John C. Wohlstetter
Global Perspective

Packet Policies: Petabits, Photons, Phonemes and the Feds

In retrospect, 1997 may well be seen as the year that information technology added dominance in communications to its dominance in computing. The public switched telephone network (PSTN), formerly viewed as voice with an overlay of data transport, is now widely seen as data with a voice overlay. This dramatic transformation is epitomized in the regulatory arena by the emergence of various Internet-related issues, and in the marketplace by the explosion of Internet usage, including a quantum jump in electronic commerce. All the more remarkable is that just four years ago the info-market picture looked quite different, although, in fact, events that year were to spur the rise of the Internet as a mass medium and driver of network evolution.

In a sense, 1993 was the apogee of what might be termed the "Old Information Age" -- the view of an info-future dominated by the television and the set-top converter, with cable and phone rivals racing to deliver broadcast video to the home, epitomized by the abortive 1993 Bell Atlantic/TCI merger that promised a 500-channel universe by 1995. It even gained considerable currency at the highest levels in Microsoft, of all places.1 It was, we now know, wrong.

That fateful year, 1993, saw two other milestones of vast import to the info-future:

  1. The advent of an administration committed to micromanaged competition and evangelical promotion of social "infobahn" equity.
  2. Creation of the first popular Internet browser, Mosaic, that made the infant World Wide Web (b. 1991) a phenomenon in three years.

The fallout from the events of 1993 is the launching of mass-market Internet access; cyber-surfing might someday overtake channel-surfing as the national pastime. In hindsight, 1993 was the last year that entertainment video could plausibly be regarded as the prime driver of information age marketplace demand.

One measure of the data transport explosion: Forrester Research projects that, by 2005, Internet data bits will represent 99% of global traffic volume.2 Even if the 99 to 1 data-voice level is not reached, clearly, data traffic will vastly predominate under any plausible scenario (few see less than 90% data).3

But regulation of Internet service providers (ISPs) -- especially at the Federal Communications Commission -- may delay and diminish potential dividends consumers reap due to premature imposition of universal access, as well as mis-pricing and inadequate costing rules. After noting the properties of packet networks, this article addresses potential harm to ISP interests that may arise from FCC rules on incumbent local exchange carrier (ILEC) interconnection, availability of unbundled network elements (UNEs), and universal access. Finally, it suggests how proper regulation of packet networks can help the Internet flourish.

FUNDAMENTAL PROPERTIES OF DATA NETWORKS: "LET'S GET VIRTUAL!"

The technological underpinning of data networks is packet switching. Messages are transmitted as a stream of distinct packets, each carrying its own addressing and error correction packets along with its information payload; unlike circuit-switched connections, there is no end-to-end continuous link. Packet networks are thus far more efficient in their use of network capacity and, by virtue of their adaptive routing capability, more resilient as well.4 Such a "connection-less" link establishes a "virtual circuit."

VIRTUAL NETS: SEAMLESS BITSTREAMS, SOVEREIGN SEAMS

The status of the United States as a federal republic encompassing dual sovereign realms is constitutionally grounded and thus a fact of regulatory life. Photons and electrons, however, are neither respecters of state lines nor legal custom -- federalism is more sound as a principle of law than of technology. Packets carry their own routing information; path selection is made by each router based upon analysis of the instantaneous prevailing traffic patterns and its own store-and-forward algorithms.

Fundamentally, the circuit-switched, voice-oriented PSTN is a physical network that meshes neatly with traditional regulatory and geographic lines; the packet-switched Internet is a virtual network in which geography is an artifact. The "Internet cloud" is, in reality, no more than a set of network nodes configured to handle the TCP/IP protocol suite (a standard for organizing, sizing, and transmitting packets), each node possessing a designated Internet IP address.

The possible regulatory permutations with Internet service are, of course, endless. Permutations were large in number even in the POTS world, but Balkanization was at least geographically defensible, with the variety of traffic in terms of quality levels and content limited essentially to inter- and intrastate voice. Internet traffic is packetized voice, data, image, and video at widely varying quality levels, some chosen by the user and others dictated by network traffic considerations.

BILLING: TO PRICE IT, FIRST FIND IT

Packet calls consist of myriad individual packets, each of which may travel a different route end-to-end to be re-assembled at the call destination. Tracking and billing circuit-switched calls is easy -- it is simply a matter of timing usage and identifying end-points. Circuits are exclusive and under carrier end-to-end control. Internet calls also often contain significant mid-points within the "cloud" -- so-called "mirror-points" and "peering points." The former are local servers that "mirror" web pages sited at remote servers, i.e., caching to increase download speed; the latter are points along the Internet backbone at which ISPs mutually exchange traffic. Pricing packets is tricky. With location and bandwidth both arbitrary, value-of-service pricing may work, priced by gradations of service (time, message priority, etc.).

INTERCONNECTION: PSTN PACKET PUZZLE

The origination and termination of packet calls is fundamentally different than in the circuit-switched world. In a circuit-switched network, interconnected traffic can clog circuits and must be cleared, with the user having to retry; a packet connection is merely delayed until a slot becomes available. Already, Internet users can avail themselves of anonymous electronic mail, digital cash, and other encrypted traffic that masks the point of origin. Another distinguishing aspect of ISP interconnection today is its discretionary nature. Private negotiation is the order of the day.

INTERNET REGULATION: REGULATORY ROULETTE

The FCC is quite aware of the special problems posed by the Internet's packet-switched set-up. The Office of Plans and Policy issued a major paper last year discussing numerous regulatory problems posed by packet networks.5 It cited as distinguishing characteristics of the Internet the high degree to which the underlying network and network services are "decoupled," the "fractal" nature of Internet connectivity, and its "connectionless, adaptive" and non-geographic architecture.6

Internet calls, unlike traditional voice telephony, frequently involve a single user accessing multiple sites serially; thus, only the call origination point can easily be identified. Further, users often do not know -- or even care -- where the sites are located. And even when the site(s) can be located, packets take diverse paths to their destination, with Internet routers not designed to record sufficient data to support jurisdictional separation of traffic for regulatory purposes.7

FCC ILEC POLICIES: WHAT'S YOURS IS NEGOTIABLE, WHAT'S THEIRS IS THEIRS

Former New York regulator Eli Noam remarked at an August 1997 Progress and Freedom Foundation conference in Aspen that the FCC's Total Element Long-Run Incremental Cost (TELRIC) benchmark was "an economic system that Lenin would have created if he had had computers." The FCC's ruling denying Ameritech long distance entry, its brokerage of the Bell Atlantic/NYNEX merger, and its "trilogy" decisions collectively enshrine three fundamental post-Telecom Act FCC regulatory principles:8

COMMUNIZATION

The evisceration of the foundation attribute of private property ownership undermines the owner's legal right to exclude non-owners and thus reserve distinct advantages to the owner. Communization stems from unbundling discrete ILEC network elements, co-location rights that encompass claims on present and future ILEC facility space, and access to all ILEC scale/scope/density economies. To achieve its goal of carving out segments of the ILEC customer base for the benefit of new entrants, the FCC micromanages to ensure that no network-derived competitive advantage accrues to ILECs as a result of possessing in-place networks. In other words, local network owners are to be denied any of the unique privileges of private property ownership. Further, network communization applies only to common carriers and thus asymmetrically aids non-ILEC competitors.

Perhaps, the prime example of ILEC network communization is the controversy over the unbundled network element provision by ILECs for use by non-ILEC competitors. The FCC adopted rules requiring ILECs to assemble UNEs in any combination desired by other providers, even including combinations and quality levels not used by the ILEC itself.9 In its initial order on appeal, the Eighth Circuit Court upheld the FCC's rule, making ILECs provide "finished services" by combining unbundled elements, while reversing the FCC on requiring ILECs to offer competitors superior quality elements.10 On reconsideration, the Court clarified itself on finished services, holding that ILECs need only make available unbundled elements and need not combine them for their competitors.11 The Supreme Court has decided to hear the FCC's appeal of the Court's ruling.12

CONFISCATION

Confiscation of embedded investment stems from below-cost, TELRIC-style under-payment to ILECs. ILECs have vigorously contested under-compensation; the Telecom Act envisages cost-plus compensation paid ILECs. However, regional Bell operating companies (RBOCs) seeking interLATA entry may feel compelled to bargain away their compensation rights if they fear greater financial harm from being kept out of new markets. Other ILECs would then face regulatory pressure to follow suit.13

Such fears are hardly theoretical -- the most recent decision of the Eighth Circuit excoriated the FCC for deliberately evading the earlier rulings of the Court denying the FCC authority to impose TELRIC pricing on ILECs nationwide:

This attempt to reassert the vacated pricing rules by imposing them as conditions for entry...does by indirection what we told the FCC...it could not do. The FCC cannot do in an advisory opinion on a section 271 application that which we have expressly forbidden it from doing in its rule-making procedure. A more clear violation of our mandate could hardly be imagined.14

The Court went further, in a rare display of judicial language that is, in the generally genteel world of appellate legal parlance, the equivalent of a body slam onto concrete:

The FCC's choice to promulgate its policy decision not in rules or regulations, but in advisory opinions appended to a section 271 order was, in our view, clearly calculated so as to evade ordinary appellate review.... [W]e suspect that this naked policy statement was added...in an attempt to forum-shop. Having lost its bid to usurp the power to determine intrastate prices in the Eighth Circuit, the FCC now seeks to have another bite at the apple in the District of Columbia Circuit.

This is the type of "evasion" that necessitates mandamus relief. The FCC's advisory opinion is clearly calculated to have a chilling effect on the state commissions' employment of non-TELRIC pricing schemes, and to do so in a way that avoids our review.15

Perhaps the quintessential example of the FCC's confiscatory policies is found in the arena of universal service. Therein, the agency, in rejecting ILEC embedded cost as a benchmark for universal service support, offered two reasons:

  1. If ILEC embedded cost exceeds ILEC forward cost, the result is to reward the incumbent carrier for inefficient investment.
  2. If embedded cost is lower than forward cost, new entrants using forward cost will be unable to enter and compete:

    As the Joint Board recognized, to the extent that [a carrier's cost] differs from forward-looking economic cost, embedded cost provide [sic] the wrong signals to potential entrants and existing carriers. The use of embedded cost would discourage prudent investment planning because carriers could receive support for inefficient as well as efficient investments. The Joint Board explained that when "embedded costs are above forward-looking costs, support of embedded costs would direct carriers to make inefficient investments that may not be financially viable when there is competitive entry." The Joint Board also explained that if embedded cost is below forward-looking economic cost, support based on embedded costs would erect an entry barrier to new competitors, because revenue per customer and support, together, would be less than the forward-looking economic cost of providing the supported services.16

Thus does the FCC combine, in a nutshell, confiscation with communization: Carriers are denied recovery of embedded cost higher than forward-looking cost; embedded carrier cost lower -- more efficient -- than forward-looking cost must be shared with rivals. Further, the agency declined to recognize legacy cost (with its potential for stranded investment), asserting that no one had presented "specific evidence" that use of forward-looking cost would effect any uncompensated constitutionally-protected "taking" of ILEC property.17

With rapid strides being made in Internet voice, the FCC faces anew the issue of compensation due ILECs for use of their networks. Internet service providers have availed themselves of a 1983 access charge exemption granted enhanced service providers (ESPs) by the FCC. In March 1996, a petition filed by the America's Carriers Telecommunications Association (ACTA) asked the FCC to declare its legal authority over ISP interstate voice transmission, enjoin provision of such services pending adoption of rules, and begin a rulemaking to develop rules for the service. The FCC issued a Public Notice seeking comment, but has not, to date, issued an order.18

The commission has, however, barred ILECs from collecting access fees from ISPs, based upon the ESP exemption.19 Its rationale for extending protection to ISPs was that, like ESPs in the 1980s, ISPs today need "infant industry protection" in order to flourish, and further that in the event ILECs benefit from carrying ISP traffic.20

The Office of Plans and Policy has suggested that the way to prevent perpetuation of potential competitive inequity is to reduce regulation on incumbents rather than impose new rules on ISPs.21 Congress, for its part, has numerous Internet regulation bills pending, but there is also an Internet Protection Act under consideration that would essentially freeze federal regulation of cyberspace.22

SOCIALIZATION

Making network services beyond basic voice universal is a trend explicitly contemplated in the expansive language of section 254 of the Telecom Act and exemplified in the FCC's much ballyhooed school Internet access subsidy. Any service -- even non-local -- that becomes popular with a decent slice of the marketplace is a candidate for socialization via common carriage.23

The FCC's universal service support for school Internet access covers Internet access and associated software plus inside wire; it does not cover fax machines, modems, and PCs. PCs were excluded because they are not in the agency's view "designed" for communication over distance.24 This is news to the computer industry.25

Since first being announced, the plan has been scaled down -- from a planned $1 billion to $625 million for the first half of 1998; the original plan called for a $9 billion cap over four years. In announcing the reduction, new FCC Chairman William Kennard noted, however, that the $9 billion cap is still in place, and that later this year his agency would re-evaluate the financial needs of the schools.26

The program, however, actually entails far more potential total expense. True, costs may be picked up by private firms helping the schools, but if incurred they must be paid by someone. If all schools participate, the true total cost of implementing the FCC's original schools plan is $75 billion. Although the support total has been trimmed, the original figure stands as an illustration of the extent of license the agency feels itself entitled to under section 254 of the Telecom Act. If this figure startles (it should), the reader might profit from a detailed explanation as to how the $75 billion true total cost figure is attained.

According to a consulting firm cited by the agency, the discount is only applied to 20% of the total cost of implementing the telecom services portion of the program, with the other 80% attributable to items (PCs, servers, maintenance, repair, training, etc.) not subject to the discounted rate.27 The average discount nationwide is 60%.28 This means that the $9 billion four-year cost of the FCC's discount cap equals 60% of the 20% share of total cost to which the FCC's program applies -- i.e., 12%.29 So if $9 billion represents 12% of the total program cost, the remaining 88% comes to $66 billion.30 Hence, the total program cost is $75 billion if all schools apply.

Looking at it another way: The typical school will spend $7.33 on related items, plus its 40% share of the cost of Internet services, for each dollar it would save under the FCC discount. A school eligible for a 20% discount would pay 96 cents per dollar of total cost to save 4 cents -- i.e., spend $24 for each $1 it saves; a school using the 90% discount would still have to pay 82 cents of total cost to save 18 cents -- i.e., spend $4.56 for each dollar it saves.

Thus, the logic of the FCC's program resembles nothing so much as that of Lucy Ricardo telling Desi, in a classic I Love Lucy episode, that she had just "saved" $300. After Desi asks how she managed this, Lucy answers that she went shopping and spent only $500, instead of the $800 she had planned to spend.

Further, the program is being implemented, although many schools -- at least half, perhaps two-thirds -- already have an Internet connection.31 The marketplace is thus well on the way to providing, without added subsidy, what the FCC wants to subsidize. In apparent recognition of this, the FCC has directed the schools fund administrator to collect "only as much as required by demand, but in no event more than $625 million for the first six months of 1998."32 (The Telecom Act, for its part, expressly identifies substantial residential market penetration as one criterion for universal service eligibility.33)

A more modest estimate for the long-term cost of the program comes from a recent report issued by the Congressional Budget Office, which projects a 10-year $20.7 billion total cost, with the FCC's $2.25 billion cap first attained in 2007.34 But CBO projects substantial expenditure by schools to buy new PCs, noting that 17% of PCs now in schools are 20-year-old Apple II PCs.

Universal service coverage, and the Internet generally, are prime issues in the implementation phase of the FCC's universal service rules, which have gone through several reconsideration cycles.35 The commission was directed by Congress to prepare a report on universal service issues to be submitted no later than April 10, 1998, including Internet access by schools and libraries.36

Once added to universal service, an advanced service will stay added forever. Washington is near creating, in effect, a telecom policy version of the "Brezhnev Doctrine" (the USSR's claimed "right" to invade the former Czechoslovakia in 1968 to crush dissent and save socialism -- i.e., once a country goes socialist, it stays socialist): Once a service is socialized as universal, it stays socialized. This "socialized forever" doctrine has proven true for voice telephony, and appears confirmed by the continuing rate regulation of basic cable service post-passage of the 1996 Act. Application of this doctrine to Internet access would permanently entrench open-ended telecom service socialization.

PACKETS FOLLOW SCHUMPETER, CIRCUITS FOLLOW MARX

Much of FCC regulatory policy seems premised upon the Marxian slogan "from each according to his ability, to each according to his needs." The world of the Internet, by contrast, resembles uncannily the "perennial gale of creative destruction" encapsulated by the Austrian economist Joseph Schumpeter, who saw capitalism as a dynamic succession of waves of technological innovation that dethrone established industries in favor of emerging ones. Thus, Microsoft, having rode a Schumpeterian wave in the 1980s to surpass IBM as the premier computer company, found itself facing a similar fate a decade later because it lagged Netscape and others in embracing the Internet.37

Regulatory policy can dramatically influence how a given technology diffuses in the marketplace. Cellular regulation delayed for more than a decade introduction of what has proven to be an immensely popular service, and the manner in which cellular was regulated has made cellular less successful in the United States than in Europe due to multiple standards, irrational pricing, lotteries, and the like.38 Internet regulation harbors the same potential, albeit there is legislation pending in Congress designed to forestall such an outcome.39

Regulation of packetized services will need to balance legitimate concerns of diverse providers if consumers are to receive the best service. ILECs must recognize that excessive access fees could sink ISPs, and in the event will not be tolerated by regulators. Congestion issues require careful negotiation, with the next (fourth) round of the Network Reliability and Interoperability Council primed to collect congestion data and adjudicate disputes.40 Content liability should be minimal and follow control, goals equally shared by ILECs and ISPs.41

For their part, ISPs should remember that below-cost access to ILEC networks can boomerang, by depriving them of the upgraded network assets needed for high-end Internet services and also undercutting network deployment by carriers entering the local market, who will prefer below-cost usage of ILEC networks over investment in their own expensive new plant.42 And while ISPs may plan to focus on high-end customer markets, it is unlikely that they will completely escape service socialization if their market targeting is perceived as endangering the ability of ILECs to provide basic universal service. Above all, a healthy financial future for ILECs and ISPs is mutually beneficial, with marketplace competition the sole arbiter of which ILECs and ISPs survive.

Toward these ends, federal regulation should recognize in the first instance the incompatibility of TELRIC and other FCC rules with spurring ILEC network innovation -- including the ILEC "last mile" essential for ISP success and Internet growth pending deployment of new local facilities. In addition, regulators should seek to reconcile legitimate ILEC and ISP interests without jeopardizing by regulation the market viability of either. Finally, regulation should be minimal, to foster rapid Internet growth and diversity of services.43

From a broader perspective, the FCC has pursued pure communization of ILEC network assets, grand-scale confiscation of both embedded and future ILEC investment, and platinum-plated expansion of PSTN service socialization -- the latter even to the extent of preempting interstate long distance access price reductions for residential subscribers by increasing universal service contribution amounts.44 There is little -- if any -- reason to believe that Congress enacted the Telecom Act with these ideas in mind, and there is no reason to believe they will aid the Internet.

Telecom regulatory policies of micromanaged ILEC network communization, confiscation, and socialization collectively constitute the polar opposite policy error committed by regulators with the Savings & Loan industry in the 1980s, when they privatized S&L investment opportunity while continuing to socialize S&L lending risk. In telecom, regulators are increasingly socializing opportunity while privatizing risk. In the former case, the result was to subsidize profligate investments that otherwise, but for the government's largesse (at taxpayer expense), would never have been made. In the latter case, the result -- equally predictable -- is that vital network infrastructure investments that would have been made may well not be made.

Evidence already exists to substantiate the fact that regulation is impeding capital investment. Telecom investment is lagging other industries in the 1990s, a period of dynamic industry evolution, with sub-par performance, vis-à-vis the S&P 500, of telecom stocks during a roaring bull market. Thus, for 1994-1996, one composite index of telecom stocks showed a decline of 25% (63%, 41%, 33%, and 21% declines, respectively for cable, wireless, Big-Three long distance, and local exchange carrier segments).45 In four out of five years this decade for which telecom investment data exist, industry growth was negative.46

True, telecom stocks recently have performed well, but most still have under-performed the market this decade, an enormously counter-intuitive result given the technological dynamism of telecom and information industry sectors. One industry sector whose share prices rose some 25-fold in the 1990s, competitive local exchange carriers (CLECs), was heavily favored by FCC and public utility commission (PUC) regulators -- stark testament to the true market value of federal favoritism.

CONCLUSION

In sum, the government faces a fundamental policy choice: privatization or socialization of emerging telecom services. There is logic behind either solution, if implemented in a unified manner. Pure socialization limits investment risk, but also limits investment opportunity. In underwriting private investment, the government justifiably limits the range of risk to which the taxpayer is exposed, by banning investments judged improvident. Pure privatization opens investment opportunity, but also opens investment risk; improvident investment is curbed by the discipline of the marketplace.

It is when the government mixes the two strategies that trouble is guaranteed. Combining privatization and socialization of the same services either encourages improvident investment if risky investments are subsidized as with the S&Ls, or discourages prudent investment if it is penalized as is happening with telecom policy. In public policy as in mathematics, changing one side of an equation requires changing the other side as well.

For an industry as potentially dynamic as Internet-driven telecommunications, the opportunity cost of precipitate socialization will be high -- such was the case with cellular regulation.47 The Telecom Act envisaged socialization for services deemed "essential," for which substantial residential market penetration exists, which are being deployed in the PSTN by carriers and serve the "public interest, convenience, and necessity."48 These are cumulative criteria, not alternative.

But FCC policy presses for immediate, broad-scale socialization -- long before market penetration suggests widespread societal acceptance. And this the FCC entwines with a pervasive communization and wholesale confiscation the Congress never envisioned, policies pursed even to the extent of attempting to circumvent an adverse federal appeals court ruling. In this, the agency continues its policy bent prior to passage of the act, during which time telecom industry investment flagged as information age technology and market demand flowered.

Defenders of FCC actions will point to already explosive data on communications growth as evidence that federal policies are in fact successful. In fact, Internet growth to date has piggybacked on the existing telephone network infrastructure, i.e., yesterday's circuit-switched, voice-driven, embedded public network investment. Telecom infrastructure modernization cannot remain a laggard if the full potential of the emerging packet-switched datacom industry is to be realized. Indeed, hardly a day goes by without some Internet denizen bewailing the lack of public network bandwidth for high-speed Internet access. With network risk already privatized, opportunity privatization must follow if telecom market progress is to follow in the footsteps of Silicon Valley.

Even new FCC Chairman William Kennard, while defending FCC policies for implementing the Telecom Act, acknowledges that investment in high-bandwidth plant is lagging: "Our nation has an ever-increasing demand for high-capacity networks. We've got to find ways in this country to increase that capacity."49

Most of this lag is felt in the residential marketplace, where improvement is limited to conditioning in-place copper and jazzed-up modems.50 Business bandwidth -- with local loop bypass -- is exploding, with several recent announcements pushing Internet voice and data tariffs down to 7.5 cents per minute, and fiber systems hitting the market that carry terabit traffic.51 Regulation of advanced services -- including high-speed Internet traffic -- will be the subject of an upcoming Notice of Inquiry covering section 706 of the Telecom Act.52

Interconnection, unbundling, and universal service expanding over time as market conditions and societal needs evolve are integral parts of the vision of competition enshrined in the Telecom Act. But Congress did not write a law aimed at privatizing ILEC risk while socializing their gains for the benefit of their competitors. It is time for the FCC, once and for all, to jettison its perverse juxtaposition of privatized risk and socialized opportunity in favor of a unitary policy: Privatizing both so that the kind of competition Congress envisioned has a chance to flourish. If telecom markets are permitted to emulate the dynamism of the computer marketplace, the winner will be the telecom consumer.



1 Ken Auletta, "The Microsoft Provocateur," The New Yorker (May 12, 1997):68. Auletta's piece profiles Microsoft's top technology strategist, Nathan Myrhvold.
2 "The Death of Telephony," Gilder Technology Report, Vol. II, No. 9 (September 1997):2. Forrester also projects that 1997's $8 billion Internet commerce market will hit $327 billion in 2002 (source: on-line newsletter).
3 "Data" here no doubt incorporates graphics and video sent over the Internet. Broadcast video is another matter.
4 Adaptive routing capability was at the heart of the Internet's original incarnation as ARPANET in the late 1960s. A fine account of those pre-commercial days was done be Katie Hafner and Matthew Lyon, Where Wizards Stay Up Late (New York: Simon & Schuster, 1996).
5 Kevin Werbach, Digital Tornado: The Internet and Telecommunications Policy, OPP Working Paper 29 (March 1997). OPP papers are not official FCC policy, but they can be influential.
6 Ibid., p. 2.
7 Ibid., p. 45.
8 The author has discussed the interplay of FCC actions and the Telecom Act in depth in a 1996 article "The Telecommunications Act of 1996 and the FCC's `Spin', " New Telecom Quarterly, Vol. 4, No. 4 (November 1996):15-24.
9 "In the Matter of Implementation of the Local Competition Provision in the Telecommunications Act of 1996," First Report and Order, paras. 226-542, CC Docket No. 96-98 (adopted August 1, 1997).
10 Iowa Utilities Board v. FCC, No. 96-3321 (July 18, 1997).
11 Iowa Utilities Board v. FCC, Order on Petitions for Rehearing (Oct. 14, 1997).
12 Writ of certiorari to the Eighth Circuit, January 23, 1998.
13 Reed Hundt has said that entry into cellular, provision of yellow pages, and entry into long distance represent "gifts" from the FCC that more than justify cost rules it would impose. The polite name for this is legalized extortion. Permission to enter markets and perhaps lose money are not normally called gifts.
14 Iowa Utilities Board v. FCC, Writ of Mandamus (8th Circuit, filed January 22, 1998). The Court chastised the FCC for attempting to use the "public interest" language of section 271 (RBOC applications for inter-LATA long distance entry) to accomplish what the Court earlier had prevented the FCC from doing under section 252 (interconnection pricing rules). ("Mandamus" is legal parlance for a court order commanding a party to do, or refrain from doing something.)
15 Ibid., pp. 12-13. The reference to forum shopping is that section 271 places "public interest" jurisdiction as to RBOC entry in the D.C. Circuit Court; the Eighth Circuit noted it was not passing on section 271 entry, but rather on evasion of its earlier orders. Ibid., p. 14.
16 "In the Matter of Federal-State Joint Board on Universal Service," Report and Order, para. 228, CC Docket 96-45 (adopted May 7, 1997).
17 Ibid., para. 230. Once upon a time, the FCC used the prospect of massive ILEC stranded investment to justify adoption of accelerated depreciation for interstate and intrastate plant; the rules were challenged by the states and, ultimately, the FCC's pre-emption was overturned by the Supreme Court in 1986 (Louisiana PUC v. FCC). This marked the high-water assertion of FCC pre-emptive power until its 1996 actions.
18 ACTA's petition was filed March 4, 1996. The FCC issued its Public Notice (RM-8775) on March 8, and comments and replies were filed. There has been no action in the matter taken since the June 1996 replies were filed, except that the FCC has expressly declined to allow ILECs to collect access fees from ISPs. Issuance of a Public Notice with an RM number designation amounts to an informal request by the agency for input from interested parties. Unlike a formal NPRM (Notice of Proposed Rulemaking), it proposes no actual rules; and unlike an NOI (Notice of Inquiry), the agency poses no question, but merely passes on for comment issues raised by the petitioning party.
19 "In the Matter of Access Charge Reform," First Report and Order, paras. 341-348, CC Docket 96-262 (adopted May 7, 1997).
20 Thus the agency stated, "We think it possible that had access rates applied to ISPs over the last 14 years, the pace of development of the Internet and other services may not have been so rapid. Maintaining the existing structure avoids disrupting the still-evolving information services industry...." Ibid., para. 344.
21 Digital Tornado, note 5 supra, p. 45.
22 Internet Protection Act of 1997, H.R. 2368, introduced by Rep. Rick White (R-WA) on behalf of co-sponsors Rick Boucher (R-VA), Billy Tauzin (R-LA), Mike Oxley (R-OH) and Christopher Cox (R-CA).
23 According to Odyssey, a market research firm, 48% of PC owners have on-line access. Average on-line hours per month increased between January 1995 and July 1997 from 4.3 to 12.8 hours. "Cable Underestimating Difficulty And Opportunity Of Modems, CTAM Is Told," Communications Daily (December 10, 1997):3.
24 "In the Matter of Federal-State Joint Board on Universal Service," Report and Order, CC Docket 96-45, (adopted May 7, 1997), paras. 451, 460 ("Universal Service"). This view runs counter to the Washington techno-talk about "convergence" of computing and communications.
25 For example, this view runs squarely counter to the oft-expressed view of Intel CEO Andrew Grove, who considers the PC to have evolved into a communication device (from a computational one). And Sun Microsystems CEO Scott McNealy has long maintained that "the network is the computer." Sun's Java programming language is based upon network-delivered "applets" to runs remote computers, and is the foundation-stone for the "NC" concept pushed by Oracle CEO Lawrence Ellison as a counter to dominance by Microsoft's desktop Windows operating system.
26 "Kennard Announces Slower Phase-In For School-Library Funding," Communications Daily (December 16, 1997):1.
27 Universal Service, para. 497. Source cited by the FCC: A report filed by McKinsey & Co.
28 The actual average discount is 59.96%, calculation as follows: (1) take the discount matrix published by the FCC; (2) weight the various discount levels by the percentage of low-, medium- and high-cost areas; and (3) weight also by the percentage of schools in the different economic disadvantage categories. The matrix detailing discount levels and school categories is set forth in the order, at para. 498.
29 This may be a generous estimate. The Congressional Budget Office (CBO) estimates that the discount will apply to only 17% of the program total cost, meaning 10%. If true, the full figure would have become $90 billion if all schools applied and the FCC's original annual cap were reached.
30 Of the $66 billion, $6 billion represents the 40% share of the 20% cost to which the FCC's 60% discount applies, i.e., 8%. The other $60 billion represents the 80% of total cost that McKinsey states is not subject to the FCC's telecom services Internet access discount rate.
31 A 50% penetration estimate is provided by the Wall Street Journal ("New Phone Tax," December 9, 1997, p. A22); a two-thirds figure is offered by columnist and American Enterprise Institute fellow James K. Glassman ("A New Tax For The New Year," Washington Post, December 2, 1997, p. A27).
32 "Universal Service," Third Order on Reconsideration, CC Docket No. 96-45, para. 6 (adopted December 16, 1997).
33 Section 254(c)(1)(B) directs the FCC to consider the extent to which telecom services "have, through the operation of market choices by customers, been subscribed to by a substantial majority of residential customers." As a general criterion, presumably, this may be applied in the educational context as well.
34 "CBO Tracks Universal Service Spending Caps," Communications Daily (January 20, 1998):2. As the FCC's current program specifies four years, it is not clear why CBO projects a 10-year life-cycle. CBO projects $539 million for FY 1998 spending -- $478 million for schools and $61 million for libraries.
35 The latest major order was issued at year-end 1997. "In the Matter of Federal-State Joint Board on Universal Service," Fourth Order on Reconsideration, CC Docket No. 96-45, Report and Order in CC Dockets Nos. 96-45, 96-262, 94-1, 91-213, 95-72 (FCC 97-420 adopted December 30, 1997). Voluminous refinements to the school/libraries program are spelled out therein in detail at paras. 133-254. Their subject matter is outside the scope of this article.
36 Ibid., Order, CC Docket No. 96-45 (adopted January 14, 1998). The Congressional directive is contained in H.R. 2267, 1998 appropriations legislation for the Departments of Commerce, Justice, and State; the review is per section 254 of the Telecommunications Act of 1996.
37 Microsoft awakened and responded vigorously to Netscape's market challenge--apparently, its actions prompted the Justice Department to commence antitrust litigation to enforce the 1995 consent decree Microsoft signed promising to cease certain practices Justice considers anti-competitive.
38 Jon G. Auerbach, "Wireless Warfare: Lessons From Europe Drive Frantic Scramble In Telephone Industry," Wall Street Journal (July 16, 1997):A1.
39 Republican Congressmen Rick White (WA), Rick Boucher (VA), Billy Tauzin (LA), Michael Oxley (OH), and Christopher Cox (CA) are co-sponsors of H.R. 2368, Internet Protection Act of 1997. The bill would bar FCC or state regulation of Internet rates, facilities, service, or technical specifications.
40 Internet congestion was raised as an issue during NRC III, but the issue was punted to NRC IV, partly because the data on congestion are still marred by significant gaps.
41 Common carriers have traditionally been protected from liability for content transported over their networks, because they cannot legally control such content. While ISPs are not common carriers, the degree to which they can, as a practical matter, effectively supervise Internet content is exceedingly limited, given millions of websites and a multi-hundred million strong user community. Also, national boundaries are essentially transparent to Internet traffic, further complicating supervision and enforcement. So long as ISPs accept that responsibility follows control and that control over Internet traffic is very limited, ILECs and ISPs can find common interest in seeking exemption from liability.
42 Alfred Kahn points out that innovation is stifled when prices are at or near marginal cost; those first to market must perceive the prospect of high returns before the rapid entry of new competitors, else they will not take risks associated with innovation. ISPs demanding discount ILEC access cost pass-through while simultaneously pressing for ILEC network modernization may thus be spinning their wheels in sand.
43 The European Union recently issued a draft calling for regulatory separation of Internet telephony from traditional voice telephony licensing rules. Regulation of PC-to-PC calls and PC-PSTN calls would be treated differently than phone-to-phone calls, except that real-time commercial sales via voice over the Internet would be treated as telephony. "Internet Telephony Won't Require Licenses in EU Nations," On-line source (January 20, 1998).
44 "Universal Service," Third Order on Reconsideration, CC Docket No. 96-45, Dissenting Statement of Commissioner Harold Furchgott-Roth, p. 2. Furchgott-Roth also decried the Commission's reported willingness to countenance keeping notice of the universal service contribution increase off customer bills. Ibid., p. 3. Section 254(e) of the Act, as Furchgott-Roth notes, expressly states that universal service support be made explicit.
45 Thomas Duesterberg and Kenneth Gordon, Competition and Deregulation in Telecommunications: The Case For A New Paradigm (Hudson Institute, 1997), pp. 17-18. Duesterberg is a Hudson Senior Fellow who was Assistant Secretary for International Economic Policy at the Department of Commerce during the Bush Administration. Gordon chaired both the Maine and Massachusetts PUCs, and now is a Senior Vice President with National Economic Research Associates. This is a fine survey of telecom regulatory policy.
46 Ibid., p. 18. The five years are not specified, but probably all antedate passage of the Telecom Act; as FCC regulation has paralleled pre-Act norms, the trend should continue unless regulation becomes investment-friendly. Critics attribute this to sluggish telecom companies, contrasting the industry with the computer industry's growth in such indicia as cost per CPU-MIP. Such assessments fail to account for the impact of pervasive continuing regulation which, to date, Silicon Valley has escaped.
47 In 1991, National Economic Research Associates estimated that cellular regulatory lag caused consumer welfare losses of $86 billion. Peter Pitsch, The Innovation Age: A New Perspective on the Telecom Revolution (Hudson Institute, Progress & Freedom Foundation, 1996), p. 83. Pitsch offers insights from political economists Joseph Schumpeter and Friedrich von Hayek in this intellectually elegant work.
48 Telecom Act, sec. 254(c)(1).
49 "Kennard Presents 1998 Agenda," Communications Daily's Washington Telecom Newswire, On-line (January 30, 1998). Kennard's statement was made at a Commission briefing for reporters.
50 Most notably, four RBOCs and GTE announced with Microsoft, Intel, and Compaq an agreement on a "Universal-ADSL" standard that will bring 1 Mb/s downstream service to the home in late-1998.
51 Recent widely-reported announcements include: (1) Qwest Communications offering 24-hour packet-switched data service at 7.5 cents/min.; (2) AT&T offering IP voice at 7.5 to 9 cents/min. to its WorldNet customers; and (3) Lucent Technologies bringing to market a new product that uses "Ultra-Dense Wavelength Division Multiplexing" to combine eight 400-Gb/s systems into a 3.2 Tb/s fiber network.
52 The Act requires the FCC to issue the NOI by August 8, 1998 and conclude it by February 8, 1999. Bell Atlantic's January 27, 1998 petition seeking deregulation of its advanced services, per section 706 of the Telecom Act, has already raised the issue. That request, and the FCC's upcoming NOI on section 706 (mandated by sec. 706(b) of the Act), will be the subject of a follow-on article by the author for NTQ.