Trying to Anticipate the FCC
Doc wonders whether to be creeped out by this speech by FCC Commissioner Kevin J. Martin. I'm not sure whether people who support fail fast policies should be creeped out, but they probably should not be encouraged.
Commissioner Martin clearly sympathizes with the plight of incumbent carriers who have "stranded costs" -- investments in obsolete equipment that present pricing rules will not allow them to recover. He refers to this plight when he says that "industry conditions cry out for answers. Companies are struggling under too much debt, unable to recoup the past investments they have made. Markets are valuing companies at depressed levels, leaving companies with little capital. Carriers are postponing the purchase of the equipment necessary to deploy competitive local and advanced services, leaving the manufacturers to suffer the consequences." The message: Incumbents are stuck with the costs of legacy equipment. They're so busy trying to cover those costs that they can't buy newer, better equipment. Martin proceeds with his discussion having thus framed the economic scenario.
Commissioner Martin proposes changes to the TELRIC (Total Element Long Run Incremental Cost) computation system for resale rates that would certainly run counter to 'fail fast' policy goals if they were applied to the resale of existing equipment. However, Martin expressly advocates these changes only for "new investment on a going forward basis." It's not clear from this speech that he would give incumbents higher resale rates for services on old equipment as well. With regard to high-speed fiber-optic data services, Martin says, "I believe that incumbents should be given the proper incentives to push fiber deeper into their networks and closer to the American consumer."
Martin appears to think that incumbents will be significant (perhaps the most significant) innovators and deployers of high-speed fiber services. He would not require ILECs to provide open access on new fiber-optic loops, or he would at least limit the bandwidth they are required to provide to the amount that they provide already. This is what he means by saying, "I believe that the Commission should freeze the service capacity level that must be made available on new or upgraded facilities to the service capacity level provided by the ILEC prior to the new investment in an upgraded facility." One can argue that this would do no more than to put ILECs on the same footing as anyone else who might successfully run fiber-to-the-home. I'm not in a position to evaluate that argument right now.
Martin's speech reveals no intent to allow incumbents to fail. This doesn't mean that he doesn't foresee that it could happen. If it is to happen, though, he intends that it be because they truly failed to compete, not because the FCC made it hard for them to invest in new equipment.
I'll summarize Commissioner Martin's proposals below, and leave the economic analysis to someone more able:
- A kinder, gentler TELRIC -- Incumbents must make certain services available at a regulated rate for other companies to resell to consumers. Total Element Long-Run Incremental Cost (TELRIC) is the present formula for computing this rate. Its critics say that it doesn't allow a company to recapture the actual costs of its investment. Martin worries that this will discourage incumbents from making new investments -- why invest if you'll be forced to resell to other companies at rates that don't make the investment worthwhile? So, he says, for new investments, make the rate a little more profit-friendly.
- Deregulate fiber-to-the-home -- Right now, incumbents must allow competitors to lease the copper wires to customers' homes at regulated (TELRIC) rates. Martin wouldn't impose this requirement to fiber services provided directly to consumers.
- "Hybrid facilities" and limited obligations -- Martin would allow an incumbent to upgrade present facilities without also upgrading its resale obligations. For example, if a competitor has 1.54 Mb/s of bandwidth on an incumbent's line, and the incumbent upgrades the line to allow 4 Mb/s total bandwidth, the incumbent would not be required to offer more than 1.54 Mb/s of bandwidth to the competitor. (The implied rationale: 'let the competitor introduce its own high-bandwidth lines.')
- Reduce DSL open-access requirements -- Treat DSL like cable modem service, so that the wireline carrier does not have to sell unbundled transport service to a bunch of ISPs if it doesn't want to, at least not at a regulated rate. Martin thinks that incumbents will want to offer unbundled transport service anyway anyway, and maybe a transition period would help show them why.
I'm going to leave out Martin's suggestions about switching and line-sharing since I don't know enough of the background information. However, I think that the line-sharing reference suggests that an incumbent who provides DSL service wouldn't have to offer its lines to others who want to provide DSL service over those lines unless there were no cable modem provider in the area to compete with the incumbent. I'll have to go re-read the USTA case.
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