Regulatory Predictions for BPL

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1 WIRELESS DEVELOPMENT March 2005 Keller and Heckman LLP Serving Business through Law and Science Regulatory Predictions for BPL Broadband over Power Line ( BPL ) technology is justifiably receiving a great deal of attention at the Federal Communications Commission and elsewhere, because of its potential as a last mile transmission technology. This White Paper highlights the principal regulatory considerations associated with services that may be provided to residential and business customers over BPL networks. More particularly, the focus of this paper is the extent to which BPL services will be regulated as compared to: high speed Internet access services of cable operators, incumbent local exchange carriers ( ILECs ), and Wireless Internet Services Providers ( WISPs ), and Digital Subscriber Line ( DSL ) services provided by ILECs. 1 These services are the models or templates that most closely correspond to the services that can be delivered over BPL networks today. In the future, BPL versions of high capacity special access services such as DS-1 or DS-3 services may be deliverable over BPL networks, as well. The extent of regulation applicable to services provisioned over BPL networks is largely a function of three factors: (1) the services being provided, (2) jurisdiction, and (3) the nature of the services provider. As discussed below, we believe that utilities delivering services over BPL networks will be regulated in a light-handed and predictable manner Telecommunications Services, Private Carrier Services or Information Services May Be Offered Over BPL Networks The statutory definitions of telecommunications services, telecommunications, and information services are central to determining how any service is categorized for regulatory purposes. These definitions are set out in Table 1. Like other services providers, utilities may offer telecommunications services, private carrier services or information services over their BPL networks. Facilities-based, high speed Internet access service in which the provider combines high speed telecommunications, such as that available through DSL technology, with the Internet Protocol ( IP ) suite is generally regarded as the principal BPL commercial service. The service delivered to the enduser is often referred to as broadband service or simply broadband. The high speed Internet access service provided by cable operators over their cable modem networks is an example of facilities-based broadband service. For regulatory purposes, the service is generally regarded as an information service, though there is controversy on this point, as discussed in Section 3, below. Examples of other information services include Internet access service offered by Internet Services Providers ( ISPs ), such as AOL and EarthLink, web portals such as that operated by Yahoo, and search engines such as Google. Table 1 Key Definitions Telecommunications: the transmission, between or among points specified by the user, of information of the user s choosing, without change in the form or content of the information as sent and received. 47 U.S.C. 153(43). Telecommunications Service: the offering of telecommunications for a fee directly to the public, or such classes of users as to be effectively available directly to the public, regardless of the facilities used. 47 U.S.C. 153(46). Information Service: the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications, and includes electronic publishing, U.S.C. 153(20). Importantly, BPL technology also can support high speed telecommunications on a stand-alone basis. This capability is functionally similar to DSL services offered by the ILECs and the transmission-only service that cable operators occasionally sell to unaffiliated ISPs. For regulatory purposes, these offerings may either be private carrier services or telecommunications services. Examples of other telecommunications services are circuit-switched voice (local and long distance), frame relay and private line services.

2 2 The distinctions between telecommunications services, private carrier services, and information services are noteworthy because of the regulatory obligations imposed on telecommunications carriers (providers of telecommunications services) as opposed to non-telecommunications carriers. Interstate telecommunications carriers are subject to Title II of the Communications Act of 1934, as amended ( Communications Act ), and must provide service upon reasonable request, pursuant to non-discriminatory rates, terms and conditions. Interstate telecommunications carriers are subject to universal service fund ( USF ) obligations, the Communications Assistance and Law Enforcement Act ( CALEA ), and entry and exit regulation under Section 214 of the Communications Act. Intrastate telecommunications carriers include providers of local exchange service, such as the ILECs and competitive local exchange carriers ( CLECs ), and providers of intrastate long distance services, such as MCI, AT&T and many resellers. They may be subject to state commission regulation, or both FCC and state regulation, depending on the nature of the services they offer. As noted above, utilities offering BPL may elect to provide telecommunications to customers, such as ISPs, on a private carrier basis. The long recognized characteristic distinguishing telecommunications carriers and private carriers is that private carriers do not hold themselves out indiscriminately to the public to provide service upon reasonable request as do telecommunications carriers. Rather, the private carrier chooses its clients on an individual basis and determines in each particular case whether and on what terms to serve and there is no regulatory compulsion to serve all indifferently. 3 This distinction is critical for regulatory purposes. A private carrier is not subject to exit and entry regulation under Section 214 of the Communications Act and is not obligated to provide service pursuant to nondiscriminatory and just and reasonable rates, terms and conditions. In other words, the private carrier can choose its customers and partners and set terms and conditions of service at its discretion. As compared to telecommunications carriers, information services providers are largely unregulated. Information services providers are not subject to exit or entry regulation, and the rates, terms and conditions for their services are not regulated by either state commissions or the FCC Virtually All Commercial BPL Services Will Be Interstate Services, Subject to Exclusive FCC Jurisdiction The services that may be deployed over BPL networks likely will be subject to exclusive FCC as opposed to state or joint state and FCC regulation. The controlling principles for determining the jurisdiction of telecommunications services may be summarized as follows: 1. Jurisdiction is based on the end points of customer s voice or data communications, i.e., the points of origination and termination. Jurisdiction is not based on the physical location of the facilities of any services provider involved in providing the service the originating access facilities, the interexchange or long haul facilities, or the terminating access facilities. 2. Dedicated, non-circuit switched services such as frame relay, private line, special access, and DSL telecommunications services are subject to exclusive FCC jurisdiction if more than a de minimis level of traffic originates and terminates in different states. 3. The de minimis threshold is considered to be reached if 10% or more of the traffic is interstate. Under these principles, many telecommunications services are almost always subject to exclusive FCC jurisdiction. These jurisdictional principles apply equally to telecommunications offered on a private carrier basis. Generally speaking, state regulation would apply to BPL services in the unlikely event a BPL provider elected to provide only circuit-switched local exchange or intrastate interexchange voice services over its BPL network. 5 The FCC has applied the same analysis to high speed Internet access, and has concluded that because Internet access service has the capability to connect users to servers and other Internet accessible devices throughout the world, high speed Internet access is an interstate information service subject to the FCC s exclusive jurisdiction Different Services Providers Are Subject to Different Regulatory Obligations Telecommunications Carriers. Among interstate telecommunications carriers, the FCC distinguishes between non-dominant carriers and dominant carriers. Only the ILECs, including the Regional Bell Operating Companies ( RBOCs ), are regulated as dominant carriers, but only with respect to DSL service, special access services DS-1, DS-3 and Ethernet access services, and interstate switched access services. The FCC requires tariffs and imposes substantive rate regulation on these types of carriers for these services and imposes business structure requirements on these carriers. All other carriers, including AT&T, MCI and competitive local exchange carriers ( CLECs ) are regulated as nondominant carriers. Non-dominant carriers are deemed to lack market power, i.e., the ability to set or maintain prices or

3 3 price levels. Thus, non-dominant carriers are not subject to substantive rate regulation or business structure (separate subsidiary) requirements. 7 Non-dominant carriers, by and large, no longer file tariffs. Utilities offering telecommunications services over BPLbased systems almost always will be regulated as interstate, non-dominant telecommunications carriers. Private Carriers. Utilities providing telecommunications over BPL networks on a private carrier basis are not subject to telecommunications carrier regulation with the exception of the obligation to contribute to USF. Information Services Providers. Regulatory uncertainty exists today for cable operators providing broadband service over their cable modem platforms. The issue is whether unaffiliated ISPs are entitled to access the cable modem platform to transport their own Internet access service. This uncertainty should benefit utilities, because ISPs blocked from cable access may well seek to partner with utilities to provide last mile high speed transport for their Internet access service via BPL platforms. On the other hand, the FCC informally maintains that emerging facilities-based information services providers, such as WISPs, are not required to provide unaffiliated ISPs with access to their wireless networks. 8 We believe that utilities delivering broadband services over BPL networks will be treated in the same manner as WISPs, because the legacy regulatory concerns associated with cable modem service simply do not apply to WISPs and BPL-based providers of information services. Unlike cable operators and ILECs, new facilities-based carriers do not have substantial revenue streams, billions of dollars, or fully deployed networks. In addition, the FCC has signaled repeatedly it does not want to extend so-called legacy regulation to new facilities-based providers of information services, although there may be some exceptions. In the near future, the FCC may impose CALEA obligations on some facilities-based information services providers. 9 Cable Modem Decision Regulatory uncertainty surrounding cable modem service stems from the insistence of local franchise authorities to require cable operators to allow unaffiliated ISPs access to the cable modem networks to offer competing high speed Internet access service. The cable operators have fought this open access obligation for years. not cable service, thereby preventing local cable franchising authorities from imposing open access obligations on cable operators. 10 But in its decision, the court held that cable modem service is part telecommunications service and part information service. Thus, similar to telecommunications carriers, cable operators would be obligated to provide a telecommunications service over their cable networks to ISPs upon reasonable request and pursuant to just and reasonable rates, terms and conditions. Looking to prevent this outcome, the FCC ruled in its Cable Modem Decision that cable modem service is a facilitiesbased, information service that utilizes telecommunications, but does not have a telecommunications service component. Thus, cable operators would not be subject to the telecommunications carrier obligations of Title II of the Communications Act under the FCC s interpretation, and cable operators could lawfully deny requests from unaffiliated ISPs for access to their cable modem platforms. The Wireline Broadband NPRM. 11 In an effort to place the RBOCs on equal footing with the cable operators and to spur competition among facilitiesbased Internet access providers, the FCC proposed to eliminate its longstanding Computer II policy adopted to ensure that the pre-divestiture AT&T and, subsequently, the RBOCs did not unfairly leverage their control over telecommunications services to dominate the market for information services. 12 In its Wireline Broadband NPRM, the agency tentatively concluded that information services provided over an ILEC s own transmission facilities are information services and do not have a telecommunications service component. 13 These facilities include the ILECs existing copper infrastructure, including DSL technology, and next generation fiber-tothe-home ( FTTH ) infrastructure. If this proposed policy change is adopted by the FCC, the RBOCs and other ILECs could elect to self-provision DSL service exclusively for their own high speed Internet access services. 14 Brand X 15 Unfortunately for the FCC and cable operators, the Cable Modem Decision was reversed and remanded in Brand X Internet Services v. FCC. The Ninth Circuit again held that cable modem service includes both telecommunications service and information service components. The decision has deferred indefinitely the Commission s resolution of the Wireline Broadband proceeding. The Ninth Circuit s decision is now before the Supreme Court, which is expected to rule on the matter later this year. In City of Portland v. FCC, the Ninth Circuit ruled that high speed Internet access provided over cable modem facilities is

4 4 4. Conclusions We believe the FCC s Cable Modem Decision ultimately will be affirmed by the courts. As this occurs, we believe the FCC will issue an order in its Wireline Broadband proceeding adopting its proposed policy change. On the chance that the Supreme Court affirms Brand X, the FCC has indicated informally that it would consider exercising its forbearance authority under 47 U.S.C. 160 so that cable operators and ILECs would not be obligated to offer the telecommunications component of their facilities-based information services as a stand-alone telecommunications service. We have every reason to believe that the FCC would adhere to these principles with regard to WISPs and utilities providing broadband service over BPL networks. While utilities need to evaluate BPL business prospects on a case-by-case basis, BPL technology presents a unique opportunity to participate in a truly dynamic segment of the domestic telecommunications and information services sector. Because the regulatory environment for new facilities-based information services providers is not burdensome and relatively predictable, utilities should feel encouraged to consider the potential of BPL technology and the merits of the business opportunity. The potentially substantial regulatory and business risks confronting many ISPs that do not have last mile infrastructure strongly suggest that utilities may have receptive partners looking to access their BPL networks. The opinions expressed in this article do not necessarily represent the views of Keller and Heckman LLP or its clients. This article is intended to provide a general overview of technical and regulatory issues related to BPL and should not be considered as legal advice applicable to any particular factual or legal question. Keller and Heckman LLP 1001 G Street, N.W. Washington, D.C The regulatory considerations addressed in this paper are distinct from the rule amendments recently adopted by the FCC amending Part 15 of its Rules and Regulations to promote the deployment of BPL technology. See Report and Order, Amendment Of Part 15 Regarding New Requirements And Measurement Guidelines For Access Broadband Over Power Line Systems/Carrier Current Systems, Including Broadband Over Power Line Systems, 19 FCC Rcd (released October 28, 2004) (BPL Order), Reconsideration Pending. In general, the BPL Order set forth rules imposing new technical requirements on BPL devices, such as the capability to avoid using any specific frequency and to remotely adjust or shut down any unit. It also established excluded frequency bands and exclusion zones. The Commission also changed the equipment authorization for BPL systems from verification to certification. See also, White Paper, BPL And The FCC: The Current Regulatory Environment, Jack Richards (August 23, 2004); White Paper, Broadband Over Power Line: Pole Attachment, Antitrust And Access Issues, Jack Richards, Tom Magee (September 23, 2004); White Paper, Broadband Over Power Line: Easements, Rights-Of-Way and Related Issues, by Jack Richards and Tom Magee (October 14, 2004). All of these papers are available at the Keller and Heckman LLP website: 2 Utilities may be obligated to allocate the expenses and investments associated with BPL to so-called regulated and non-regulated accounts to ensure that electric ratepayers are not being burdened with costs, expenses and liabilities properly allocated to the business or subsidiary engaged in the provision of BPL services to residential and business customers. Cost allocation issues will be addressed by state commissions having jurisdiction over the regulated businesses of utilities, principally, retail electric distribution. 3 Inquiry Concerning High-Speed Access to the Internet over Cable and other Facilities, 17 FCC Rcd 4798, (2002) ( Cable Modem Decision ). 4 In several ongoing proceedings, the FCC is considering whether to impose USF contribution obligations on information services providers. 5 Congress expressly preempted state regulation over entry and rates of commercial mobile wireless services offered by wireless carriers such as Verizon Wireless and Sprint PCS. 47 U.S.C. 332 (c)(3). 6 Cable Modem Decision, 17 FCC Rcd at Utilities owned by holding companies subject to the Public Utilities Holding Company Act of 1935, as amended, are required to provide telecommunications services, information services and private carrier services through a separate affiliate that has filed for and obtained Exempt Telecommunications Company ( ETC ) status from the FCC. 8 The FCC expressly excluded WISPs from the scope of its Cable Modem Decision. Cable Modem Decision, 17 FCC Rcd at 4800, n.5. 9 Communications Assistance for Law Enforcement Act and Broadband Access and Services, Notice of Proposed Rulemaking and Declaratory Ruling, 19 FCC Rcd (2004). 10 AT&T v. City of Portland, 216 F. 3d 871 (9th Cir. 2000). 11 Notice of Proposed Rulemaking, Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, 17 FCC Rcd 3019 (rel. Feb. 15, 2002) (Wireline Broadband NPRM).

5 5 12 Today, ILECs provide DSL service as a stand-alone telecommunications service. Under the FCC s Computer II rules, ILECs are required to provide non-affiliated ISPs with non-discriminatory access to this service pursuant to just and reasonable rates, terms and conditions. 13 The Commission expressly excluded wireless Internet access service, non-ilec fiber networks and BPL-based Internet access service from the scope of the Wireless Broadband proceeding. Wireline Broadband NPRM, 17 FCC Rcd at 3020, n ISPs could still acquire DSL service from CLECs, such as Covad, that obtain local loops from the ILEC as unbundled network elements ( UNEs ) and offer the DSL services. ISPs are information services providers and are not eligible to acquire UNEs from ILECs. 15 Brand X Internet Services v. FCC, 345 F. 3d 1120 (9th Cir. 2003), cert. granted, Order list 543 U.S. (U.S. Dec. 3, 2004) (No ) (Brand X). Doug Jarrett is a Partner in the Washington, D.C. law firm of Keller and Heckman LLP (www. khlaw.com). Mr. Jarrett specializes in domestic and international telecommunications matters. He represents companies and associations before the Federal Communications Commission, focusing on Wireline Competition and Wireless matters with an emphasis on the deployment and regulation of broadband services. He regularly writes and speaks on varied telecommunications policy matters, including broadband deployment matters. Douglas Jarrett (202) jarrett@khlaw.com Jack Richards (202) richards@khlaw.com Jack Richards is a Partner in the Washington, D.C. law firm of Keller and Heckman LLP (www. khlaw.com). Since joining the firm in 1986, Mr. Richards has represented electric utilities, commercial wireless service providers, mobile radio and microwave operators and others before the Federal Communications Commission and in various telecommunications business ventures. His clients include the National Rural Telecommunications Cooperative and the National Rural Electric Cooperative Association. Before joining Keller and Heckman LLP, Mr. Richards served for 10 years as an attorney with the FCC, where he held senior policy and management positions. Kevin Rupy is an Associate in the Washington, D.C. law firm of Keller and Heckman LLP (www. khlaw.com). Since joining the firm in 2000, Mr. Rupy has represented clients on regulatory and compliance matters before the Federal Communications Commission related to the wireless and satellite industries. Mr. Rupy s practice also includes the handling of diverse licensing issues such as assignments, transfers of control and compliance obligations. Kevin Rupy (202) rupy@khlaw.com