The FCC Ignores Reality in 5G Proposal

The FCC Ignores Reality in 5G Proposal

September 20, 2018

 

The Coalition for Local Internet Choice and the National Association of Telecommunications Officers and Advisors asked for my view of the Federal Communications Commission’s pending order, proposing to cap the fees that state and local governments may charge for small-cell attachments. According to the FCC’s draft order, these price‐caps will save the industry $2 billion in costs to operate in metropolitan areas—which will translate into $2.5 billion in new wireless investment, primarily in rural areas. 

 

My judgment in this matter is based on several decades of advising institutional investors in telecommunications, my work as a municipal finance lawyer which involved structuring a number of public‐private partnerships, and my experience in Washington DC as FCC Chief of Staff, and as Executive Director of the National Broadband Plan and Gig.U—roles that required me to be involved in evaluating detailed analysis of the economics of broadband deployment and the tools with which federal, state, and local government authorities can incent and stimulate investment. Through these different roles, I’ve interacted with numerous investors, carriers, and localities, and that experience leads to my concerns with the FCC’s argument:

 

First, focusing on state and local government fees and processes is a distraction from the real obstacles to accelerated and ubiquitous deployment of next-generation mobile services, which are that broadband deployment economics are very challenging and have to be addressed at all levels of government and through creative collaboration with the private sector. Fees for access to public property represent only one of many, many costs of doing business a carrier will encounter. A focus on reducing or eliminating one (relatively marginal) cost of doing business does not solve the challenging economics of broadband deployment and serves only to obscure the true challenges. Indeed, even if one accepts the FCC claim about the $2.5 billion—which is highly questionable—that amount is about 1% of what the FCC and industry claim is the necessary new investment needed for next-generation network deployments, and therefore is not likely to have a significant impact.

 

As discussed in the attached speeches, while the FCC focused on the relatively small amounts at issue with municipal fees, it did not even evaluate what other countries and cities have done to reduce deployment costs by amounts orders of magnitude greater than what the FCC proposes to do. In addition, the FCC action ignores other federal government action that will have a greater—and negative—impact on 5G deployment. As Intel recently told the United States Trade Representative, the recently announced tariffs on China “will slow down the pace of technology adoption across the U.S. economy, causing American firms and institutions to fall behind foreign competitors outside of China that aren’t subject to the same tariffs.” Thus, despite the FCC rhetoric, the item is unlikely to have any material impact on whether the United States leads the world in 5G deployment.

 

Second, local governments have a strong recent track record of endeavoring to enable and facilitate broadband deployment, as the Google Fiber experience conclusively demonstrated. Vilifying them based on fees for use of public property is not only a distraction but also unfair. Indeed, rather than acknowledging that carriers have a proven ability to negotiate advantageous fees with localities, the FCC’s draft order infantilizes carriers by preempting state and local government, presumably on the theory that carriers cannot protect themselves in negotiations with states and localities.

 

This is absurd. As the carriers themselves have acknowledged, they have sufficient leverage to walk away from any locality that creates too many obstacles to deployment and that leverage has led them to strike the same kinds of deals that numerous fixed broadband providers were able to strike in the wake of the Google Fiber efforts. In the attached speeches, I note the piece de resistancedemonstrating the ability of carriers to work things out with localities without federal interference involves the carriers and the city of San Jose. They were antagonists in the FCC’s recent BDAC process, but those parties were able to negotiate terms that all thought fair and that allows the companies to begin small cell deployments. Notably, the deals include having the companies contribute to a digital inclusion initiative and help the city pay for accelerated permitting, thus securing all parties’ goals.

 

Further, San Jose is not unique. Other cities and carriers have struck deals that provide benefits to both sides and will result in deployment without the need of a top‐down, one‐size‐fits‐all framework that the FCC is preparing to impose on thousands of diverse municipalities.

 

The FCC characterizes its draft order as “balanced,” which is equally absurd, as all the new costs and obligations are borne by localities and all the benefits are enjoyed by the carriers. The more accurate description would be a “power grab” in which the FCC majority substitutes their judgment of what is best for local communities for the judgment of duly elected local officials. The FCC is deciding that the sole method localities can use for charging for access to public rights-of‐ways is a cost‐based methodology.

 

I might note that in directing the writing of the National Broadband Plan (at Recommendation 6.6) and in my work at Gig.U, I have advocated to cities that they move in the direction of cost‐based charges. There is a huge difference, however, in believing that generally city officials should lower costs to access to public property when they believe their community will receive a benefit—and a federal agency, with no expertise in municipal finance and at no cost to itself, mandating that all localities have to lower the costs to all carriers, whether or not the carrier will be deploying new network facilities or whether or not the local community obtains any benefit.

 

Indeed, given the challenges of broadband deployment economics, partnerships of all sorts between companies and local governments are essential. Tying the hands of localities and states is self‐defeating – it stops them from using creative partnering strategies (as they have successfully done in cities like San Jose, CA and Lincoln, NE) to find ways to improve broadband outcomes. Perversely, the draft order actually prevents local communities and states from working with their private partners by taking away a tool they have at their disposal (the attractiveness of their assets as mounting locations for small cells) to negotiate on behalf of the public.

 

In fact, I have been in discussions with a number of local governments and states that wish to provide an attractive investment climate for small cell and 5G networks but also seek to assure that under‐adopting communities receive the benefit of the new services. They are exploring a range of techniques, such as pricing permits in less attractive areas significantly less than the more attractive areas or prioritizing permitting requests that are in areas of under‐adoption. The FCC’s draft order would make such efforts to address the digital divide ineffective if not illegal. I cannot predict with confidence how many localities and states would undertake such efforts. I can predict with confidence that any such locally‐led efforts are more likely to narrow the digital divide than the FCC’s order, which provides carriers with economic incentive to cherry-pick locations. Thus, despite the FCC’s rhetoric, the proposal will likely exacerbate, rather than alleviate, the digital divide.

 

Third, the FCC’s draft order is based on a fallacy that no credible investor would adopt and no credible economist endorse: that reducing or eliminating costs for small cell mounting on public property in lucrative areas of the country (thus reducing carriers’ operating costs), will lead to increased capital expenditures in less lucrative areas– thus supposedly making investment more attractive in rural areas.

 

That simply is not how investment decisions are made. Rather, as Commissioner Carr admitted in his recent speech, in lucrative areas, carriers will pay market fees for access to property just as they would any other cost of doing business. But they will not, as rational economic actors, necessarily apply new profits (created by FCC preemption) to deploy in otherwise‐unattractive areas. My experience on Wall Street is that neither analysts nor investors regard this FCC action as likely to lead to increased deployment in non‐economically attractive areas, which most on Wall Street would consider an irrational act. The smoking gun revealing that neither the companies nor Wall Street believe the economic logic that the FCC uses is that, to my knowledge, no carrier has publicly specified and committed to Wall Street that the FCC action will cause it to materially increase its capital expenditures or has specifically committed to how its deployment map will be broadened in light of the FCC action.

 

In short, while the FCC may ignore reality, the carriers and Wall Street understand that increasing profitability in Market A will not make Market B more attractive for investment. Market B will still an area that is unprofitable or otherwise unattractive for investment, and the new requirement that Market A subsidize carriers by reducing fees will not benefit Market B under these circumstances. Indeed, as I detail in my attached speeches, only in Washington do otherwise intelligent people believe that lower costs automatically lead to commensurate capital investment.

 

Carriers have the same incentives as other corporate entities. The reality that my Wall Street clients have taught me over the last two decades, and that has been proven in through all kinds of evidence that the FCC simply ignored, is that under most circumstances stock-buybacks, debt reduction, or dividend support are higher priorities than new capital investments in networks. Nothing the FCC is doing changes those incentives.

 

Finally, let me note something I discuss at length in my prior speeches: the draft order presents a framework in which industry gets all the benefits (reduced fees to access state and local property) with no obligations to reinvest the resulting profits in rural broadband—even though the purported rationale for the reduced fees is that they will lead to new investment. At the same time, states and localities will be forced by federal mandate to bear all the costs and receive no guaranteed benefits. These costs include not just the loss of revenue but having to bear the increased costs of addressing the permitting needs of a single industry (which, notably in the case of deals negotiated between carriers and cities, carriers agreed that they should assist in funding some of those costs.) The principal impact of the FCC’s action is to facilitate a large transfer of wealth from the public to private enterprises—and leave American communities and states no better positioned to bridge digital gaps between urban and rural or between rich and poor. Further, those communities will lose revenues that they are using for such critical services as police, fire, and schools. The FCC is disingenuous in ignoring the cost of its action. In addition, the FCC action will likely lead to litigation over, among other things, jurisdiction and the meaning of such terms as “cost‐based,” that will delay, rather than accelerate, next-generation broadband deployment.

 

In short, my response is that I am deeply troubled by the FCC’s draft order, the options it ignored, and the fallacious logic on which it rests. And I’m particularly concerned about the prospect of unelected federal officials in Washington DC mandating how, and at what price, state and local elected officials can manage their own property—all for the benefit of a select group of companies that are under no obligations to reinvest these mandated public subsidies in new deployment.

 

This article originally ran on benton.org.

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