FCC Rules That DSL Is An “Information Service”

Lynne Kiesling

So what, you say? It amounts to the deregulation of DSL, through the vehicle of saying that phone companies no longer have to share their phone lines with competitors. It puts DSL on more equal regulatory footing with cable, in the wake of the Supreme Court’s Brand X decision earlier this year that negated the open access for competitors mandate.

This is huge, and hugely good. As usual, Ray Gifford has clear and cogent commentary on it:

For this, the Chairman deserves congratulations, not just for the regulatory parity it will achieve, but the Schumpeterian incentives it creates.

It is peculiarly foreign to the regulatory mindset that you only invest in those things where you believe you will be able to earn back and keep the profits from that investment. In capitalist parlance, we call that a property right. This Order acknowledges that.

Some folks are nervous that this ruling means more entrenchment of big old phone companies and less opportunity for competing resellers who lease their wires. I prefer to see it as the removal of a regulatory mandate that forces property owners to let others use their property for a fee.

Sonia Arrison agrees with me on this, and points to the vibrant reseller industry in cell phones, which has not been hampered by the lack of an access mandate. I should also mention here that I am thrilled to find that Sonia has set up her own website, yay!

If you define property rights clearly and reduce transaction costs, sharing and reselling may still happen. But it will happen in a more economically efficient and dynamic way.

Another good commentary comes from Tim Lee at Technology Liberation Front:

In any event, if your goal is to spur investments in new infrastructure, the first step must be to insure that the company that invests capital reaps the profits from that investment. It’s hard to see how “open access” rules could possibly accomplish that. Once the dust has settled from the well-deserved death of “unbundling,” we should have a thorough debate about how best to lower barriers to entry to the broadband market, so that companies can more easily build infrastructure (especially wireless infrastructure) to compete with the incumbents. But the debate must start with the principle that the government should respect the rights of companies who invest in infrastructure to profit from their investments, rather than “unbundling” them and giving “access” to other companies who have not bothered to make such investments.

Question: for you electricity folks out there, do you see any lessons here that we could apply to the putative lack of transmission investment in electric power? We’ve had open access rules since Order 888. We had investment problems before then, but you could argue that the open acess tariff in electricity transmission reduces the incentive to invest in high voltage wires.


5 thoughts on “FCC Rules That DSL Is An “Information Service”

  1. In a word, no. I see a very loose analogy.

    I can see that there are competing broadband services, both of which can use existing infrastructure to get into the home. I would expect that broadband over powerline would be yet another competing form, along with wireless technologies. Given the existence of these competing forms of similar services, I’m in agreement that common-carrier treatment is not really called for. This all makes rational sense. But as a power engineer, I have difficulty forcing electric transmission into a parallel. I see the problems as fundamentally different.

  2. The open issue on this seems (to me at least) the FCC and Illinois Commerce Commision granted incumbent monopoly to Ameritech, GTE etc some time ago on the condition that the allow others to resell access to their lines. Now Ameritech, GTE etc don’t want resellers to sell access to their lines.

    Wasn’t it part of the deal to begin with? Didn’t Ameritech and the Baby Bells realize they would not be able to keep competitors off the lines they laid when they signed up to be line-laying monopolies? Why should they change the rules midstream so that the incumbents can put more of a squeeze to the customers?

    JBP

  3. What JBP said, plus:  those phone wires (and many cable TV systems) were installed under monopoly grants.  In the case of phone wires, they were given guaranteed rates of return as well.

    I’m all for the investor reaping proper profits on their investments, but there’s a problem when this amounts to only one service provider being allowed to actually compete in a market.  The proper thing to do would be to separate the phone (and cable) companies into programmers/service providers (handling the data) and distributors (handling the infrastructure).  Let the distributors get their rate of return in return for anyone being allowed to provide services, and you’ll see an explosion in the business.

  4. What does this mean for POTS which has more regualtions? Are we going to see phone companies offering telephone service over DSL at reduce rates in order to use this ruling to gain more control over such things? It’s possible to set up phones so that they are VOIP until their get to the DSL terminus where they are converted back to POTS. It would even allow phone companies to offer multiple lines over a single copper pair and many other new value added services. This could push the Bells into the VOIP market and possibly stifle the now existing players.

  5. As a consumer I’m not happy about the FCC decision, as it seriously limits my choices. I would have preferred a common-carrier approach where the distributor makes regulated profits on its infrastructure business and the providers all use the same network. Let the providers struggle to differentiate themselves.

    That is also the way I prefer the electric transmission system to be regulated. The problems causing lags in transmission investment are cost allocation and cost recovery, not that the profits are limited to a regulated rate of return on book asset value. I am confident that there would be a line of providers willing to build and operate a transmission line for which they could obtain a regulated rate of return commensurate with a regulated level of risk. The problem is that our industry structure doesn’t yet offer many such clear opportunities, and the regulatory mechanisms that would facilitate it generally do not exist in this country.

    An associated problem is that the transmission decision-makers are also in a much larger energy business, and they would prefer that their transmission function be an adjunct to their energy business. Order 888 really makes that transmission function available to competing energy business, though, so these combined providers simply sit on their transmission functions. I hear “WE could build transmission, but then WE can’t guarantee that WE get to use it.” I don’t even know for sure that this is literally true, but clearly the WE in that sentence is wearing several hats. If WE had property rights over the project, WE would control it and WE would extract the energy-business profits made available by its existence. Clearly that might result in some transmission being built, but I don’t think that is a valid basis for a competitive model in energy supply.

    Region-sized spot markets with LMP do not solve the transmission investment problem, and never should have been expected to. LMPs provide the important function of exposing marginal prices that react to changes in supply, demand, and transmission, but they do not provide a proper means of focusing the cost of a transmission project to the entities or areas that benefit from it. It is simply not true that the value of a transmission line is equal to the value of the financial rights it provides. If it were true, then there might be such a thing as “merchant” AC transmission built without regulatory cost recovery, financed on the value of its financial rights. A better approach to building AC transmission is for the decisions and their costs to be focused on the beneficiaries of the projects (neglecting for the moment how challenging that would be to do). Beneficiaries would estimate the value of the alternative relative to its costs, and would decide on that basis. If that sounds far-fetched for consumers to be doing, keep in mind that regulators or LSEs could stand in as representatives for groups of consumers, as they do today. Also realize that consultants and transmission providers would quickly move into the business of evaluating and “selling” transmission projects to beneficiaries. In any case, a project accepted under this system joins the regulated cost-recovery mechanism, and its revenue requirements are billed out to beneficiaries over time.

    This kind of system has been in effect in Argentina’s LMP-style market for a dozen years, and it has been successful in bringing major transmission projects into being.

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