This week, the FCC announced bidding has finished for the latest Connect America Fund (CAF) broadband subsidies auction.

Once again, the FCC gave first priority to incumbent phone companies to bid for the subsidies, which defray the cost of expanding internet access to homes and businesses otherwise unprofitable to serve. Nearly $2 billion was left on the table by disinterested phone companies after the first round of bidding was complete, so the FCC’s second round opened up the leftover money to other telecom companies.

Winning bidders will receive their portion of $198 million annually in 120 monthly installments over the next ten years to build out rural networks. In return, providers must promise to deliver one broadband and voice service product at rates comparable to what urban residents pay for service. The winning bids, still to be publicly announced, will come from rural electric and phone cooperatives, satellite internet providers, fixed wireless companies, and possibly a handful of cable operators. But much of the money overall will be spent by independent phone companies rolling out slow, copper-based, DSL service.

Because the total committed will take a decade to reach providers, rural Americans will likely face a long wait before what purports to be “broadband” actually reaches their homes and businesses.

While many co-ops will spend the money to expand their own homegrown fiber-to-the-home services, most for-profit providers will rely on wireless or copper networks to deliver service.

Telefónica Spain

Overseas, broadband expansion is headed in another direction — expansion of fiber-to-the-home service, with little interest in investing significant sums on furthering old technology copper wire based DSL and fixed wireless services. The expansion is moving so quickly, Verizon made certain to sign long-term contracts with optical fiber suppliers like Corning in 2017 to guarantee they will not be affected by expected shortages in optical fiber some providers are already starting to experience.

Virtually everywhere in developed countries (except the United States), fiber broadband is quickly crowding out other technologies, despite the significant cost of replacing copper networks with new optical fiber cables. If a provider is brave enough to discount investor demand for quick returns and staying away from big budget upgrade efforts, the rewards include happier customers and a clear path to increased revenue and business success.

Not every Wall Street bank is reluctant to support fiber upgrades. Credit Suisse sees a need for optical fiber today, not tomorrow among incumbent phone and cable companies.

“The cost of building fiber is less than the cost of not building fiber,” the bank advised its clients. The reason is protecting market share and revenue. Phone companies that refuse to upgrade or move at a snail’s pace to improve their broadband product (typically DSL offering 2-12 Mbps) have lost significant market share, and those losses are accelerating. Ditching copper also saves companies millions in maintenance and repair costs.

Canada’s Telus is a case in point. Its CEO, Darren Entwistle, reports Telus’ effort to expand fiber optics across its western Canada service area is already paying off.

“We see churn rates on fiber that are 25% lower than copper,” Entwistle said. “35% lower in high-speed internet access, and 15% lower on TV — 25% lower on average. We’re seeing a reduction in repair volumes to the tune of 40%. We’re seeing a nice improvement in revenue per home of close to 10%.”

Telus promotes its fiber to the home initiative in western Canada as a boost to medical care, education, the economy, and the Canadian communities it serves. (1:31)

Telus’ chief competitor is Shaw Communications, western Canada’s largest cable company. Fiber optics allows Telus to vastly expand internet speeds and reliability, an improvement over distance sensitive DSL. Shaw Cable has boosted its own broadband speeds and offers product bundles that have been largely responsible for Telus’ lost customers, until its fiber network was switched on.

In economically challenged regions, fiber optic expansion is also growing, despite the cost. In Spain, Telefónica already provides service to 20 million Spaniards, roughly 70% of the country, and plans to continue reaching an additional two million homes and businesses a year until the country is completely wired with optical fiber. In Brazil, seven million customers will have access to fiber to the home service this year, expanding to ten million by 2020.

Verizon and AT&T regularly ring alarm bells in Congress that China is outpacing the United States in 5G wireless development, but are strangely silent about China’s vast and fast expansion into fiber optic broadband that companies like Verizon stopped significantly expanding almost a decade ago. China already has 328 million homes and businesses wired for fiber and added another five million homes in the month of June alone. AT&T will take a year to bring the same number of its own customers to its fiber to the home network.

The three countries that are most closely aligned with the mentality of most U.S. providers — the United Kingdom, Australia, and Germany — are changing their collective minds about past arguments that fiber to the home service is too costly and isn’t necessary.

The government of Martin Turnbull’s cost concerns forced a modification of the ambitious proposal by the previous government to deploy fiber to the home service to most homes and businesses in the country. That decision to spend less is coming back to haunt the country after Anne Hurley, a former chief executive of the Communications Alliance involved in the National Broadband Network (NBN), admitted the cheaper NBN will face an expensive, large-scale replacement within a decade.

ABC Australia reports on findings that the country’s slimmed-down National Broadband Network is inadequate, and parts will have to be scrapped within 5-10 years (1:37)

Turnbull’s government advocated for less expensive fiber to the neighborhood technology that would still rely on a significant amount of copper wiring installed decades ago. The result, according to figures provided to a Senate committee, found only a quarter of Australians will be able to get 100 Mbps service from the NBN, with most getting top speeds between 25-50 Mbps.

Despite claims of technical advancements in DSL technology which have claimed dramatic speed improvements, Hurley was unimpressed with performance tests in the field and declared large swaths of the remaining copper network will have to be ripped up and replaced with optical fiber in just 5-10 years.

“If you look around the world other nations are not embracing fiber-to-the-[neighborhood] and copper … so yes, it’s all going to have to go and have to be replaced,” she said.

In the United Kingdom, austerity measures from a Conservative government and a reluctant phone company proved ruinous to the government’s promise to deliver “superfast broadband” (at least 24 Mbps) over a fiber to the neighborhood network critics called inadequate from the moment it was switched on in 2012. The government had no interest in financing a fiber to the home network across the UK, and BT Openreach saw little upside from spending billions upgrading the nation’s phone lines it now was responsible for maintaining as a spun-off entity from BT. In 2015, BT Openreach’s chief technology officer called fiber to the home service in Britain “impossible” and too expensive.

Two years later, while the rest of Europe was accelerating deployment of fiber to the home service, the government was embarrassed to report its broadband initiative was a flop in comparison, and broke a key promise made in 2012 that the UK would have the fastest broadband in Europe by 2015. Instead, the UK has dropped in global speed rankings, and is now in mediocre 35th place, behind the United States and over a dozen poorer members of the EU.

What was “impossible” two years ago is now essential today. The latest government commitment is to promote optical fiber broadband using a mix of targeted direct funding, “incentives” for private companies to wire fiber without the government’s help, and a voucher program defraying costs for enterprising villages and communities that develop their own innovative broadband enhancements. The best the government is willing to promise is that by 2033 — 15 years from now — every home in the UK will have fiber broadband.

Deutsche Telekom echoed BT Openreach with claims it was impossible to deliver fiber optic broadband throughout an entire country.

Deutsche Telekom’s dependence on broadband-enhancements-on-the-cheap — namely speed improvements by using vectoring and bonded DSL are increasingly unpopular for offering too little, too late in the country. Deutsche Telekom applauded itself for supplying more than 2.5 million new households with VDSL service in 2017, bringing the total number served by copper wire DSL in Germany to around 30 million. The company, which handles landline, broadband and wireless phone services, is slowly being dragged into fiber broadband expansion, but on a much smaller scale.

In March, Telekom announced a fiber to the home project in north-east Germany’s Western Pomerania/Rügen district for 40,000 homes and businesses. The network will offer speeds up to 1 Gbps. In July, Telekom was back with another announcement it was building a fiber optic network for Stuttgart and five surrounding districts Böblingen, Esslingen, Göppingen, Ludwigsburg, and Rems-Murr, encompassing 179 cities and municipalities. But most of the work will focus on wiring business parks. Residents will have a 50% chance of getting fiber to the home service by 2025, with the rest by 2030.

In contrast, the chances of getting fiber optic broadband in the U.S. is largely dependent on which provider(s) offer service. In the northeast, Verizon and Altice/Cablevision will go head to head competing with all-fiber networks. Customers serviced by AT&T also have a good chance of getting fiber to the home service… eventually, if they live in an urban or suburban community. Overbuilders and community broadband networks generally offer fiber service as an alternative to incumbent phone and cable companies, but many consumers don’t know about these under-advertised competitors. The chances for fiber optic service are much lower if you live in an area served by a legacy independent phone company like Frontier, Consolidated, Windstream, or CenturyLink. Their cable competitors face little pressure to rush upgrades to compete with companies that still sell DSL service offering speeds below 6 Mbps.

CAF funding from the FCC offers some rural areas a practical path to upgrades with the help of public funding, but with limited funds, a significant amount will be spent on yesterday’s technology. In just a few short years, residents will be faced with a choice of costly upgrades or a dramatic increase in the number of underserved Americans stuck with inadequate broadband. Policymakers should not repeat the costly mistakes of the United Kingdom and Australia, which resulted in penny wise-pound foolish decisions that will cost taxpayers significant sums and further delay necessary upgrades for the 21st century digital economy. The time for fiber upgrades is now, not in the distant future.

While celebrating its success at cutting $350 million in expenses, Frontier’s newest plan to keep the company from drifting towards bankruptcy is a $500 million increase in revenue (and hopefully profits) with a series of “revenue enhancements” and cost cutting.

Significant broadband upgrades in legacy DSL service areas are not on the table, as Frontier continues to spend most of its capital on matching Connect America Funds (CAF) and state grants to expand broadband into unserved and underserved rural areas.

“Approximately 80% of our capital program continues to focus on revenue generating and productivity enhancing projects,” said R. Perley McBride, Frontier’s outgoing chief financial officer. “The focus of our capital spending remains consistent. We continue to focus on our CAF builds, using both wired and wireless technologies.”

Frontier has been criticized by some for spending too much on its network and acquisitions and not enough on shareholder return. The company suspended its dividend in February, and the share price has remained below $6 a share since July. After announcing its latest quarterly results and a new $500 million EBITDA initiative on July 31, the average share price posted only modest gains of around $0.25 a share.

Frontier’s business remains troubled, with looming debt repayments in its future. The date to remember is Sept. 15, 2022 — the day Frontier needs to repay $2 billion in unsecured bonds to maintain its credibility in the credit markets. If it fails to pay, the company could find future financing difficult, which is often what triggers a trip to bankruptcy court.

The year 2022 is also very important to Californians. Frontier disclosed it planned to expand rural broadband service to 847,000 unserved/underserved rural residents by the end of 2022, with specific commitments in the next few years to upgrade 77,402 locations, in part with CAF funding, increase broadband speed for 250,000 households, and deploy newly available service to 100,000 homes.

Frontier’s own deployment goals in California — goals the company may not be honoring. (Image courtesy of: Steve Blum’s blog)

According to the California Emerging Technology Fund (CETF), Frontier has no intention of meeting its rural broadband commitments. In effect, similar to Charter Communications, it merely made the commitments to win approval of its acquisition of Verizon’s wireline and FiOS business in California.

A day of reckoning for the company’s alleged failure to meet its obligations is likely forthcoming. Steve Blum’s blog notes Frontier isn’t saying much:

In its formal response to CETF’s allegations, Frontier never actually says that it kept to that timetable. All it says is that “Frontier sent a letter to the Communication Division dated March 8, 2018 on its commitments that includes a confidential attachment reflecting completed locations through December 31, 2017”. It sent a letter, but doesn’t say what’s in the letter or even claim that the letter documents fulfillment of its obligations.

CETF told California regulators a disturbing story about Frontier’s failure to perform and other allegations in its filing with the California Public Utilities Commission, alleging Frontier is reneging on the deal it made with the state and various stakeholders in return for getting its acquisition approved. The group also accused Frontier of failing to deliver on its affordable broadband offering, because the company made signing up difficult and bundled extra fees and surcharges onto the bill.

“Frontier launched its existing affordable broadband offer in late August 2016 and to date only 9,173 adoptions have been achieved, a mere 4.5% of the 200,000 household adoption goal,” the CETF wrote. “Due to the initial Frontier eligibility requirement that Frontier customers be a telephone landline Lifeline subscriber and the total bundled cost, the affordable broadband offer has only attracted 7,452 low-income subscribers, which is 190,827 households short of the agreed-upon goal.”

Frontier has a employer turnover problem in California, evident from this filing by the CETF. (Courtesy: CETF)

The CETF said Frontier was “shirking” and should face the maximum fine of $50,000 a day retroactive to July 1, 2016 for failure to comply with its obligations. As of the end of July, 2018 that fine would amount to over $39 million.

To comply with existing obligations to California, Frontier could have to spend in excess of $1 billion in the next two years. But Frontier has told investors it planned to spend no more than $1.15 billion on capex in fiscal year 2018 across its entire national service area. This could explain why Frontier may be stalling on upgrades in California.

Also raining on Frontier’s parade is the muted reaction to Frontier’s latest money-raising scheme. Shareholders appear lukewarm, with some openly skeptical that Frontier can deliver what it promises.

The plan’s success depends on:

• Frontier’s ability to raise rates and find other “revenue enhancements” of $150-200 million. Rate increases drive customers to competitors, reducing revenue.
• Vague “operational improvements” are expected to bring $150-200 million.
• Customer care and support savings are anticipated to generate $125-175 million in EBITDA benefit.

Outgoing CFO McBride relies heavily on opaque corporate-speak like this, with few specifics:

“In addition to the dedicated resources, we are utilizing a new approach that will significantly accelerate the benefits of both revenue and expense initiatives. This new approach involves utilization of external expertise to significantly reduce the time to successfully realize our objectives. This will allow us to execute more initiatives in parallel while still managing day to day requirements of the business.”

In short, this suggests Frontier will outsource a lot of initiatives they used to manage in-house. The company also plans to start limiting truck rolls to customer homes if the company determines the problem is likely elsewhere in their network. It also claims it is cutting customer hold times at their call centers, which are still frequently outsourced.

What Frontier has made clear, again, is their determination to keep a cap on spending, which means much of the money Frontier will spend each year will go towards network maintenance, not service upgrades. Therefore, customers can expect incremental upgrades, usually when a construction project requires Frontier to replace existing copper wire infrastructure with fiber optics or at a building site for a new housing development. Most customers in existing neighborhoods served by legacy copper wiring on the poles since the 1960s will continue to be serviced by those lines until they are torn down in a storm or stolen. Frontier has consistently shown no interest in wholesale network upgrades in its legacy service areas.

Moving on out?

New York’s Public Service Commission on Friday set the stage for ‘an orderly transition’ ending Spectrum’s brief life in New York, to be replaced with a ‘to be announced’ new cable operator to serve the needs of New York subscribers.

Or so the New York Public Service Commission hopes.

Although Friday’s 4-0 unanimous decision to revoke Charter’s merger deal in New York is a public relations and legal nightmare for the country’s second largest cable operator, we suspect top executives are getting a good night’s sleep tonight, not too concerned about the immediate consequences of today’s stunning vote.

Losing New York is what Wall Street would call “a materially adverse event” for any cable operator. New York City is the country’s largest media market. Billions of dollars worth of cable infrastructure, subscriber and advertising revenue, and prestige are at stake. Despite the ‘vote to revoke,’ Charter’s attorneys have signaled for weeks they intend to preserve and protect the cable company’s legal rights, and it is almost certain the PSC’s merger revocation order will meet a court-ordered injunction as soon as next week.

The courts are likely to make the final decision about whether Spectrum can stay or has to go. That aforementioned injunction will stop the clock on any ‘rash action’ and start what could be years of litigation, filled with discovery, endless hearings, stall tactics, blizzards of motions, appeals, more appeals, and then more lawsuits over whatever final exit plan is eventually filed, if one is required by the courts. A judge could also order the cable company and the state to work it out in a court-approved settlement, something the PSC seems loathe to do in its two orders published today which make it clear the regulator is done talking only to feel strung along by the cable company.

For the near term, Spectrum customers won’t notice a thing. Even if the PSC was not taken to court, Charter has 60 days to file a six month transition plan, making the earliest date to waive Spectrum goodbye is sometime in early 2019.

To help readers out, we’ve prepared a short FAQ to address any concerns:

Q. Will I lose my cable and internet service?

A. No. Regardless of what happens, the PSC has ordered a transition plan designed to provide a seamless switch between Spectrum and a future provider. For most customers, it will resemble Charter’s own transition from Time Warner Cable to Spectrum.

Q. Who will replace Spectrum?

Not again.

A. The cable industry often resembles a cartel, whose members go to great lengths to protect each other. Historically, no large cable operator will entertain requests for proposals from cities or states requesting a replacement of a cable company already providing service. In short, if a city is fed up with Comcast and wants to shop around for another provider, it is highly unlikely Charter/Spectrum, Cox, Altice/Cablevision, Mediacom, or other providers will submit a bid to replace Comcast. If they did, Comcast could theoretically retaliate in their service areas. Should the Public Service Commission itself solicit bids to replace Spectrum, it is unlikely any operator will send a proposal unless/until Charter indicates it wants to leave the state. This kind of informal protectionism has proven highly effective limiting the power of towns and cities to play companies off each other to get a better deal for their residents.

Q. If Charter loses its court challenge and has to leave, what happens then?

A. If Charter exhausts its appeals and realizes it can no longer do business in New York, it will seek a private sale or system swap with another provider. Comcast would be the most likely contender, having shown prior interest in serving New York and having contiguous cable operations in adjoining states, especially in northern New England, Massachusetts, Pennsylvania and New Jersey. Comcast could agree to trade its cable systems in states like Texas, Florida, or California in return for its New York State’s Spectrum systems, which cover cities across the state. But that is likely years away.

Q. Isn’t Comcast worse than what we have now with Spectrum?

A. Consumer satisfaction surveys suggest the answer is yes. Comcast is routinely rock bottom in customer satisfaction, customer service, pricing, and service options. Its 1 TB data cap on internet service has not yet reached many of its northeastern customers, but most observers expect it eventually will. In contrast, Charter has agreed not to impose data caps for up to seven years after its 2016 merger. But Comcast has delivered more frequent broadband speed upgrades and has more advanced set-top boxes and infrastructure.

Stop the Cap! would vociferously oppose Comcast’s entry in New York, however, just as we did a few years ago when we participated in the successful fight to stop Comcast’s merger attempt with Time Warner Cable.

Q, What other providers might be interested?

A. Altice, which does business as Cablevision or Optimum, is New York’s other big cable operator, providing service exclusively downstate. Altice had aggressive plans to become a big player in the U.S. cable business, but its acquisition dreams were halted by shareholders, concerned about the European company’s already staggering debt, run up acquiring other companies. Altice is currently scrapping Cablevision’s existing Hybrid Fiber Coax infrastructure and replacing it with direct fiber to the home service, which offers improved service. But the company charges a lot for its advanced set-top box, has bloated modem rental fees, and is notorious for vicious cost-cutting, which stalled service improvements at its mobile and cable companies in France and raised a lot of controversy among employees.

Cox could be another contender, but would have to find a few billion to acquire Spectrum’s statewide system. Wild card players include AT&T and Verizon. Verizon would face extreme regulatory challenges, however, because it is the local phone company for most residents in the state. AT&T sold its U-verse system in Connecticut to Frontier Communications and seems increasingly focused on content, not on the systems that deliver content. A hedge fund or private equity firm could also be contenders, but perhaps not considering the high cost to acquire the systems and New York’s reputation for fierce customer protection. Remember, New York insists that a cable company ownership transfer must meet public interest tests, not simply enrich hedge fund participants.

Q. What happens to Charter’s pre-existing deal conditions on rural broadband and speed increases?

A. Officially, the PSC has ordered Charter to continue abiding by the 2016 Merger Order and its deal commitments. The state will likely continue to fine Charter if it keeps missing rural broadband rollout targets until a court stops them or the company leaves. Charter will probably continue rural broadband expansion to show good faith. Charter has met its merger obligations related to speed increases, so it is not currently out of compliance. But a legal challenge offers the opportunity for a third-party judge to suspend or modify existing deal commitments, at least temporarily. It is unlikely Charter will want to invest large sums in its cable systems if it believes it will lose its case in court. The timetable for an upgrade to 200 Mbps Standard speed will likely now occur on a regional basis. The northeast division will still likely activate these speeds across multiple cities in the region sometime this summer, especially in places where it faces competitive pressure. The 300 Mbps upgrade in 2019 is more likely to be impacted by any forthcoming legal action.

Q. Is this political or about the union striking Charter? It is an election year.

A. All things are political to some degree in an election year in New York. That said, the New York Public Service Commission has the nation’s best track record of protecting consumers from bad actor telecom and energy companies. They take their responsibilities very seriously, and have shown consistent independence from the governor’s office, especially in recent years. The Commission was by far the most responsive of any state, including California, in taking our concerns about the Charter/Time Warner Cable merger seriously, and incorporated several of our suggestions into the final Merger Order. We warned the PSC cable companies have routinely reneged or slipped through deal conditions. We even predicted Charter would attempt to count new buildouts in non-rural areas and business office parks towards any commitment to expand their service areas. The PSC smartly conditioned its Merger Order by defining the goal of Charter’s broadband expansion — serving the unserved and underserved. That is why the company is not getting away with counting New York City buildouts towards this commitment.

Cynthia Nixon and Andrew Cuomo, both running for New York governor, neither fans of Charter Spectrum.

Few voters are likely to tie a PSC decision to the governor’s race, although Gov. Andrew Cuomo has repeatedly taken credit and praised the PSC for not tolerating bad behavior from Spectrum. If it was a purely political play, it would originate in the governor’s office. Gov. Cuomo’s Broadband for All program depends on achieving near-100% broadband penetration, something it may not manage if Charter fails its rural buildout commitments. That would be a PR mess. There is ample evidence that Charter’s own conduct was sufficient to trigger this kind of response, with or without an election looming.

New York is also a union-friendly state, and the International Brotherhood of Electrical Workers (IBEW) Local 3 has held out for over a year in the New York City area striking to preserve important job benefits Charter wants to discontinue. New revelations from the PSC outlining Charter’s increasingly bad safety record has strengthened the union’s case that Charter would rather bring in unqualified replacement workers and put safety at risk than settling with a union that essentially built the cable system serving New York City. There is no credible evidence that the union is involved in the PSC’s decision to revoke the merger agreement, although we suspect most affected members will fully support the decision.

Q. Is the PSC being too harsh? Can’t they work it out with Charter?

A. For New York to revoke a merger and effectively boot the company out of business in the state is remarkable. Utility companies that irresponsibly lack a credible disaster plan or do not comply with industry standards to maintain tree trimming and infrastructure repairs that result in plunging parts of upstate into darkness for up to two weeks after wind storms in two consecutive years were fined, but not ordered to leave. The ongoing scandal of competing private ESCO electric companies that have almost all scandalously overcharged New Yorkers with electric bills higher than their incumbent utility have been threatened with de-certification and fines, but are still conducting business, even though much of their marketing material was misleading.

Is it too late to work it out?

That should tell you the PSC’s move today was a final straw. The two parties have negotiated and debated Spectrum’s performance lapses for nearly a year. Tension was clearly rising by the spring after the PSC uncovered evidence Charter was intentionally counting areas it knew were outside of the spirit and language of the merger order’s rural broadband deal commitments. Charter’s brazen behavior achieved a new low when it questioned the PSC’s authority to oversee the merger agreement Charter signed. At one point, it unilaterally announced it would only honor the deal commitments found in one appendix of the Merger Order, conveniently ignoring the section describing and defining the rural broadband commitment Charter agreed to. The company also continued to air what the PSC declared to be false advertising, promoting Charter’s claimed accomplishments in rural broadband expansion. Charter repeatedly ignored warnings to suspend and remove those ads. In fact, the PSC issued strongly worded warnings to Charter at least twice, specifically outlining the possibility of canceling the merger agreement and forcing Spectrum out of the state. In response, Charter began staking out its legal arguments in filings, obviously preparing for litigation.

The PSC would probably argue it is impossible to work things out with a company that repeatedly breaks its own commitments. The PSC also openly worried what message it would send to other regulated utilities if it did not react strongly to Charter’s behavior. If the company had a corporate agenda to cheat New York out of important rural broadband expansion, negotiating, fining, and sanctioning a company is unlikely to change its behavior at the top.

Stop the Cap! had earlier recommended the PSC adopt new sanctions to force Charter to comply with its commitments, and expand them to bring service to many New Yorkers who were left behind by Gov. Cuomo’s Broadband for All program, suddenly saddled with satellite internet service. A large percentage of those affected are frustratingly close to nearby Spectrum service areas and although it would cost Charter a significant sum to reach them, it would deliver a financial sting for their bad behavior while also bringing much-needed internet access to the leftovers left-behind by the governor’s broadband expansion program. Such a settlement would require the company to actually comply with their commitments, something the PSC had been unable to achieve through no fault of their own. Perhaps a judge might have better luck should a negotiated settlement come up in litigation.

How exactly did America get stuck with a broadband monopoly in many areas, a duopoly in most others? It did not happen by accident. In this occasional series, “Historical Truths,” we will take you back to important moments in telecom public and regulatory policy that would later prove to be essential for the creation of today’s anti-competitive, overpriced marketplace for broadband internet service. By understanding the trickery and legislative shell games practiced by lobbyists and their elected partners in Congress, you will learn to recognize when the telecom industry and their friends are preparing to sell you another bill of goods. 

Vice President Al Gore watches President Bill Clinton digitally sign the 1996 Telecom Act into law on February 8, 1996.

By the end of the first term of the Clinton Administration, the president faced a major backlash from Republicans two years into the Gingrich Revolution. A well-funded chorus of voices in the business community, the Democratic Leadership Council — a business-friendly group of moderate Democrats, as well as commentators and pundits had the attention of the Beltway media, complaining in unison that the Democrats shifted too far to the left during the first term of the Clinton Administration, leaving it exposed in the forthcoming presidential election to another voter backlash like the one that installed the Gingrich revolutionaries in the House of Representatives and delivered a Republican takeover of the U.S. Senate in 1994.

With pressure over the growing lack of bipartisanship, and a presidential election ahead in the fall, the Clinton Administration was looking for ideas to prove it could work across the aisle and pass new laws that would deliver for ordinary Americans.

Revamping telecommunications policies would definitely touch every American with a phone line, computer, modem, and a television. Before 1996, America’s telecommunications regulation largely emanated from the Communications Act of 1934, which empowered the Federal Communications Commission to establish good order for the growing number of radio stations, telephone, and wire lines crisscrossing the country.

The 1934 Act’s legacy remains today, at least in part. It created the FCC, firmly established the concept of content regulation on the public airwaves, and established a single body to conduct federal oversight of the nation’s telephone monopoly controlled by AT&T.

Efforts to replace the 1934 Act began well before the Clinton Administration. In the early 1980s, Sen. Bob Packwood (R-Ore.) attempted to push for a legislative breakup of AT&T and a significant reduction in the oversight powers of the FCC. The bill met considerable opposition from AT&T, spending $2 million lobbying against the bill in 1981 and 1982. Alarm companies also heavily opposed the measure, terrified AT&T would enter their market and put them out of business. AT&T preferred a more orderly plan of divestiture being carefully negotiated in a settlement of a 1974 antitrust lawsuit by the Justice Department. A 1982 consent decree broke off AT&T’s control of local telephone lines by establishing seven Regional Bell Operating Companies independent of AT&T (NYNEX, Pacific Telesis, Ameritech, Bell Atlantic, Southwestern Bell Corporation, BellSouth, and US West). AT&T (technically an eighth Baby Bell) kept control of its nationwide long distance network.

Also in the 1980s, the cable television industry gained a much firmer foothold across the country, quickly gaining political power through well-financed lobbyists and close political ties to selected members of Congress (particularly Democrat Tim Wirth, who served in the House and later Senate representing the state of Colorado) that allowed them to push through a major amendment to the 1934 Act in 1984 deregulating the cable industry. The result was an early wave of industry consolidation as family owned cable companies were snapped up by a dozen or so growing operators. These buyouts were largely financed by dramatic rate increases passed on to consumers, resulting in cable bills tripling (or more) in some areas almost immediately. By the end of the 1980s, a major consumer backlash began, creating enormous energy for the eventual passage of the 1992 Cable Act, which re-regulated the industry and allowed the FCC to order immediate rate reductions.

The Progress and Freedom Foundation, with close ties to former House Speaker Newt Gingrich, closed its doors in 2010.

The biggest push for a near-complete revision of the 1934 Act came during the Gingrich Revolution. In 1995, the conservative Progress & Freedom Foundation — a group closely tied to then-Speaker Newt Gingrich (R-Ga.) floated a trial balloon calling for the elimination of an independent Federal Communications Commission, replaced by a stripped-down Office of Communications that would be run out of the White House and be controlled by the president. A small army of telecom industry-backed scholars also began proposing privatizing the public airwaves by selling off spectrum to companies to be owned as private property. The intense interest in the FCC by the group may have been the result of its veritable “who’s who” of telecom industry backers, including AT&T, BellSouth, Verizon, the National Cable & Telecommunications Association, cable companies like Comcast and Time Warner; cell phone companies like T-Mobile and Sprint; and broadcasters like Clear Channel Communications and Viacom.

The proposal outraged Democrats and liberal groups who called it a corporate-friendly sell-off and giveaway of the public airwaves. Then FCC Chairman Reed Hundt took the proposal very seriously, because at the time Gingrich lieutenant Tom DeLay’s (R-Tex.) secretive Project Relief group had 350 industry lobbyists, including some from BellSouth and Southwestern Bell literally drafting deregulation bills and a regulatory moratorium on behalf of the new Republican majority, coordinating campaign contributions for would-be supporters along the way. The proposal ultimately went nowhere, lost in a sea of the House Republicans’ constantly changing agendas, but did draw attention to the fact a wholesale revision of telecommunications policy would attract healthy campaign contributions from all corners of the industry — broadcasters, cable companies, phone companies, and the emerging wireless industry.

When it became known Congress was once again going to tackle telecommunications regulation, lobbyists immediately descended from their K Street perches in relentless waves, with checks in hand. There were two very important agendas in mind – deregulation, which would remove FCC rate regulation, service oversight, cross-competition prohibitions, and ownership caps, and ironically, protectionism. The cable and satellite companies had become increasingly fearful of the regional Baby Bells, which arrived in Congress in the early 1990s promoting the idea of entering the cable TV business. The cable industry feared phone companies would cross-subsidize the development of Telco TV by charging telephone ratepayers new fees to finance that entry. The cable industry had carefully developed a de facto monopoly over the prior decade of consolidation. Companies learned quickly direct head-to-head competition between two cable operators in the same market was bad for business.

The original premise of the 1996 Telecom Act was that it would eliminate regulations that discouraged competition. Promoters of the legislation asked why there should only be one phone or cable company in each city and why maintain regulations that kept cable and phone companies out of each others’ markets. Fears about market power and allowing domineering cable and phone companies to grow even larger were dismissed on the premise that a wide open marketplace, with regulations in place to protect consumers and competition would avoid creating telecom robber barons.

The checks handed out by industry lobbyists were bi-partisan. Democrats could crow the new rules would finally give consumers a new choice for cable TV or phone service, and help bring the “information superhighway” of the internet to schools, libraries, and other public institutions. Republicans proclaimed it a model example of free market deregulation, promoting competition, consumer choice, and lower prices.

At a high-brow bill signing ceremony held at the Library of Congress, both President Bill Clinton and Vice President Al Gore were on hand to “electronically sign” the bill into law. Both the president and vice-president emphasized the historical significance of the emerging internet, and its ability to connect information-have’s and have-not’s in an emerging digital divide. Missing from the discussion was an exploration of what industry lobbyists and their congressional allies were doing inserting specific language into the 1996 Telecom Act that would later haunt the bill’s legacy.

On hand to celebrate the bi-partisan bill’s signing were Speaker Gingrich, Sen. Larry Pressler (R-S.D.); Sen. Ernest F. Hollings (D-S.C.); Rep. Thomas J. Bliley Jr. (R-Va.); Rep. John Dingell (D-Mich.); and Ron Brown, the Secretary of Commerce. Pressler was among the soon-to-be-endangered moderate Republicans, Hollings was a holdout against the gradual wave of Republican takeovers in southern “red states,” and Dingell was a veteran lawmaker with close ties to the broadcasting industry.

Some of the bill’s industry backers were also there, some who would ironically see its signing as directly responsible for the eventual demise of their independent companies. John Hendricks of the Discovery Channel, Glenn Jones of Jones Intercable (acquired by Comcast in 1999), Jean Monty of Northern Telecom (later Nortel), Donald Newhouse of Advance Publications (eventual part owner of Bright House Networks and later Charter Communications), William O’Shea of Reuters Ltd. and Ray Smith of Bell Atlantic (today part of Verizon) were on hand. Also in the audience was Jack Valenti of the Motion Picture Association of America, representing Hollywood Studios.

Among the fatal flaws in the Telecom Act of 1996 were its various ‘competition tests,’ which were open to considerable interpretation and latitude at the FCC. The Republican supporters of the bill argued that the presence of an open and free marketplace would, by itself, induce competition among various entrants. They were generally unconcerned with the question of whether new competition would actually arrive. Their priority was lifting the protective levers of legacy regulation as soon as possible. Many Democrats assumed what appeared to be carefully drafted regulatory language would protect consumers by preventing the FCC from lifting protections too early in the competitive process. But lobbyists consistently outmaneuvered lawmakers, finding ways to insert loopholes and compromise language that introduced inconsistencies that could be dealt with and eliminated either by the FCC or the courts later.

For example, lawmakers insisted on unbundling telecommunications network elements, an arcane way of saying new competitors must be granted access to existing networks to be shared at wholesale rates. In practice, this meant if a phone company entered the internet service provider business, it must also make its network available for other ISPs as well. In some areas, competing local telephone companies also offered landline service over existing telephone lines, paying wholesale connection fees to the incumbent local phone company. As competition emerged, the incumbent company usually petitioned for a lifting of the regulations governing their business, claiming competition had arrived.

The first warning the 1996 Act was going awry came a year after the bill was signed into law. Phone companies started raising rates from $1.50-6 a month on average. AT&T was petitioning to hike rates $7 a month. Someone would have to pay to replace the scrapped subsidy system in a competitive market — subsidies that had been in place at the nation’s phone companies for decades. By charging higher rates for phone service in cities and for pricier long distance calls before the arrival of companies like MCI and Sprint, the phone companies used this revenue to subsidize their Universal Service obligations, keeping rural phone bills low and often below the real cost of providing service. To establish a truly competitive phone business, the subsidies had to be reformed or go, and that meant someone had to cover the difference.

“This game is called ‘shift and shaft,'” Sharon L. Nelson, the chairwoman of the Washington Utilities and Transportation Commission, said in 1997. “You shift the costs to the states and shaft the consumer.”

Sam Brownback (R-Kansas)

Gradually, consumers suddenly discovered their phone bill littered with a host of new charges, including the Subscriber Line Charge and various regulatory recovery fees and universal service cost recovery schemes. Phone companies also boosted rates on their unregulated Class phone features, like call waiting, caller ID, and three-way calling. The proceeds helped make up for the tens of billions in lost subsidies, but the end effect was that phone bills were still rising, despite promises of competitive, cheap phone service.

At a hearing of the Senate Commerce Committee later that year, several angry senators said they would never have voted in favor of the Telecommunications Act of 1996 if they had thought it would lead to higher rates. Sam Brownback, a Kansas Republican, was in the line of fire because of his rural constituents. Rates for those customers are subsidized more heavily than elsewhere because of the cost of extending service to them. Rates were threatening to skyrocket.

“We would be foolish to build up all these expectations about competition without saying to the American people, ‘We’re going to have to raise your phone bill,'” Brownback said.

But the rate hikes were just beginning. By the beginning of the George W. Bush administration, telecom lobbyists brought a thick agenda of action items to Michael Powell’s FCC. Despite promises of competition breaking out everywhere, that simply was not the case. Republicans quickly blamed the remaining regulatory protections still in place in noncompetitive markets for ‘deterring competition.’ But the companies knew the only thing better than deregulation was deregulation without competition.

Consolidation wave

The Republican-dominated FCC quickly began removing many of those protective regulations, claiming they were outdated and unnecessary. The very definition of competition was broadened, allowing the presence of virtually any company offering almost any service good enough to trip the deregulation levers. Later, even open access to networks by competitors was often limited to pre-existing networks, not the future next generation networks. Republicans argued those networks should be managed by their owners and not subject to “unbundling” requirements.

The weakened rules also sparked one of the country’s largest consolidation waves in history. Cable companies bought other cable companies and the Baby Bells gradually started putting themselves back together into what would eventually be AT&T, Verizon, and Qwest/CenturyLink. For good measure, phone companies even snapped up a handful of independent phone companies, most notably General Telephone and Electronics, better known as GTE by Verizon and Southern New England Telephone (SNET) by AT&T.

Prices rising as costs dropping.

The cable industry, under the premise it needed territories of scale to maximize potential ad insertion revenue from selling commercials on cable networks, gradually shrunk from at least a dozen well-known companies to two very large ones – Comcast and Charter, along with a few middle-sized powerhouses like Cox and Altice. Merger and acquisition deals faced little scrutiny during the Bush years of 2002-2009, usually approved with few conditions.

The result has been a rate-raising oligopoly for telecom services. In broadcasting, the consolidation wave started in radio, with entities like Clear Channel buying up hundreds of radio stations (and eventually putting the resulting giant iHeartMedia into bankruptcy) and Sinclair and similar companies acquiring masses of local television outlets. On many, local news and original programming was sacrificed, along with a significant number of employees at each station, in favor of inexpensive music, network or syndicated programming. Some stations that aired local news for 50 years ended that tradition or turned newsgathering over to a co-owned station in the same city.

Although telephone service eventually dropped in price with the advent of Voice over IP service, consumers’ cable TV and internet bills are skyrocketing at levels well in excess of inflation. Last year, the Washington Center for Equitable Growth demonstrated that the current consolidated, anti-competitive telecom marketplace results in rising prices for buyers and falling costs for providers.

Your oligopoly tax.

“In truly competitive markets, a significant part of cost reductions would be passed through to consumers,” the group wrote. “Based on a detailed analysis of profits—primarily EBITDA—we estimate that the resulting overcharges amount to more than $45 per month, or $540 per year, an aggregate of almost $60 billion, or about 25 percent of the total average consumer’s monthly bill.”

That is one expensive bill, paid by subscribers year after year with no relief in sight. Several Republicans are proposing to double down on deregulation even more after eliminating net neutrality, which could cause your internet bill to rise further. Several Republicans want to rewrite the 1996 Telecom Act once again, and lobbyists are already sharing their ideas to further curtail consumer protections, lift ownership caps, and promote additional consolidation.

Pai

In an effort to “streamline” procedural rules and paperwork at the Federal Communications Commission, FCC Chairman Ajit Pai is proposing to theoretically weaken the existing informal complaints process, leaving consumers with unresolved complaints only one firm option — paying a $225 filing fee to pursue a formal complaint at the Commission regarding their internet service provider.

“This Order streamlines and consolidates the procedural rules governing formal complaints against common carriers, formal complaints regarding pole attachments, and formal complaints concerning advanced communications services and equipment,” the FCC proposal reads. “We base these rule refinements on 20 years of experience adjudicating formal complaints and conducting mediations. We find that these rule revisions will eliminate inconsistencies among various complaint proceedings, promote a fully developed record in each case, foster disposition of formal complaints in a timely manner, and conserve resources of the parties and the Commission.”

With thousands of informal complaints about the nation’s cable, phone, wireless, and satellite companies arriving at the FCC every week, and millions of comments to process on hot-button topics like net neutrality, the federal agency is trying to distance itself from being a government’s version of the Better Business Bureau. Under the Obama Administration, FCC Chairman Tom Wheeler invited consumers to bring their complaints about internet service providers to the FCC’s attention. In 2015, the FCC launched a Consumer Help Center that, like Pai’s latest proposal, also claimed to “streamline the complaint system.”

FCC’s online Complaint Center

“The first responsibility of the FCC is to represent consumers,” the agency noted in a 2015 blog post. “Facilitating consumer interface with the Commission is a major component of that responsibility.”

Three years ago, the FCC stepped up involvement in the consumer complaints process to keep an eye on the marketplace and its providers — to see whether consumers were being well-served and ferret out companies that were not responsive or “bad actors” in the industry. The best way the FCC determined that was to track and measure consumer complaints.

“The information collected will be smoothly integrated with our policymaking and enforcement processes,” the FCC wrote in 2015. “The result will be better results for consumers and better information for the agency. The insights we gain will help identify trends in consumer issues and enable us to focus Commission time, money, and resources on the issues that matter most.”

The proposed changes supported by Chairman Pai are subtle, but in the regulatory world, a few words can mean a lot — something the New York State Public Service Commission and Charter/Spectrum are debating right now. A single appendix in the 2016 Merger Order approving Charter’s acquisition of Time Warner Cable and the cable company’s interpretation of it led to threats by the PSC to de-certify the multi-billion dollar merger.

Matthew Berry, the FCC’s chief of staff, promptly attacked as “fake news” a partly specious article on the subject published by The Verge (which was substantially modified from the original this afternoon).

This is fake news. No change is being proposed to the FCC’s process for handling informal complaints. I’ve rarely seen an article about an FCC item that has been this far off base. https://t.co/L59YxbggSY

— Matthew Berry (@matthewberryfcc) July 10, 2018

But Berry ignores the fact the proposal states up front it amends or changes current rules. Whether the FCC intends to make changes in its day-to-day operations as a result is a separate matter from the rules that govern the FCC’s work. The former can be changed almost at will, the latter cannot.

The section that has sparked controversy this week is: § 1.717 Procedure. It details what happens when the FCC receives an informal complaint from a consumer, either from a web-based complaint form or written complaint:

Current Language:

The Commission will forward informal complaints to the appropriate carrier for investigation. The carrier will, within such time as may be prescribed, advise the Commission in writing, with a copy to the complainant, of its satisfaction of the complaint or of its refusal or inability to do so. Where there are clear indications from the carrier’s report or from other communications with the parties that the complaint has been satisfied, the Commission may, in its discretion, consider a complaint proceeding to be closed, without response to the complainant. In all other cases, the Commission will contact the complainant regarding its review and disposition of the matters raised. If the complainant is not satisfied by the carrier’s response and the Commission’s disposition, it may file a formal complaint in accordance with § 1.721 of this part.

Proposed Language:

The Commission will forward informal complaints to the appropriate carrier for investigation and may set a due date for the carrier to provide a written response to the informal complaint to the Commission, with a copy to the complainant. The response will advise the Commission of the carrier’s satisfaction of the complaint or of its refusal or inability to do so. Where there are clear indications from the carrier’s response or from other communications with the parties that the complaint has been satisfied, the Commission may, in its discretion, consider a complaint proceeding to be closed. In all other cases, the Commission will notify the complainant that if the complainant is not satisfied by the carrier’s response, or if the carrier has failed to submit a response by the due date, the complainant may file a formal complaint in accordance with § 1.721 of this part.

At first glance, these two sections appear nearly identical. The subtle changes relate to defining, in writing, the exact responsibilities of the FCC. Weasel words like “may,” “advise,” “in its discretion,” and “consider” are red flags. When these kinds of words replace black letter words like “will,” the rules are weakened by making them discretionary. In such cases, a decision to pursue a matter is no longer a requirement, it’s an option.

In this case, Mr. Pai is proposing to reduce the FCC’s obligations to oversee an informal consumer complaint from the moment it is received to its ultimate disposition.

Under the current complaint rules, the FCC has collected a lot of information about the nature and resolution of consumer complaints. Let’s say Nancy Smith files a informal complaint against Comcast using the FCC’s online complaint center. Right now, the FCC requires Comcast to respond to Nancy’s complaint within 30 days. Comcast knows that the FCC will be monitoring the complaint and Comcast’s response. If Comcast were to ignore the letter or dismiss it, the FCC will be watching.

Consumers getting squeezed by reduced oversight.

The high complaint rates earned by telecom companies have been fodder for regulators and politicians for years, so most companies refer complaints filed with the FCC to their highest level “executive customer service” personnel empowered to resolve complaints almost anyway they can. If Mrs. Smith is pleased with the response from Comcast, the cable operator knows the FCC sees that as well. Comcast is also sensitive to the fact the FCC might one day act on unresolved issues that generate the most complaints. Over time, statistics gathered by the FCC will reveal the companies least willing to cooperate with their customers and those most motivated to resolve issues. That could count if a company like Comcast sought a merger with another cable company with a lower complaint rate, for example.

Under the proposed informal complaint rules, the FCC’s role is effectively reduced to a complaint letter-forwarder. Nancy Smith’s letter sent to the FCC under the new rules will still be forwarded to Comcast and probably arrive with a 30 day deadline to respond, should the FCC choose to maintain that requirement. In a theoretical response to Mrs. Smith, the FCC can immediately notify her it has forwarded her complain to Comcast and regardless of the provider’s response (assuming Comcast sends one), her only recourse if she remains dissatisfied is to pursue a formal complaint — the one that involves a previously established $225 filing fee and comes with a mass of terms, conditions, and requirements comfortable only for lawyers and lobbyists.

The FCC attempts to explain away the changes in a footnote (emphasis ours):

We also clarify rule 1.717, which addresses informal Section 208 complaints. See 47 CFR § 1.717. In addition to wording revisions that do not alter the substance of the rule, we delete the phrase “and the Commission’s disposition” from the last sentence of that rule because the Commission’s practice is not to dispose of informal complaints on substantive grounds. We also add a rule memorializing MDRD’s staff-assisted mediation process, which enables parties to attempt to resolve their disputes before or after the filing of a formal complaint.”

A “practice” is not a “rule” or “requirement,” however. “Substantive grounds” is also undefined in the footnote and could be subject to interpretation. After all, Mr. Pai has also claimed that repealing net neutrality would have no substantive impact on the internet.

D.C.’s lobbyists routinely make regulatory language change suggestions on behalf of their clients.

Lobbyists are paid handsomely to urge adoption of similar, subtle modifications in regulatory rules and laws because they can establish loopholes large enough to drive a truck through. In virtually every proceeding, comments routinely focus on proposed language changes. This will be the core part of the discussion at the FCC before voting on the rule change proposal as early as tomorrow – July 12, 2018.

In practical terms, the changes are designed to subtly distance the FCC from involvement in consumer disputes with their providers. Oversight is weakened in this proposal, but more importantly, the focus of the FCC’s mandate changes from “the first responsibility of the FCC is to represent consumers” in 2015 to “if the complainant is not satisfied by the carrier’s response, or if the carrier has failed to submit a response by the due date, the complainant may file a formal complaint.” Only then, assuming a consumer successfully navigates a very complicated procedure to file a formal complaint and correctly follow notification requirements, will the FCC be compelled by the rules to stay involved with a complaint from start to finish.

Keep in mind companies that frequently have regulatory business before the FCC have staff attorneys and employees familiar with the FCC’s bureaucracy and rules. A $225 filing fee is an afterthought. For the average consumer, neither is probably true.

The likely result of the change will act as a deterrent for consumers relying on the FCC to help them resolve problems. Providers will also quickly recognize the FCC is no longer as willing to scrutinize customer complaints.

Ranking Member Rep. Frank Pallone, Jr. (D-N.J.) and Ranking Member of the Subcommittee of Communications and Technology Mike Doyle (D-Penn.), who both serve on the House Energy & Commerce Committee, quickly realized the implications of the FCC’s proposed rule changes and fired off a letter to Mr. Pai this week:

We are deeply concerned that the Federal Communications Commission (FCC) is poised to adopt a rule that would eliminate the agency’s traditional and important role of helping consumers in the informal complaint process. Too often, consumers wronged by communications companies face unending corporate bureaucracy instead of quick, meaningful resolutions. Historically, FCC staff has reviewed responses to informal complaints and, where merited, urged companies to address any service problems. Creating a rule that directs FCC staff to simply pass consumers’ informal complaints on to the company and then to advise consumers that they file a $225 formal complaint if not satisfied ignores the core mission of the FCC — working in the public interest.

At a time when consumers are highly dissatisfied with their communications companies, this abrupt change in policy troubles us.

After reviewing a lot of regulatory proceedings and comments over the last ten years of Stop the Cap!, it troubles us too.