PANEL DEBATES MERITS OF BROADBAND BUILDOUT SUBSIDIES

In response to idea of govt. subsidies for broadband infrastructure, NTIA Deputy Dir. Michael Gallagher said Administration’s policy had been to “look at the world outside of this room and look at the world outside our borders and look at the cost. We are a country that is at war.” Cost of war on international terrorism and on domestic security have had significant budgetary impact, Gallagher said.

In keynote, FCC Comr. Abernathy stressed need for FCC to keep pace with changes in technology and in market. “By this I mean we need to avoid applying yesterday’s regulatory answers to the technologies of tomorrow,” she said. “Instead, we must make real-time assessments of markets and technologies so that we can identify and eliminate barriers to infrastructure investment and facilitate the deployment of innovative new services.” Noting progress FCC has made to date in pending broadband rulemakings, Abernathy referred to impact as different technologies converge. “Those legacy service categories -- wireline, wireless, cable and satellite -- are rapidly losing their significance as providers from different platforms are competing in each other’s markets and are all moving closer to providing integrated offerings of voice, data and video,” she said, which was why FCC was focusing on function of service being offered and not its legacy platform.

Saying “core” part that Sec. 11 of Communications Act played in regulatory process, Abernathy said FCC recently revised way in which it conducts biennial reviews. Comment period closed Fri. in which FCC sought feedback on review of telecom regulations. Sec. 11 covers biennial reviews in which FCC must determine whether regulation no longer was “necessary in the public interest” as result of meaningful competition among service providers. Abernathy said FCC staff in past had initiated first review in which it pinpointed candidates for elimination and then sought comment on such proposals. “But this led to an artificially cramped process because the universe of potential cuts was limited by what we identified as outdated,” Abernathy said. “We have now changed the process to bring commenters in at the front end.” Public notice last month sought comment on any rule change that would serve public interest, she said. Result should lead to more “fulsome” review of regulations, “a review with teeth,” she said.

In panel discussion, Kayes stressed importance of pursuing discussions in earnest on how govt. could subsidize broadband rollouts, “not in the indirect and under-the-table way, which we do through the telecom system, but in a very direct way, where everybody knows who’s getting what and there are some policy objectives.” He said biggest current driver of the telecom debate was employment. “I think what is driving this whole debate in Congress now is the fact that we have half a million people out of work,” he said. Asked by moderator Richard Wiley how govt. could subsidize broadband buildouts, Kayes responded: “I don’t know, that’s a good question.” He described recent Senate Commerce Committee hearing that stressed importance of wireless technology as 3rd path to home and examined subsidization possibilities as one of most productive on broadband this year. He referred to testimony by former FCC Chmn. Reed Hundt that cited large volume of unused fiber capacity in this country and called on public money to jump-start broadband deployment.

Aside from costs of war on terrorism, NTIA’s Gallagher said that in contrast to calls for subsidizing broadband infrastructure buildout, wireless and cable industries had been successful and weren’t subsidized. “I think you have to go very slow with those types of things because every time you subsidize something you are taking dollars away from some American family,” he said. Americans tend to feel “queasy” about tax dollars’ being diverted for telecom or broadband uses because “there is a higher calling” for that money, Gallagher said. Beyond that, govt. tends to lock in standard when it ventures out in that direction: “There’s only one way of doing these things.” Waving computer chip embedded with both 802.11a and 802.11b capabilities, Gallagher said such technological developments might have some of answers for employment concerns related to telecom downturn.

Kayes said Hollings had planned to introduce bill addressing broadband subsidies by end of this Congress, but he decided not to when even proponents couldn’t agree on how to do that. That didn’t mean he had given up, he said: “We are trying to jump-start this process and get some people back to work.” Such legislative efforts also are examining how to “jump 2 to 3 steps ahead” so the next level of investment isn’t on older technologies such as DSL but on their next iterations, he said.

Drafts in works in last several months examined 2 different types of models, Kayes told reporters: (1) Money would be provided to incumbent providers so they could offer last-mile links. (2) Subsidies would be provided to companies as they won customers, so that funds would be tied to new subscribers to help aid demand. That point was touted at last month’s Senate broadband hearing by Michael Price, vice chmn. of Evercore Partners. He outlined proposal in which service provider would be paid $300 per subscriber as build-out subsidy if it agreed to provide high-speed service for under $30 per month for 3 years. Asked by reporter whether legislation covering broadband subsidy still was under consideration, Kayes said: “We are considering anything right now because this industry is in such poor shape.”

Kayes expressed frustration that such relatively large amount of staff resources on Hill was devoted to “a fairly narrow issue of how the CLECs and the ILECs should get along.” He said: “One of the frustrations is that we keep fighting the last decade’s battles.” Back-and-forth on network access issues between competitors and incumbents detracts time from other policy areas such as new spectrum technologies, he said. “It’s not really a battle of access anymore because, as policymakers, we all agree they should have access,” he said. “It’s a question of price.” Congress should be creating forum to discuss policy issues involving spectrum, Kayes said. “We tried to move a spectrum bill for 2 years now and we have been unable to do it because we have to devote so much time to this whole battle.” Last year, drafting began for legislation that would constitute “a rational discussion about spectrum,” including how to pull more spectrum from Defense Dept. and Dept. of Transportation “and use it in a more efficient way,” he said. “I'm convinced that we can do that.”

While time will be limited in 2 weeks for which Congress is returning for postelection session, Kayes said NextWave re-auction bill recently redrafted from version sponsored by Sen. Kerry (D-Mass.) still could move on unanimous consent. Hollings has been working to pass legislation before session ends that would direct FCC to refund NextWave re-auction funds to bidders who haven’t had licenses pending FCC appeal of lower court ruling to U.S. Supreme Court. FCC recently issued public notice in which it outlined possibilities for returning remaining deposits to bidders and relieving them of any outstanding payment obligations. “I don’t see any reason why anybody would oppose this bill,” he said, acknowledging it wasn’t clear lingering concerns of Sen. Stevens (R-Alaska) could be addressed. Stevens said last week he still was reviewing bill but was concerned about its potential impact on Alaska Native Wireless. Hollings staff plans to continue talking with Stevens’s aides about issues, Kayes said.

On spectrum front, Bryan Tramont, aide to FCC Chmn. Powell, reiterated that Commission’s Spectrum Policy Task Force still planned to issue report next month. In wide- ranging panel discussion moderated by Wiley, panelists discussed how best to address rural access issues, which some cited as missing link when it came to govt. policies on access. In response to audience question about how that played into recent FCC decision on EchoStar’s proposed takeover of Hughes Electronics and subsidiary DirecTV, Tramont said it was determined that there would be no public interest benefits for rural customers in moving to 2 competitors from 3. “It just shows that the Commission takes its public interest role very seriously and it is not a rubber stamp,” Tramont said.

Sprint CEO William Esrey said he was optimistic telecom market would turn around soon but said “you cannot overestimate the impact of WorldCom’s malfeasance on the telecom industry.” Before WorldCom’s problems surfaced, “At Sprint we kept asking ourselves what we were doing wrong because we couldn’t generate the numbers WorldCom claimed,” Esrey said. To bring telecom sector back to health, “we must demonstrate that abuses of trust were aberration [and] set high standards for customer performance,” he said in speech. Asked from audience his views on WorldCom possibly emerging debt-free from bankruptcy, Esrey said that might be unfair but he doubted if company would have strength it once had. “WorldCom lost good people and I think they lost a significant part of their customer base,” he said. He told reporters after speech that Sprint was winning “a ton of contracts,” most of which won’t play out for 2-3 quarters. “We won’t know the real impact [of wins] until 2004, but I know it’s going to be significant,” he said. (Sprint told analysts in conference call late last week that it had won contracts valued at more than $250 million from distressed carriers.) “We are benefiting significantly from this whole shakeup,” Esrey said.

“Things that happened in this industry couldn’t have happened in Sprint’s culture,” Esrey told reporters: “If I gave a direct order to do some of these things [such as fraudulent accounting practices], it would not have been followed.” He said WorldCom had created situation that was “very frustrating” for Sprint. “We gave up business” because Sprint couldn’t meet prices, he said. WorldCom was “a price leader, driving down prices” and when Sprint couldn’t meet those prices it began cutting staff in order to reduce costs, he said. “What they did to our company” could be measured in thousands of people who were cut from payroll, he said: “The impact was significant. I can’t feel good about it.” One reporter asked why Sprint didn’t spot accounting problems when it sought approval to merge with WorldCom in 1999. Esrey said he didn’t know whether questionable accounting had started at that time and, even if it had, it would have been difficult for accountants to uncover it as part of “due diligence” process that takes place before planned mergers. Asked about talk of increase in telecom industry prices, issue brought up by other speakers at Yankee Group conference, Esrey said he wouldn’t be surprised if prices stopped dropping, and perhaps some might rise. Prices had fallen to point that they were “destructive to the industry,” he said: “I don’t think we'll get out of this by cutting costs. Some prices are going up or holding” at current levels.”