At one level, the vote represents a high-stakes power struggle at the FCC's 12th Street headquarters between lobbyists for companies such as Verizon Communications and SBC Communications that own local telephone networks and a host of rivals like AT&T and WorldCom that want to connect to them.
But the FCC's painstaking internal deliberations also highlight an ideological conflict between two wildly different views of how to keep broadband prices low and competition robust: Should federal regulations be strengthened or rescinded? The FCC's answer will determine not only the winners and losers in the broadband race, but also how much consumers will pay for high-speed access and how technologies such as online movies and video telephony will be implemented.
In a sign of how bitter this political tug-of-war has become, a long-awaited vote on the proposal was abruptly postponed last week after sharp differences of opinion emerged between two Republican commissioners. (The formal name of the process is the FCC's Unbundled Network Element Triennial Review, and it does not cover cable modems, wireless or satellite connections.)
The deregulatory camp is led by Michael Powell, a Republican who hopes to relax rules that currently let competitors of companies like Verizon and SBC demand access to the former Bell networks at a relatively low cost. With that access, rivals can sell DSL (digital subscriber line) or voice telephone service and compete with the Bell companies who own the copper and fiber lines.
Powell is hardly a Libertarian, but he has staked out a more laissez-faire position than many of the FCC's other four commissioners. "Reliance where possible on competitive market forces rather than regulation is a key part of the solution to our current troubles," Powell wrote in an opinion article last month.
That was a not-so-oblique reference to the current malaise of the telecommunications industry, which has been hard hit in the last three years by continuing job cuts, plummeting share prices and towering bankruptcies. Lucent, for instance, closed Friday at $1.69, down from its dizzying high of around $60 in late 1999. Nortel Networks hovers around $2.31, after nearly touching $80 in mid-2002.
To Powell, the way to restore financial health to the sector is to spur investment in broadband. "In the U.S., the 1996 Telecommunications Act launched an ambitious effort to increase competition in the communications market. The act was implemented during an economic boom," Powell says. "Now, the government must review that experience and identify what changes are needed during a harsh market downturn."
Those views drew a sharp rebuke last March from Sen. Fritz Hollings, D-S.C., who at the time was the chairman of the powerful Senate Commerce Committee that oversees the FCC. When Powell said he believed the free market was vital to the industry's future, Hollings said Powell's statement suggested that he might be better suited to be "an executive vice president of the U.S. Chamber of Commerce."
On the other side is a competing proposal drafted by Commissioners Kevin Martin--a Republican appointed by President George W. Bush--and Democrats Michael Copps and Jonathan Adelstein. They propose continuing to require the Bells to give rivals access to high-speed lines, and support allowing states to decide how much deregulation is appropriate.
As recently as the beginning of February, Powell appeared to have secured a majority of commissioners who were prepared to erase the access requirement entirely. But Powell's proposal lost its support in recent weeks and the deals holding the agreement in place have unraveled, one source familiar with the situation said.
"Things are really in flux right now," the person said.
Also in the last few weeks, states have been demanding a larger role in deciding what part of a Bell company's network should be opened to local competitors. The Bells, looking to compromise, are now willing to let competitors use their voice networks, but only in exchange for keeping fiber-optic broadband networks closed, the source said.
A history lesson
At the heart of this squabble is the 1996 Telecommunications Act, which handed the FCC broad authority to undertake a set of rules regarding interconnection and open access to the Bell companies' networks.
The law says the Bells must provide "nondiscriminatory access to network elements on an unbundled basis at any technically feasible point" and at a price that state and federal regulators can reject as unreasonable or not in the public interest. Another phrase for this is Unbundled Network Elements Platform (UNE-P), which allows companies to compete with the Bells by delivering service without laying their own copper or fiber infrastructure.
Verizon challenged the FCC's rate-setting methodology, however, placing the status of UNE-P in legal limbo. In May 2002, the U.S. Supreme Court asked a lower court to determine the legitimacy of the UNE-P scheme and the FCC's authority to oversee it.
When Reed Hundt ran the FCC, he made it a top priority to open the Bells' networks to as many rivals as possible.
In his book that appeared two years ago, after he had resigned from the FCC, Hundt said: "Congress had not been mindful of Senator (John) McCain's repeated warnings against transferring power to me. The Telecommunications Act of 1996 made me, at least for a limited time...one of the most powerful persons in the communications revolution."
What Hundt's decisions brought about, the Bells say, was a reduced incentive to invest. They contend that the Hundt-era rules require them to sell service to competitors at, or below, their own cost, which means they have little reason to spend more on fiber networks. They also say that cable companies, which currently claim the bulk of the U.S. broadband market, are not shackled by the same requirements and are therefore at a competitive advantage. FCC statistics last December show that there were 9.1 million cable modem subscribers and 5.1 million DSL subscribers, as of June 2002.
Hundt's critics have even coined a derogatory term: The current rules privatize the risks and socialize the rewards.
"The more infrastructure sharing you encourage, the less long-term innovation and investment you have," said Adam Thierer, an analyst at the free-market Cato Institute. "This has profound implications for the development of the Internet and the deployment of broadband. If no one is building the high-speed pipes that we'll need in the future, then the Internet is in trouble. Today we can barely surf at the speed we'd like on DSL and cable modems--a lot of people think they're too slow. If that's all we have in the future, we're in trouble."
After last week's hastily postponed meeting, a trade association representing the Bells welcomed the delay. "Since the FCC's two previous attempts to implement the unbundling provisions of the 1996 Act were thrown out by the courts, a small delay is less important than getting it right," said Walter McCormick, president of the United States Telecom Association, whose members include Verizon, BellSouth and Southwestern Bell. "We are confident that Chairman Powell and the commissioners will take this time to develop a policy that will withstand judicial review, create jobs, boost investment and restore stability to the telecom industry."
Opposed to this view are many consumer groups and the Bell's rivals and customers, who enjoy today's steeply discounted prices and warn that the former Bell companies would still enjoy monopoly power if left unchecked by the FCC.
"Rule changes at the FCC could stop telephone and Internet service competition in its tracks," said H. Russell Frisby, president of CompTel, a trade association representing long-distance companies and Internet providers. "It also could lead to the demise of small telecom businesses and eliminate much-needed jobs."
Frisby predicts that if the current regulations remain in place, consumers will save more than $9 billion in phone bills, and argues that local phone rates have decreased and consumer options for local phone companies have increased since the Hundt rules were enacted.Next steps
Last week, Powell signaled that he planned to proceed with Thursday's scheduled vote, whether he could muster a majority or not. Because Democrats Copps and Adelstein are viewed as opposed to Powell, and Kathleen Abernathy is seen as an ally, Martin has emerged as a swing vote.
Cato's Thierer, who Martin chose to serve on a Bush administration transition team, says that Martin appears to be taking the unusual step of disagreeing with his fellow Republicans because he's sympathetic to giving state regulators more power. "Martin seems sympathetic to the states' plea," says Thierer, who agrees with Powell. "There is this philosophical issue for Republicans about the role of the states."
The last few days of changing dynamics and furious lobbying has muddied the outlook for this week's meeting.
Should Powell's original plan to lift the rules survive, critics see the collapse of an industry that the rules created in 1996. On the other hand, the benefit is that the Bells would use the expected surge in local calling revenue to invest in networks or other companies, industry experts say.
"I'd give that one real heavy odds, though," a BellSouth source familiar with the recent lobbying said about the prospects of a Powell victory.
But if Powell loses, one wild card remains: the federal courts. In two different cases, the Supreme Court and three appellate judges have concluded that Hundt's regulations imposed on the Bell companies go far beyond what Congress said the FCC could do. Now the FCC is under court order to draft more reasonable rules or have them struck down in their entirety--and the deadline is Thursday, the same day as the vote.News.com's Ben Charny contributed to this report.