Our Uneven Regulatory System

The Florida Legislature recently passed a bill that brings poles under state jurisdiction for any electric cooperative that elects to enter the broadband business. That would be a change from current regulatory rules that exempt cooperatives and municipally-owned electric companies from federal and state oversight of pole regulation.

This blog isn’t going to debate the pros and cons of this specific legislation but will instead point to our uneven regulatory environment in the U.S. Over the years, State legislatures have passed laws that create regulatory rules that apply only to specific entities and not to everybody.

Laws affecting electric cooperatives related to broadband are a good example. Over the last several decades, a lot of states passed laws that prohibited electric cooperatives from entering the broadband business. These laws were clearly prompted by telephone and cable companies that didn’t want a new competitor. In the last few years, a lot of legislatures reversed these laws due to pressure from the public to allow their local electric cooperatives to bring them fiber broadband. These new laws have been effective, and a Google search tells me that 250 of the 900 electric cooperatives are either offering broadband or have plans to do so.

Most of the legislation that created exceptions has been aimed at squelching broadband competition. A lot of states have laws that either prohibit or restrict municipalities from entering the broadband business. It’s a little hard to get a precise count these days because there is a wide range of laws against municipal broadband that range from outright bans to rules that only create a few hurdles for a municipality to enter the business that aren’t faced by other competitors.

Most of the restrictions against municipal broadband are written in such a way as to make it seem like there is a path for cities to provide broadband. But most such laws often have a kicker that makes it extremely difficult for a municipality to comply.

As an example, North Carolina imposes a long list of requirements on a municipality that wants to offer broadband. A public entity must impute phantom costs into their rates, conduct a referendum before initiating service, forego popular financing mechanisms like bond financing, refrain from using typical industry pricing plans, and must make their commercially sensitive information available to their incumbent competitors. These rules collectively make it nearly impossible for a municipality to launch a broadband business.

As the new Florida law shows, it’s a never-ending battle with incumbents trying to legislate away competition. Last year there was a major push in Ohio for new legislation that would prohibit municipalities from providing broadband. The law was ultimately defeated, but it seems that several laws that create hurdles to market entry are introduced around the country every year.

Because of the push to get broadband to everybody, some restrictions have been relaxed in the last few years. It’s now a bit easier for municipalities in Arkansas to offer broadband. In Washington, there was a law prohibiting the municipal Public Utility Districts (county-wide electric companies) from offering any broadband except open-access. Last year, in a bizarre legal move, the Washington legislature passed two conflicting laws that allow PUDs to offer retail broadband. The Governor simultaneously signed the two bills rather than choose one of them, and now it’s unclear what the law is. Colorado just lifted the requirement that municipalities must hold a referendum before entering the broadband business.

It’s not surprising that there are laws that restrict some entities from becoming ISPs. Every textbook about monopoly power and abuse predicts that monopolies can’t resist the temptation to quash competitors.

Our National Telecom Priorities

I recently wrote a blog that talked about the FCC’s formal goals for the next few years. I noted in that blog that some of the FCC’s actions currently seem to conflict with their stated goals. Today I present my take on what I see as the actual current priorities in our industry.

5G, 5G, 5G. The FCC and other policy makers have swallowed the 5G hype hook, line and sinker. I have no doubt that 5G will be an important part of our future telecom landscape, but the hype seems way out of proportion to the reality we are likely to see. Nothing highlights this better than a Qualcomm-sponsored article that claims that 5G technology will be as important as the introduction of electricity.

The FCC is sweeping away regulations that might interfere with 5G and already killed local say over the location of small cell electronics and towers. The FCC is well on the way towards allocating massive amounts of spectrum for 5G and ignoring other spectrum needs. The White House even held a 5G summit where politicians were repeating the talking points of the 5G carriers.

This all seems premature since engineers all say that the major benefits of mature 5G will come years from now. There will be some early 5G technology introduced into the market over the next few years, but this will not include the characteristics that make 5G an important technology. From a policy perspective, 5G seems to have won the war without having had to fight any of the battles. I’ve never seen this industry (and the politicians) go so gaga over a new technology that we aren’t even going to see for a while. The marketers at the cellular companies have clearly hit a hype home run.

The Rural Digital Divide Gets Lip Service. Talking about solving the rural digital divide is a high priority. The FCC rarely makes a presentation without mentioning how important this is to them. However, the FCC and others in Washington DC are doing almost nothing to solve the problem. The FCC even went so far as to list the rural digital divide as the first priority on their own list of goals but has done little to address the problem.

There is universal acknowledgement that the private sector is not going to invest in rural broadband without some funding help from government. Yet all of the state and federal grant programs added together are throwing millions of dollars at a problem that needs many billions of dollars to solve.

Meanwhile, the rural digital divide is widening as urban areas are seeing significantly faster broadband speeds while rural America is stuck with little or no broadband.

The Big ISPs Want to be Google. Every one of the big ISPs has made investments to try to catch-up with Google. The big ISPs want to monetize their vast troves of customer data. Big ISPs are envious of the advertising money made by Google and Facebook and want to grab a piece of those dollars. The FCC has aided the big companies by weakening consumer privacy protections.

But for whatever reason, the big ISPs haven’t yet figured this out. They have the most intimate and detailed access to customer data but have scarcely found any ways to understand it, yet alone monetize it.

Take My Residential Customers, Please. The big telcos have made it clear that they are not particularly interested in the residential market. CenturyLink made it clear this year that they will no longer invest in residential networks. Verizon has already sold vast tracts of rural networks. AT&T is constantly petitioning the FCC to let them tear down rural copper. Verizon is talking about expanding wireless local loops using 5G, but we’ll have to wait to see how serious they are about it.

Big ISPs Continue to Try to Squash Competition. The big ISPs miss no opportunity to squash competition, no matter how small. They all still rail against municipal competition, although all such competition added together is barely a blip on the national radar. They still pay for hit pieces – articles and papers that blast municipal fiber networks – even ones like Chattanooga EPB that is a paragon of competitiveness. They have been working hard to kick CLECs off of their dying copper networks, even thought the CLECs have been investing in newer DSL that can deliver decent broadband over the copper.

The Dawson Internet Act of 2018

A few days ago I wrote that we are not likely to get any significant telecom legislation this year. That’s unfortunate because we really need a major new Act to update all of the regulatory rules concerning broadband, telephone and cable TV. That got me thinking what I might write into such an act if I was the author, so following are the highlights of the envisioned Dawson Internet Act of 2018 (it’s time we stop calling this the telecom industry):

Cable TV. It’s time to scrap all requirements that dictate cable tiers. Cable companies need to be able to offer whatever channels they think make economic sense, including offering a la carte channels, if that’s what the public wants. I’d also scrap the must-carry rules for major network stations. The retransmission costs for those channels are one of the primary culprits for rate increases and removing the requirement to carry channels will return cable companies to a position of fair bargaining for price since they could walk away from any local station that wants too much.

Telephone. Other than a few rules that govern customer privacy I’d totally scrap federal regulations for landline service. I’d eliminate the CLEC classification and deregulate traditional telephone and VoIP equally to put the products on a non-regulated level playing field. I think I would retain the historic monopoly service territories, although I’d have to give that a lot more thought.

Interconnection. I’d keep the mandate that network owners must continue to interconnect with other carriers. They can’t be allowed to shut out a competitor by refusing to give them access to the underlying backhaul networks. But since I would eliminate the CLEC status, the big network owners need to be required to interconnect with anybody who meets specified technical standards.

ETC Status. Today a company must become an Eligible Telecommunications Carrier in order to participate in Universal Service Funds or other federal funding programs. I’d eliminate this requirement because it’s nothing more than a paperwork barrier to market entry. The current rules also disallow certain types of providers, such as owners of open access networks, although customers almost universally prefer that operating model.

Broadband. The FCC needs to regulate broadband, even if they elect to regulate it lightly. Congress can mandate this and get rid of the nonsense of trying to make broadband fit under Title II and just explicitly give the FCC the authority and obligation to regulate it.

Network Neutrality. I would make network neutrality the centerpiece of broadband regulation. The most important aspect of network neutrality is prohibiting paid prioritization – because once the ISPs start doing that all of the nightmare scenarios of a broken Internet emerge.

Spectrum. I think the FCC is already on a good path to free up spectrum for broadband. But I think they are missing the boat by not providing more spectrum for public access. One only has to look at the huge economic boom created by WiFi to see that giving all spectrum to big monopolies is not the best answer. I’d also make a firmer use-it-or-lose it rule for rural spectrum. A huge amount of spectrum sits unused in rural America but is still under control of the big carriers who purchased large-area licenses. Finally, rather than turn spectrum auction proceeds over the US Treasury I’d redirect these revenues towards meeting universal service goals.

Universal Service. I’d maintain the requirement that the FCC monitor broadband connectivity and require them to try to find solutions for areas without good broadband. I’d also prohibit them from funding any broadband programs like CAF II that support technologies that are slower than the federal definition of broadband. I’d also mandate an ongoing process for defining the official speed of broadband.

Privacy. I like what I’m reading about the European Union privacy rules. They are allowing ISPs and others to monitor and track customers only with customer consent. That will allow people who care about privacy to maintain it while allowing others who choose to sacrifice privacy for services to allow tracking. The penalties for violating customer privacy must be economically severe.

Municipal Broadband. I’d eliminate all barriers to municipal competition. Local communities ought to be able to decide themselves if they want to tackle the risk of building broadband. This is particularly needed in rural America where, in many cases, the local government might be the only one willing to tackle funding a network.

Access to Poles, Ducts and Dark Fiber. I’d make these assets available to anybody that can meet technical standards to use them. I’ve still not decided how I feel about federal one-touch rules, but I’d have the FCC institute a major rulemaking to get more facts on the issues involved.

I’m sure everybody in the industry has a different list than mine. I remember all of the discussions and negotiations leading up to the Telecommunications Act. That Act took  some political bravery since Congress was taking on the big telcos for the greater public good – and that Act did a fairly good job of promoting competition. But I don’t see this same courage in Washington today and most of the topics on my list are sadly not even being discussed.

Municipal Broadband

One of the fights that I expect to see resurface this year is on the topic of whether local governments should be allowed to build fiber networks and become ISPs. The last FCC tackled this issue in a small way when they granted petitions by Chattanooga, TN and Wilson, NC to expand their broadband networks beyond their electric service territories and municipal boundaries. That ruling got reversed by a US district court and was not appealed by the FCC. But the ruling was of limited scope anyway and only addressed those two cities and didn’t set any precedent for other communities.

There are a lot of moving parts on this topic and it’s hard to know where this might go with the current FCC. This FCC is obviously pro-big ISP and companies like Comcast and AT&T have been staunch opponents of municipal broadband. But by the same token, this administration seems to lean towards states’ rights – and up until now municipal broadband has been regulated on a state-by-state basis.

Interestingly, at the local level municipal broadband has broad bipartisan support. In most communities almost all local politicians of both major parties support local broadband efforts. In my experience in working around the country, the only local political opponents of municipal broadband I have seen are those who are strong opponents of government spending money for anything but essential services. Generally local, state and even federal politicians support local broadband efforts in the communities they serve. I think the broad bipartisan appeal is due to politicians recognizing the strong public support for broadband and that almost every household wants broadband these days.

But there are 22 states with some restrictions on municipal broadband. These range from hurdles that can be overcome, like a referendum, up through states that have a total prohibition on municipal broadband. There has been a continual effort by ALEC (American Legislative Exchange Council) – funded by large corporations – to pass new state restrictions on broadband. But most recent efforts to increase prohibition of local broadband have been rebuffed, because few politicians want to go on the record against broadband. But I would not be surprised to see the big ISPs try to press their current advantage at the FCC and try to pass new national restrictions.

Today I see the municipal world dividing into two separate constituencies – urban and rural. Very few big cities have any desire to become an ISP. But they have legitimate concerns that urban broadband isn’t benefiting everybody. For example, San Francisco and some other cities are unhappy that apartment residents don’t have the same broadband opportunities and options as single family homes. And a lot of cities are still unhappy that after all of these years there is no solution for the digital divide. The FCC said last year that there are still around six million people in pockets of urban areas that don’t have access to broadband that meets the 25 Mbps download standard. But while these issues are viewed as a major problem in urban areas, I don’t see much appetite for big city governments tackling the cost of building broadband networks, which is particularly expensive in cities.

Rural America is a totally different story. We have come to the point where communities without good broadband really suffer. Broadband is not just about Netflix but is necessary to take part in the modern world. Local governments are finding that nobody wants to buy homes without broadband if there is a nearby community with broadband. Worse, communities are seeing businesses move away or bypass them when considering new locations. Lack of broadband puts school kids at a definite disadvantage and there are still a lot of households that drive kids daily to public hotspots just to do homework. And lack of broadband takes away all the opportunities for working at home – probably the biggest area of job growth in rural America.

I see small communities – even down to really small sizes like townships with 700 residents – trying to find ways to build a broadband network. I’ve read a few hundred RFPs from rural communities over the last few years, and probably not more than 5% want to become an ISP. But they will do so if they can’t find a commercial company willing to do it. Rural communities largely favor of public-private partnerships. More and more of them are willing to kick money into a building a network if an ISP will invest in their community and operate a broadband network.

I believe that within a decade we are going to start seeing broadband ‘deserts’ where communities without broadband start withering – just as happened in the past to communities that didn’t get electricity, or that were bypassed by railroads or interstate highways. It’s hard to think that a community today can keep their kids at home without broadband – and this is starting to scare local governments.

I just hope that the FCC doesn’t wade into this battle on the side of the big ISPs. Those big companies are not spending money in rural America – or if they are, it’s only when handed to them by the federal government. And even then they are just putting band-aids on rural broadband rather than building fast new networks. I have a feeling that many of the states that have restrictions on rural broadband are going to start having second thoughts about those restrictions when they realize that broadband is at or near the top of concerns of most of rural America.

There are companies building great rural broadband networks. The small telcos are almost all expanding their service areas to build broadband networks. And many of them are working with or partnering with local governments. But all of these small companies collectively can only solve a relatively small percentage of the rural broadband gap – together they do not have the capacity to borrow anything close to the billions needed to build broadband everywhere. Many rural electric cooperatives are now looking hard at the issue, and they could satisfy another slice of the rural market. But that’s still going to leave millions of rural residents with no broadband on their horizon. And I predict these folks are going to become a vocal constituency that politicians will be unable to ignore.

Is This an Activist FCC?

FCC_New_LogoSince I have been in the industry there have been fourteen different Chairmen at the FCC. And during that time those have been split pretty evenly between democrats and republicans. We had Chairmen who had the reputation of leaning towards the public such as Reed Hundt and those that have favored the large businesses in the industry like Michael Powell. But you can find FCC decisions under each of Chairman that are in favor of the public or in favor of carriers, radio and television stations that the FCC regulates.

When you read the press about the current FCC (the Tom Wheeler FCC) the public impression is that it is pro-competition and pro-public. And there are plenty of rulings that back that up such as:

  • Net neutrality that regulates broadband ISPs and stops them from various practices that would restrict internet choice.
  • The current proposal for privacy rules that would let people restrict how ISPs can use their personal data.
  • Opposed the Comcast / Time Warner merger.
  • Reset the definition of broadband to 25 Mbps down / 3 Mbps up.
  • The decision last year that said that restrictions on municipal broadband were anti-competitive.
  • Opposed the AT&T / T-Mobile merger.
  • Slashed prison calling rates to make it easier for families to stay in contact with those in prison.

Every one of these orders favors the public over the big companies that are regulated by the FCC. And there are other orders beyond this list.  It’s not hard to see why this FCC has built the reputation of being pro-competition and anti-big business. And yet there are some major decisions that have been clearly in favor of the big companies regulated by the FCC.

Probably the biggest of these was the decision to award over $6 billion to the largest telcos to upgrade rural broadband. In establishing the Connect America fund the FCC gave almost all of the money to AT&T, Frontier, and CenturyLink and is only requiring them to upgrade rural broadband over a six year period to speeds of 10 Mbps / 1 Mbps. Those speeds are already becoming obsolete today and are the equivalent of somebody still sitting on a 1 Mbps DSL connection in 2005. Those speeds will provide Internet access, but a household on those speeds can’t do the same things that those of us with faster connections can do. And by the end of the six years these speeds are going to be completely out of date and inadequate.

And just last week this FCC put a rule in its Lifeline order that can be seen as nothing but a giveaway to cellular companies. The FCC is going to allow the $10 per month Lifeline subsidy for low income households to go to a cellular plan operating on the 3G network and with a monthly data cap of only ½ gigabit. The stated purpose of the Lifeline plan is to close the ‘homework gap’ and yet this one provision will probably end up sending a billion dollars a year to the cellular providers to pay for data plans that won’t meet the stated goal of the Lifeline program.

I remember when Chairman Wheeler was announced that industry insiders assumed that he was going to be in favor of the large carriers and cable companies since he had spent his career representing them. But he immediately quieted this criticism by making a number of pro-competitive and anti-carrier rulings.

When I look at the whole record I have a hard time seeing this FCC as activist. They certainly lean towards promoting things that a democratic White House would favor, as you would expect from a democratic FCC Chairman. But at the same time this FCC has handed billions of dollars to big carriers, and in doing so has greatly harmed the public. One can just imagine how far the Connect America Funds could have gone if that money was instead given out over six years as matching funds to build rural fiber systems. That much seed money would have brought a fiber solution to millions rather than stick them with another decade of poor DSL.

But in retrospect, when I look back at all of the various FCC Chairmen I can see that they have presided over decisions on both ends of the spectrum, and that probably comes with the job. The FCC is in charge of regulating very complex industries that change rapidly and which are controlled by large and powerful companies. I’m glad it’s not me sitting in that chair.

Politics and Municipal Competition

Capitol_domeNot long ago I had a blog that looked in amazement at how political the issue of net neutrality had become, and how it was being debated more along partisan lines than on the merits of the issue. And I noted that this was the biggest political issue I had remembered during my career in the industry that had started back in the 70’s.

And now, in a very short period of time national politics has entered our industry again on the issue of allowing municipal competition in broadband. I find this issue interesting because it looks at state barriers to competition, and states vary widely on how they handle the issue today. The press reports that there are 20 states that have a ban on municipal competition, or else rules that are draconian enough to effectively stop it.

This issue has been political for years at the state level. There is a group, the American Legislative Exchange Council (ALEC) that writes and promotes various laws that support conservative policies. These laws are then introduced into state legislatures whenever the environment seems ripe. ALEC has been pushing anti-municipal broadband legislation for several decades. In recent years we’ve seen bans enacted against municipal broadband in North Carolina in 2011 and South Carolina in 2012. Just this year an ALEC bill was introduced in Kansas.

But the fight has now moved from the state legislatures to the FCC. In the last week there were two petitions filed at the FCC by existing municipal fiber systems in Chattanooga, Tennessee and Wilson, North Carolina. These petitions ask the FCC to remove barriers in those states that prohibit those municipal fiber businesses from expanding outward to serve other communities. The FCC accepted these petitions and has asked for comments by August 29th. This probably means that the FCC will consider granting the petitions, which is in line with statements made all year by FCC Chairman Tom Wheeler who says that there should be no restrictions on municipalities from building fiber networks.

The FCC granted the hearing of these petitions in the face of open political opposition. On July 16 the House of Representatives voted to strip the FCC of any authority to allow communities to pursue broadband businesses. The bill passed 223 – 200 with Republicans voting 221 – 4 in favor of the bill. Just like with net neutrality, this issue is heavily partisan with Republicans staunchly against municipal competition while democrats, while not so staunch, seem these days to be for whatever the republicans are against.

And so, just like net neutrality, this debate has left the arena of public discourse and now is highly partisan. This seems odd to me since there is already a lot of municipal competition in the states that allow it. It’s been reported that there are over 150 communities that have built and are operating fiber networks to customers. And there are hundreds more that have built fiber networks to serve their own government, schools and even sometimes large businesses. And so we have many examples of how municipal competition works and what it means to a community. This is not a national fight on whether cities can get into the fiber business, but rather we are debating whether states can prohibit it.

It’s interesting because the Chattanooga petition to the FCC quotes republican Trent Lott, the Speaker of the House at the time of the Telecommunications Act of 1996, as saying how that Act would help communities to compete in the telecom space. So this hasn’t always been so clearly partisan, but like many issues it is now clearly divided along party lines.

I don’t like this political fight any more than I like the one on net neutrality. Call me old fashioned, but I would rather see topics in our industry decided on their merits rather than being divided straight along party lines. There certainly are arguments to be made on both sides. But to me, the argument that trumps them all is that there are tens of thousands of small rural communities that don’t have sufficient broadband. And in most cases there is nobody lining up to build broadband network in these places.

I say that we should let localities decide on their own what is in their best interest. Fiber networks and Internet access are growing to become a natural utility like water lines and electric lines. Communities without broadband are going to be at risk of withering away and becoming irrelevant. I look at this issue in the context of what happened with electricity a hundred years ago. At that time big companies scrambled to build electric networks in all of the major cities. But rural America was left behind and many small towns decided then to electrify their towns in order to be relevant and to be a place that people want to live. Broadband is this century’s electricity. In those places where no incumbent steps up to bring broadband the local community needs to have the right to do it on their own.

Lifting the Ban on Municipal Competition

FCC_New_LogoFCC Chairman Tom Wheeler said a few weeks ago that the FCC was strongly considering lifting state barriers to municipal competition. His reasoning is that there is such a large need for broadband infrastructure that governments should not stand in the way of anybody who is willing to make the last mile investment. There are twenty-two states that have barriers that are significant enough to either ban or make it almost impossible for municipalities to compete with broadband.

There are a number of kinds of existing barriers to entry in State laws. First there are states like Texas that just have an outright ban on municipal competition. But there are also a few states that handled this a different way, like North Carolina, which instead created a list of barriers to entry that are impossible for any City to meet. North Carolina’s law is an effective ban, but it never explicitly bans municipal competition, but instead is written to sound like there might be a path to compete.

Utah has an unusual restriction in that Cities there are allowed to build fiber networks, but they can only operate them on a wholesale basis, meaning that some commercial provider must come in to provide the services. This same restriction is also in place in Washington where the Public Utility Districts (rural electric companies) have this same restriction. As it turns out it is very difficult, and maybe impossible over the long-run to make money with a wholesale network. This was the issue faced by Provo who finally gave up and sold their network to Google. And the problems faced by Utopia in Utah are well known.

Finally, there are states like Louisiana that create extra hurdles for a municipal provider. These restrictions are generally couched in language that creates a ‘level playing field’. That sounds good on paper, but the municipal provider ends up being regulated and having to comply with more rules than the incumbent. An example of this is the Fair Competition Act in Louisiana that places a lot of requirements in Lafayette, the only municipal provider there so far. But since that law has been written, AT&T has been effectively deregulated in the state but leaving Lafayette with significant and expensive regulation

What is interesting is that these bans are sponsored by the large incumbents like AT&T and Comcast. But for the most part the Cities that have decided to build fiber are small, rural and are in places that the incumbents have written off years ago. No large NFL City has ever given really serious consideration to building fiber. And only two Tier 3 Cities – Chattanooga and Lafayette have done so. Most of the places that want to get into the fiber business are towns that realize that no commercial company is going to make an investment in their community.

The cities that want fiber see that their kids leave town because there are no decent jobs in the local economy. With poor broadband the businesses that are there have trouble competing today and many of them will eventually relocate to where there is fiber. Most towns that decide to consider fiber feel they have been pushed into that decision. They generally have asked the incumbent providers to make the investments, but those big companies are not investing in small town America. In fact, just the opposite is happening and AT&T told the FCC that they would like to disconnect millions of rural landlines.

I don’t know a town that built fiber that didn’t do it reluctantly. But I think everybody is finally coming to understand that fiber has become basic infrastructure. It’s as essential to the well-being of a community as streets and sewers. Places without broadband are going to fade away over time and become irrelevant in economic terms. And towns get this. They want fiber as a way to make sure that their community is still here and still relevant twenty and thirty years from now.

It just seems incredibly selfish and greedy for the incumbents to work so hard to ban small towns from building fiber, when they themselves will never make any investment in those communities. I guess that is just in the nature of large corporations to generically fight against any competition if it can be legislated. They want to milk the last dollars out of their aging copper plant before they cut it down one day and leave these communities stranded.