REGULATING INTERNET ACCESS:
An Idea Whose Time Never Came


Kenneth Brown, Senior Vice President
The Alexis de Tocqueville Institution
March 6, 2000
Email: kenbrown@erols.com

Overview

Throughout 1999, one of the most hotly debated issues on the Internet was whether government officials should place regulations on high-speed cable Internet service.

A coalition of local telephone companies (GTE, SBC, Bell Atlantic) and Internet Service Providers (ISPs) advocated a policy they termed "open access." While there is no single definition of the policy, it generally would require cable companies providing Internet service to offer any arrangement made to one ISP available to all ISPs. These companies came together and created the OpenNet Coalition.

Cable companies, including long-distance company AT&T, rejected this access policy as unwarranted. They argued that deals between cable companies and ISPs were inherently complex and not suitable for government pricing regulation. They also raised concerns about the technical feasibility of such policies.

The Federal Communications Commission (FCC) weighed in, rejecting the access idea. Chairman William Kennard argued, "If we've learned anything about the Internet in government over the last 15 years, it's that it thrived quite nicely without the intervention of government."

The battle over access gained prominence in late 1998, when Portland, Oregon became the first locality to require "open access" regulations as a condition for its cable company to provide high-speed Internet service. In June 1999, a federal judge in Portland upheld the city's right to enforce such a law on AT&T, the city's cable service provider. The Ninth U.S. Court of Appeals granted an expedited review of AT&T's appeal and heard oral arguments on November 1, 1999. A final decision is pending.

Regardless of how this closely watched case is ultimately decided, it now seems clear that the push for access regulations has faltered badly. Despite the best efforts of forced access proponents throughout last year, barely a dozen localities agreed to enact access provisions. All the high-profile efforts (e.g., San Francisco, Miami, Richmond) rejected open access regulations.

At the federal level, Congressional leaders are on record saying that there is no chance Congress will pass a national access bill in 2000. And the FCC is remaining firm in rejecting the need for access regulation at the local, state or federal level.
The rejection of access regulations by lawmakers, regulators, technology analysts and independent voices has been near uniform. Ironically, that makes the original Portland court case almost beside the point. Even if the court upholds Portland's right, so many government bodies have already rejected the need for access regulations that this issue seems unlikely to stay in the national spotlight much longer.

Why has this idea, which once seemed on the fast track to adoption throughout the country, faltered? There are several reasons, but the key ones include:

I.Prices for High-Speed Internet Access Are Plunging

Throughout 1999, a price war raged as cable and phone companies deployed their competing systems of high-speed Internet access. That brought about drastic price reductions:

Monthly Price for Phone Company DSL Service

	January 1, 1999	January 1, 2000	Percent Reduction
California	$89.95	$39.95	-56%
Rocky Mountains	$59.95	$29.95	-50%
Pennsylvania	$69.95	$49.95	-29%

California's experience is particularly illustrative: As cable Internet service emerged, Pac Bell (a unit of SBC Communications) would cut its own DSL prices – but only in those counties where cable was becoming a viable option. As cable service continued to deploy Internet access services, SBC/Pac Bell ultimately decided to cut its prices statewide.

Commenting on the price cutting in the industry, The San Jose Mercury-News editorialized, "Whenever [a] cable company announces its Internet service, the local phone monopoly expedites the roll-out of digital subscriber lines, or DSL, telephony's high-speed equivalent, and sharply cuts the price."

II. The FCC's Active Promotion of a "Hands Off" Policy

In a series of reports and decisions over the past year, the FCC repeatedly urged states and localities not to pass open access bills. As FCC chairman Kennard declared in June 1999, "There are 30,000 local franchising authorities in the United States. If each and every one of them decided on their own technical standards for two-way communications on the cable infrastructure, there would be chaos."

In October 1999, the FCC issued a report on the growth of broadband systems in the US. That report detailed the burgeoning competition involved not only in DSL and cable Internet service, but also a myriad of other systems. For example, America Online and Hughes are slated to roll out a high-speed satellite access system in the spring of 2000. Wireless companies and even electric utilities are investing billions to perfect their systems.

Finally, on February 18th, 2000, the FCC turned down Internet Ventures' petition to have regulators mandate the "leasing" of cable lines.

III. The Legal Complexities

Telecom laws are some of the most complex in the country and there is no "simple" way to regulate anything. Once legislators' focus shifted from the vaguely appealing concept of "openness" to the tough details that would inevitably accompany any access laws, their enthusiasm dropped precipitously.

As Miami Mayor Alex Panellas put it last October when discussing an access proposal in front of the Miami-Dade Board of County Commissioners, "Though the proposed ordinance was originally presented as a very simple matter, the Board and my office quickly learned that this is a complex regulatory issue with implications far beyond the borders of Miami-Dade County." He later called access regulations, "a policy that would create a chilling effect on investment, competition and consumer choice."

Consider the work that would ensue for any locality that passed an access regulation. First, it would have to define the terms and conditions of access. It would have to coalesce around a pricing model that makes sense so that it ensures nondiscrimination. This would involve highly specialized legal and economic issues such as cost allocation and dual-loop pricing.

Once a locality wrote these rules, it would have to create a method to enforce them in a meaningful way. A white paper issued by the Los Angeles Information Technology Agency estimated, "The cost to the City to address these unbundling disputes is likely to exceed hundreds of thousands of dollars per year at a minimum, not including the initial costs associated with developing the pricing methodology and rules regarding dispute resolution. These costs would increase if additional open access obligations, such as interconnection, resale and network element unbundling were also required of cable operators."

Finally, localities would have to be prepared to handle not only legal challenges to the bill, but also the very real prospect of being dragged into and adjudicating various "he said-she said" disputes between cable companies and ISPs.


IV.The Fast-Changing Marketplace

Adding to the clear legal complexities is the marketplace itself. In December 1999, AT&T announced an agreement with MindSpring, an ISP, and committed itself to providing consumer choice of ISPs on its cable platform. Then in January 2000, America Online and Time Warner announced their merger, which further muddied the waters on cable access issues.

According to a series of recent news reports, AOL has now ordered its lobbyists to pull back from advocating open access.

With the nation's two largest cable companies (AT&T and AOL/Time Warner - market penetration: just under 50 percent of the country) now committing themselves to consumer choice and the ISPs of nearly 25 million subscribers having already gained access agreements, the need for regulatory interference is obviously far less today than was perceived even as recently as last fall.


V. Independent Voices

Anytime there is a public policy battle like the one involving access, regulators lawmakers and staff will hear widely conflicting stories from the companies involved. Third-party groups from across the spectrum also make their voices heard.

But what is particularly interesting in the access controversy is that the nation's editorial boards have lined up almost uniformly against open access. What follows is just a partial list of publications opposing the idea of states and localities regulating Internet access:

"AT&T, cable hookup bodes well" USA Today May 17, 1999	"No reason for local regulation of cable now" The Miami Herald July 12, 1999
"Internet Wars" The New York Times September 6, 1999	"Who's Afraid of Ma Cable?" The Industry Standard May 10, 1999
"AOL-Time Warner" The Washington Post January 13, 2000	"Reject 'Open Access' Ordinance" The Ft. Lauderdale Sun Sentinel July 11, 1999
"Let market forces determine whether ISPs gain access to broadband networks" Red Herring June 1, 1999	"Force The Access Issue" The Detroit News November 15, 1999
"Net Advantage" The Pittsburgh Post-Gazette November 8, 1999	"Let Internet Access Evolve On Its Own" The Boston Herald August 15, 1999
"Hands Off The Internet" The Washington Times September 15, 1999	"The Market, Not Government, Should Force Internet Competition" Manchester Union Leader February 4, 2000

What's most striking is the sheer diversity reflected here. The New York Times, The Washington Post and The Detroit News don't typically hesitate to endorse reasonable government regulation to protect consumers. USA Today is a well-known moderate voice on regulatory issues. Meanwhile, The Union Leader and Washington Times rarely hesitate to express their skepticism about government involvement in the private sector.

It's also worth noting the presence of so many well-known high-tech publications, including The Industry Standard and The San Jose Mercury-News. The fact that the notoriously independent-minded high-tech press (along with noted analysts such as George Gilder) has come together on this issue says something about the merits of keeping government out of regulating access.


VI. Summary – Market Forces are far better than Regulation

GOVERNMENT ACTION ON INTERNET ACCESS REGULATIONS

BRANCH OF GOVERNMENT	RESULT
Federal Communications Commission	The FCC chairman William Kennard: "If we've learned anything about the Internet in government over the last 15 years, it's that it thrived quite nicely without the intervention of government." Commissioner Michael Powell has termed the reasoning behind access regulations "shallow."
U.S. Congress	"Legislation to mandate open access to cable systems and other broadband networks 'has no legs whatsoever in the House Commerce Committee,' committee member Rep. Oxley told Consumer Electronics Show here last week." -- Communications Daily, 1/10/00
State legislatures (Year 2000 activity)	Six states have considered access regulations. All six have declined to approve them.
State PUCs (Year 2000 activity) (public utility commissions)	One state (Minnesota) considered access. By a 5-0 vote, the commission declined to take action.
Localities	More than 1,300 localities approved transfers and renewals during 1999. Only about a dozen actually approved access regulations.

Roughly a dozen access bills have been introduced in state legislatures since January 1. As noted, legislatures in six states (New Hampshire, Idaho, Pennsylvania, Utah, Virginia and Kansas) have already failed to pass the bills.

Action at the federal level has been similarly one-sided (see details above). And at the local level, the results are similarly one-sided. Out of the several hundred transfers that took place last year, only about a dozen counties and localities actually enacted access laws.

The fact that so many disparate voices and votes from across the country have converged on one conclusion is important. It shows recognition by lawmakers, especially at the state and local levels, that the Internet and Internet access are simply too elastic to be tied down by regulatory strictures, no matter how well meaning the cause.

As the AT&T and AOL Time Warner positions show, the industry trend is clearly towards providing consumers choice. Rather than placing new regulations on cable, lawmakers wishing to hasten the prospect of greater consumer choice should instead focus on making their communities as friendly as possible to new high-speed access systems: DSL, cable, satellite, wireless, and via electric utilities.

In the end, the discipline of competition will bring about consumer choice far better – and far cheaper – than even the most well meaning government regulations.

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