurisdictions: (1) Enforcement. (2) Accounting rules, because for states to make decisions on cost issues “you have to have information that’s consistent across jurisdictions.” (3) Universal service. (4) Payphone issues. (5) Sec. 271 proceedings.

“Congress didn’t make hard choices with the Telecom Act” and left FCC with lots of discretion, said Randy May of Progress & Freedom Foundation. He said Commission faced 2 competing visions: (1) Telecom is natural monopoly. “Question is how to shape the proverbial level playing field” and give competitors access to facilities. (2) Telecom is becoming naturally competitive with need for more deregulation. “The question then is how to deal with pockets of noncompetitive behavior,” May said. “The FCC opted for the first vision and took on a well-intentioned role of micromanaging the environment to make the level playing field.” Public policy proved most harmful in deployment of broadband services where agency established rules for unbundling using Total Element Long-Run Incremental Cost (TELRIC) “that arguably established an unrealistic cost for facilities,” he said, and new entrants in broadband market had disincentive to build new facilities because it was cheaper to lease from ILECs. Incumbents are discouraged from making investment to build new infrastructure “due to excessive requirement for sharing telco elements at TELRIC rates,” May said.

“The dinosaurs are still at the gate and are doing what comes naturally,” said Aileen Piscotta, Kelly Drye fellow, citing monopoly rule of the ILECs and cable companies and their continued resistance to unbundling and allowing competitors access to networks: “The 1996 Act also is a bit of a dinosaur,” facing 10 challenges in Supreme Court this term on TELRIC, federal vs. state authority, other issues. Regulatory efforts are stymied by several “sacred cows” such as subsidized local rates, universal service fund and spectrum policies, she said: “Universal service is a bankrupt system that can’t survive as it now exists.” Regulators are driven to identify new telcos as way to fund universal service, Piscotta said. On spectrum policy, she said “we are not doing enough to open up massive protected blocks of spectrum.” Other legacy handcuff to regulators is reliance on service-based common carrier regulation, she said: “Try to find a carrier today that still meets the definition of a common carrier.” Piscotta called for “zero-based telecom policy” that would eliminate or restructure subsidies.

Ramsay made pitch for “avoiding unnecessary legislation,” meaning Tauzin-Dingell bill shouldn’t be passed, he said. Other way to avert litigation is for FCC to avoid jurisdictional disputes by giving guidelines to states rather than mandating actions, he said. Adoption of TELRIC rules is example of that, he said. Most states adopted TELRIC standard to set prices for unbundled network elements (UNEs) so FCC could have gotten same result if it had issued nonbinding guidelines, rather than making requirements that invited court challenge on jurisdictional ground.