Tech Bytes – Tid Bits in Tech News: More Deception From Tauzin-Dingell Opponents

There is a myth going around Capitol Hill that H.R. 1542, “Internet Freedom and Broadband Deployment Act” would repeal Section 251 of the Telecom Act of 1996. This bit of rhetoric, like much else that has come from opponents of this Tauzin-Dingell bill, is completely false.

The truth goes something like this: The Supreme Court could barely decipher the section’s meaning and gave broad discretion to the Federal Communications Commission (FCC) to enforce it. Not surprisingly, the FCC interpreted Section 251 in a way that ensured Commission decisions would have more relevance than those made in the marketplace for years to come. Section 251 of the Telecom Act created three provisions to benefit Competitive Local Exchange Carriers (CLECs), which could compete with the local Bell networks:

interconnection to the Bell network;

access to “unbundled” elements of the Bell network and the ability to combine certain network elements to provide service to customers; and

the right to buy a Bell’s retail services at wholesale rates and then resell them to end-users.

Section 251 was designed to encourage local competition, but it failed to clarify precisely what competition it wished to encourage. The FCC wished to create “perfect competition” whereby CLECs and the incumbent Bells would compete on equal footing. To accomplish this, the FCC calculated wholesale rates based not on actual costs, but on forward-looking estimates of what the most efficient company’s costs would be.

The Supreme Court rejected this logic and forced the FCC to develop more realistic rates. The cost-based rates now in place allow the Bells to recover their cost of capital, but nothing more. Consequently, the Bells cannot justify spending billions in discretionary risk capital to construct new facilities, because telecom investments depreciate rapidly.

Meanwhile, instead of building competitive networks on the local level, CLECs have built facilities to offer services where consumer prices are not capped. The estimated $715 billion in debt—in addition to countless more in equity investment—collected by CLECs between 1996-2000 went to build optical networks and interconnection facilities instead of rival local facilities to compete with the Bells.

Due to intense investment and infrastructure deployment in precisely these areas, revenue from Internet traffic increased by only 30 percent last year, while Internet traffic itself increased by 300 percent. This suggests prices are falling, which is good for consumers but bad for CLECs trying to earn a return on their investment. Now that the risk capital that financed such speculative deployment has dried up, many CLECs are either bankrupt or teetering on bankruptcy and more in need of Bell facilities than ever.

While CLECs invested heavily in unregulated technologies, the unlimited cost-based access to local Bell networks mandated by the FCC has done nothing to encourage competition and has left the CLECs as ill-suited to compete for local phone and Internet service today as they were in 1996.

When competitors share a single network, competition is even less beneficial to consumers than old monopolistic rate-of-return regulation. By guaranteeing access to CLECs at cost-based prices, the FCC has effectively capped the Bells’ rate of return on new investment. However, unlike the old monopoly days, regulators have not guaranteed the Bells any return on such investment. Given this regulatory regime of privatized risk and socialized returns, Bell investment in broadband deployment has been negligible. The current regulatory regime has punished consumers by discouraging investment in new technologies and products, thus outweighing any potential benefit from the FCC’s stylized version of “competition.”

Most analysts agree that Section 251 was designed to allow CLECs to generate an income stream to be used to build rival facilities. The idea was that regulations would be used in the short term to eliminate the need for them in the long run.

Instead, FCC rules have fostered a dependence on shared resources that contradicts the basic tenets of wealth-creation in competitive markets. Consider an analogy: What if steel companies were required to share their mill and warehouse with competitors? The steel company would have no reason to make capital investments in the shared space. Nor would consumers receive any benefit from the competition itself; the steel would be made at the same facility, under the same conditions, at the same cost. Unfortunately, this is precisely the “competition” the FCC has created with its interpretation of Section 251 of the Telecom Act.

Tauzin-Dingell strengthens the Telecom Act by reaffirming its deregulatory thrust and fostering the local competition that Section 251 was meant to encourage. It repeals the senseless FCC approach that misdirects resources away from the local loop and discourages genuine competition.