INTRODUCTION AND SUMMARY

The Alliance for Public Technology (APT) submits the following comments in support of the policies set out in the Notice in the above-titled rulemaking (or NPRM), but with the strong recommendation for a different legal approach, resulting in both a stronger legal and policy position. Specifically, APT urges the Commission to remove investment barriers for incumbent local exchange carriers (ILECs) and competitive local exchange carriers (CLECs) by "leveling the playing field" for competitors to the greatest extent possible. The Commission has proposed to do so in part by permitting ILECs to provide advanced services through unregulated subsidiaries. Recognizing that competition is likely to compel these subsidiaries to act like other CLECs, which tend to focus on high-margin customers at the expense of the ubiquity goal of Section 706, we ask the Commission to monitor carefully ILECs’ use of advanced services affiliates and to consider phasing out their use over time. In making this request, we note the critical need for the Commission to combine its monitoring activities with a commitment to implement the affirmative measures we recommend to overcome market failures that impede "deployment of advanced telecommunications capability to all Americans."

Our comments also advocate that the Commission use its discretion under Section 251(d)(2) to determine which network elements ILECs must unbundle and resell as a means of providing itself the flexibility, as conditions change, to modify the advanced services subsidiary proposal in accordance with public interest considerations. We suggest further that the Commission refrain now from imposing wholesale resale requirements on advanced capabilities to avoid unnecessary disruption later and to promote Section 706’s goal of advanced universal service.

APT is a non-profit consumer advocacy and education organization comprised of almost 300 members, including other non-profit organizations and individuals. Its members support APT’s mission to ensure that all people of the United States, regardless of race, income level, urban or rural residence, or functional limitation enjoy affordable, equitable access to communications technology and information in their homes. To advance this goal, APT filed a petition asking the Commission to begin simultaneous inquiry and rulemaking proceedings to implement Section 706 of the Telecommunications Act of 1996. In the Petition, APT urged the Commission to adopt various policies both to remove barriers inhibiting advanced telecommunications infrastructure deployment, and to actively promote infrastructure investment.

We commend the Commission for initiating dual proceedings under Section 706 for the purpose of creating "marketplace conditions conducive to the nationwide

deployment of advanced telecommunications services, such as high-speed Internet and video telephony, by all providers." APT believes that these proceedings can help to ensure that low income families, rural residents, consumers, minorities, senior citizens, people with disabilities and small business owners will receive the empowering benefits of advanced telecommunications technology. Accordingly, we set forth below our recommendation for an alternative legal approach that we contend will strengthen the Commission’s legal and policy bases for its actions.

We agree fully with the above policy thrust of the Notice. If the complex and detailed regulatory scheme set out in Section 251(c)(3) and (4) were applicable to advanced telecom operations of ILECs, they would assuredly be operating in the marketplace but under the heaviest possible regulation. Further, disparate treatment of cable and telephone companies would result. Cable is now providing high-speed data access through cable modems, free from any such heavy regulation. The telcos also are beginning from "scratch" in this field and are endeavoring to provide their competitive input, largely through xDSL services. It makes no policy sense to handicap this new competitive race by burdening the telco entry with complex regulation. The matter should be fought out in the market.

Indeed, with the applicability of "resale" under Section 251(c)(3) and (4), both cable and newcomers like Covad face unfair competition. Cable companies like Cox have invested billions of dollars to modernize their systems to provide high-speed digital services; so also Covad needs access to the conditioned local loop and co-location, but it is investing substantial sums to supply its own electronic equipment, such as the DSLAM.

Suppose, however, that large competitors like AT&T, MCI and Sprint decide to enter this field based solely on "resale" of the ILEC’s advanced telecom using substantial discounts and the incumbents’ operations support systems (OSS). Consequently, these competitors, unlike Cox and Covad, have no infrastructure investment, little risk, and can simply expand their very considerable marketing and billing arrangements to include new advanced services. We submit that these circumstances discourage rather than promote investment for advanced telecom capabilities as Section 706 intends. See APT Petition at 11. Significantly, the Bell Atlantic-New York Long Distance Pre-Filing Statement covers "plain old telephone service" (POTs) and BRI-ISDN, but not advanced telecom capabilities like xDSL.

2. The policy of strengthening competitors’ access to the loop and to floor space in the ILEC central office (co-location).

   We strongly support the proposals in the Notice to strengthen competitors’ access to the critical element, the local loop, and to facilitate effective co-location. Of course, as the Notice recognizes, there can be difficulties in this regard; "the devil is always in the details." But the general proposals are worthy.

   So also is the use of a separate subsidiary. As we stated in our Petition at page 17, such an approach has two marked advantages: (i) it allows for deregulation of the sub (i.e., no economic regulation because it lacks market power); and (ii) it "helps guard against anti-competitive activity since relations between the subsidiary and the parent ILEC would be open to full scrutiny, thus assuring treatment parity for other CLECs."

   But it is on the matter of separate subs or the "advanced services affiliates" as the Commission terms them in Paragraph 86, that we disagree with the Commission’s proposal and urge a different legal and possible future policy course. We now turn to our suggested course.

3. The appropriate legal and policy course.

   The Commission does not require the use of the separate sub but rather gives the ILEC the option of using that method to avoid application of Section 251(c). The Commission’s legal theory is that the sub, as structured in its proposal, is not a "successor or assign" of the ILEC (see NPRM at Paras. 90-92) and thus is a CLEC, not an ILEC, for this advanced telecom operation.

   Under our approach, we would require the use of the separate sub because of its competitive benefits described in (i) and (ii) above (see APT Petition at 17; and NPRM at Para. 85). The Commission in the past has required the use of separate subsidiaries, and this would simply be another instance where it is generally called for because it has been found appropriate to provide a level playing field for competitors.

   We say "generally" because there are serious questions about the broader impact of subsidiaries on the "ubiquity" objectives of infrastructure deployment that the Commission must monitor very carefully. APT is concerned that the present proposal, absent close supervision by the Commission, may help to institutionalize competitors’ preference for business and affluent residential customers and perpetuate a disregard for ordinary residential and small business consumers in impoverished, rural or other less attractive markets. Such monitoring is critically important to the implementation of Section 706 when subsidiaries are permitted or structured to become vehicles for accommodating a competitive "level playing field" that strongly favors the high end of the market. Where this becomes a reality, the use of subsidiaries would not fully serve the public interest either in urban communities "marginalized" by the market or in sparsely populated rural areas. APT’s support of a more appropriate way of requiring ILECs to establish subsidiaries to roll out high-capacity bandwith in a competitive environment recognizes this potential problem with the use of subsidiaries.

   Thus we have coupled our support of a subsidiary mechanism, as set forth in these comments, with an emphasis on APT’s pro-active recommendations. These recommendations help to overcome rivals’ propensity in a competitive marketplace to focus on high margin customers and to direct public policy more effectively on community-driven applications development and demand aggregation that brings marginalized communities and rural areas within the orbit of the digital world.

   We have recently reiterated our pro-active recommendations in the Commission’s inquiry evaluating deployment of advanced telecommunications capability to all Americans under Section 706. Below, we specifically reference two of them. It is most important in the instant proceeding that the Commission recognize the urgent necessity of coupling pro-active policies for advancing the ubiquity goals of Section 706 with use of the subsidiary as a vehicle for promoting a competitively "level playing field" for the deployment of advanced network capability. This commitment should signal a clear intent by the Commission to confront market failures as they become evident. Our central point is that the economies of scale and scope of telecommunications networks must reach the full spectrum of society. The purpose of the subsidiary approach is to promote competition as a means to an end. Appropriate use of subsidiaries must not sanction an outcome that limits competitive services to high-margin subscribers.

   Accordingly, we strongly urge the Commission to monitor closely experience with subsidiaries and to consider terminating their use in three years, for example, if evidence demonstrates that advanced services affiliates are restricting service only to high paying customers. In such case, including indications that advanced services affiliates are not extending their infrastructure to low income, rural and other high cost areas, APT strongly suggests that the Commission permit ILECs to offer advanced services in those communities on an integrated basis. This approach would enable ILECs to maximize the scale and scope of their operations to serve less attractive customers consistent with Section 706’s goal that all Americans obtain access to advanced networks.

   We are not suggesting that the Commission predetermine the necessity of relief from the subsidiary requirement—only that it is most desirable for it to have flexibility to deal with situations as the public interest dictates. Our primary point is that the potential downside of subsidiaries heightens the need for our pro-active policy proposals. The Commission must combine policies for removing barriers to facilities-based infrastructure investments with complementary policies that make the marketplace work for everyone.

   The Commission, however, has "boxed itself in" with its legal theory. It must adhere to the separate sub approach, no matter what the record shows, because that is its only basis for not applying the unbundling and resale requirements of Section 251(c) of the 1996 Act. Thus, even as to transfer of equipment purchased in good faith by the ILEC for an integrated operation, the Commission struggles with the issue, and concludes that it can only allow "de minimis" transfers between the parent and the sub. See NPRM at Paras. 105-106. This highly technical approach casts the Government in a poor light.

   We believe that there is an alternative approach that is much more appropriate, and allows for flexibility in the use of separate subsidiaries. As we urged in comments on our Petition:

   …What we are raising now is the policy issue of whether, consistent with the Act, the Act’s purpose (see APT Pet. at n.5), and the public interest standard, the UNE platform should extend to advanced capabilities, or be limited to the existing ILEC network. The Commission surely has the power, in an appropriate rulemaking proceeding, to adopt the policy modification here urged. It is the Commission’s responsibility to balance the contending considerations -- the CLECs’ need for such future advanced capabilities against providing incentives for the ILECs to initiate such capabilities to residences [footnote omitted] in order to distinguish their networks from those of resellers (including those using the UNE platform) and to meet the broadband competition now presented by cable companies.

   In a paper delivered by Dr. Joseph Farrell, then Chief Economist of the FCC, he stated (at 46) that "... Section 251(d)(2) tells the Commission, in choosing what network elements should be unbundled, to consider, at a minimum, whether unbundled access to ‘proprietary’ network elements is ‘necessary,’ and whether failure to ‘provide access’ would impair competitors' ability to provide service... there seems to be scope, as there ought to be, to consider the competitive implications of requiring or not requiring unbundling [footnote omitted]." That is precisely what APT is requesting the FCC to do in the proposed rulemaking -- to consider whether competition and the public interest are better served by requiring or not requiring unbundling of advanced capabilities not yet in existence. We submit that for the reasons set forth in our petition, the balance should be struck in favor of not unbundling.

   The Eighth Circuit Court of Appeals has held several times, and justly, that the Commission has the discretion to determine which networks elements are to be unbundled and how that should occur. See, e.g., SBC et al. v. FCC, Case no. 97-3389, 1998 U.S. App. LEXIS 18352, *16 (August 10, 1998). ("Where, as it has here in Section 251(d)(2), Congress expressly delegates to an agency the power to formulate policy and fill gaps in a statutory scheme, we defer to agency regulations promulgated pursuant to such delegation ‘unless they are arbitrary, capricious, or manifestly contrary to the statute.’" [Citing Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 843 (1984)]. In its recent decision, the Eighth Circuit court stated:

   Although Congress defined the term "network element" in the Act, it invested the FCC with the authority to determine which network elements should be made available to new entrants on an unbundled basis. See 47 U.S.C.A. Sec. 251(d)(2). Section 251(d)(2) limits the FCC’s authority in this regard only insofar as it requires the FCC to consider two factors "at a minimum" as it makes this decision. These factors are whether "access to such network elements as are proprietary in nature is necessary," and whether "the failure to provide access to such network elements would impair the ability of the telecommunications carrier seeking access to provide the services that it seeks to offer."[Citation omitted]. Id. at * 4.

   At the tail end of the NPRM, the Commission has finally turned to the applicability of Section 251(d)(2). See NPRM at Paras. 179-184. We submit that the Commission should exercise its discretion under Section 251 to reach the sound conclusion we propose above. The Commission may or may not be correct that Section 706 confers no independent grant of power, but the provision strongly directs the Commission to take its purpose and aims into consideration when engaged in any "regulating method." It would be clear error for the Commission to disregard this important directive when exercising its discretion under Section 251.

   The above discussion deals with the applicability of the UNE platform to the ILEC’s advanced telecom capabilities. We turn now to the issue of the applicability of Section 251(c)(4) — the Act’s wholesale resale provision. We believe that it is sound policy for resale (see Section 251(b)(1)) to apply to such capabilities and not wholesale resale. We also believe that the Commission has the power to act in this regard as set out in pages 17-19 of our Petition.

   We recognized in that analysis what the Commission has again stressed in the NPRM – that Section 401(d) prohibits the Commission from forbearing application of Section 251’s requirements until it determines that they have been fully implemented. But consider what would occur if wholesale resale were implemented for ILEC xDSL service. One month after such implementation, an incumbent could file a persuasive petition asking the FCC to forbear on the grounds that all the requirements of Section 401(a) are met, and indeed, under the Commission’s proposed regulatory regime for advanced telecom capabilities (regarding co-location, loop availability and the use generally of a separate subsidiary) the public interest is served by forbearance. The Commission’s very proposal in this proceeding establishes that all the requirements for forbearance are met --- no need for rate regulation, public interest protection against discrimination of competitors, and public interest benefits for consumers. We contend therefore that in view of Section 401(a)’s conditions and again taking into account the clear statutory directive of Section 706, the Commission does have the discretion to act now in the public interest as to these advanced telecom capabilities. If not now, when would the Commission act – after six months or a year? This would be simply an unnecessarily disruptive way of proceeding. We again implore the Commission to adopt a common sense approach to this issue.

4. Affirmative policies to promote infrastructure investment for advanced capabilities.