Remedy for Last
Mile Reform
Though daunting, we propose that communities have a choice of adopting open service network platforms, not for competing with retail service providers but to enable truly non-discriminatory access to all broadband providers. We believe that the imposition of cost in the last-mile between subscribers and providers is disproportionately high in the direction of the subscriber when choosing to replace the ILEC for an alternative provider. Monopolistic incumbents repress consumer choice unduly, and undertake practices that exclude legitimate rivals from participating in the market.
Technological
Alternatives Exist to Provide Open Network Solutions
By 2003, commercial availability of broadband transport solutions, including PON (Passive Optical Networks), and other advanced sub-loop technologies designed to open and upgrade legacy plant will be commercially available. Such developments can reduce subscriber captivity while significantly raising the bandwidth limit between subscribers and providers. We hold that the consumer can begin acquiring open networks in the coming 3-5 years, acting in conjunction with all retail service suppliers, as well as local, state and federal governments, and equipment and system vendors. Network management systems exist today that enable multiple providers to monitor the shared open network in order to provide surveillance information at carrier class levels.
Cost of Optical Technology: Near Parity to Captive Copper and Coax Technologies
As a reference and benchmark, we currently have designed and implemented new fiber plant in the range of $100,000 to $110,000 per route mile. The cost of per urban and suburban home that have 25-75 homes per route mile densities (roughly ranging from multi-acre lot to multi-family neighborhoods) would cost $5,000 to $1,350 per home. Home gateways that convert optical signals into separate video, voice and data bit-streams are projected by 2003 to cost $1,000-2,000[4], and drop further, following other related network element price-experience curves, as adoption and volume increase. (Another part of the function of these gateways is to eliminate separately purchased equipment otherwise required to attach digital TV and interconnect in-home and wide area networks together.)
While no one could claim that optical upgrades are inexpensive, the ability to get more services and save by gaining broadband competition readily for many justifies the premium for many, starting in new home sites. In fact, for newly built homes, fiber by 2003 may cost little more than prior generation captive network plant. Therefore, we believe, starting with new homebuyers, one should have the option of securing open optical connectivity as a standard service platform.
The cost of physical network connection is mostly one of labor, secondarily one of material cost. Copper twisted pair is less expensive than a strand of fiber, but that cost pales when comparing cost per megabit, the ability to provide choice of providers and services, and increase very substantially the amount of available and terminated bandwidth[5] for next generation fiber-connected homes.
Subsidies Promote
Unhealthy Subscriber Captivity: Example in New Home
Installations
Incumbent service captivity is in many ways even more instructive in the new home deployment situation. New home developers pay the Telco ILEC, sometimes years in advance, to install lines and network facilities into new single, townhouse and apartment type communities (currently about 1.6M units are added annually). This takes place on top of the ultimate homeowners’ ongoing captive subscription fee. This connection fee varies by locale, but our experience indicates land developers pay between $1,100-1,400 per home to the ILEC for the privilege of attaching the incumbent Telco copper network to each new single or multi-family home. Since this cost is passed along to the ultimate buyer, the new homebuyer effectively underwrites most if not all the ILEC’s incremental capital and installation costs. Since this cost is paid in advance of occupancy, the Telco ILEC is never in real jeopardy of the plant capital being paid back. So, in effect, each new resident/subscriber pays for an allocated share of the access network not as an investor, or controlling stakeholder (where at least they could direct custodial care of their lines, cross connections, and circuit or IP switch port be assigned to another provider), but as a pro hoc subscriber[6].
Created by the current practice, this uneven footing imposes a great challenge for new CLECs to offer competitive service when the underlying infrastructure cost falls on them without the same cost recovery mechanism (buyers are not ordinarily going to pay to connect each provider separately). This is not to speak of another level of unequal footing related to aggregating enough subscribers in a given service area to minimally meet long term competitive cost requirements. We therefore conclude that these practices hold back and distort the marketplace by:
1. Continuing the practice of Telco ILEC exclusivity in terms of capitalizing new plant and on-going maintenance, where subscribers underwrites the cost of both,
2. Preempting consumer choice by effectively removing their ability to direct the use of their portion of the network to a preferred service supplier.
It is worth noting that a similar situation arises where incumbents are afforded free access in other areas such as shared tenant offices, shopping malls while CLECs must pay for their access. In essence the incumbent is given a discriminatory preference to reach broadband consumers because of its incumbent status, and not on the competitive merits of its offer.
Promise of Next
Generation Broadband
Residential consumers in particular have many ways to use effectively broadband to enhance living, security, productivity and convenience. We have seen new home communities with advanced fiber networks that link nearby school classrooms, and provide convenient services such as remote banking and shopping with local retailers. As just one of many new uses of residential broadband services, there are a number of electronic home management systems that can notify mobile users of home environment and utilities remotely. Applications, such as interactive or on-demand video services, allow consumers to arrange what and when they choose to view. Not these services and applications will necessarily succeed, or even if they do, they may be only adopted by a small segment. However, the number of possible services available to the widest possible audience is important to the success of the access service and programming and content businesses. Based on our first-hand observations, we do not believe that the incumbent access providers necessarily want to develop the market propositions and features that over 50M American households would demand and spend on consumption.
Consumers are
Broadband “Ready”
During the early days of broadcast radio, one could not fairly blame the lack of quality on the pioneering broadcast stations and networks. They played a vital role in the quest for high fidelity radio reception. However, for the first twenty years of the radio broadcast era, crude AM receivers were in the homes of millions, but as the earliest forms of that era’s technology, these sets lacked sustained listening quality. Transmissions were easily impaired or interrupted by whistling sounds, electrical storms and nearby motors. Programming choices were very limited. Nevertheless, without radio, especially then, society would not be as connected and informed. Today’s residential broadband service is in many ways a similar pioneering experience. Unlike the first twenty years of radio, there are few limitations in consumers’ broadband reception equipment -- the TVs and PCs, intelligent peripherals, networks and software capabilities are extremely capable, often more idle than active. This is a result of years of global competition among the suppliers of the major elements of these devices: displays, memory, disk drive storage, communication systems, we have vastly more powerful and inexpensive ways to use broadband transmission. More than the majority of homes has PCs, and about the same number have multiple televisions and wireless service subscriptions.
Inside these advanced-but broadband-idled homes, one sees many uses of a variety of inexpensive local area networks, with advanced wireless and wired, even fiber options, to share data and printing and storage. By 2003, gigabit Ethernet outlets, which would for the first time, allow homes to send and receive simultaneous broadband video/data/voice content to every room. “Gig-E” connectivity is projected to cost a few dollars per connection as it becomes an industry-wide, high volume standard.
Core Networks are
Broadband Service “Ready”
Upstream, the central networks that new providers need to mount retail services have advanced in both capability and performance. More important, they are economical as smaller or entry scale solutions, thanks to the inherent modularity of core network design. Outsourcing human-intensive functions such as telecom infrastructure construction and customer care is the profitable and time-efficient norm, and these businesses have thrived during periods of industry growth. Further, it is feasible to make direct network attachments, that are electronically managed, to the current ILEC plant. While procedurally intensive, CLEC to ILEC attachment is assured by following consistent and precise technical standards, a practice already widely followed. So, where is the bottleneck, and to your first question, the most important aspect of broadband regulation? It’s the full and fair openness and ability by all LECs to fully exploit the legacy network, currently controlled exclusively by the ILEC. We focus on this bottleneck as a basis for our answers to your policy questions. We believe that the ILEC’s is unwilling to fully exploit the network, which a rival set of suppliers would otherwise offer. We believe that the ILECs choose to make competitive entry difficult in a natural response to their own interests. Therefore, appropriate intervention is required to bring a neutral management approach to the use of the public local access elements of new broadband delivery networks.
NTIA
Inquiry Questions and Responses
II-A. What should be the primary policy considerations
in formulating broadband policy for the country? Please discuss the relative
importance of the following: access for all; facilities-based competition;
minimal regulation; technological neutrality; intra-modal competition;
inter-modal competition; and any other policy consideration.
Based on today’s situation, we believe ubiquitous Broadband Service most turns on facilities based competition (we would prefer to call it “facilities based parity”) is the most effective area to focus Broadband Service policy formulation. Given the massive regulatory overhaul required to transition away from today’s sluggish, non-competitive monopoly dominated industry, to one where customers are served by a multitude of providers, common access is provided by a neutrally managed access network entity. The Broadband access network managed on behalf of a public collective of private owners, links qualified providers to customers, and is essential to assure full, effective competition. We believe this would provide three critical ingredients that all pro-competitive sides appear to agree:
- More service innovation can still drive consumer uptake well beyond present levels,
- Deploying networks that exploit the vast bandwidths of optical signalling thus lowering cost to serve subscribers, and
- Provide sufficient access flexibility to change or add services as well as content and communication providers as individual consumer demand changes.
- Greater return on the consumers initial and periodic investment into broadband access networks
In this environment the need for external regulation drops as choice of services and providers increase. Using a common facility that delivers multiple services, from multiple carriers to individual consumers is a paramount objective of the policy outcomes. It carries with it the need to lower the cost of connection between providers and consumers, using the least expensive point of entry and freedom to chose optimal transmission formats further lowering access barriers consistent with lowering cost to consumers.
In regard to inter- and intra-modal competition, and minimal regulation and access-for-all, the first deals with increasing entry and reducing the conditions while the second poses less government responsiveness to address perceived market failures or imbalances, and the third deals with a standard of service ubiquity. More cross mode competition is consistent with increasing consumer choice and generally reducing cost. But in today’s subsidized environment, there is little purpose to adding cross-mode services if they cannot compete due to attaching high subsidy fees (thus barriers) to every call outside a local service area. These and other subsidies undermine the power of new modes of technology to deliver better or lower cost services. Removing these barriers calls for allowing prices to float in the market, much as airlines were de-regulated in the late 1970’s caused greater variation in route prices, seat quantity, quality differences to come into the bargaining system between private buyers and sellers. For Telecommunication services, we believe in the vision of this de-regulation, but this process has political implications, which may make the undertaking too difficult to sell to certain consumers and constituencies to accept, independent of the economic benefits this step would bring to the entire society.
Minimal regulation should not be addressed as a political choice as much as the result of policy and legislative outcomes achieved by diligently building free and competitive markets that regulate themselves. We would hold that simply taking away legislative and executive powers needed to achieve the proper goal at this juncture of market development is not consistent with achieving a vital minimally regulated, free market for broadband services.
Access-for-all, as we state above, is as a matter of economics likely to impose a greater burden than is warranted or even preferred by all consumers. We believe that a setting the goal of providing the most number of broadband services (content, communication or transmission based), service providers (with capability to attach themselves to the access networks) delivering to the greatest number of consumers is the appropriate public policy goal.
II-B. How should broadband services be defined? Please discuss (1) what criteria should be used to determine whether a facility or service has sufficient transmission capacity to be classified as "broadband;" (2) how the definition should evolve over time; and (3) the policy implications of how the term is defined.
We offer the following elements that define broadband service for policy setting purposes. Service providers and facilities are fairly categorized as “Broadband” if they have these minimum attributes:
1. Broadband access facilities are simultaneously multi-service, multi-provider capable.
2. Broadband service providers (used here: communication, content or transmission based) over these facilities are able to fully share all transmission facilities without technical or administrative limitations.
3. Broadband access facilities are designed to allow unconstrained delivery of broadband services, which maintains their long-term value.
It is generally recognized that first generation broadband is not limited to a particular transmission method (modulation and emission) or medium (copper, fiber optic or wireless), proscribed signalling speed or particular carrier bandwidth. Broadband services are generally considered to have characteristics that enable simultaneous projection of voice, data, and more conditionally, video services when they are all carried to the customers on a common (or co-existing set of) signal(s). This multi-service capability means that broadband services can be offered at much lower cost to both residential and business users compared to separately transported and provisioned services, as ILECs offer today. Therefore, the definition of broadband ought to recognize its inherent multi-service demand and capability (a factor that is at least as significant as raw signalling speed) with respect to shaping policy and competitive market initiatives.
This policy concept contemplates a common managed network element (in the form of a signal transmission path, terminated at the individual home, and “upstream” at economically concentrated neighborhood points of presence), whose ownership is readily separable from all retail providers up to a common gateway demarcation point. This path is also a resource that is shareable among different providers, even concurrently. (Example: different parts of an enterprise, or different rooms within the same house, with optical networks could conceivably adopt different retail providers that concurrently transmit bits over the same facility physically serving the address.)
The policy implications and definitions of broadband are
significant. Broadband services can
be almost infinitely separated using powerful and inexpensive packet networks
that use routers to forward information from one to one, or one to many. Under already gelled industry standards,
mostly notably Gigabit Ethernet, relatively inexpensive gateway devices
(residential or business) are available and capable of separating the service
carrying bit streams, each readily and automatically connected to an array of
terminal devices consumers use in interacting with their broadband
services. When applying policy
directives to Broadband, policy makers should vigilantly focus on the sever
ability of these bit-streams, and the technology’s inherent ability to have
competitive providers’ signals fully co-exist on the same transmission path.
C. Several studies indicate that the rate of deployment of broadband services is equal to or greater than the deployment rates for other technologies. What is the current status of (1) supply and (2) demand of broadband services in the United States? When addressing supply, please discuss current deployment rates and any regulatory policies impeding supply. When addressing demand, please discuss both actual take rates and any evidence of unserved demand. Please also address potential underlying causes of low subscribership rates, such as current economic conditions, price, cost-structure, impediments to the development of broadband content, or any other factor. To what extent has the growth in competition for broadband and other services been slowed by the existing rates and rate structures for regulated telecommunications services?
Broadband Supply
Situation (Residential Marketplace)
Telco ILEC carriers are offering first generation broadband, xDSL most typically to residences, and T1 to T3 services to businesses, the latter using fixed and modularly provisioned transmission systems. Limited data exists regarding the split of business and residential DSL installations, but we project that between 2-3 million US homes (or about 2/3 of all DSL subs) are currently served by DSL. Normally, these connections share the same pair and transmission path as one of the voice circuits into the home. Cable Modem technology used by MSO cable operators, and is almost exclusively serves residences, now estimated to exceed 6.4M homes served (Nov. 2001, NCTA). Cable Modem service requires plant upgrades, so that carried over drops in the coax distribution plant are able to pass two-way signals using Hybrid Fiber Coax, HFC. Fiber feeds two-way signals between the Head End and sets of 250-500 homes. Cable modem delivered broadband data uses distinct transmission paths to send data in either direction simultaneously. By adding up and downstream carriers (each downstream carrier occupies a 6MHz slice of video bandwidth) or take a more intensive route of splitting the number of homes assigned to each fiber node. MSOs are arguably in the better position to increase their transmission capability as demand builds. All of the top ten operators supply Cable Modem service where they have upgraded their analog plant to two-way, data certified HFC plant (in most cases are now well above 60-80% of all homes passed). More of the smaller MSOs now offer Cable Modem broadband service where they have upgraded their plant.
We also cite the success of the DBS operators to offer an always-on satellite delivered data service, usually in conjunction with their other satellite-fed video services. DBS is the most conditional of these services in terms of available bandwidth since the a few number of transmission downlinks are shared by a large number of subscribers. However, the service is often the best option for rural customers, given their few alternatives. As of 2001, 16M homes are connected to a DBS video service, with an estimated single-digit percentage of those subscribers using a DBS delivered broadband service.
Finally, wireless broadband services, using MMDS, unlicensed and in other cases, mobile PCS spectrum, were launched over the last two years. These services were hailed initially as the best alternative to the wired connections to the home or business for broadband data. Recently, two of the larger carriers to deploy this technology, Sprint and AT&T suspended their rollouts citing the high cost to deploy, and limited demand as they offered. Based on reports from the field, including former employees responsible for deploying their services, there was unforeseen cost in the installation, specifically field installer “truck rolls,” where the subscriber’s mast or roof-mount directional antenna was expensive to survey and ultimately install. Though fixed wireless services were probably known by operators to not be always simple, nonetheless the actual costs exceeded the forecast. In the case of AT&T, the initial deployment was deployed as a single market trial. Given their proposition, we believe AT&T was unable to justify the service to consumers as sufficiently compelling due to its low data speeds. We also understand that AT&T was not able bring the focus at this time to this service, given AT&T’s emphasis on serving the higher growth mobile marketplace.
We believe that wireless still holds substantial promise for broadband delivery to homes and businesses. Sprint is known to be evaluating their options to employ a coming generation fixed wireless system. This will offer customer a self-provisioned solution (that is, no truck roll installation, and as an added benefit, subscriber devices can nomadically roam within the service area). These services can also offer multi-service high-speed data. Based on our past work, we believe fixed services could readily extend wireless carriers’ businesses beyond pure mobile service. Such services would enable subscribers to roam freely over a combined-service network, thereby increasing the utility of their services to home and business customers. To this end, the FCC’s recent rulemaking to allow MMDS spectrum to serve mobile and fixed applications is important to broadband service policy making.
Private Systems and Municipal Services
Though small in their total number of homes served, MDUs and a growing number of master plan communities are beginning to install their own dedicated broadband retail services and networks. One recent report estimates 2.5M MDUs are presently served by SMATV video distribution systems. Master Plan communities are either contracting with 3rd party, “On-Site” operators or installing their own proprietary high-speed connectivity solutions. No exact numbers exist, but our estimate that 50,000-100,000 homes are either installed or await service from such systems once the rest of the community is built out. Municipal service providers, that are usually a rural co-operative utility that adds video and data services, are filling in where incumbents understandably cannot reach smaller or isolated towns. Again, we cannot find exact numbers but based on the press accounts would estimate these homes to fall under 100,000 homes served today. As small as these numbers are today relative to the entire home site population, we believe that this model is representative of the future model to obtaining high quality, affordable broadband services.
Current State of Broadband Demand
Few residential consumers would turn down always-on high speed, multi-service broadband service, if it were not for its price, its uncertain or unreliable quality. However, consumers also require that services offer value and relevance to their information and entertainment, or home security needs. Consumer readiness to adopt relies on their belief that a provider can meet their particular needs, which calls for service providers that are not only meet consumer price and performance criteria but service response and bundled applications as well.
We see demand for the first generation of broadband, now rolling out will be supplanted by more advanced services providing more bandwidth intensity, capable of supplying real time, interactive services, greater choice of video programming content, committed information rate data services to name a few.
Credible industry forecasts project that broadband might reach 30-40%[7] of homes within the next 4-5 years.
Delay in Competitive Competition due to Rates or Rate Structures
We treat this topic in our introduction above, and in E-1 below.
D. Should government adopt as a goal "access for all" to broadband service? What would be the costs of such a goal? What policy initiatives, if any, should be considered to achieve that goal? Are there areas or persons that are unlikely to be served through marketplace forces?
“Access for all” could take two very different forms. The first is to mandate that a few providers, presumably the incumbents, serve all homes located within a feasible service area by a date-certain. The second form, more of an “Access for all that want” would be where residential consumers participate voluntarily, where the individual homeowner elects to connect and bear a substantial portion of the cost for upgrading their service connection. This requires a publicly coordinated and mandated access network designed to be open on the terms discussed in our opening comments. We believe that the second form provides a market-driven solution since it connects those who demand more services to providers that have a rational incentive to serve. We believe there is also a role for financial incentives, using tax credits for instance, to help underwrite the transition from captive networks. Such a policy initiative if adopted would encourage broadband adoption through the open marketplace.
We believe the forced access to all is neither economically realistic nor warranted. Therefore we recommend that the broadband service policy limit its role to assuring free access with Open Service Networks connecting participating homes and businesses to a variety of providers.
Revamping Public Financing of Broadband: Moving Toward Public Open Service Networks (OSN)
This program would require a separate network that is managed either independently or possibly contracted to the community’s franchised MSO. In the event of passage of S. 1364, which contemplates creation of a structurally separate neutral manager from within the operating entities of Telco ILECs, another feasible alternative emerges to manage and maintain all or part of the OSN. These privately financed facilities would be open to service entry by the MSOs, ILECs and CLECs to offer services directly to the consumer. Installation cost would be shared by private parties, and to initially fund it, would be financed by government in the form of tax credits, no-lease cost ROW and easement contributions up to neighborhood and metro area points of presence. From these points of presence, where each subscribers optical circuit is terminated, the management of the network is assigned to either the franchised MSO, or if performed independently to a qualified provider or technical service supplier. Optical connections are stable, and do not require active components between the home and the N-POP (which would be designed to serve between 2,000-10,000 homes). Therefore, the management cost over this segment would be minimal and charged “upstream” to the provider serving the subscribed connection. We estimate this cost to be under $100/year/subscriber except when changing providers, which would be a one-time cost paid by the consumer as part of switching or adding providers.
We offer the following conceptual approach to create a publicly financed transition to open networks.
1. To create the public network, subscribers would bear the initial cost, using a variety of funding mechanisms developed by each locale with offset by tax credits, to connect their homes to N-POP points of service presence. For most of urban and suburban America, the program would use fiber PON technology, which offers the least cost and fewest constraints on increasing services and providers with minimal maintenance cost.
2. Once attaining a minimum of 20% of the neighboring homes as evidenced by depositing a down payment, a cost that could be offset with a tax credit, the homeowner gets connected to an N-POP. This initial amount would be in the range of $500, or about 1/3rd the amount required to physically connect each home. Once the N-POP connection is complete, the homeowner pays a completion charge, and if immediate service is desired, purchases a home gateway to bring service into the home. Their service provider in exchange for a long-term subscription commitment by the private homeowner could reimburse either or both of these charges. The connection to the N-POP is considered part of the property, not an asset of any single provider (if tax credits are used to finance the installation).
3. Local governments provide to the full extent rights-of-way, existing physical plant resources such as conduit often already installed in the ground. Where crossing public easements, local governments have the ability to appropriate access to aerial plant that in addition to power or telephone and cable could carry fiber to each home. Standardized access to each of these facilities would greatly improve the ability to build and maintain a neutrally managed network on behalf of residents choosing to access the service.
4. Once connected and served through their private optical connection, the homeowner can severe their connection to providers currently connected through the copper or coax plant.
Policy Initiative: Tax Credits to Align Public and Private Interests for Deploying Open Broadband Services
Tax credits would allow those investing to seek government participation which in turn gain tax revenues from service and content providers and equipment producers that benefit from the private market participation and organization of their interests. There is likelihood that the investment in this system would precede the revenue period by several years. The cost of financing is therefore somewhat speculative and long-term in terms of payback. However, the value to society could be justified as both economically simulative and financially positive. We point to the cogent points made by Intel Corp. in their recent FCC comments[8] made in this regard, and the work of economists Robert Crandall and Charles Jackson[9] that point to a half trillion dollar gain in undertaking build out of a widespread Broadband Internet infrastructure. We would only add that as part of their role of developing integrated economic development, local and state governments have successful precedents in using tax credits as a mechanism to achieve public policy aims. These levels of government are using broadband network deployment for their local economic development aims.
E. Do the interconnection, unbundling, and resale requirements of the Telecommunications Act of 1996 reduce incumbent local exchange carriers' (ILECs') incentives to invest in broadband facilities and services?
As stated in our introduction above, we believe ILECs have little incentive to upgrade, or otherwise make the local loop facilities capable of carrying broadband services, as defined in Question II, beyond what the incumbent itself is willing to fulfill in the near term as a virtually exclusive retail provider. This position is plainly independent of customer needs or rival CLEC requirements. As stated in more detail in the response immediately following, there appears to be no limit (up to selling wholesale services at virtually retail prices) that ILECs would find it incentivizing to allow another retail entity to take over a number of retail relationships so as to make it profitable for a rival to sustain its position.
This appears to be a rational position for the ILEC, since by a set of factors that would offset the ILEC’s rational behavior, the ILEC gains more value by captivating 90+% of the nation’s retail customers indefinitely, versus sharing service revenues to customers (whose demand for broadband services is expected to rise by 7% annually) with other retail competitors,
We believe the Act’s intent was proper, but it does place the ILECs in an uncooperative position (to the point of paying nearly $500M in non-compliance fines in a recent 15 month period[10]) to respond to directly competitive providers and carriers whose interests are critically dependent on fulfilling their retail customers’ needs.
Looking back with the knowledge now gained about using indirect incentives, we see that the Act apparently took as a matter of blind faith the proposition that each ILEC wholesale network organization would comply, and by legal standards, fully co-operate with their retail division’s rival CLECs. We believe the record speaks for itself on ILEC compliance.
In setting up the Act’s commercial incentives, ILECs were given the choice to enter into retail long distance services provided they fulfilled the Act’s open interconnection, bundling and related provisions. It is therefore instructive to look at the role of the LD entry incentive as motivating interconnection and bundling. As a commercial incentive, the value of the long distance business is waning. In the last year reported, overall domestic and international LD annual revenues rose by less than 3%, the lowest increase since 1991. LD call counts and durations remain essentially flat, and a decline in LD as a percentage of all call usage continues, as toll-free and Internet usages have risen. Moreover, average revenue per minute for domestic long distance has dropped 25% from 1994 to 1999, the last year reported. Over the last 15 years, international long distance has grown four fold, which adds further doubt to the case for incentivizing value of LD, since these calls clearly transit to foreign carriers that control much of the revenue value of that service. Perhaps its impact not fully anticipated since the 1996 Act, wireline-carried long distance traffic is being substantially displaced by wireless, and given the competitive bundling of LD service in wireless subscriptions, revenue per minute continues to decline[11].
So it appears as no surprise that as of the time of this inquiry, nearing five years after the Act’s passage, only nine states had approval for release from inter-LATA service restriction by the FCC[12]. We conclude that the value of the incentive, which indirectly ties to promoting ILECs to fulfill interconnection and flexible service bundling, is substantially diminished.
E1. Are their investment disincentives attributable to the regulated rates for interconnection, unbundled network elements, and resold services?
ILEC and CLEC management have one thing in common: seek the highest returns consistent with sustaining their respective positions. For the ILECs, this amounts to maintaining the highest entry barriers against retail CLEC rivals by controlling network growth and access to customers tilted to their specific operating practices and technical legacy systems. For CLECs, the goals are to acquire as many target customers as available at the least cost of entry, preferably with the fewest assets not under the control of their largest rival, the ILEC. These contrasting goals point to the differences each would make regarding network investment, which leads to the conflict and voiced complaints of “disincentives”. For the ILEC, the tariff rates cannot be high enough, the terms of interconnection not conditional enough, and the access to all technically feasible points in the network not limited enough. For the CLECs, who are attempting to grasp every competitive advantage, the motives are exactly the opposite.
The ILEC have an incentive to keep facilities oriented to serving their special interests: reliability, lower operating cost, and most important, retention of retail subscribers. This position favors maintaining status quo over service provider expansion. The ILEC is acting rationally to exclude rivals given their economic starting point and control bargaining power within the telecom services marketplace. However, this power is in conflict with creating a free and open services market, especially given the fact that much of the capital to finance the network comes from subscribers, and is why policy and legislative intervention appears warranted.
If the bargaining basis were to change from protecting a monopoly franchise to one oriented to seek maximum economic utilization of the current and future broadband networks, the value of the underlying plant would rise as more capacity were made available, and through access arrangements with many more providers, more subscribers are fulfilled. Since the plant has a substantial fixed cost, with substantially lower cost to augment it and fill it to capacity, the plant cost for both ILECs and CLECs would predictably fall. Since revenues may (if not as predictably) fall faster for the ILEC in this freer market arrangement, it is rational for the ILEC to go to great lengths to forestall changes to the present scheme.
So, to focus the point of the question not on only addressing supplier incentives, but also address enhancing incentives for consumers to participate in voting their dollars to follow their preferences. consumers that have paid and continue to subsidize the last-mile network would have greater bargaining power in terms of their choice of providers, services and competitively set prices.
To what extent are
those disincentives due to ILECs' uncertainties about their ability to recover
the added network costs needed to accommodate potential requests from
competitors? What is the magnitude of those additional costs? What mechanisms
could be used to share the risks of those costs efficiently and equitably among
ILECs, competitors, or users?
ILECs do face some market and financial uncertainties, but where things stand today, we believe that their business uncertainty is relatively contained and comparably low relative to other capital-intensive service industries, especially other service industries that do not enjoy subscriber financing of their operational assets such as airline, transportation and financial services. Unlike these and many other competitive service industries, publicly funded assets (like municipal airports, regional and national highways, and FDIC insurance, and by extension, the recent airline stabilization and insurance underwriting legislation) enable viable and certain access to customers. These publicly financed and neutrally managed assets fall outside the preferential control of any one retail service provider. These assets are shared for the economic and strategic benefits of the consuming public. Such capital assets provide a convenient way for retail providers to meet the marketplace on a fair and competitive basis.
In our proposal above with
regard to Public Open Networks, we conclude that the nation’s consumers are the
ultimate financiers and beneficiaries.
The public should participate in directing their funds, which today are
imposed in the forms of taxes and subsidies, to finance and build a coordinated
and open broadband access networks.
We believe the long-term viability of this solution can be readily funded
with a range of public and private financing vehicles, along with the prospect
using tax credits, such as those envisioned in S.88 for implementing residential
broadband services.
Some have presented
estimates for upgrading the nation’s infrastructure to broadband services to
cost in the vicinity of $200B[13]. We believe that this is a good initial
estimate, given an addressable base of about 100M homes and apartments. However, for the reasons stated
elsewhere, the likely adoption and implementation would be less that 100% of all
homes and businesses, perhaps building out in the $100-125B area using the PON
system that we contemplate above.
This would cover the majority of urban and suburban residential locations
(dispersed rural areas would typically be better served economically with high
speed wireless), and which excludes the cost of subscriber equipment. Total residential subscriber equipment
could reach $100-150B necessary to outfit the homes served by the networks. As is customary today, this cost could
be partially subsidized by providers seeking to enter the homes of their
subscribers in exchange for annual or longer service commitments, which are
freely bargained. We would also
note that in the case of new homes these costs can be included in their finished
cost thus applicable to typical mortgage financing, which itself is tax
deductible.
Few would argue that costs on the scale of $200B clearly require a uniform approach and mandate to determine how the capital will be used and paid back. This adds weight to the call for uniform policy and legislation.
In proposed legislation to
advance serving consumer needs, reduce risk of entry, and reduce supplier
disincentives, proposals such as the Open Public Network above, and legislation
such as Senate Bill S.1364 provide an initial framework to structure and operate
a competitively neutral, publicly accessible broadband plant. This is also an opportunity for the
incumbent to focus their resources on developing their retail broadband
businesses, while lowering their network cost and capital risk and perceived
uncertainty. Competitive broadband suppliers also are entering the market with
their technical deployment costs and risks lowered since cost will be governed
more by rising broadband plant utilization. The CLEC viability risks are reduced
since the OPN, managed neutrally, assures higher reach and greater flexibility
to meet subscriber demands. For the
industry at large, risk is reduced by removing inefficient duplicate network
resources, which negatively impacts capital formation in what is a
capital-intensive industry.
- To what extent are the returns on ILECs'
investments in new infrastructure uncertain? Is the uncertainty of gaining an
adequate return on each infrastructure improvement (attributable in part to
other firms' ability to use those facilities to offer competing services)
significant enough to deter investment?
In today’s process, the monopoly ILEC controls the design, cost and use of the access network to maintain its subscribers. To our knowledge, ILECs are not explicitly compelled to design access networks explicitly for competitive entry for rival broadband service providers. As the examples show above, following traditional practice, Telco ILECs enjoy customer financing thereby reducing their risk significantly when compared to firms that have to provide access network financing. This also shields the ILECs from competitors by preempting their entry on the same terms.
- What are the principal strengths and
weaknesses of the FCC's total element long run incremental cost
(TELRIC)(1) methodology? What changes could be
made to render TELRIC an effective deterrent to the exercise of market power
and conducive to efficient infrastructure investment? Would it be possible to
construct an alternative methodology that would not depend on cost information
controlled by regulated firms?
We have no comment on the relative strengths or weaknesses of TELRIC pricing methodology per se, and its use for making a determination of the fair charges based on the principle of ILEC avoided cost. We have a specific objection to the way in which TELRIC allows inclusion of costs clearly outside the network elements subject to lease by the incoming carrier. We cite this recent example of an incoming carrier attempting to inject their technically compatible service into a local subscriber sub-loop.
Today’s
TELRIC rules allows the ILEC to collect maintenance and service fees based on
investments made across other areas of the plant that are not related to or have
no direct benefit to the distribution loops. Under TELRIC, Qwest, the acquirer
of the US WEST regional RBOC, charges $3.30 per month to share an existing “dry”
plain line for a sub-loop connection, a link that exists between a residential
demarc point and the field distribution box. Due to allocating unrelated network
element costs stemming from the TELRIC calculation, this charge includes
on-going “OSS” and so-called maintenance services, which in our view are
un-justified since at most they are only apply one time. If TELRIC practices were
pro-competitive, they would charge nothing for fully depreciated facilities
until the ILEC upgrades the same facilities, or rely on a historically weighted
depreciation charge reflecting the same eventuality.
We believe that this practice to where customers finance
new-build facilities as a financing practice ought to be opened through the
neutral manager concept and Open Public Network proposals discussed above where
incoming carriers have pari passu access, and eliminates incentives to
overcharge for duplicative network elements and installation for competitively
motivated reasons.
F. Some have
suggested that a regulatory dividing line should be drawn between legacy
"non-broadband" facilities and/or services and new "broadband" facilities and/or
services. Is this a feasible approach? If so, how would it work?
- What effects would changes in the
regulatory structure for broadband services and facilities have on regulation
and competition with respect to voice telephone and other non-broadband
services?
- If ILECs deploy broadband services using a
mixture of new and old facilities, will competitors be able to use the older
shared facilities that they previously had access to?
- If ILECs deploy broadband facilities to
replace portions of their existing copper plant, will the displaced copper
plant give competitors a viable opportunity to offer alternative services?
What would be the annual costs to the ILEC (or to a purchaser of the displaced
copper plant) of a continuing obligation to maintain that plant?
- What regulations, if any, should apply to new broadband facilities and/or services to ensure a competitive marketplace?
TELRIC addresses
how much cost the ILEC and CLEC should each bear based on allocated capital
depreciation and operating cost associated with the element used by incoming
carriers. The accounting follows
the cost to maintain the signal carrying capability of the physical facility.
This is not a strong function of the electrical signal applied to the facility,
assuming the facility was initially able to carry a serviceable narrow or
broadband signal to the subscriber. Therefore we see no policy need to normally
differentiate on the basis of usage, be it narrow or broadband in nature.
(sub-parts 1,2 and
4:) Access to the both old and new facilities should and could be handled
through the competitively neutral manager concept discussed in our previous
responses. This would reduce or avoid duplication, improper charging with
respect to allocating cost for network elements.
(sub-part 3:) We
believe the primary focus ought to be on the future as opposed to developing a
body of new rules to handle retroactively non-broadband services. Current copper plant that becomes
displaced has a stable and relatively non-controversial maintenance cost
history. Copper plant in older urban areas for instance is still in use from
original installations in the early 20th Century, so it has for
applications that can apply it a very long useful life. It seems fair to charge incoming
carriers lease costs consistent with the historical cost, useful life and
geographic area specific factors that impinge on the maintenance cost.
(sub-part
4: ) To reduce the incentive for ILECs to duplicate access network
installation where a certified CLEC provider exists, we believe state regulators
should not allow ILECs to demonstrate that they are using as a first resort
existing or planned CLEC facilities.
They should not justify any part of their rate-base maintenance or when
these facilities are used or available.
The ILECs should be protected and be able to access their competitors’
facilities for a cost no more than what they charge to CLECs, thereby
eliminating the basis or need for the argument that ILECs have a higher
incremental cost than TELRIC costing provides on a go-forward basis (primarily
applicable to new-build sites).
G. To what extent have competitive firms deployed their own (a) transport, (b) switching, and (c) loop facilities? Are those investments limited to particular areas of the country or to particular portions of communities and metropolitan areas? What market characteristics must exist for competitors to make facilities-based investments? Do competitors have the ability to deploy their facilities in ways that minimize costs and facilitate efficient network design?
First, we
understand through published reports about 10% of all access lines (from 3% in
residential, to 17% in larger business[14])
are CLEC fulfilled. Roughly ˝ of
these lines are UNE fulfilled versus CLECs reselling pre-provisioned
services. Of the CLEC lines about ˝
provide a substantial capital element to complete the service delivery
solution.
Market
characteristics required for investment: We put forward the proposal above of
Open Public Networks that steer today’s subscriber-funded financing and capital
plant toward a neutrally managed, open-to-all access network. This addresses
certainty, cost to serve and competitive concerns that have been raised in this
inquiry. Such a plan is essential to restore investor confidence in
telecommunications services and equipment sales, leading to a strong increase in
economic growth.
CLEC
deployment efficiencies: CLECs do have a choice of using elements inside and
outside the ILECs plant. Cost,
margins, and time to reach the end-subscribers have to be mutually weighed to
determine the best choice. As
explained above, we believe that the present structure impedes efficient and
effective service for both ILECs and CLECs. Neither has an incentive to work
together nor helps develop the access resources required to reduce cost, speed
delivery, provide long-term bandwidth expansion. We believe this is a defect of the
historical monopolistic structure that asserts control over the access
facilities for holding captive subscribers independent of the subscriber
demands, and independent the facilities needs of the rival retail provider
aligned to serve consumer needs.
H. What cable companies are currently conducting trials to evaluate giving multiple Internet service providers access to broadband cable modem services? Describe the terms and conditions of ISP access in such trials. What technical, administrative, and operational considerations must be addressed to accommodate multiple ISP access? How can cable firms manage the increased traffic load on their shared distribution systems caused by multiple ISPs?
We are only aware based on attending a November 2001 public presentation by an AT&T Broadband plant executive of their open access trial for ISPs currently taking place in Boulder, CO. We understand that this trial has been underway for some time and has demonstrated general feasibility and operational robustness.
I.
What problems
have companies experienced in deploying broadband services via wireless and
satellite? What regulatory changes would facilitate further growth in such
services? Is available spectrum adequate or inadequate? What additional spectrum
allocations, if any, are needed?
Terrestrial Broadband Wireless
Sprint Direct and AT&T Wireless have performed substantial testing and actual service launches in the US.
Problems encountered: We understand from management statements and press accounts that Sprint has recently chosen to suspend its wireless Direct business based on the higher than expected cost to install customers with the current generation of equipment. Present generation equipment calls for a line-of-sight engineered antenna installation. They plan to continue testing the cost effectiveness of next generation equipment that promises higher speed, and a lower cost to install and maintain customers than present generation equipment. Operating like present mobile wireless systems, the next generation relies on saturated signal coverage, which allows it to be self-provisioned since it offers a much less sensitive antenna installation that can be moved.
Satellite
DBS Satellite is a good alternative where all other practical alternatives are not available.
Problems encountered: DBS has limited throughput to offer return channels due to sharing across a large number of customers through relatively few satellites. This platform appears to be best suited for sparse rural areas.
Future LEO/MEO satellite systems, offering substantially more channel number and capacity than geostationary, and thus will offer substantially more throughput should they prove economical to launch and maintain. These systems can use fixed high gain antenna to provide high bandwidth and availability, unlike the mobile voice counterparts. We believe these systems offer another important option where there are few service options such as in the deep rural service areas.
In considering future spectrum allocations we include promising technologies that offer greater utility, higher performance, and less interference limitations.
Ultrawideband (UWB)
UWB radio systems deserve close attention as a longer-term option since these systems offer few constraints on bandwidth, and offer large amounts of interference immunity. Within limits, UWB can co-exist with other services operating on the same spectrum. Co-existence is further enhanced as more legacy services convert from analog to digital, which usually increases interference immunity levels. UWB technology can readily support combinations of voice, video and data. These systems may prove incompatible with navigation, GPS, and sensitive communication systems outside standard commercial applications. Therefore sharing common spectrum with these services has to be fully understood.
Free Space Optical
Free space optical systems deserve close attention and consideration for near and longer term needs. These systems offer virtually unconstrained bandwidth and are inherently low in cost to mass-produce. Operating at infrared wavelengths, these systems operate in a region of the electromagnetic spectrum that does not require licensing. Free space links are easily installed and maintained. Due to the strict alignment and line of sight requirements naturally eliminates practical sources of same-system interference. Attention has to be paid in placing nodes in such a way that extraneous interference from sun or physical blockages do not occur. In essence, these systems have only one significant deployment limitation, fog. This manifests itself in limiting the useful range (for predictable service and availability) to 200-500 meters in many parts of the country. This in turn means using mesh network grids, which are practical in urban areas, but are progressively more problematic in suburban areas to maintain proximity and line of sight between neighboring nodes. These systems require by their nature ubiquitous distribution of root, transit and termination nodes in order to be most cost effective. Though they can exploit multiple routing when a temporary outage occurs, redundant nodes must be added to the installation (which can serve multiple purposes, both routing and terminating traffic).
Spectrum Allocations for Wireless
Broadband
As stated above, there are many promising wireless systems for specialized or lower density service areas. These networks can extend carrier service areas beyond the point where it is uneconomical to deploy coax, copper or fiber. Spectrum above 5 GHz is less valuable for vehicular wide area mobile applications but would serve fixed applications extremely well. Equipment operating at these bands is not currently designed and optimized to serve mass-market applications, and therefore today is not at an acceptable commercial cost. As semiconductor technology has improved, usable signal speeds are rising making this spectrum ripe for commercial exploitation.
A different spectrum dispensation model might also want to be used to conform to the needs of using this spectrum, since wide area service is not the objective. Dispensing based on link and frequency usage would be more appropriate, and would lower the acquisition cost for leased spectrum. Under this arrangement the overall spectrum is shared efficiently (sharing the same band, not the same space and frequency channel) Such a method moves away from operators with an exclusive geographically defined territory to one that is defined by path-links connecting subscribers and hubs.
Such systems require radio elements able to tolerate controlled levels of interference, such as UWB, and otherwise operate on coordinated frequencies within a common service band.
J. How should the
broadband product market be defined? What policy initiatives would best promote
intra-modal and inter-modal broadband competition?
The Broadband product market should be defined by those provisioning high-speed data, voice and multi-channel video services, or any subset, perhaps with the exception of voice-only services.
All possible competitive barriers should be eliminated for intra- and inter-modal competition while migrating toward open network solutions discussed above. This would include taking away competitive barriers and subsidies such as inter and intra-LATA costs imposed on competitors and in effect on consumers. This would enable intra-modal Voice-over-IP for instance to compete favorably with traditionally provisioned voice services. It would be up to the ILEC to decide if they would continue charging IXCs differentially for its retail customers to terminate calls on their network based on the origin of the call.
Once a competitively
neutral managed network is established, we support elimination of inter-LATA
restrictions on Telco ILECs
K. Would it be appropriate to establish a single regulatory regime for all broadband services? Are there differences in particular broadband network architectures (e.g., differences between cable television networks and traditional telephone networks) that warrant regulatory differences? What would be the essential elements of a unified broadband regulatory regime?
As we have emphasized above, it seems most appropriate to focus on access, and form a competitively neutral managed network that anticipates and deploys next generation broadband services. Once accomplished, we believe that market openness will reduce the need for more regulation as constraints are removed from the supply and demand sides of the marketplace.
L. Are there local issues affecting broadband deployment that should be addressed by federal policies? Please provide specific information or examples regarding these problems. Should fees for rights of way and street access reflect costs in addition to the direct administrative costs to the municipalities affected? To what extent do state laws and regulations limit municipalities' ability to establish nondiscriminatory charges for carriers' use of public rights-of-way? Please discuss the most appropriate relationship between federal, state, and local governments to ensure minimal regulation while removing disincentives or barriers to broadband deployment.
As emphasized in our approach above, policies should encourage next generation open networks to use all available rights of way in addition to appropriate technologies such as optical, we believe that such networks should be given preferences that may not be afforded to closed incumbent networks. For instance, impact fees should be substantially higher for installations that would only install private network installations. We stress again the need to consider tax credits similar to those contemplated in S. 88 for residential broadband.
M. Are there impediments to federal lands and buildings that thwart broadband deployment? Please provide specific data. What changes, if any, may be necessary to give service providers greater access to federal property?
We have no comment to this question.
N. With respect to any proposed regulatory changes suggested in response to the above questions, can those changes be made under existing authority or is legislation required?
We believe legislation, is needed to address neutral management of today’s last mile publicly funded assets currently managed by the Telco ILECs, and any related financial aspects such as tax credits to implement the Open Public Network that requires new legislation. We believe that a good model for initiating reform lies in Senate Bill 1364 (Telecommunications Fair Competition Enforcement Act), which provides for the treatment of the legacy plant as a neutrally managed and maintained asset. Finally, we believe that Federal legislation should work closely with State and Local government bodies who are in a good position to work with improving access to Broadband services and enabling competitive providers.
Respectfully
submitted,
Richard
Lee
Angus
Dougherty
William
Tieman
Greenwood
Telecommunications Consultants LLC
Appendix
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