A High-Tech Pandora's Box

High-bandwidth is here, but for state and local governments, what you get isn't always what you see.

by / August 31, 1999
The Holy Grail of connectivity, high bandwidth, is nearly ready for mass consumption. Unfortunately, the breakthrough making high bandwidth widely available -- cable companies upgrading their cable loops to hybrid fiber-coaxial (HFC) cable, and turning those loops into powerful broadband networks -- is proving to be a Pandora's box for local governments.

Litigation involving a local government is already under way in Oregon. Officials from the city of Portland and Multnomah County are embroiled in a closely watched lawsuit against AT&T over an "open-access" provision to a cable service contract. The provision would force AT&T to let other companies deliver information services, such as high-speed Internet access, over AT&T's cable network -- in effect, creating competition.

Los Angeles and San Francisco are also wrestling with this issue. Los Angeles' Information Technology Agency recommended the city pursue an open-access provision in a future contract with AT&T if necessary, but argued against it at the current time. San Francisco will soon decide its approach to the open-access provision. Its Board of Supervisors (BOS) is considering resolution 990455, which would "support the authority of cities to require cable companies to provide nondiscriminatory access by unaffiliated Internet and other online providers to the broadband cable network."

Portland is the only U.S. city to attach an open-access condition to its cable-services contract with AT&T. San Francisco could become the second with others also making moves.

In July, the Canadian Radio, Television and Telecommunications Commission ruled that Canadian cable providers must share their broadband networks with competing ISPs.

Also in July, U.S Rep. Ed Markey, D-Mass., the ranking minority member of the House Commerce Committee's communications panel, introduced a concurrent resolution which states that "allowing cable operators to offer proprietary and discriminatory access to the Internet only through affiliated Internet service providers deprives consumers of the full benefits of competition." If Congress passes Markey's resolution, the Federal Communications Commission would be required to regulate broadband access under the provisions of the Telecommunications Act, which would result in the opening of cable networks to competition.

High Stakes Scenario

Finding the right balance between private- and public-sector interests is another problem. Industry wants large market shares and profits while local government wants to defend constituents' interests and improve its cities' infrastructures.

Both sides are often at loggerheads because of their conflicting interests, processes and roles. The high-tech arena is another venue for such conflict because each side faces certain risks.

For industry, at stake are the staggering amounts of money required to be competitive in the high-tech marketplace. Billions of dollars have been spent to perform the necessary upgrades to cable networks to make them competitive. Industry's need for speed-to-market can be blocked by inefficient local regulation, as can industry's impetus to innovate.

At stake for local government are prosperity and economic development. The growth and economic strength of cities and towns depend on their strong municipal infrastructures, such as good roads and schools. Now, cities need a strong telecom infrastructure to support business development with high-bandwidth information services, whether voice, video or data.

A real fear exists among communities: Those lacking the appropriate infrastructure may be unable to attract new businesses, which are placing a high priority on an area's high-tech infrastructure when relocating.

Setting the Stage

"It's either going to be a telephone company becoming a cable company or the cable companies trying to upgrade and do the high-speed stuff and later add telephone," said Jane Lawton, president of the National Association of Telecommunications Officers and Advisors (NATOA) and the cable administrator in Montgomery County, Md. "We're seeing a huge convergence."

This convergence is affecting how municipalities deal with telecom corporations delivering new information services to residential and business customers. Cable companies, who have joined the ranks of these corporations with their newly upgraded networks, sign franchise agreements with city or county government agencies to provide cable services to residents. Also, when a cable company changes ownership, a transfer of control agreement must be completed.

Local governments have the authority to condition these contracts because they are responsible for managing the public rights-of-way telecom companies, including cable companies, use to build networks.

Since people want high-bandwidth information services, including Internet access, companies will, naturally, try to supply that demand. Cable companies are uniquely poised to take advantage of the high-bandwidth services market because of their penetration into homes.

According to a report entitled "Internet Over Cable: Defining the Future In Terms of the Past," by the FCC's Office of Plans and Policy, the combined cable networks of one major player reach approximately 40 percent of U.S. households.

Subscription rates are inching up, as cable modems are being slowly deployed in U.S. cities. In North America, there are nearly 600,000 subscribers, said Patti Reali, cable-industry analyst at San Jose-based Dataquest/Gartner Group.

A Changing Game

Technology itself is complicating the regulatory process between government and industry. "In this day and age, you have emerging technologies that didn't exist 15 to 20 years ago when these franchises were put into place," said Jesse Juarros, assistant general manager for the city of Los Angeles' Information Technology Agency (ITA). "Today, you have a different regulatory environment with respect to deregulation, in that you have companies with the ability to offer local and long-distance services. You have at least four technologies capable of delivering broadband services on the data side. So now, you put together a proposal, and you will have a lot of folks interested in deploying their technology into your city."

The telecom industry's latest round of mergers is making local governments play in a different game.

"The mergers have the biggest impact on local governments," said Lawton. "The old days of one-company monopolies are gone. Big companies sell services off left and right to other companies. Local governments need to get the right kind of help so they can understand, in a sophisticated way, the impact of these things on the rates and the services that are going to be offered, or not offered, in their area."

The open-access issue is a new wrinkle that local governments have to consider when negotiating with telecom companies, especially cable companies.

"Across the country, cities are looking at the open-access question," said Lawton. "Some communities believe that multiple ISPs are important; that open access is necessary. In places where there is already competition, this may not be necessary. In other places, where there is a good relationship between the city and the cable company, this may not needed if local officials have confidence in the cable company."

This issue is whether a company such as AT&T, which is both a broadband backbone and an Internet service provider (ISP), should allow other ISPs to connect to its backbone so they can deliver information services. To do this, other ISPs would have to buy the necessary equipment to connect and pay the associated fees to AT&T.

This became a problem after the AT&T/Telecommunications Inc. (TCI) merger of 1998, giving AT&T control of TCI's nationwide cable loops and TCI's affiliated companies.

This problem will not be solved quickly or easily. AT&T is looking to merge with MediaOne, another cable-television company that markets Internet access, adding more cable networks under its control. AT&T hopes this merger will be completed early next year.

Not An Open-And-Shut Case

What started the open-access debate was AT&Ts requirement that customers subscribing to its cable internet services must use the ISP owned by TCI, called @Home, for Internet access.

Officials from Portland and Multnomah County, where Portland is located, challenged this policy, attempting to condition approval of a transfer of control agreement to AT&T -- required when AT&T merged with TCI -- with an open-access provision intended to stimulate competition in the market for the benefit of residential consumers.

In a brief submitted to the U.S. District Court in March, Portland and Multnomah County officials set forth their arguments.

One argument warned, "@Home's [Securities and Exchange Commission] filings affirmed that there were reasons for the city to be concerned about the competitive effect of the merger. @Home characterized itself as having exclusive access to a majority of the houses in the United States and described its exclusivity arrangement in ways that left little doubt as to their potential for limiting competition and innovation."

The court sided with Portland and Multnomah County, upholding the open-access condition. Judge Owen Panner, in his written opinion, noted, "Congress specifically recognizes the power of local franchising authorities to preserve competition for cable services. Local franchising authorities have the power to determine whether a change of ownership or control would 'eliminate or reduce competition.' The franchising authority's power to prohibit a change of control includes the lesser power to impose conditions under which it will permit a change of control."

AT&T appealed the June decision, and is asking for an expedited hearing on the matter.

In its brief to the Ninth Circuit U.S. Court of Appeals, AT&T argued, "the challenged local ordinances [the open-access condition] must be invalidated because they are plainly inconsistent with the controlling statute and constitutional principles" and "they also threaten a balkanized approach to national telecommunications regulation that would deter beneficial investment and deny customers new services."

Meanwhile, the FCC is taking a wait-and-see approach. FCC Chairman William Kennard, in a speech to the National Cable Television Association (NCTA) in June, articulated a "high-tech Hippocratic Oath" that pledged "a hands-off, deregulatory approach to the broadband market." He noted that the FCC approved the AT&T/TCI merger "without imposing conditions that they open their network."

Kennard also addressed the Oregon situation and local regulation in general, saying, "instead of a national policy of deregulation and competition, [local government officials] want a local policy of regulation. If every one of them decided on their own technical standards for two-way communications on the cable infrastructure, there would be chaos. The market would be rocked with uncertainty. Investment would be stymied. Consumers would be hurt."

However, Kennard's speech contained elements of a warning to the cable industry. He told industry leaders that "the ball is in your court" to "act responsibly" to ensure that consumers get broadband following the open tradition of the Internet. Kennard warned NCTA members that "we are not regulating, but we are watching."

The open-access issue is a complicated knot for cities to untie. The FCC says cities should keep their regulatory hands off but warns industry that the federal hammer can come down. Corporations are subtly threatening to withhold broadband investment in the face of local attempts at regulation; while constituents, both consumers and small businesses such as ISPs, plead for open-access conditions and increased competition.

One City's Approach

Los Angeles, last December, found itself in Portland's situation. The City Council reviewed the AT&T/TCI request for approval of transfer of control and conducted the necessary public hearings. As in Portland, Los Angeles officials heard from consumers and small businesses arguing for open access and competition.

The Council asked its ITA to study this dilemma and report back to the council. "What we did is look at what would be best for the city and its consumers," said the ITA's Juarros. "Because we did that, we tried to do it as on-balanced as possible. We wanted to fully understand all sides. We make arguments both for and against open access."

The agency's June report stated, "concerns about the nature of the market for broadband access services warrant continued monitoring. However, the market's ability to grow and develop should not be hindered by regulation that is based on speculative assumptions about the future of the Internet."

The agency's report echoed the FCC's findings for the most part, but did not completely agree with the FCC's viewpoint. "'Wait and see' is an approach adopted by the FCC. It recognizes the likelihood that a competitive market in broadband Internet access services will develop. Its estimation of the residential broadband Internet access market may be optimistic. In Los Angeles, some providers are focusing solely on the business sector."

The agency recommended the City Council not require an open-access condition, but monitor the Los Angeles market to determine if the open-access condition would become necessary.

The agency also recommended the following regulatory proposal: "Define a set of conditions that govern the provision of cable modem service in Los Angeles, including scheduled deployment, access to all Internet content without limitation, universal availability of the service, technical standards, application of the consumer service standards, payment of cable franchise fees for cable-modem service and a market-based reopener to secure."

The report's market-based reopener lets the city attach an open-access provision in the future, following this statutory language: "Parties agree that the Internet services obligations may be reopened for resolution if any cable television franchisee's high-speed Internet access services capture more than two-thirds of the customers served by high-speed Internet access technology in a geographic area defined by any cable system operated by that franchisee in Los Angeles."

Mission Impossible?

Local governments face a daunting task when deciding their approach to franchise agreements and transfers of control. However, there are precedents to consider and preparations to be made which will ease the process