Regulatory Framework PanelState, federal and local stakeholders have begun taking positions on the issues surrounding city-led broadband deployments, said Carlos Kirjner, Principal at McKinsey & Co. and a leader of its telecoms practice. Moreover, the debate in the United States is being watched around the world and could have public-policy implications for virtually every market. “Today you see municipalities saying there is tremendous economic benefit to having broadband in my community, and I want to see if I can do something to improve quality of life and create wealth,” Mr. Kirjner said. “The public-safety community has been looking for an improved communications infrastructure. But on the other side, the private sector is saying it’s taking away their revenue streams. In a few months, they may say they will no longer build in your city or your state. These are fair questions.” "The more things change, the more they stay the same,” said James Bradford Ramsay, General Counsel, National Association of Regulatory Utility Commissioners. “When electricity was being deployed 125 years ago, people called it a luxury, and there were those who did not want the small municipalities and power authorities to get started. But people figured out you needed electricity for economic growth. The problem is that in most of the places where you have municipal entry, the reason why the people got involved is because the facilities-based carrier didn’t want to. No company in a capitalist society is going to put their money in rural areas first.” To suggest that incumbents “try to hold a community hostage over this is totally bogus,” said Jeff Arnold, Deputy Legislative Director, National Association of Counties. “State and local governments need to work together to find the solution that fits their situation best. When counties have stepped in because the incumbents don’t, the immediate reaction is that the incumbents will step up, or a public-private partnership will emerge.” Only about about 600 of 56,000 U.S. towns and cities have entered into providing telecommunications services. “If you don’t have broadband connectivity in your area, and you can see any way to get positive externalities for the municipalities, if you’re going to spend money on telecom anyway, there’s a way to leverage that to get what you want,” Mr. Ramsay said. “The overall advice for the municipalities is to push as much as possible into the private sector. There are things you can do without becoming the operator of the network and take full advantage of existing regulations and subsidies.” Cities in the Balance But Mr. Carter of the FCC listed five issues for why municipal entities should not be able offer a consumer network, stating that “these are my own thoughts and they don’t represent the Commission”: • unfair access to risk capital and its ability to tax (might get a lowered risk premium);
• the “fallacy of privatization” where a regulator regulates a competitor and itself;
• unfair competition and cross-subsidization;
• First Amendment issues; and
• the economics of networks and universal service.
Moreover, incumbent local exchange carriers, or ILECs, are arguing that local franchising doesn’t make much sense, Mr. Primosch said. “Their argument is that when they go to the cities, when they want to add video, the cities tell them get a franchise, and they ask why should I pay again? So you’re seeing aggressive legislative moves at the state level, particularly by SBC, to have a statewide franchising concept, and the cities are not really happy about that. I think that’s going to be a big issue for the telephone companies.” Mr. Arnold said that cable companies are required to enter local franchise agreements with local governments, like it or not, and when you’re providing almost identical service, and you want to make sure local policy doesn’t get pitted between any type of technology, you have to treat them the same way. The National Association of Counties “testified…that we’d be willing to enter into discussions about statewide franchising, so we’re not saying no, but the law is what it is, and we have to treat everyone the same, as long as it is the law. You can’t be giving SBC and Verizon special treatment, nor can you give the Cox’s, Comcast’s, TimeWarner’s special treatment as it relates to their common carrier status if they’re providing phone service.” Public-private partnerships are a battle that isn’t going to end any time soon, especially as networks become all IP-based, Mr. Primosch said. “What is the relevance of the cities? Why not let the marketplace take care of it? As you get into this whole triple-play argument, there’s an aggressive move to get everyone under the same platform, and municipal franchising doesn’t work with that model.” The FCC is trying to get everyone under the same umbrella, but the House is heading off at an angle, Mr. Ramsay said. “This is a very scary time. I hope Congress doesn’t do anything for the next two or three years, so we can see the impact of these two mergers—MCI and Verizon, AT&T and SBC. This is probably the biggest structural shift since the breakup in 1982. And there are a lot of optimistic people in Wall Street who think this will lead us to two vertically integrated monopolies.” At the federal level, Congress is taking a broad look at the Telecommunications Act of 1996, and “cities are concerned about that,” said Cheryl Leanza, Principal Legislative Counsel for the National League of Cities. “Municipal broadband is going to come up at the federal level. We had a hearing last week. Members of Congress were asking about it. Senators were asking about it. Cities are not alone in fighting this fight.” The Fiber to the Home Council and the American Public Power Association have been active in educating on this issue. Could the federal government overrule the anti-municipal-wirelesss state legislation that has passed? “We don’t know,” Ms. Leanza said. “Legally the national government could overrule the states to some degree. The proposals that I have seen would limit the states to a degree but allow them some latitude. I don’t think they would completely eliminate the states, because obviously our federal legislators need to respond to the state governors and legislators who would be very upset to be preempted. And that’s on the Senate side. It definitely looks were going to have a proposal coming forward. Even if we see something positive on the Senate side, I would bet it’s going to be much more negative toward municipalities on the House side.” Telecom Duopoly “Why not use the word monopoly?” asked an audience participant. “Why can’t we just force the incumbents to deliver adequate services to our homes? They’re the regulated monopoly. They’re the ones charged with delivering this service, and they have the capital for it. We gave it through them, through years of monopoly service.” Yes, but the Telecommunications Act of 1996 unregulated that monopoly, Mr. Arnold said. “Many of the advantages the incumbents have today are because the regime was set down when they were a regulated monopoly. They got a lot of benefit when they were, but they no longer are, and Congress has not seen fit to change that.” “When it comes to facilities, not services, there may be a natural monopoly here because of the relationships between revenues and the capital required to deploy, but that’s a question of market structure,” Mr. Kirjner said. “You still could ask, who would deploy these facilities? The federal government, the municipality, or is it a bargain with private enterprise?” “Because of the 1996 Act, everybody’s getting into the other’s business, so there really is a duopoly in many parts of the country,” Mr. Ramsay said. “Some would argue that wireless is a third distribution network. The stats don’t show me that it’s considered a substitutable service by American consumers.” But if you buy into the notion of a natural monopoly, why are the cable and telcos trying to get into each other’s businesses? Mr. Primosch asked. “Because they’re not generating as much cash. Regulation of voice over IP is so important. This going to be the first big issue for the Martin commission.” Increasing Competition It’s good for municipalities to stimulate a third-pipe creation in one way or the other, Mr. Kirjner said. Is there a better model? Philadelphia is creating a wholesale platform available to multiple providers. Remember that no single model fits every community across the country, Mr. Arnold said. He mentioned Oakland County, Michigan, which is trying to wire 910 square miles for $50–$100 million and working with the private sector to make that happen. “I think in the long run, whatever model works best in your community is what’s going to best serve your community, and is worth some of the battles that you have to go through,” Philadelphia CIO Dianah Neff said. “The AOLs, Earthlinks, and MSNs are looking for new pathways, and I think our wholesale model makes a lot of sense. Cities by and large are not looking to take on the telcos and the cable companies, but they are looking to serve a population that isn’t served today.” Among the 58% of Philadelphia’s population with an Internet connection, 76% of these are dial-up subscribers, and that industry is losing market share because people are demanding more bandwidth and throughput. “So we think competition is what we do need,” Ms. Neff said. “It will give citizens a choice, and it will go after the 42% of our population that isn’t connected,” the majority of which are low-income and underserved neighborhoods. Philadelphia isn’t making this an exclusive network, “so we think there’s plenty of room out there,” Neff said. “There are a lot of capabilities out there. If we want to make this fair, then stop the duopoly and make it open to people. The reason you’re seeing municipal governments getting into this today is because there isn’t choice.” Jeff Arnold said he “couldn’t agree more. SBC, talking about their Project Lightspeed [IPTV], specifically said they were going to serve this much of the richest neighborhoods, this much of the middle-class neighborhoods, and this much….and they didn’t know when, if ever, they would roll out that technology to the smallest group. You’re exactly correct. We can’t rely on the good intentions of those things to serve the populations we need to serve.” “I don’t disagree with what you just said, but I want to point out a few other trends that might be at work here,” said Mr. Ramsay. He referred to a Pew survey on the Internet showing that “the price point for broadband just isn’t low enough for people. There isn’t enough difference between what you get with dial-up and broadband to make it work yet. Once there are innovative products that are entertainment oriented that plug into my TV for the low-tech person, then everybody’s going to have it…. I tend to think it’s price point, which is how competitive is the market, but it’s not just that. Moreover, in low-income neighborhoods, if they don’t have a computer, a broadband connection isn’t going to do them much good.” Daniel Aghion, Executive Director for W2i, noted that Jordan has the same problem as local communities here in the United States, “which is a lack of competition, meaning prices are not coming down. But on the point that if you can’t afford a computer, why give access, in Brazil, micro-WISPs are breaking even supplying services in slums for a few dollars a day. One of the peculiarities of favelas there is that they don’t have water, but they have a TV and a computer.” US Broadband Slippage Several participants noted with alarm that the United States is steadily falling behind other countries in broadband penetration. Several world rankings were mentioned: 13th, 18th, 23rd, but as Alan Shark, President, Public Technology Institute, noted, “It’s not where we are, it’s that the trend is going down, not up, as others move ahead. My feeling is that local government has an enormous leadership role to play in this whole thing.” “I’m not saying things are simple and easy to address,” said Mr. Aghion, “but it is a serious issue where we’re seeing somewhat of a gap between national policy and the implementation on the ground and that gap is due to competing forces pulling in different directions in between.” Korea (pop. 50 million) committed a few years ago to move ahead briskly, and it has surged from 1% in 1995 to 71% having broadband penetration today. “They’re shopping and buying stocks online and have an e-enabled population,” said Todd Ramsey of IBM. “Their companies have been successful. The Nordic countries and Japan are doing well, too. We’re having a lot of political fighting going on here while the rest of the world is moving forward on this.”
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