Stevens-Inouye Telecom “Reform” Falls Way Short

Network neutrality is just one of the key issues

Much of the digital economy-the Internet, PCs, e-commerce, wireless networking and new media—has thrived in the absence of regulation and legislation. That’s why the latest effort in the Senate to reform U.S. telecom regulation, the so-called “Communications, Consumer’s Choice, and Broadband Deployment Act of 2006,” is so disappointing.

The sweeping draft bill includes all the right telecom policy buzzwords-“net neutrality,” “video franchising,” “universal service,” “municipal broadband”-along with the “war on terrorism” and “protecting children” thrown in for good measure. But the bill, co-sponsored by Senate Commerce Ted Stevens (R-Alaska) and Daniel Inouye (D-Hawaii) does little more than extend the current costly, unproductive and largely unworkable telecommunications regulatory regime into the rapidly evolving field of broadband services.

For example, when it could have authorized a process for nationwide video franchising, ending the necessity for would-be cable competitors to spend years negotiating agreements in every city and town in order to provide service–the bill instead leaves franchising with local governments, but awkwardly requires them to use an FCC-created standard franchise application form. Local agencies must approve franchises within 30 days, but the bill leaves a few loopholes they can use to create delay. If the bill had given outright video franchise authority to the FCC, it would stand to be more successful in getting competitive broadband services to more people.

Rather than calling for a complete overhaul of the way we fund rural service, the bill merely lists past suggestions for reforming the Universal Service Fund (USF), a legacy of the monopoly era where revenues collected from urban users offset the higher cost of telephone service in rural areas. Today, in a competitive market, the USF subsidies only encourage rural phone companies to maintain their costly investments in older infrastructure and allow them to hold prices artificially low enough to keep competitors with cheaper, yet better, broadband technologies, out. Now, in the post-monopoly era, so many new service providers are trying to game this “rob-Peter-to-pay-Paul” subsidy scheme that it has been overcome with administrative problems and a lack of transparency. The Stevens-Inouye bill does little to address these inherent problems.

Instead, the bill expands the USF to include revenues from cable modems and Voice over Internet Protocol (VoIP) services in its contribution formula. This means higher rates for users of both services. Although a vast number of new companies would be required to pay in, the largest share of payouts would be reserved for rural telephone companies. Worse, USF recipients would be allowed to collect new broadband subsidies for as long as five years-an eternity in Internet time-before they would have to actually invest in network upgrades.

In the past year, state bills have placed restrictions on municipal broadband, allowing cities and towns to operate systems only when they can demonstrate there is no commercial service provider. The Stevens-Inouye bill takes the opposite tack, encouraging municipalities to spend themselves silly competing with private sector broadband services that invariably turn out cheaper and better. (Marietta, Ga., and Ashland, Ore., are just two examples of cities that invested millions in municipal broadband that in the end failed to attract enough customers to be sustainable.)

Rather than put the burden on the local government to demonstrate a lack of commercial market development before embarking on a municipal broadband initiative, the proposed bill shifts the burden to service providers to prove unfair competition from the municipality-a more difficult prospect given a local government’s ability to discreetly shift costs, transfer funds, and exempt itself from taxes and right of way payments.

The bill’s one bright spot is its handling of network neutrality. Network neutrality is the misguided idea that Internet content carriers should not be permitted to charge providers of applications or content that consume large amounts of bandwidth, such as high definition movies, for the cost of optimizing the delivery of those services. The bill would allow service provider to use market mechanisms, such as pricing tiers, to manage and partition bandwidth-intensive services, which would create a better Internet experience for all users because it would keep enough bandwidth open for low-volume applications, such as email. In order to address concerns that service providers would block access to legitimate web sites, the bill calls for the FCC to issue annual reports on how carriers are transmitting information over the Internet.

Finally, the bill establishes programs to fund studies on how to improve interoperable communications between public safety agencies. The average tech school grad can answer that in four words – Use the Internet protocol. It is simple, robust, mature and there is a host of video, radio and portable computing equipment designed to plug and play on existing IP networks.

Besides, cities face no scarcity of resources here. The high-flying security industry is already performing network integration studies for local police, fire, and rapid response teams in pursuit of a coveted city contract. Let corporate marketing budgets fund this work, not taxpayer dollars.

As it is drafted, the Stevens-Inouye bill, expansive as it is, falls far short of the true reform that’s needed to unleash the power of the broadband economy. Instead of freeing the industry from the burdensome regulations that have hindered broadband penetration growth, it piles on more. It would open the door to greater economic, market and content regulation. It would impose a massive new regulatory structure on services that have, to date, thrived without them. It would harm consumers by slowing the introduction of competition, tacking on fees and surcharges to broadband services, and placing limits on the ways carriers and content providers can work together to deliver a better broadband experience. It is a huge step backward.

Steven Titch is telcom policy analyst at Reason Foundation. An archive of his work is available here and Reason’s telecom policy research and commentary is here.