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December 20, 2004, 9:00 AM ET, Alert No. 1,041.
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Reaction to FCC Unbundling Order

12/15. The Federal Communications Commission (FCC) adopted, but did not release, an Order on Remand at its December 15 meeting regarding incumbent local exchange carriers' (ILECs) obligations under 47 U.S.C. § 251 to make their network elements available on an unbundled basis. This article reviews some of the reactions from interested parties.

The FCC issued a short release [2 pages in PDF] that summarizes this Report and Order. Four Commissioners wrote brief separate statements. See also, story titled "FCC Adopts Unbundling Order" in TLJ Daily E-Mail Alert No. 1,039, December 16, 2004.

Walter McCormick, P/CEO of U.S. Telecom Association (USTA), a group that represents ILECs, wrote in a release that "While we will need to review the final order once it is released, it appears that the Commission recognizes the tremendous competition in today's consumer market and is moving in the right direction, although not fast enough, on phasing out the unlawful UNE platform. Unfortunately, instead of resolving all of the issues once and for all, as the courts have ordered, the Commission continues to perform a regulatory two-step, which at the end of the day leaves the industry right back where it started with government-managed competition."

McCormick added that "key aspects of this order appear to defy the direction of the D.C. Circuit, further delaying certainty for the industry and deferring the clear public interest in investment-based competition. It is unfortunate that the Commission failed to seize the opportunity to take decisive steps forward in our telecom policy and catch the laws up with the modern world. By clinging to and even expanding heavy-handed regulations, the FCC fell far short of this important task today."

FCC Chairman Michael Powell predicted in his December 15 statement [PDF] that "one will undoubtedly hear the tortured hand-wringing by incumbents that they are wrongly being forced to subsidize their competitors."

Herschel Abbott, BellSouth's VP for Governmental Affairs, stated in a release that it appears that "there have been significant strides in responding to the vast amount of switching alternatives now in place."

But, he continued that the FCC "has recognized the level of competition in the residential market, but inexplicably seems to ignore the broad competitiveness of the business market where we are still required to substantially unbundle elements of our network so our competitors can get them at a huge discount."

Abbott elaborated that "We are extremely disappointed in the new tests to assess impairment in the areas of transport and high-capacity loops. These rules do not appear to follow the court's order to take into consideration potential competition as well as actual competition. For example, there are BellSouth central offices in Charlotte, Miami, Atlanta and Ft. Lauderdale house a dozen or more competitive fiber networks which apparently could not meet the new high-cap test, thus requiring BellSouth to continue to offer broad unbundling. These rules do not appear to recognize this obvious competition or establish a mechanism to foster the facilities-based competition Congress envisioned. Similarly unbundling of transport is broader than warranted."

Powell also stated that "one can expect to hear dire predictions of competition's demise from those who wanted more from this item. Time will show this will not be so. Business models may change, but competition and choice for consumers in the information age will continue to grow and thrive."

Mark Cooper, of the Consumer Federation of America (CFA), stated in a release that "The FCC today continued its practice of chipping away at telecommunications competition while strengthening the Bell monopoly. And consumers will be the ones paying the price through diminished choices and higher rates. The Bells will soon be able to leverage their new market power over new services, such as broadband and Voice over Internet Protocol, stymieing competition in those new territories as well."

Cooper added that "I find it difficult to understand how the Commission could develop a rule finding there is telecommunications competition throughout this country when we know that most areas of the U.S. only have one major telecommunications provider."

Russell Frisby, CEO of CompTel/ASCENT, wrote in a release that his group's members "remain resolute in their mission to bring cost-effective services to their customers. However, today's FCC actions may potentially place unnecessary obstacles in front of further investment and economic development. CompTel/ASCENT is committed to helping its members retain the unfettered access to monopoly chokepoints that is vital to the further development of IP communications."

Moreover, Frisby stated that "Our hope is that, in the long term, this decision does not ultimately hamper the evolution of alternative IP networks and the deployment of competitive VoIP offerings."

This Report and Order is FCC 04-290 in WC Docket No. 04-313 and CC Docket No. 01-338.

AEI Panel Addresses Telecom Regulation

12/14. The American Enterprise Institute (AEI) hosted a panel discussion titled "The Proper Direction for Telecommunications Reform Legislation". Robert Crandall of the Brookings Institution presented a paper titled "A Critical Analysis of the Economic Benefits of the 1996 Telecom Act's Local Competition Provisions". He argued that while the goal of the 1996 Act was to produce local competition, it did not produce "meaningful local competition".

He said that while there have been some benefits for local competition, they have been swamped by resource costs. He added that competition is coming instead from wireless and voice over internet protocol (VOIP) services. He also said that the 1996 Act delayed entry into long distance by the regional Bell operating companies (RBOCs), and this delay resulted in the loss of reduced rates for consumers.

Crandall summarized the theory behind the 1996 Act's local competition provisions. The local telecommunications market was a monopoly. So, the Congress mandated unbundling of network elements at regulated rates, mandated interconnection, mandated reciprocal compensation for local interconnection, and barred the RBOCs from providing in region interLATA services until they met a 14 point checklist. The theory was that this would enable new entry, increase competition, and thereby cause company revenues, and prices, to drop for local telecommunications services. And, in theory, it would not affect long distance revenues or rates.

Crandall said "the theory did not work out very well". Instead, long distance revenues and prices have dropped, while local revenues grew until quite recently. He added that local revenues only dropped because of a drop in the total number of access lines. Moreover, contrary to the theory underlying the 1996 Act, local prices have not dropped as anticipated by the theory underlying the 1996 Act.

He also argued that the new entrants enabled by the 1996 Act have not innovated.

He said that "consumers have gained from lower local rates". However, he said that there have been costs as well. He said that the competitive local exchange carriers (CLECs) spent more per customer than the incumbent local exchange carriers (ILECs), even though the CLECs did not maintain the networks of the ILECs. He argued that CLEC entry reduced productivity.

Moreover, he argued that the total capital expenditures of the CLECs far exceeds their total current market capitalization. He added that the prospects for survivors is bleak.

John Mayo of Georgetown University's McDonough School of Business was the first panelist to comment on Crandall's paper. He said that the "current process has shortcomings" and is "arguably broken". However, he emphasized the reaction of the ILECs to the local competition provisions of the 1996 Act. He said that "monopolists do not readily cede their monopoly power", and that the ILECs worked hard to maintain control over their networks after passage of the 1996 Act.

He also made the point that rent seeking behavior has occurred at the FCC, in the courts, and in the Congress.

Mayo offered three recommendations. First, he said that the practical implementation of universal service has been atrocious. He said that funds should be collected broadly and distributed narrowly, but that just the opposite is taking place now. He said that policymakers should consider including broadband services when collecting funds.

Second, he argued that access pricing is laden with subsidies and competitive distortions, and that it is essential that access "be priced at the same competition enabling levels" that exclude subsidies.

Third, he argued that the Congress should sharpen the prospects for antitrust liability as a means to promote competition.

To this final point Crandall responded that "there is no empirical economic evidence that antitrust has been successful at improving consumer welfare". He said that "we need some evidence" before more authority is given to the Federal Trade Commission (FTC) and the Department of Justice's (DOJ) Antitrust Division.

He added that the independent regulatory agencies that have been given antitrust authority have been "politically compromised". He added that "you have to change the structure to reduce the political lobbying".

Crandall also addressed the FCC's universal service programs during the question and answer session. He said that universal service "has nothing to do with universality of service". Rather, it is "a huge slush fund moving around between competing political groups".

Harold Furchtgott-Roth, who is a former FCC Commissioner, next commented on Crandall's paper. He made three main points.

First, he said that is far easier to analyze the consequences to consumer welfare of a statute in hindsight than it is to predict the likely consequences before its enactment. He was involved in drafting the 1996 Act as a member of the staff of the House Commerce Committee.

Second, he stated that while Crandall's assessment is on point as to local competition for consumers, there has been more innovation and price reduction on the business side.

Third, he said part of the problem is not the statute, but rather how the FCC implements statutes. And hence, he argued changes in the law will not necessarily bring about improvement. He was later asked a question about what legislation the Congress should enact to direct the FCC on VOIP regulation. He responded that "my point is that they do not follow directions".

Finally, Walter McCormick, P/CEO of U.S. Telecom Association (USTA), spoke. He said that "UNE-P was dumb", and that "it was an entirely failed experiment". He argued for "market competition" as opposed to "government managed competition".

Robert Hahn of the AEI Brookings Joint Center opened the discussion, and Greg Sidak of AEI moderated.

BellSouth CEO Ackerman Offers Recommendations for Next Telecom Act

12/14. Duane Ackerman, Ch/CEO of BellSouth, gave a speech, answered questions, and held a press conference, at the American Enterprise Institute on Tuesday, December 14, 2004. He said "It's time to update our communications laws" with Congressional legislation. He argued for less regulation in some areas (such as mandatory unbundling of network elements, and price regulation), but expanded regulation in others. He wants the Congress to expand telecommunications regulation under the rubric of 911, universal service, CALEA, disabled access, and consumer protection from telecommunications carriers to other industry sectors.

He gave a luncheon address that followed a panel discussion. See, related story in this issue titled "AEI Panel Addresses Telecom Regulation"

Ackerman said that there is a "disconnect between policy and reality". He asserted that "There's no credible evidence of ``market power´´ anywhere in U.S. communications markets today." (Internal quotations are from the prepared text of the speech.)

"There's no need for Government regulation to control the market", said Ackerman. "Perhaps it's time to substitute competition for regulation instead of substituting regulations for competition which was yesterday's policy objective."

He stated that "The next telecom act should focus on two communications policy goals: First, we should foster a far more consumer-controlled, investment-friendly, and less regulated marketplace than we have today… and … Second, we should correct flaws in the current universal service mechanism, preferably before that mechanism totally unravels "

He still wants some price regulation. Under his proposal, "very basic service rates would remain regulated. But if a customer opted to add another service or feature, the resulting bundle would not be regulated."

He also wants a reduction in, but not yet the elimination of, unbundling requirements. He said that "Wholesale regulation should be limited to requiring non-rural phone companies to unbundle local copper loops at negotiated rates. This obligation also should sunset after a few short years in order to facilitate commercially negotiated network access arrangements."

"During that period, incumbent carriers would be required to give competitors access to copper plant where other competitive alternatives are not available. There'd be a uniform Federal intercarrier compensation rate to reduce arbitrage." He added that "But at the end of a date certain, the FCC and state regulators would be out of the business of fixing interconnection terms and rates."

He also advocated regulation in a range of other areas, in order to enforce "social responsibilities" of companies. This includes 911, universal service, law enforcement monitoring of communications, disabled access, and consumer protection.

Moreover, he argued for an expansion of current regulation from telecommunications to other types of service providers. He said that "Congress must ensure that all the base-line social obligations placed on the communications business are equitably apportioned and supported by all competitors … regardless of the technology they choose to serve the public."

Also, he advocated expanding the pool of companies that subsidize the universal service programs. He said that "the contribution base should be broadened to include all service providers". Also, he said that general revenues of the federal government should support universal service programs. He said that "General tax revenues could also be used to fund at least part of the USF."

Ackerman also addressed intercarrier compensation. He said that the Congress should "direct the FCC to adopt a uniform federally administered intercarrier compensation mechanism within 6 months of enactment. The new mechanism should fairly compensate providers for use of their networks, while minimizing arbitrage opportunities. It also should require facilities-based carriers to interconnect directly and to provide transiting service to other facilities-based carriers at rates terms and conditions set through commercial contracts or, failing that, FCC-developed principles."

And then, "After a few years, the FCC's authority over interconnection and transiting should sunset. An industry group should then be responsible for updating default interconnection guidelines as necessary. Dispute resolution would be accomplished through mediation and/or some type of arbitration utilizing these guidelines."

Ackerman also discussed the logistics of passing legislation, during the question and answer session, and at a press conference. He said that it took about five years to pass the 1996 Act. He hopes that the next bill will take less time. When asked if the 109th Congress will pass a bill, he said "I won't go that far."

He said that any bill "has got to be pragmatic enough to get through the Senate". He also said that "I don't think that you are going to get through the Senate without an acceptable universal service approach".

He also suggested that the legislative process in likely to entail comprises. This means compromise language will be included in the statute. And then, this results in more litigation.

Washington Tech Calendar
New items are highlighted in red.
Tuesday, December 21

The House will next meet on January 4, 2004 at 12:00 NOON. See, Republican Whip Notice.

The Senate will next meet on January 4, 2005 at 12:00 NOON.

The Supreme Court will next meet on Monday, January 10, 2005. See, Order List [9 pages in PDF] at page 9.

12:00 NOON. The Federal Communications Bar Association's (FCBA) Executive Committee will meet. Location: Wiley Rein & Fielding, 1776 K St., NW.

Extended deadline to submit reply comments to the Federal Communications Commission (FCC) in response to its Notice of Proposed Rulemaking and Declaratory Ruling (NPRM & DR) [100 pages in PDF] regarding imposing Communications Assistance for Law Enforcement Act (CALEA) obligations upon broadband internet access services and voice over internet protocol (VOIP). This NPRM is FCC 04-187 in ET Docket No. 04-295. The FCC adopted this NPRM at its August 4, 2004 meeting, and released it on August 9. See, story titled "Summary of the FCC's CALEA NPRM" in TLJ Daily E-Mail Alert No. 960, August 17, 2004. See, notice in the Federal Register, September 23, 2004, Vol. 69, No. 184, Pages 56976 - 56987. See also, notice of extension [PDF].

Thursday, December 23

Deadline to submit comments to the National Institute of Standards and Technology's (NIST) Computer Security Division regarding the FIPS 201 and SP 800-73 public drafts. See, document [91 pages in PDF] titled "Federal Information Processing Standard 201 (FIPS 201), Personal Identity Verification for Federal Employees and Contractors", and document [99 pages in PDF] titled "Special Publication 800-73 (SP 800-73), Integrated Circuit Card for Personal Identity Verification". Submit comments to

Friday, December 24

The Federal Communications Commission (FCC) and other federal offices will be closed. See, Office of Personnel Management's (OPM) list of federal holidays.

Thursday, December 30

Extended deadline to submit reply comments to Federal Communications Commission (FCC) in response to its Notice of Proposed Rulemaking (NPRM) [38 pages in PDF] regarding use by unlicensed devices of broadcast television spectrum where the spectrum is not in use by broadcasters. See, story titled "FCC Adopts NPRM Regarding Unlicensed Use of Broadcast TV Spectrum" in TLJ Daily E-Mail Alert No. 898, May 14, 2004, and story titled "FCC Releases NPRM Regarding Unlicensed Use of TV Spectrum" in TLJ Daily E-Mail Alert No. 905, May 26, 2004. This NPRM is FCC 04-113 in ET Docket Nos. 04-186 and No. 02-380. See, notice (setting original deadlines) in the Federal Register, June 18, 2004, Vol. 69, No. 117, at pages 34103-34112; and notice [PDF] of extended deadlines, and erratum [PDF].

Friday, December 31

The Federal Communications Commission (FCC) and other federal offices will be closed. See, Office of Personnel Management's (OPM) list of federal holidays.

11th Circuit Holds Trade Secrets Lawsuit Not Covered by Advertising Injury Clause

12/17. The U.S. Court of Appeals (11thCir) issued its opinion [PDF] in State Farm v. Steinberg, affirming the District Court, and holding that the advertising injury clause of a commercial general liability business policy does not obligate State Farm to defend and indemnify its insureds in a lawsuit brought against them alleging misappropriation of confidential business information.

State Farm filed a complaint in U.S. District Court (SDFla) against its insureds seeking a declaratory judgment that it is not obligated to defend or indemnify its insureds in the underlying trade secrets action. Subject matter jurisdiction is based upon diversity of citizenship. The District Court and Appeals Court applied contract law of the state of Florida.

The policy at issue provides that "``Advertising injury´´ is defined in the policy to include:
injury arising out of one or more of the following offenses:
  a. oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;
  b. oral or written publication of material that violates a person’s right of privacy;
  c. misappropriation of advertising ideas or style of doing business; or
  d. infringement of copyright, title or slogan."

The Court of Appeals held that there was no advertising injury as defined by this policy.

This case is State Farm Fire and Casualty Company v. Richard Steinberg, et al., U.S. Court of Appeals for the 11th Circuit, App. Ct. No. 03-12565, an appeal from the U.S. District Court for the Southern District of Florida, D.C. No. 02-80209-CV-KLR.

People and Appointments

12/17. President Bush announced his intent to nominate Bobby Burchfield to be a member of the Antitrust Modernization Commission (AMC) for the life of the Commission. See, White House release. Burchfield is an attorney who has represented the Republican National Committee and campaigns of Republican candidates. The next public meeting of the AMC is on Thursday, January 13, 2005 at 10:00 AM at the Federal Trade Commission (FTC). See, notice [PDF] in the Federal Register, December 7, 2004, Vol. 69, No. 234, at Page 70627.

12/16. The six member Federal Election Commission (FEC) elected Scott Thomas Chairman and Michael Toner Vice Chairman for 2005. The term of office is one year. See, FEC release.

12/16. Eric Brown will join McAfee, Inc., on January 3, 2005, as Executive Vice President and Chief Financial Officer. He was previously P/CFO of Microstrategy, Inc. See, McAfee release.

12/14. Intel announced the appointments of 18 Vice Presidents. Suzan Miller was named VP Legal and Government Affairs, and Assistant General Counsel. Intel wrote in a release that Miller, who has worked for Intel since 1991, "is responsible for legal support for Intel's product and technology business units."

More News

12/17. President Bush signed S 2845, the "Intelligence Reform and Terrorism Prevention Act of 2004". See, Bush's signing statement and transcript of White House event.

12/17. The Federal Communications Commission's (FCC) Wireline Competition Bureau's (WCB) Industry Analysis and Technology Division (IATD) released a report [34 pages in PDF] titled "Quality of Service of Incumbent Local Exchange Carriers". It summarizes data provided for calendar year 2003 by regional Bell operating companies (BOCs), Sprint and other price-cap regulated incumbent local exchange carriers (ILECs). The report compares the performances of carriers on customer complaints per million access lines, initial trouble reports per thousand lines, residential installation dissatisfaction, residential installation intervals, residential repair dissatisfaction, and residential initial out-of-service repair intervals. The report also provides comparative data on switches with downtime. The report was written by Jonathan Kraushaar, who can be reached at

12/17. The Progress & Freedom Foundation (PFF) released a paper [20 pages in PDF] titled "A Model State Act for Communications". It was written by Ray Gifford (President of the PFF) and Adams Peters (PFF). The state that "We hope this Model Act provokes a critical inquiry into the widening gulf between the reality of today's communications marketplace -- which is characterized by multiple networks capable of supporting a variety of competing services -- and laws designed to regulate a single network optimized to provide traditional telecommunications services." 11 pages of the paper is the proposed Model Act, and explanatory footnotes.

12/16. Microsoft announced that it acquired Giant Company Software Inc., an anti-spyware and internet security company. Microsoft stated in a release that "Microsoft will use intellectual property and technology assets from the acquisition to provide Microsoft Windows customers with new tools to help protect them from the threat of spyware and other deceptive software. In addition, key personnel from GIANT Company will be joining Microsoft's security efforts." Microsoft added that it "plans to make available to Windows customers a beta version of a spyware protection, detection and removal tool, based on the GIANT AntiSpyware product, within one month."

12/13. 3Com Corporation announced that it has signed an agreement to acquire TippingPoint Technologies, Inc., a provider of network based intrusion prevention systems. See, 3Com release.

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