Kennard's balancing act

The FCC chairman faces tough issues at the close of his tenure By many accounts, the people who worked closely with William E. Kennard in his years as the FCC's general counsel had high hopes when he was sworn in as chairman of the commission in 1997.

Kennard, described at various turns as a consensus builder and a nice guy who won the respect and admiration of colleagues, was viewed as someone who would make substantial changes within the FCC and be the ideal person to rigorously enforce and promote the implementation of the Telecommunications Act of 1996.

But to those expecting a radical change from the general direction of the Reed Hundt administration, Kennard's regime clearly has been a "profound disappointment," says Lawrence Spiwak, a former colleague of Kennard's in the FCC's Office of General Counsel and current president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies.

Kennard's three-year tenure as chairman thus far generally has been seen as lacking in leadership and just "another stitch in the seamless quilt of transition," Spiwak says. Kennard has not distinguished his FCC from that of the Hundt years from 1993 to 1997, and his failure to present a cohesive public policy vision helped slow the development of many areas of telecommunications, he adds.

"Hundt had a vision - it was flawed, but he had that place snapping," Spiwak says. "It's a disappointment considering who [Kennard] is as a person and the amount of talent he has."

At the same time, Kennard has been praised as a social engineer and activist who is more of a methodical policymaker than predecessor Hundt. Kennard is seen as someone who lacks the big picture vision but has been more adept than Hundt at the implementation of the law and at pushing the industry toward an open, competitive telecom market.

In the last three years, two incumbent local exchange carriers (ILECs) received Section 271 approval to enter the in-region long-distance market; domestic long-distance rates dropped nearly 56% since 1984, saving consumers about $200 billion; FCC policies have driven down the cost of international calling rates by 27% from 1996 to 1999; and the FCC's E-rate program invested $6 billion to connect schools and libraries to the Internet.

But Kennard also has been seen as the promoter of a cynical, regulatory quid pro quo. Some say that instead of taking tough stances, he attempted to perform a complex balancing act that involves promoting competition but not necessarily holding the incumbent carriers' feet to the fire when enforcing anti-monopoly policies.

As a result, a string of knotty issues has yet to be unraveled during Kennard's administration, many vital to the survival of emerging carriers that are driving the technology revolution in communications. They include finding solutions to reciprocal compensation and switched access charges; determining the fairness of requiring open access to cable operators' networks; keeping the vertical and horizontal consolidation of the industry in tune with consumer benefits; and identifying spectrum usable for third generation wireless systems while adjusting the spectrum cap so U.S. operators can catch up with their European counterparts.

That's not to mention the issue of the alacrity at which the FCC works and the need to bring U.S. telecom regulation out of the 1980s and into the digital era.

"We have been disappointed at times with the speed of [the FCC's] policy-making," says Gary Lytle, interim president and CEO of the U.S. Telecom Association. "The FCC's quasi-legal process, where huge amounts of paper are filed and issues take a long time to be resolved, doesn't work in an age of megabytes. We have to figure out a way to do things faster."

Enforcing the '96 Act If Hundt's chairmanship was judged by the formulation and passage of the 1996 Telecom Act, the standard by which Kennard's will be judged is the Act's implementation. So far, the chairman has received mediocre grades.

In 1999, according to the FCC, the number of new competitive carriers operating their own networks doubled from about 150 to more than 300, and these carriers are adding about 1 million lines per quarter.

In addition, as of February, about 130,000 cable customers received telephone service from their cable operators.

Meanwhile, Bell Atlantic - pre-Verizon - and SBC Communications cleared the Section 271 bar to enter the long-distance markets in New York and Texas, respectively, and have rapidly acquired customers with local bundled services.

And from the competitive LECs' (CLECs') view, Kennard's FCC also has done a commendable job of strengthening co-location rules ensuring competitors' access to incumbent carriers' networks - although it took the agency more than three years to do so. In August, the FCC adopted time frames for the implementation of co-location provisioning, requiring incumbents to provide co-location no later than 90 calendar days after a request and requiring them to allow a competing LEC to construct adjacent structures on land owned or controlled by the incumbent to the extent that physical co-location space is exhausted in an incumbent's central office.

"It was Chairman Kennard's commission that expanded some of the obligations of the ILECs on co-location," says Robert McCausland, vice president of regulatory and interconnection for Allegiance Telecom.

"In the wake of the remand of the co-location order, we're confident that the Kennard commission will flush out the rules," says Jonathan Askin, general counsel of the Association of Local Telecommunications Services. "They did some very forward-looking thinking on how competitive carriers will gain access to next generation networks."

But at the same time, McCausland and others are disappointed with the FCC's enforcement of backsliding, especially when problems with Bell Atlantic's operations support system caused orders from competitors to be delayed and dropped.

"We've been pleased that [Kennard has] maintained the policy direction that Hundt started - he has stuck to his guns and done so in a much less adversarial and confrontational way," says John Wind-hausen, president of ALTS. "Nevertheless, we are disappointed that he hasn't done as much as he could have in terms of enforcement actions and really taking a strong stance to pry open the local markets."

Indeed, in many of his public statements, Kennard conveys a belief that the industry already has made significant progress from an era of monopoly regulation to an era of open competition. He has said that he expects the FCC's role as central command post for overseeing regulation and market entry to diminish. But many industry executives think Kennard's declaration of victory is premature, with ILECs maintaining a 93% share of the local phone market and with CLECs still encountering obstacles in gaining access to the local loop.

"Where the FCC has diverged [under Kennard] is that they now are under the assumption that competition has taken hold, and it's now a balancing act,"Askin says."We have excellent rhetoric from the FCC, but we don't have fully fleshed out definitions of nondiscrimination, for example. In recent years, the [commission] has devoted its best and brightest minds to mergers and [Section] 271 approvals when they should be devoted to opening competition in local markets. More legwork needs to be done to get the rules firmly established."

Many CLECs also feel that the FCC wasn't aggressive enough on the issue of reciprocal compensation, currently being addressed in pending congressional legislation after a federal court overturned the FCC's position.

"The commission created some confusion as to whether ISP calls were intrastate or interstate, which provided an opportunity for ILECs to withhold payments and facilitated gamesmanship on their part," McCausland says. "They really didn't do all the homework necessary prior to releasing the decision."

Even the USTA, which represents the incumbent carriers' interests, questions the FCC's handling of the issue. "No solution is certainly not acceptable," Lytle says."The FCC testified in May of this year that they would have a proposed solution in September. We haven't seen anything yet."

Allegiance and other CLECs hope to see more action from the FCC on the issue of payment of switched access charges, which are being withheld by some interexchange carriers and causing more drain on CLEC revenue streams.

"We would like to see the FCC, by the end of this year, create ground rules for pricing interexchange access," McCausland says.

Managing mergers During Kennard's tenure, the FCC also has come under fire from multiple quarters for its approval of mega-mergers in the domestic telecom markets. In particular, the "voluntary conditions" attached to blockbuster deals such as SBC/Ameritech, Bell Atlantic/GTE and AT&T's purchase of MediaOne have drawn the ire of open market proponents.

"[Kennard] is way too trusting of the ILECs,' Askin says. "He takes them at their word, and time and time again they've shown that they can't be trusted."

For one, the approval of such deals, which concentrate horizontal market power, is seen as a step backwards in the promotion of open competition. For example, with its 69 million local exchange access lines, Verizon now controls more than one-third of all local access lines and serves two-thirds of the top 100 markets in the U.S. Likewise, the purchase of MediaOne gives AT&T about 30% of the multichannel programming market.

Kennard's response has been that although his tenure has seen the approval of major horizontal mergers, significant conditions have always been attached to mitigate their consolidating effects.

"There's a natural skepticism of horizontal market power," says Pat Wood, chairman of the Public Utility Commission of Texas. "That's why you have to do things that balance it back out."

In the case of Verizon, the combined company was forced to sell GTE's Internet backbone units to the public (although it retained an option to win back ownership), was required to launch DSL services in low-income rural or urban areas and to spend at least $500 million to provide competitive local services to out-of-region customers.

But according to critics, the FCC has been less than stringent at enforcing these merger conditions."There's ample evidence that their feet have not been held to the fire,"Askin says, citing the deteriorating performance of Bell Atlantic in provisioning unbundled network elements since its acquisition of Nynex three years ago. "The FCC has been receiving that data and charting and monitoring it. They have overwhelming evidence, but there's not talk of tearing apart that merger."

Meanwhile, the companies involved in these mergers think the FCC's mandate of determining whether a merger is "in the public interest" gives the commission too much authority in reviewing deals. Some industry watchdogs have even suggested that merger reviews should be left to the Federal Trade Commission and the Department of Justice. The lengthy time the FCC has taken to review large mergers has added weight to the argument.

Approval of the SBC/Ameritech merger took 18 months, and the Bell Atlantic/GTE merger took even longer - almost two full years.

"When it goes to that length, it causes anxiety in the markets and anxiety for employees," Lytle says."The FCC defines its role more broadly than we would have. We have antitrust laws."

But the more forceful arguments criticizing the FCC's handling of mega-mergers involve the commission's practice of extracting commitments that have nothing to do with the potential harmful effects of the merger.

"If the politics say you have to approve the merger, I have no problem getting as much open access commitments as you can," Spiwak says. "But in all of these major mergers, there are no efficiency benefits, so why are you approving them?"

Re-regulating the Net The smartest policy decisions for Kennard's commission have perhaps been the ones that haven't been made. In particular, Kennard's "hands-off " approach to regulating the Internet and broadband services has drawn accolades from a variety of industry participants who believe that regulating the Internet would stifle investment in broadband services and prevent competitors such as multiple systems operators from challenging the large dominant telecom carriers.

But the FCC's approach to convergence has been more "I don't know what to do, so I'm just going to sit down like a dog tangled in a leash" than a conscious laissez-faire policy, Spiwak says.

In a speech before the Voice on the Net Conference in Atlanta in September, Kennard emphasized his commitment to oppose any plan to levy new fees or taxes on IP telephony.

"It just doesn't make sense to apply 100-year-old regulations meant for copper wires and giant switching stations to the IP networks of today," Kennard said.

But Kennard's pledge to leave the development of high-speed Internet services to free market forces may require some readjustment.

The FCC's review of the America Online/Time Warner merger - and Kennard's own intense interest in closing the digital divide that keeps many rural and inner-city areas from having access to broadband services - may force his hand.

The AOL/Time Warner merger, which was expected to be voted on by the commission in November, has raised concerns among content entities such as Disney that vertical integration will allow AOL/Time Warner to exert undue control over the Internet and cable content.

From the carrier side, companies such as Verizon are pushing heavily on the cable open access issue and are trying to get the courts to define cable modem service as a telecom service.

"We're playing this game by two sets of rules," said Ivan Seidenberg, president and co-CEO of Verizon, in a speech before the National Press Club in September. "We're trying to upgrade our networks with broadband capabilities while operating under line-of-business rules that restrict our revenue and wholesale pricing rules that devalue our infrastructure. Cable, on the other hand, is permitted to leverage its monopoly into the broadband arena, which means it can lock up programming, Internet access, instant messaging and huge libraries worth of intellectual property on closed, proprietary systems."

This year's FCC report on the deployment of high-speed and advanced telecommunications services again showed that Americans in rural areas, inner-city residents, minorities and low-income consumers are particularly vulnerable to being left out of the advances in Internet access. Again, Kennard and the other commissioners may feel compelled to do something to turn the tide and are reportedly considering ideas such as forcing Bell companies to provide access to newly installed, advanced Internet gear.

The challenge for Kennard's commission will be to develop a cohesive public policy vision for an area it has been loath to regulate. "There's a difference between laissez faire and just not wanting to touch it," Spiwak says. "[The FCC's] policy papers make the supposition that the Internet is successful because of a lack or regulation. But structural regulation was what made it successful."

Wireless imperatives Another area that presents policy and procedural hurdles for the remaining portion of Kennard's FCC tenure is the direction of the domestic wireless industry.

By his own account, Kennard believes that the FCC's challenge is to pave the way for the wireless Internet by pumping more spectrum into the market to give more wireless devices and services access to the Internet. It's no secret that so far the growth of the U.S. wireless industry has lagged behind that of Europe and Japan, where nations have made a strong commitment to spectrum allocation for 3G platforms.

"The U.S. wireless industry is a real disappointment compared to other countries where wireless is becoming a substitute for fixed service," Spiwak says. "The U.S. is nowhere near that."

According to the Cellular Telecommunications Industry Association, the U.S. is very much on the short end of the spectrum stick, having made just 189 MHz available for wireless applications compared with Japan's 300 MHz, the U.K.'s 364 MHz and France's 395 MHz.

How the FCC goes about making more spectrum available and reforming rules on spectrum caps could have a substantial impact on the worldwide competitiveness of U.S. operators, says Tom Wheeler, president and CEO of the CTIA.

One effort involves the auctioning of channels 60 to 69 of analog spectrum allocated to broadcasters until 2006 or whenever digital TV reaches 85% market penetration.

In an October speech at the Museum of Television and Radio in New York, Kennard underscored his determination to accelerate the availability of the spectrum to wireless players by wrestling control of it from broadcasters "squatting" on empty spectrum.

Among other things, Kennard plans to recommend to the next session of Congress in January 2001 that it enable the FCC to require that all new TV sets include the capability to receive digital TV signals by 2006. Kennard believes such an order would accelerate digital TV deployment and make the technology more affordable. In addition, Kennard will recommend that Congress impose a fee on broadcasters for use of the analog channel after Jan. 1, 2006. The fee would escalate yearly until broadcasters complete the transition to the digital spectrum.

But true leadership on the problem of spectrum for next generation wireless services is coming from other branches of the government. Earlier this month, President Bill Clinton signed an executive order setting forth a timetable for the auctioning of 3G spectrum by Sept. 30, 2002. The order requires the FCC and other government agencies to identify spectrum that can be used by 3G systems by July 2001.

Kennard's future Throughout his tenure, Kennard demonstrated a commitment to allowing market forces to determine the winners and losers in telecom.

Thus, in March 1999, Kennard outlined his five-year reform plan to streamline and consolidate the FCC's policymaking functions for a future in which traditional regulatory definitions and jurisdictional boundaries are converged. The plan says that in five years, the domestic communications markets should require minimal or no regulation, and that the rate regulation in competitive telephone services should be totally deregulated.

In such a market, according to the FCC, the commission would consolidate its seven operating bureaus - common carrier, enforcement, wireless, mass media, consumer information, international and cable services - and focus on "core functions that cannot be accomplished by normal market forces." These include universal service, consumer protection and information; enforcement and promotion of pro-competition goals domestically and internationally; and spectrum management.

Kennard's term officially expires on June 30, 2001, so whether the FCC turns itself into this streamlined model of bureaucracy - or whether it should - Kennard probably won't be around to see it happen.

The latest speculation surrounding the presidential election in November says that if Texas Gov. George W. Bush wins the White House, Commissioner Michael Powell, son of Colin Powell, the former chairman of the Joint Chiefs of Staff, would replace Kennard. Even if Vice President Al Gore wins the election, Kennard could leave his post, considering the erosion of support for his chairmanship in Congress and the possibility of obtaining another position in a new Democratic administration.

In the meantime, next week, on Nov. 7, Kennard will celebrate the three-year anniversary of his swearing in as chairman of the FCC. Whether he has made an indelible stamp on telecommunications policy or will be just a footnote in the history books still is open to revision.

`In the last four years, FCC decisions have led to rate reductions in long-distance, international and wireless phone service. We need the same outcome for local telephone and cable TV. And if confirmed, I will work with the Congress and my new colleagues to make this a top priority for the FCC.'

-Kennard at the confirmation hearing before the U.S. Senate's Commerce, Science and Transportation Committee, Oct. 1, 1997

`In a [broadband] market developing at these speeds, the FCC must follow a piece of advice as old as Western Civilization itself: First, do no harm. Call it a high-tech Hippocratic oath. So with competition and deregulation as our touchstones, the FCC has taken a hands-off, deregulatory approach to the broadband market. We approved the AT&T/TCI deal without imposing conditions that they open their network. We did this because there is no sign that as this nascent market matures that the cable operator has an incentive to deny ISPs access to their platform.'

-Kennard before the Federal Communications Bar, Northern California Chapter, San Francisco July 20, 1999

`Unfortunately, the first three years of the implementation of the Telecommunications Act of 1996 were characterized not by cooperation, but by confrontation - litigation instead of collaboration. What we got was uncertainty, confusion and delay. We lost valuable time.'

-Kennard before the USTA, San Francisco Oct. 18, 1999

`We will head off a spectrum drought if we build on the successes of the past: expanding on the market-based approaches of the last decade; finding more ways to create a fluid market in spectrum. First, we need to encourage secondary markets for underused spectrum. The demand is there. Parties come to the commission all the time seeking spectrum on a short-term basis for sporting events, like the Super Bowl, or for use in major metropolitan areas. We know that there are blocks of spectrum not being used.'

-Kennard before the CTIA, New Orleans Feb. 28, 2000

`Convergence is our greatest challenge. It is challenging our jurisdictions like never before, and touching every aspect of regulation. We must ensure that convergence doesn't undermine the competitive gains we have made. We must also have the courage to hold the line against mergers that threaten all of our hard work.'

-Kennard before the National Association of Regulatory Utility Commissioners, Los Angeles July 24, 2000

`People are telling me that voice communications, whether delivered by the Internet or the traditional phone companies, should be treated the same: licensed the same, regulated the same and taxed the same. In other words, more regulation for IP telephony. But while symmetry may be important in art and architecture, in the world of economic regulation, it's not necessarily so.'

-Kennard before the Voice on the Net Conference, Atlanta Sept. 12, 2000