Telecommunications Regulation in Comparative Perspective

As part of a continuing emphasis on telecommunications regulation reform, the Silicon Flatirons Center brought together a top-flight panel of experts at a conference to discuss telecommunications regulation from a comparative perspective.

By Paul Shoning, Silicon Flatirons Research Fellow

New leadership at the FCC and funds available through the American Recovery and Reinvestment Act present an opportunity to shape telecommunications regulation. As part of a continuing emphasis on telecommunications regulation reform, the Silicon Flatirons Center brought together a top-flight panel of experts at a conference on September 9, 2009 to discuss telecommunications regulation from a comparative perspective. The conference, held at the University of Colorado Law School, explored the successes and failures of different approaches to unbundling policies, broadband funding strategies, spectrum policy strategies, and universal service policy.

The opening panel began by surveying the unbundling policies in Australia, Canada, the European Union, and the United States. Though the different jurisdictions each had differing policies, Canada and the U.S. had fewer unbundling requirements than Australia and the European Union. Moderator Norton Cutler, Of Counsel at Perkins Coie, began the discussion by querying which approach the panelists through was most effective.

Reviewing Canada’s experience, Hank Intven, Partner at McCarthy Tetrault, noted that one risk of unbundling is that it leaves the regulator to make wise decisions for the proper pricing of unbundled assets–under pricing leaves no incentive for the incumbent to invest in infrastructure. Intven credited Canada’s successful broadband penetration to its lack of unbundling requirements and the fierce competition between telecommunications companies and cable companies. Bob Harris, Senior Consultant for CRA International, observed that in Australia, mispricing of unbundled assets may have had the unintended consequence of delaying wireless broadband deployment. Harris reported that Unwired (a wireless broadband provider) delayed expanding its service because of the fierce competition from companies using, what Unwired felt were, unbundled loops priced below the cost of service.

Randy Milch, General Counsel at Verizon, discussed the effect of unbundling on investment incentives by noting that Verizon only began laying fiber to the home after the removal of unbundling requirements in the U.S. While agreeing with many of the remarks, Scott Marcus, Senior Consultant for WIK-Consult, cautioned that the effectiveness of unbundling policies depends on the infrastructure already in place. In the E.U., for example, relatively few areas have a deployed cable television system. Because there is only one wire to the home, E.U. countries would not see the fierce competition Intven described in Canada.

The second panel’s discussion focused mainly on identifying the best funding mechanism for broadband deployment in the United States. Steve Davis, Senior Vice President of Policy and Law at Qwest, began by asserting that most of the broadband subsidy mechanisms in the U.S. have failed. One problem, Davis noted, was the lack of prioritization of broadband requirements. David Brown, General Counsel for WildBlue, affirmed the current lack of prioritization and noted that reverse auctions, the economists’ preferred mechanism for distributing funds, cannot occur without clearly defined requirements on which the applicants will bid. Brown observed that the National Telecommunications and Information Administration has taken a much easier rout by telling telecommunications companies to “give us your plans and we’ll decide” which to fund. Greg Rosston, Professor at Stanford University, suggested that a voucher system where individuals decide which broadband service to purchase would have the beneficial effect of allowing the market to determine the best use of funds to spur broadband deployment. However, Rosston noted, vouchers were the one system that Congress specifically banned.

Drawing on the discussion in the opening panel, Cutler asked the panelists if they though removing unbundling requirements may spur investment in broadband infrastructure without government investment. Balan Nair, Chief Technology Officer for Liberty Global, noted that this approach worked successfully in Japan. In Japan, NTT proposed deploying fiber to the premises if the regulators guaranteed that the fiber infrastructure would be exempt from unbundling requirements. With the guarantee secured, NTT began deploying the fiber network. In response, the cable companies invested in upgrading their infrastructure with competitive DOCSIS 3.0 technology. Nair concluded that the cable companies would not have made this investment without the threat of competition from NTT.

The third panel began by comparing the conceptual differences in spectrum policy between the U.S. and the U.K. Susan Ness, Head of Susan Ness Strategies, discussed the FCC’s role in regulating non-governmental spectrum use according to the “public interest, convenience, and necessity.” In contrast, William Webb, Head of Research and Development at OFCOM, noted that OFCOM has duties to two constituents–citizens and consumers. Consumers are presumed to want the best service at the cheapest price, while citizens presumably want the best for society. Because these are output oriented measurements and spectrum is an input, Webb said that OFCOM saw its primary role as making spectrum efficiently available.

Focusing on availability, Kathleen O’Brien Ham, Vice President of Federal Regulatory Affairs at T-Mobile, suggested that a key challenge was moving legacy users to more spectrum-efficient technology. Moderator Pierre de Vries, Senior Adjunct Fellow of the Silicon Flatirons Center, expanded on this challenge by asking how technological change was impacting regulation. Paul Kolodzy, Founder of Kolodzy Consulting, said that the key challenge was developing regulations that allow for future technological progression. O’Brien Ham added that regulation should focus on allowing technological competition. For example, the Digital Television transition, which was heavily regulated, took many years and has not resulted in an efficient use of spectrum while cellular phone service, which is lightly regulated, continues to make rapid advances.

The final panel compared universal service policies in various jurisdictions. Ray Gifford, Partner at Kamlet Reichert, noted that nearly every country has a universal service policy, and in almost all these countries, political considerations drive fund distributions. Expanding on Gifford’s observation, Dale Hatfield, Executive Director of the Silicon Flatirons Center, noted that even in countries where corruption is not endemic, regulators are unable to resist spending inappropriately once money is available. Scott Wallsten, Economics Director of the Broadband Task Force, quipped that, from a competition perspective, open corruption for personal gain may be better than subsidization of an incumbent at the expense of future competitors.

Noting the near universal shortcomings of universal service policies around the world, de Vries questioned whether there was a more efficient way to raise and distribute funds. Wallsten suggested that it may be more efficient to raise funds through general taxation. Because urban customers currently subsidize rural customers, Wallsten observed that we have the unintended effect of residents of downtown Detroit subsidizing millionaires in Aspen. Echoing the conclusion of the second panel, Wallsten suggested that once funds are raised, a reverse auction mechanism is the most efficient way to distribute universal service funds. Even if the auction fails to generate any competitive bidders, the funds simply subsidize the incumbent provider, which is the current system.

Throughout the conference, all the panelists agreed that while an understanding of other approaches is critical to avoiding policy errors. The panelists also stressed that, because infrastructure and legal frameworks differ so significantly between countries, blindly copying a policy that worked in other areas is unlikely to succeed.

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