Monday, October 01, 2012

FCC Forbearance Needed to Encourage Broadband's Economic Benefits

The FCC is considering CenturyLink's petition for forbearance relief from restrictions on its enterprise broadband services. In several instances, CenturyLink's Ethernet and other broadband offerings to enterprise customers – generally large businesses with major telecom requirements – are subject to legacy dominant carrier regulations and Computer Inquiry tariff obligations. But the competitiveness of the enterprise broadband services market renders such regulations unnecessary and harmful to innovation and investment.
CenturyLink's petition is important not only for the regulatory relief it may afford the company but, more broadly, for what it signals to the market concerning the FCC's regulatory posture. The FCC has a new opportunity to show it appreciates the need to use its forbearance authority to accord relief from outdated and burdensome regulations. Too many times in the past the agency has failed to do so, although it deserves credit for its recent exercise of forbearance authority with regard to the purchase of competitive local exchange carriers by cable operators.   
Rate regulations and disclosure obligations burden CenturyLink's ability to offer competitive prices, particularly since its marketplace rivals have already received forbearance relief. FCC precedents recognize that forbearing from these regulations incentivizes additional investment in broadband infrastructure and enhances competition in the broadband enterprise services market. The FCC should grant CenturyLink's petition promptly.
Enterprise broadband services are highly sought after by businesses with unique communications and information technology needs. Customers in this market are sophisticated and informed, often soliciting services through individualized requests for proposals and hard bargaining with service providers for the best deals. Also, the high financial returns from enterprise broadband services provide strong inducements for infrastructure investment and competitive entry. The market for enterprise broadband services is essentially nationwide in its scope with dozens of competitors, including AT&T, Cox, Charter, Frontier, Verizon, Comcast, TimeWarner Cable, tw telecom, XO, and Level 3.
The innovative and competitive conditions of the enterprise broadband services market calls for a deregulatory policy approach. Reducing regulatory restrictions and relying more fully on market forces offer the best means of ensuring further economic growth and broadband deployment. Such an approach fits closely with the deregulatory purposes of Section 706 of the Telecommunications Act of 1996. That provision expressly calls on the FCC to use forbearance as a way of reducing barriers to infrastructure deployment for advanced telecommunications services.
Beneficial economic results would obtain from enhanced deployment of Ethernet and other broadband-enabled services. Enterprise customers stand to benefit from improved efficiencies in doing business. And enterprise broadband services are increasingly being used by wireless carriers for backhaul transmission of data traffic. Economists have recognized the job growth and other benefits resulting from upgrades to new generations of wireless networks. Backhaul facilities are a critical input for those wireless services.
But as things stand today, some of CenturyLink's enterprise broadband services remain subject to dominant carrier regulations and Computer Inquiry tariff obligations. (In particular, such regulations still saddle CenturyTel-affiliated sevices as well as some Embarq services. Following mergers and acquisitions, those services are now under CenturyLink's umbrella.) The regulated services at issue are broadband-enabled technologies such as Ethernet. All this despite CenturyLink not being a dominant provider. For instance, a Frost and Sullivan estimate ranked CenturyLink as the 4th largest retail provider of Ethernet services for 2010. A Vertical Systems estimate of wholesale Ethernet providers put CenturyLink in 6th place for 2011.
Dominant carrier regulations restrict the ability of CenturyLink to offer flat-rate pricing on a nationwide basis to potential customers and undermine CenturyLink's flexibility in putting together deals. Tariff obligations require CenturyLink to give the public advance notice of its price offerings, giving rivals a jump in luring enterprise customers.
Even worse, CenturyLink must operate at a competitive disadvantage in this lucrative high-tech market because its rivals are allowed to operate free from similar regulatory constraints. CenturyLink's rivals once subjected to dominant carrier and tariff obligations for their respective enterprise broadband services have already obtained the forbearance relief that CenturyLink now seeks. Between 2006 and 2008, the FCC issued a series of forbearance orders regarding such services that can collectively be referred to as the FCC's "Enterprise Broadband Orders." Forbearance relief, or at least partial relief, was granted to AT&T, Embarq, Qwest, and Verizon.
In its Enterprise Broadband Orders the FCC expressly concluded that the market for packet-switched broadband services was "highly competitive." Those orders likewise recognized that the demand for such services is sufficient to incentivize deployment and entry by competitors absent such regulation. And ultimately, the FCC concluded that national market conditions and trends satisfied the criteria for forebearance relief set out in Section 10 of the Communications Act. That is, in those orders the FCC concluded that: (1) regulation was not necessary to ensure availability of services at just and reasonable rates and on a nondiscriminatory basis; (2) regulation was not necessary to protect consumers; and (3) forbearance was in the public interest. 
These considerations add up to a strong case for granting CenturyLink's petition. To recap:
  • Granting forbearance relief would encourage further marketplace competition and investment, fulfilling Section 706's directive that the FCC use forbearance to remove regulatory barriers to deployment of advanced telecommunications services like enterprise broadband services.  
  • Regulatory forbearance would give CenturyLink needed flexibility to bargain with customers at arms-length. CenturyLink's competitive prospects would likewise be improved without tariff obligations continuously undercutting it.
  • Forbearance relief would end the disparate treatment for enterprise broadband services, resulting in regulatory parity for CenturyLink.
  • FCC precedents also support forbearance relief for enterprise broadband services, recognizing that deregulation will further unleash the competitive forces already at work in the market, leading to increased investment in broadband infrastructure.

Again, while CenturyLink's case is persuasive, so is the case for the FCC's broader use of its forbearance authority. Hopefully, the FCC will be more receptive than it has been in the past to exercising its forbearance authority – as Congress intended – to cease applying regulations that are no longer necessary.