Friday, October 31, 2014

Uncertainty Threatens Investment in Gigabit Networks?

The reason service providers abhor “uncertainty” is the same reason any entrepreneur, investor or saver objects to uncertainty: making long-term decisions is a risky proposition when there is high uncertainty.

That is as true for Brazil as for the United States, the European Community or Mexico.

Many economists, in fact, would argue that much poverty around the world is caused because people are not assured that the fruits of their labor are safe from sudden confiscation.

It is not rational for a farmer to plant a crop if the farmer is not fairly certain he or she will be able to reap the harvest, in other words. The rule of law is a prerequisite for economic development, though not sufficient.

The problem at the Federal Communications Commission, argue Dr. George S. Ford, chief economist and Lawrence J. Spiwak, president, of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, is that, despite public assurances that “regulatory certainty” is an FCC objective, the agency is behaving in ways that increase uncertainty.

And that will have consequences for capital investment.

The reality remains that over the last few years the FCC has become entirely unpredictable, largely, we believe, because of the increased politicization of the agency's deliberative process,” say Ford and Spiwak. “Over the past five years, the FCC either has reversed, or is threatening to reverse, some of the most significant bipartisan deregulatory achievements of the past two decades.

“This dramatic reversal of FCC policy” means investors and carriers can no longer predict the agency's actions.

But some might argue that the Commission’s actions are clear, if unhelpful: increased market intervention that will lead to lower financial returns for investing in facilities.

Still, very long-term investments require “certainty,” or at least “stability,” which comes from a credible commitment to a long-term policy, the authors say.  

“Yet, the FCC has proven it will not make such commitments; its policies are anything but stable,” Ford and Spiwak say.

“Special access” circuits generally had been deregulated since 1999. But in 2012 the Commission suggested it would reimpose regulations on a product that is declining, being replaced by Ethernet connections.

Another example is the agency's decisions on forbearance from the 1996 Act's unbundling obligations. In 2005, at the request of Qwest Communications, the FCC used its authority under Section 10 to forbear from the application of (many of) the Act's unbundling mandates in parts of the Omaha Metropolitan Statistical Area based on the presence of a facilities-based competitor.

In 2009, a nearly identical forbearance request was made by Qwest for the Phoenix MSA. Not only did the FCC reject the petition, but it rejected its own precedent and created a new barriers to granting future requests.  

The agency's radical reversal towards forbearance between the Omaha and Phoenix petitions is significant, the authors say. “In these two cases, you had (a) the same carrier (b) submitting data showing a comparable competitive landscape and (c) a FCC whose staff was probably 90 percent unchanged.”

Yet, the agency reached two entirely different and conflicting decisions, Ford and Spiwak say.  

When the FCC first squarely addressed the issue of state laws restricting or prohibiting municipal broadband back in 2001, the Commission unanimously ruled that the agency lacked any legal authority to preempt such laws, a ruling which was ultimately upheld by the United States Supreme Court.

But FCC Chairman Tom Wheeler has said he believes “the FCC has the power--and I intend to exercise that power--to preempt state laws that ban competition from community broadband.”

This sharp reversal in policy and change in the agency's interpretation of its legal authority is troubling for a wide variety of reasons.

First, the law remains clear that the FCC lacks the authority to preempt state laws that restrict or prohibit municipal broadband deployment.

Second, should the agency decide to grant the Chattanooga petition, it will nakedly pick a fight with both the National Governors Association and the National Association of State Legislatures.

Third, the FCC is disregarding the advice of its own National Broadband Plan which explicitly recognized that “[m]unicipal broadband has risks” because it “may discourage investment by private companies”.

But perhaps the biggest issue is the potential reclassification of broadband Internet access from a lightly-regulated Title I “information service” to a heavily regulated common carrier “telecommunications” service under Title II.

Over a period of years, the FCC has classified cable broadband, wireline broadband, wireless broadband and even broadband over powerline as Title I information services.
“These four cases are but a sample of actions taken by the FCC that signal uncertain times for investors in this sector, especially investors in infrastructure upon which all else depends,” argue Ford and Spivak.

The mobile wireless industry has been deemed “effectively competitive” for some time. Yet, In the agency's last several reports, the FCC has refused to reach such a determination.

The great danger is that investment incentives are diminished.

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