U.S. House of Representatives: Committee on Energy and Commerce, Republicans Prepared Witness Testimony: Davidson, Charles M.

Subcommittee on Telecommunications and the Internet
July 21, 2003
3:00 PM
2123 Rayburn House Office Building

Mr. Charles M. Davidson
Commissioner
Florida Public Service Commission
2540 Shumard Oak Boulevard
Tallahassee, FL, 32399

Thank you, Mr. Chairman.My name is Charles M. Davidson.I am a Commissioner at the Florida Public Service Commission, the agency with regulatory jurisdiction over Florida's investor-owned telephone, electric, natural gas, water and wastewater utilities, in accordance with Florida law.My comments here today are those of an individual Commissioner.I would like to thank the Committee for inviting me here to testify.I would also like to thank the Florida delegation represented on this Committee for its consultation with the Florida Commission on utility-related issues.Finally, I would like to thank the House for its leadership on the matter before you today.

Chairman Upton, I am sure you are aware that as recently as last Thursday, TechNet, a national network of CEOs and senior executives of leading companies in the fields of IT, biotechnology, venture capital, investment banking, and law, released a state-by-state ranking of broadband deployment policies with Michigan and Florida leading the way.So, Mr. Chairman, I wanted to congratulate the great State of Michigan on that designation, but I have to warn you -- Florida is very competitive, and with the continued leadership of Governor Bush and the Florida Legislature on making our state increasingly more conducive to high-tech investment and economic development, we intend to grab the top spot.

The communications market is characterized by competing and rapidly evolving technologies, by new business models and by consumer choice. Experts and analysts are in wide agreement that investment in broadband technologies and networks is vital for the long-term economic strength of the country.They also agree that realizing economic benefits will require billions in additional up-front investments in technology, networks, and deployment.A sagging tech sector, capital scarcity, and a market that is averse to committing capital in an uncertain regulatory climate argue for as rational a regulatory approach as can be had.

The broadband sector is characterized by fairly robust intermodal competition.While cable modem service and DSL dominate the broadband market, overall take rates for other technologies (e.g., fixed wireless, Wi-Fi, satellite) are increasing.Of the competing technologies, DSL is potentially subject to greater regulation than the others.Where there is technological parity confronted with a regulatory disparity (i.e., where substitutable products are subject to asymmetrical regulation), the predicted economic outcomes in the long run include:a competitive advantage for the less burdened product; decreased investment in the more burdened technology; and less consumer choice.

Technological parity should result in regulatory parity.This principle, the intent of the 1996 Act, FCC precedent, and the interstate nature of broadband all argue strongly for a national broadband policy.Within that policy, there will clearly be many opportunities for state to articulate policies designed to attract investment in, and deployment of, broadband infrastructure within their borders.

The regulatory regime embodied in the1996 Act and its progeny presupposes that the relevant market is local telephony, and the regulatory approach is fundamentally grounded in a wireline paradigm.In the regulated market, for example, LATA boundaries matter.In the unregulated market, they do not.The regulated telephony regime presupposes that consumer choice is primarily a function of the ILEC vs. CLEC competition; it is not focused on other competitors or other technologies that may be competing with traditional telephony.

Competing and rapidly evolving technologies, new business models, and consumer choice characterize the communications market of today.Cable, DSL, Wi-Fi, fixed wireless and satellite technologies are competing for market share. Data, not traditional telephony, is the predominantly stronger growth segment.Convergence of content and conduits is resulting in new corporate strategies (e.g., mergers of service providers and content providers, horizontal and vertical integration) and in bundled product offerings to consumers.The result:customers have greater choice between competing platforms and competing applications.

The largest growth segments have been in the less regulated market.For example, the wireless segment has expanded from roughly 38 million users in 1996 to over 136 million subscribers as of December 2002 (and this estimate may be substantially lower than actual results because carriers with under 10,000 subscribers in a state were not required to report).The stable and deregulatory nature of the FCC's wireless policies is credited for much of this growth.

Experts and analysts are in wide agreement that investment in broadband technologies and networks is vital for the long-term economic strength of the country and, in the short run, central to jump start the economy.Florida's economic development - including skills and job training, education and health care services, and the recruitment and retention of businesses - is increasingly linked to an advanced communications infrastructure.The high-tech, IT, and telecom sectors, which drove economic growth for so long, are suffering.Investments are down; capital is scarce.Broadband enabled activities (streaming video, exchanging music, photography) have the potential to spur new rounds of upstream and downstream investments and consumer spending - in content, in software and applications, on device makers (MP3 players, digital cameras, multimedia PCs, etc.) and in retail channels.The oft-cited estimate (of economist Robert Crandall who recently appeared before this Committee regarding the health of the telecom sector) is that accelerating the deployment and installation of broadband could generate $500 billion a year in economic benefits for the country.Whether that estimate is too high or too low, consensus exists that realization of this economic outcome will require billions in additional up-front investments in technology, networks, and deployment.

In the past 7 years, the industry has moved from a position of capital abundance to a position of capital shortage.Venture capitalists in the United States roughly quintupled their investments in the telecommunications and media, entertainment and Internet sectors from 1996 to 2000.Investments in the telecommunications and related sectors are a fraction of what they were just three years ago.

That the high-tech sector, particularly the telecommunications industry, has been in a lingering slump is an understatement.A June 2003 report by the New Millennium Research Council and the Competitive Enterprise Institute characterized the state of the industry:

A July 1,2003 Wall Street Journal article reports equally dismal statistics for the nation's telecommunications sector:

Still, this and other recent articles appear to indicate a renewed optimism based on substantial growth in broadband subscribership.I too hold out hope for the industry, and if anything can reverse the downward spiral of this ailing sector, it is broadband.That is why it is so critical for regulators such as myself to practice restraint in areas where basic economics dictate that the market provides its own, more efficient policing mechanism.To do otherwise would risk stifling investment and further setbacks to our economy.

Communications companies face a critical paradox: they must respond to the constant need for innovation and growth while at the same time they must manage profitability and cash flow in very constricted capital markets.A recurring topic is the role that the current regulatory regime has had in creating this paradox.The issue is of obvious, and critical, importance - given the central role that our communications infrastructure plays in the nation's economic development and given that billions of dollars of future investment will be required for broadband to reach its full potential.

The constriction in the capital markets will impact business strategy and should impact regulatory policy. Investors increasingly value companies based on available internal cash flow.The constriction of capital markets means that companies that can self-finance projects from internal free cash flow will have a strategic advantage over those companies seeking cash from Wall Street.It also means that companies will invest their cash flow cautiously.As such, it is critically important that regulation not misalign investment incentives by treating similarly situated competitors dissimilarly.

Based on FCC data released in June 2003, cable remains the dominant provider in the broadband market.In December 2002, cable held approximately 57% market share.DSL accounted for 33% of the market.Broadband technologies such as fiber, satellite, fixed wireless, and other wireline services (excluding DSL) roughly accounted for the remaining 10%.With the exception of fiber and other wireline service, these technologies experienced approximately 25% growth over the last half of 2002.From the consumer's vantage, a strong argument exists that DSL and cable and other platforms are substitutes for one another in the delivery of broadband services.Consumers can receive similar services over different platforms and could, if the price of one platform is "too high," switch to another platform.

Of the four major competing broadband-delivery platforms (i.e., cable, DSL, satellite, wireless), DSL is the most regulated platform.Cable firms can package, price, invest in and sell services, including broadband, as they deem appropriate.Economics 101 teaches that where two products are substitutes for one another, competition is not sustainable where the substitutable products are subject to asymmetrical regulation.In a market characterized by competing, substitutable technologies but also by asymmetric regulation, investors and companies will compare the anticipated ROI of a dollar of capital when it is invested in the regulated sector to a dollar of capital invested in the non- or less-regulated sectors.A rational investor seeking a maximum return on its investment would, all else equal, choose "non-regulated" investments.

The stakes of this debate are high.Competition law is not about protecting competitors or categories of competitors, whether they are cable companies, RBOCs, CLECs, or wireless companies - it is about protecting competition, which, in turn, protects consumers.With its market share, cable has the greatest potential at present to obtain market power, i.e., the ability to "lock in" customers for its broadband, content services, and pricing.As a substitute for cable broadband and with roughly one-third of the market, DSL is currently the best positioned to compete with cable.The asymmetric regulation of DSL (i.e., treating DSL like traditional telephony), however, will likely deter optimal investments in the development and deployment of a competitive broadband infrastructure. Any regulatory misalignment of capital flows is especially acute in view of the current capital issues faced in the communications market.

Economic theory argues for a level playing field - let the competitors compete, and competition will yield optimal results.If the goal is a level playing field, then two basic questions are begged:(i) what is the market, and (ii) who are the competitors?A realistic characterization of the communications marketplace requires that it be considered broader than wireline.Competing platforms can offer relatively comparable applications and services. For competing platforms to be able to meaningfully and fairly compete on a level playing field, either the mandates to which DSL may be subjected should be removed, or similar mandates would have to be imposed on cable broadband and other broadband providers.

The 1996 Act, designed to deal with an established market and established networks and regional monopolies, is not well-suited to the development of a competitive, facilities-based broadband market.The Act presents three approaches to competition and, related, three strategies for competing:resale, unbundling, and facilities-based competition.Facilities-based competition is the desired outcome.The resale components of the Act, confining a competitor to deriving revenue between resale and retail rates, is not a viable long-term strategy and would not encourage optimal investment in broadband infrastructure. Unbundling presents more of a mixed, though still problematic, picture in the broadband market.With an unbundling strategy, a competitor does have some latitude to provide differentiated services that combine unbundled elements from the ILEC with elements provided by the competitor.And the unbundling of existing facilities has contributed to the deployment of broadband.For example, through the unbundling of existing local loops, CLECs have provided DSL service in some areas underserved by ILECS, and they may have stimulated greater deployment by ILECs.

Unbundling, as premised in the 1996 Act, connotes an unbundling of existing (static) facilities.Upgrades and improvements to networks are constantly required - especially in the context of broadband development and deployment.Broadband providers would have less of an incentive to invest in upgrades and improvements if they would ultimately be forced to provide access to the broadband network on terms & conditions other than those that are market-based.

While the rules regarding local phone service were appropriate for opening established networks that were built when traditional telephony was the market and when that market was dominated by regional monopolies, the rules do not apply well to emerging markets where constant innovation is characteristic - as in the broadband market.Whereas much of the risk in developing the traditional telephony networks was shouldered long ago, in a market where the incumbents had monopoly power, the development and deployment of broadband presents an enormous and immediate financial risk for firms.In contrast to the traditional telephony market, where there has historically been a guaranteed customer base from which a service provider could expect a certain minimum return on its investment, there is no such guaranteed customer base for competitors in the broadband market.Applying a monopoly-focused regulatory regime to an emerging market characterized by competing technologies and companies may disincent players from investing in broadband.

Based on the nature of the technology and the reality of the market, broadband service should be treated as interstate in nature because broadband is interstate in nature.Broadband technologies and platforms exist and function for the most part without regard to state boundaries and as part of a national (indeed, global) communications infrastructure.[2]This inherently interstate nature of broadband argues strongly for a single, coordinated federal policy (either via legislation or FCC action) that is economically rational and respects markets.

A national broadband policy is fundamentally consistent with (if not required by) the Telecommunications Act of 1996, which was designed "to provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technology and services.").See H.R. Conf. Rep. No. 104-458, at 1, reprinted in 1996 U.S.C.C.A.N. 10 (emphasis added).

Further, Section 706 of the 1996 Act provides the FCC with the ability to create a minimalist regulatory regime.Indeed, Section 706 imposes upon the FCC the obligation to "encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans . . . by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment" (emphasis added).

Recognizing broadband to be interstate in nature and an information service[3] is entirely consistent with FCC precedent. In 1998, the FCC determined DSL service to be an interstate service. In 2001, the FCC determined Internet access to be an interstate service.In 2002, the FCC determined cable modem service to be an interstate information service.In its Wireline Broadband NPRM, the FCC tentatively concluded that wireline broadband is an information service.Numerous broadband platforms and information services exist (and new ones will surely emerge).

The need for regulatory consistency and stability argue for determining "broadband" generally to be an interstate information service subject to regulation, if any, pursuant to the FCC's Title I ancillary jurisdiction.If the FCC were inclined to regulate DSL under Title II, then, given DSL's lack of dominance in a competitive broadband sector and based on established law and practice, federal policymakers should consider forbearing from applying Title II access-like obligations on broadband platforms and services.Related, to the extent that Title II obligations are imposed on one platform, such obligations should be applied symmetrically across platforms and should not intentionally or inadvertently pick winners and losers.[4]

Any national policy regime should reflect the basic notion that technological parity should result in regulatory parity.Whatever Congress or the FCC decide,[5] as the case may be, the ultimate policy should not discriminate based on the underlying technology and platform used for the delivery of broadband.From the vantage of the consumer, there is no reason for regulating non-dominant broadband providers differently.Although via different platforms, consumers seek essentially the same service from broadband providers - namely, high-speed connectivity and data transfer.

Two avenues exist for achieving regulatory parity:"regulating up" or"deregulating down."Because the broadband market is competitive and because consumers have choice, deregulating broadband to the point of regulatory symmetry amongst platforms would likely do more to encourage investment in broadband than would regulating up to the point of symmetry.

State regulators are, and have historically been, concerned with price (i.e., the price that historic monopolists in local telephony charged consumers and the price at which parts of the monopolist's network were unbundled or resold to competitors).Given the lack of fully competitive local markets, the 1996 Act (and the U.S. Supreme Court's May 2002 decision upholding the FCC's pricing/access rules) instructs regulators to focus on price and the other terms and conditions of access to local markets.As Chairman Powell has cautioned, regulators must "vigilantly guard against the regulatory creep of existing models into broadband, in order to encourage investment."

Absent a national policy, there is a risk that, at least in some states, the existing model for regulating local competition may creep into broadband.Because DSL is an emerging technology housed on a regulated platform (i.e., an incumbent telecommunications network), a real risk exists that regulators may assume that DSL should be dealt with in the same manner as the regulated platform on which it is housed.The risk is that state regulators may seek to regulate the deployment of broadband using the existing telecom laws and may treat broadband networks no differently than local phone networks - by focusing on price and other terms and conditions of broadband.It is respectfully submitted that in our free market economy, regulation must not substitute for what markets do best.

The challenge facing state regulators is, thus, to avoid regulation of the advanced technology while simultaneously fulfilling their mandate with regard to the regulated technology.A national policy on the former would help address that challenge.

As a preliminary matter, regulators should avoid the temptation to cast the issue as one of states' rights versus federal preemption.State and federal policymakers should be pursuing the same core goal - that being to promote investment in the development and deployment of broadband infrastructure.Fifty states with potentially fifty different regulatory policies will not further that goal.[6]

The market teaches that one outcome of national broadband policy will be greater regulatory certainty.To the extent that a national, markets-based policy is adopted, as opposed to a patchwork of varying state rules (some of which may be economically rational and some of which may not), greater certainty (i.e., less investment risk) will result.An industry that faces fifty potentially divergent jurisdictional approaches to broadband will have less of an incentive to invest than would an industry that faces a more uniform, deregulatory national policy.[7]

The states clearly have a fundamental role in ensuring that the benefits of broadband are available to its citizens. States can and should work to remove unnecessary barriers to broadband deployment. In particular, states can work with local governments on rights-of-way access and permitting issues. To address the supply side, states can also create financial and non-financial incentives for build-out of the broadband network. To address the demand side, states can offer e-learning applications and other e-government initiatives to promote the value of using broadband technology to carry out day-to-day functions. If states act quickly to bring broadband to its citizens and to provide valuable services that can be most effectively utilized by broadband technology, those states and the citizens within the states can look forward to reaping the economic rewards that follow investment in broadband infrastructure.

Opponents of broadband regulatory reform - or proponents of open access - argue that to exempt DSL from regulation would undo key provisions of the 1996 Act and would undermine local phone competition.Critics of reform argue that the system that has worked for local phone competition - i.e., incumbents opening their networks at rates set by the federal government, resulting in more competitors - should be the same system for regulating broadband.In short, because the broadband market is competitive, the open access required in a common carriage regime should not be mandated - though it should certainly be encouraged.To the extent, open access would be required, such access should reflect market-based pricing (and other terms and conditions).

Advocates for a national broadband policy argue that the potential for broadband to serve as the engine for (or at least stimulate) the nation's economic growth is not yet being met.Advocates point to a number of justifications:the regulatory disparate treatment of similarly-situated competitors, capital market constriction, sub-optimal state regulatory philosophies, poor demand for broadband and related applications, concerns about copyright infringement, etc.

These concerns argue for reform in a variety of arenas:at the FCC, in Congress, by state regulators and in the private sector.Meaningful change will not occur in one sphere alone.The FCC's classification of DSL as an "interstate information service" rather than a "telecommunications service" would be less significant if broadband providers do not meaningfully address the business challenges confronting them - such as getting broadband to the last mile, stimulating demand, dealing with convergence, etc.Congress legislating supply-side development or deployment incentives will have a sub-optimal impact if regulators treat broadband like traditional telephony.Development of a competitive, fully-functioning broadband market poses multi-pronged challenges and calls for a multi-pronged solution by various actors.

My policy positions are based on a fundamental belief that the real beneficiaries of a robust broadband market are the consumers.Those entrusted with making public policy decisions must be relentless in their pursuit of broadband policies that ensure we expeditiously provide consumers with more choices ofinnovative technologies at the most efficient prices.

[1] While I believe that a sound deregulatory approach to broadband will best serve the consumers of Florida (and across the country), my responsibility, as a state Commissioner, is to apply federal and state laws on the books.

[2] Broadband is used almost entirely for Internet service.Internet access is likely to include communication with websites in multiple states (and multiple countries).The substantial majority of communications over the web are interstate on an end-to-end basis.This is the FCC's longstanding and consistent basis for determining the jurisdiction of traffic.Treating the entire broadband medium as interstate in nature reflects that there is no reasonable way to segregate Internet communications into intrastate and interstate communications.

[3] Telecommunications Service means "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available to the public, regardless of the facilities used."47 U.S.C. § 153(46).Information Service means "the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.." 47 U.S.C. § 153(20).

[4]Consideration should be given to allowing DSL providers to opt to provide broadband within Title II, as an argument exists that providing DSL service as common carriage is important to the deployment in rural America.

[5]A blanket FCC policy to treat all broadband services as information services may be argued by some to be a usurpation of Congress' power to legislate.As such, a legislative deregulation of broadband, if that were ultimately the goal of Congress, would provide greater certainty up-front.

[6]The reasoning of states-rights supporter Justice Scalia on the local competition issue supports the notion of a national broadband policy.As Justice Scalia has stated, "[T]he question . . . is not whether the Federal Government has taken the regulation of local competition away from the states.With regard to the matters addressed by the 1996 Act, it unquestionably has.The question is whether the state commissions' participation in the administration of the new federal regime is to be guided by federal agency regulations.If there is any presumption applicable to this question, it should arise from the fact that a federal program administered by 50 independent state agencies is surpassing strange."

[7] The process of reducing the burden of regulation is not an easy one, however.It may take some time for the FCC to remove all of the restrictions that potentially stifle the investment needed to develop a truly vibrant and pervasive national broadband market.Should the FCC lose heart at some stage in that process, it may fall to the states to stay the course and continue efforts to ensure that their citizens get the benefits of a robust market-driven broadband infrastructure.

The Regulatory Status of Broadband Services: Information Services, Common Carriage, or Something in Between?