Reply Comments of Universal Service Alliance

Universal Service Alliance (USA) joins other commenters in commending the Federal Communications Commission (Commission) for issuing its Notice of Proposed Rulemaking (NPRM) and proposing measures to promote the deployment of advanced telecommunications capability for all consumers as required by Section 706 of the Telecommunications Act of 1996. However, like other commenters, USA is concerned that requiring advanced services affiliates to follow strict structural separation requirements could discourage the deployment of advanced capability where such deployment is needed the most – in low income, rural and other traditionally underserved areas. In view of the growing "digital divide" in our society, we urge the Commission to employ regulatory tools that impose the least cost on providers who deploy advanced capabilities in underserved areas and allow those providers to realize the economies of scope in research, development and marketing of those advanced capabilities.

1. The Commission Should Be Seeking to Close the Digital Divide.

   When Congress enacted the Telecommunications Act of 1996, it recognized that high speed, broadband communications is essential not just for global financial firms and high technology companies but for individuals, community based organizations, small businesses, schools, libraries and public services agencies in all areas of the country including low income neighborhoods and rural areas.

   Since 1996, the explosion in Internet applications has made it even clearer that access to jobs, commerce, and education in our society increasingly depends upon access to advanced telecommunications capability. It also has become increasingly clear that there is a "digital divide" in our society where a substantial number of Americans are unconnected to the Information Age. A recent study by the National Telecommunications and Information Administration entitled Falling Through the Net II finds that while there has been a significant growth in computer ownership and usage overall,

   [T]he growth has occurred to a greater extent within some income levels, demographic groups, and geographic areas than in others. In fact, the digital divide between certain groups of Americans has increased between 1994 and 1997 so that there is now an even greater disparity in penetration levels among some groups. There is a widening gap, for example, between those at the upper and lower income levels. Additionally, even though all racial groups now own more computers than they did in 1994, Blacks and Hispanics now lag even further behind Whites in their levels of PC-ownership and on-line access.

   This digital divide also extends to high speed data networks. In California, where the California Public Utilities Commission opened the local exchange market to competition well before the enactment of the Telecommunications Act of 1996, Competitive Local Exchange Carriers (CLECs) are not deploying advanced networks to serve all Californians. Of the 150 CLECs certificated to date, only a few are actually constructing new network facilities and those facilities are being selectively deployed to serve high-end customers in downtown financial districts and high tech centers like Silicon Valley. A recent article in the San Francisco Examiner describes the current situation as follows:

   The acronym CLEC may be a bit of a misnomer since most of these companies aren’t marketing traditional local phone service but rather focusing on selling data transmission capacity. Only about 250,000 of California’s 22 million local phone lines are serviced by CLECs, said Jack Leutza, director of the state PUC’s telecommunications division.

   "The CLECs’ networks are all in and around key business districts," said Ron Cowles, another Dataquest analyst. "Those are the big data users. They’re going after the cream of the crop. If you look at San Francisco, the CLEC’s probably have about 15 percent of the business market." That’s because profit margins are much higher in the business market, analysts said.

   In this proceeding, the Commission should be trying to close this digital divide. Above all, it should avoid policies that would widen the divide.

2. The Commission’s Rules Should Support Efforts at the State and Local Level to Encourage the Deployment of Advanced Telecommunications Capabilities to Underserved Communities.

   In view of the growing "digital divide" in our society, USA filed comments in CC Docket No. 98-146 urging the Commission to use its authority under the Telecommunications Act to accelerate the deployment of advanced capabilities in underserved communities. We described how local community based organizations, including USA and its member organizations, have been working to accelerate such deployment in California and how these efforts are beginning to bear fruit.

   A. Community Partnership Agreement.

   In particular, one of the results of the 1997 merger between SBC Communications and Pacific Telesis Group is a broadbased Community Partnership Agreement (CPA) in which Pacific Telesis, SBC and nine groups and coalitions (including USA) representing 134 organizations and individuals entered into a partnership the aim of which is to "meet the needs of California’s underserved communities for full and equal access to basic and advanced telecommunications services, and to meet underserved communities’ needs for information carried by those services." Among other things, the CPA calls for an unprecedented goal of 98 percent telephone penetration rate in California and establishes a $50 million Technology Fund which will "focus on advancing universal service in underserved communities and providing underserved communities with access to and education about emerging and advanced telecommunications." The California Public Utilities Commission gave preliminary approval to the CPA on March 31, 1998 and final approval on July 23, 1998.

   B. Widescale Deployment of ADSL Technology.

   In addition, at the urging of USA and other signatories to the CPA, Pacific Bell recently agreed to broadly deploy Asymmetric Digital Subscriber Line (ADSL) technology in more than 200 communities across California, including traditionally underserved communities such as East Palo Alto, South Central Los Angeles, Watts, Hunters Point, Oakland, Compton, and San Francisco’s Mission District. Pacific Bell recently announced that it has deployed ADSL in 180 of these communities.

   The CPA and broad deployment of ADSL technology are important steps in promoting access for underserved communities in California. The CPA provides an organizational structure and financial resources to begin to promote the development of applications and demand in underserved communities. The broad deployment of ADSL complements the CPA by providing the infrastructure necessary for these applications. By enabling customers to access and transport information at high speed over ordinary copper lines, ADSL can help to create new jobs, enhance education, improve health care and strengthen civic and nonprofit organizations in traditionally underserved communities.

3. The Commission Should Avoid Imposing Higher Costs and Inefficiencies on Any Provider that is Deploying Advanced Capabilities to Traditionally Underserved Communities.

   Local Exchange Carriers (LECs) are deploying ADSL technology based on their current assessment that ADSL will be competitive with other high-speed data products. A recent analysis by Prudential Securities notes that

   The most formidable competitors [to large LECs] are cable companies, who already have an estimated 250,000 high speed Internet access subscribers in the U.S. In comparison, we believe the large LECs currently have less than 10,000 ADSL subscribers.

   ...AT&T’s planned acquisition of TCI intensifies the cable modem threat to the RBOCs since AT&T intends to accelerate TCI’s timetable for upgrading its network to provide high-speed Internet access. TCI’s prior network upgrade plan called for competition by the end of 2000, but AT&T hopes to complete the upgrade by as much as six months earlier. TCI and its affiliates account for about 30% of the homes in the U.S., but AT&T doesn’t plan to stop there. AT&T plans to find a way to address the remaining 70% of homes on a facilities basis, and further deals or alliances with cable companies are a possibility. AT&T is targeting 30% penetration of TCI’s customers with high-speed Internet access within 5 years, which would be over 3 million subscribers.

   Regarding the relative costs of ADSL and cable modem deployment, the Prudential Securities Report states "[W]e believe the deployment costs of ADSL and cable modems will be comparable and that neither side will have a significant cost advantage." In particular, the Report estimates that a cable company’s total high speed data infrastructure cost will be $629 per subscriber and a LEC’s total ADSL infrastructure costs will be $700 per subscriber.

   The Report notes that to be successful LECs will have to work with hardware and software providers to ensure that that ADSL equipment is interoperable, affordable and available on a "plug and play" basis. The LECs will also have to put into place processes that will handle wide-scale demand. This includes training their staff to quickly determine whether a customer’s loop is qualified for ADSL service and to quickly diagnose and correct problems in ADSL service. The Report states "It is not a trivial matter for the large LECs to quickly diagnose the condition of their lines because they haven’t had to monitor their lines this closely before. Voice services are much more tolerant of imperfect lines than ADSL service." Cable companies deploying cable modem technology face similar challenges.

   With neither technology having a decided advantage in cost or performance, the Report advises investors that LECs should be competitive with cable companies in the market for high-speed Internet access. The Report states "In areas in which both telcos and cable companies compete, we expect market share to be close to evenly split." Based on this assessment, the Report concludes that ADSL will generate a sufficient rate of return for LECs to deploy the technology aggressively. In California, aggressive deployment of ADSL has meant that traditionally underserved areas such as East Palo Alto, South Central Los Angeles, Oakland and the Mission District now have access to high speed Internet access.

   USA strongly believes that all providers including LECs should have a strong economic incentive to deploy ADSL and other advanced capabilities to serve all customers, not just high-end business customers. Consequently, we are concerned that, as proposed in the NPRM, the requirements for the advanced services affiliate could alter the economics of ADSL deployment so that there is little or no incentive for LECs to deploy this technology in low income, rural and other underserved areas.

   Given the current competitive parity of ADSL and cable modem technology, the Commission should be especially careful not to favor the deployment of one technology over the other. Nor should it favor one type of provider over another. As Chairman Kennard recently stated to regulators at the ITU Conference,

   As I travel throughout the United States, incumbents tell me they want to make investment decisions based on the rules of market risk and reward, rather than regulatory advantage. They deserve that opportunity.

   Currently, cable companies, including the combined AT&T/TCI, are not required to interconnect, unbundle or resell their high speed data services or provide them through a separate subsidiary to avoid such requirements. Under these circumstances, the Commission should not impose requirements that would compel LECs to either incur additional costs or forego efficiencies that could render ADSL service non-competitive relative to cable modem service.

   Imposing even small costs and inefficiencies could have a large effect on the deployment of ADSL service especially in underserved communities. The Prudential Securities Report indicates that ADSL and cable modem technology are extremely close in terms of the cost of deploying these technologies. Indeed, the Report indicates that cable modems have a slight advantage. Under these circumstances, imposing additional costs and inefficiencies could make the deployment of ADSL non-competitive. This would be true not just in California but in all states where LECs are considering deploying ADSL technology. While the Commission should be interested in preventing unfair discrimination and cross-subsidization in the deployment of high-speed data services, the Commission should not adopt rules that would render one type of provider or technology non-competitive.

   Moreover, even if higher costs and reduced efficiencies from the Commission’s NPRM are not sufficient to discourage LECs from deploying ADSL service altogether, higher costs and inefficiencies could discourage LECs from deploying ADSL service in low income, rural and other underserved communities where demand is less certain, costs may be higher and profit margins are likely to be lower than in the high-end business market. The result of higher costs and inefficiencies would be to focus ADSL deployment in the high-end market where advanced capabilities are already being deployed, instead of the residential market where such deployment is needed. This result would be directly contrary to the intent of Section 706, which requires that the Commission take steps to promote the deployment of advanced capabilities to all consumers.

4. This Commission Has Found That Strict Structural Separation Requirements Can Impose Higher Costs and Greater Inefficiency to the Detriment of Providers and Consumers.

   This is not the first time this Commission has been faced with this issue. In its Computer III Inquiry, the Commission reexamined its structural separation requirement for enhanced services. There, the Commission found that requiring structural separation results in higher costs and greater inefficiencies, as providers are unable to organize their operations in the manner best suited to the markets and the customers they serve. The Commission stated

   We further recognize that structural separation imposes direct costs on the BOCs from the duplication of facilities and personnel, the limitations on joint marketing, and the inability to take advantage of scope economies similar to those we noted for AT&T. These are indications of the more fundamental costs of structural separation – namely, that the BOCs are unable to organize their operations in the manner best suited to the markets and customers they serve. The net result of these costs in delayed services and innovation, in direct duplicative costs, and in organizational inflexibility, is that structural separation prevents consumers from obtaining services and service combinations that they desire.

   Finding that structural separation had few advantages, if any, over non-structural safeguards, the Commission turned to less restrictive, non-structural safeguards to prevent unfair discrimination and cross subsidization.

   In the Computer III Order, the Commission noted that "[S]tructural separation is not an end in itself, but a regulatory tool for protecting the public interest, to be altered as experience and changed circumstances warrant." Section 706 requires that this Commission "encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans by using in a manner consistent with the public interest, convenience and necessity

   … regulating methods that remove barriers to infrastructure development." In view of the growing "digital divide" in our society, this Commission should employ the regulatory tool that imposes the least cost on LECs who deploy advanced capabilities in underserved areas and allow those LECs to realize the economies of scope in the research, development, and marketing of those capabilities.

5. The Commission Should Give Added Flexibility to LECs that Deploy ADSL Service in Low Income and Rural Communities.