Barriers to Entry: The Fight Against Power- Line Communications

Deck: 

And for a reasonable regulatory policy for new broadband technology.

Fortnightly Magazine - December 2004

The Federal Communications Commission (FCC) and some state regulators support, for good reasons, the widespread deployment of broadband over power line (BPL) communications platforms that make use of existing electric utility distribution systems. In rural areas that have no broadband wire access, BPL could fill the gap in service. In geographic markets or sub-markets equipped only for digital subscriber line (DSL) or cable-modem service, a BPL platform would eliminate a broadband wire monopoly. Where both DSL and cable modem are available, BPL would stimulate more effective competition, just as the addition of more carriers did to the former duopoly in the commercial mobile radio services market.1 Moreover, BPL could leverage more value from existing electric utility assets while opening opportunities to improve the quality and efficiency of electric power service through automated meter reading, distribution system management and monitoring, and remote load control and fault detection.

To achieve these benefits, policy-makers must resolve a number of issues, including: (1) harmful radio interference; (2) access; and (3) cross-subsidies.

If their policies impose diseconomies on the operation, design, or financial structure of BPL, widespread deployment of the technology is unlikely.

Harmful Radio Interference

While BPL systems do not use radio spectrum and therefore need no license from the FCC, they require devices (e.g., couplers and repeaters) that attach to electric power distribution lines and unintentionally radiate radio frequency (RF) energy, which may interfere with amateur (HAM) radio and some government frequencies. Because of the potential for harmful interference, BPL systems are subject to the FCC's Part 15 regulations, which prescribe limits on unintentionally radiated emissions. The FCC proposed to apply those limits to BPL systems, and to require mitigation in response to valid complaints of harmful interference with the use of licensed radio frequency bands. Permanent or temporary radio frequency "notching" can be used to ameliorate harmful interference with a nearby affected radio signal.2 Manufacturers and putative operators of BPL systems generally agreed to this proposed policy.

But representatives of licensed users of potentially affected radio frequencies urged the FCC to adopt a more restrictive policy. HAM operators argued for lower emission limits. To protect its federal government radio receivers, the National Telecommunications and Information Administration (NTIA) recommended mitigation before activation of commercial BPL systems, including frequency coordination, mandatory BPL power limitation controls, no operation in certain frequency bands, and exclusion zones. The FCC has adopted some of NTIA's recommendations, but only with certain modifications that make them less restrictive.3

The NTIA initially claimed that peak emissions could occur at at any point along the power distribution lines.4 Results from a variety of BPL system field demonstrations submitted to the FCC show, however, that downward radiating peak emissions occur close to BPL devices and that such emissions steadily decay as distance from the device increases. Thus, in the event of a valid claim of harmful interference, a peak emission BPL source could soon be detected and mitigated.

The FCC had to strike a careful balance. It had to restrict BPL operations to protect its radio licensees. But it also had to recognize that such restrictions would hamper to some degree the ability of BPL systems to compete in the broadband market. BPL investors ultimately will decide whether the FCC has achieved a proper balance in its new rules.

Access Rules

An electric utility's primary responsibility is safe, reliable, and efficient delivery of power. It is not, and should not, be permitted to compromise that responsibility to accommodate the attachment of BPL devices to its distribution lines. Section 224 of the Communications Act protects this policy. It grants only a conditional right of access to an electric utility's "poles, ducts, conduits, and rights-of-way" for the facilities of cable television systems and telecommunications service providers, which electric utilities historically have accommodated. It properly permits an electric utility to deny access "where there is insufficient capacity and for reasons of safety, reliability and generally applicable engineering purposes." It grants no right of access for the attachment of BPL facilities to an electric utility's distribution lines. Thus, BPL developers initially need to satisfy electric utilities and their regulators that BPL systems will not compromise the safety and reliability of electric power distribution. If that burden is met, policy issues relevant to access to the BPL system should be considered.

In the initial development of Internet communications, telephone companies provided the first (and last) leg of data transport through their local narrowband networks. Independent Internet service providers (ISPs) could subscribe to local telephone service lines through which their customers transmit computer-generated information to them. The ISP transforms data transmitted in telephone signal format into data packets and routes the traffic over its own packet-switched network to the intended destination, often via transmission over "backbone" long-distance networks to another ISP network. The movement of data packets over the various networks is controlled and facilitated by a nonproprietary set of protocols-transmission control protocol/
Internet protocol (TCP/IP)-that do not discriminate among the data packets they route.5

ISPs now want regulators to enforce a similar structure on all broadband transport, including that provided by telephone companies, cable operators, and, presumably, operators of BPL systems.6 But the structure used for cable and telephone broadband transport displaces the primary value an ISP adds in dial-up (narrowband) Internet communications. The broadband transport provider itself must maintain a packet-switched network to serve and route data traffic. Moreover, the Internet has evolved into a medium of mass communications, and broadband transport makes possible new applications, such as video streaming and voice over Internet protocol (VoIP), that require more bandwidth and less variation in the rate of throughput. Centralizing traffic management function could increase network efficiency as greater and more intense demands, facilitated by broadband transport, are made on the Internet. In addition, as more commerce moves to the Internet, centralized traffic management could more efficiently serve user demands for greater privacy and security, as well as lawful government demands for surveillance capability.7 These considerations suggest that a government mandate of open broadband transport access for ISPs may not be sound public policy. ISPs, however, can partner with BPL entrepreneurs and electric utilities (some have already done so) to design platforms, and develop proprietary applications as well as content.

Advocates for application and content "open access" support maximum interoperability of different broadband transport platforms through the government mandated use of standard nonproprietary protocols (e.g., TCP/IP). While cable modem and DSL broadband now use TCP/IP, a general protocol standardization mandate could be a deterrent to the entry of new competitive broadband transport platforms such as BPL.

One commentator on broadband technology has argued that it has natural monopoly characteristics, including high sunk costs, as well as supply and demand-side scale economies. If required by regulation to use standard, nonproprietary protocols, all such broadband transport platforms would tend to produce a homogeneous "high-speed" service. In these circumstances, the firm with the highest traffic volumes could underprice its rivals and dominate the market.8 But some cable companies have publicly announced that they will not compete on price with DSL. Those companies may try to segment the market by offering higher speeds than telephone companies can achieve with DSL, for higher prices than telephone companies charge for their service. Cable companies also are bundling proprietary content and applications with their cable modem and traditional television service offerings.

New broadband platforms are more likely to enter this market if their operators are free to design them without government-mandated standardization constraints. For example, BPL platforms with proprietary protocols and designs different from those employed by cable and telephone companies may facilitate new applications, such as the automated load controls in which electric utilities are interested. Thus, if the policy goal is to encourage economic broadband transport platform entry, regulators should support flexible, creative designs, and should not mandate standardization.9

Nor should government adopt a flat ban against vertical integration by broadband transport operators into applications and content. A profit-maximizing broadband transport operator has an ongoing incentive to pursue a strategy that will produce innovation in applications and content markets to integrate the complementary efficiencies that make its platform more valuable. That strategy may include support of independent applications and content competitors, vertical integration, or licensing a limited set of independent providers, in whatever combination will achieve the desired complementary efficiency objective.10

BPL vs. DSL and Cable

Because electric utilities provide a regulated monopoly transmission and distribution service, their provision of a competitive BPL service would present a risk of cross-subsidy by the former to the latter. To avoid that risk, it might be argued that regulators should prohibit electric utilities from investing in BPL, require them to allow independent BPL service providers to have access to their distribution systems, and impute foregone contributions from BPL to fixed-system costs for utilities that deny such access. Such a policy, however, would be of doubtful legality, and go well beyond the "light hand" of regulation the FCC has recommended for competitive broadband platforms. Moreover, it would deter competition because it would require BPL to be produced as a separate product and deprive it of the economies of scope enjoyed by DSL and cable modem, which are produced in combination with other products at a lower average cost for each product.

The Justice Department justified its prohibition against the divested Bell companies entering the competitive long distance (or interLATA) telecommunications market on the grounds that they could deny access to monopoly "bottleneck" local exchange networks essential to the origination and completion of interLATA telecommunications. Given the existence of cable and telephone company broadband transport systems, it is difficult to maintain that electric utilities control a monopoly "bottleneck" broadband transport facility. Access only to electric utility poles and conduits is essential to cable and telephone competitors, and it is no more essential than the access required to telephone company poles and conduits by cable companies and by BPL operators. Regulation has protected pole and conduit access well for a long time. It is not necessary to prohibit the owners of such facilities, or their affiliates, from participation in the broadband transport market to protect competition.

In light of the extensive experience regulators have with the provision of both monopoly and competitive services by the same firm, the risk of cross-subsidization, in and of itself, is insufficient to justify a flat prohibition against participation in an unrelated competitive business. To cite but one example, the AT&T divestiture court did not prohibit the Bell local exchange carriers from engaging in competitive businesses outside of interLATA communications. Since the broadband transport service market is largely duopolistic at this point, a new entrant would bring a substantial competitive benefit. The value of additional competition in the relevant service and geographic markets can outweigh a risk of cross-subsidization that is diminished by proper regulatory oversight.

Regulators also have employed a "maximum separation" approach to the cross-subsidy problem under which the competitive business must be run from a separate subsidiary without common officers, directors, employees, or billing systems. If this remedy were applied to BPL, however, it would add substantial costs to operations that regulators require neither DSL nor cable modem to bear. The competitive inequity of imposing such a requirement on BPL could not be justified on the grounds that telephone and cable companies have no ability to engage in cross-subsidization. While they face competition in their respective service markets, they continue to have geographic market power in places where there are no effective substitutes for their services.

A rational cost-allocation policy can be employed to protect against cross-subsidization without subjecting BPL to competitive inequity. Regulators have commonly developed post hoc cost-allocation policies in response, for example, to allegations of cross-subsidy in electric utility rate cases. Proceeding in that fashion, however, may be unacceptable to some electric utilities, particularly those who believe regulators could saddle their investments in BPL with "royalty" assessments. Regulators could alleviate that concern by issuing clear policy statements on the principles they will use to allocate costs and to regulate possible affiliate transactions.11

Regulators would properly encourage economic BPL system investment by allocating to BPL only its direct costs, and that portion of joint and common costs actually caused by an electric utility's offering of BPL service. For example, while distribution line investment would produce joint products-electric power and BPL service-it would not be economically efficient to assign any of that cost to BPL when demand for the latter would not cause an increase in distribution line investment or consume any power distribution capacity.12 A similar economic test is applicable to distribution investment by cable and telephone companies, since the former's distribution facility produces cable television and cable modem service, while the latter's produces voice grade service and DSL. Unless demand for cable modem in the one case, or DSL in the other, would cause an increase in investment in distribution facilities over the long run, costs of the latter would not be assigned to the broadband service to determine prices necessary to cover total costs caused by its offering. To the extent that the provision of BPL imposes additional costs on electric utility distribution systems, those costs are properly allocable to BPL. For example, there may well be additional line maintenance due to the addition of BPL equipment to distribution lines.

A Fair Shot

If policy-makers want investor-owned electric utilities to enter the broadband market, they will need to craft rules that allow those utilities to earn a fair return on BPL investments.

Government agencies have legitimate interests in protecting FCC-licensed radios-as well as competition in the broadband transport and complementary markets-from harmful interference by operating BPL systems. Preserving those interests need not conflict with a goal of wide deployment of BPL. The FCC's Part 15 rules for BPL systems provide ample protection against any actual (and even some apparently theoretical) radio interference. Any actual harmful interference with competition is punishable under established antitrust law principles.13 The government need not impose open-access rules or structural constraints on BPL operators to preserve its interest in protecting competition.

Establishing a reasonable regulatory policy for BPL presents, however, a daunting institutional challenge. While the FCC has exclusive jurisdiction over radio interference issues, it shares jurisdiction with state regulators over providers of telecommunications services. Moreover, state regulators have an interest in protecting against cross-subsidy of BPL by power distribution service, while the Federal Energy Regulatory Commission has a similar interest relative to power transmission service. If these various agencies were to produce disparate policies that conflict with the goal of widespread BPL deployment, judicial or legislative action would be necessary to realize the benefits of additional, efficient broadband transport competition from BPL systems.

Endnotes:

1. The FCC has named the external BPL system discussed in this article "Access BPL" to distinguish it from "In-House BPL." The latter, which uses internal electrical wiring as the transmission medium and offers the user "plug-in" portability, could in theory be connected with any external broadband system. Further development of satellite and terrestrial wireless broadband, which currently serve less than 10 percent of the total broadband market, could produce additional, effective competition. However, since they generally require additional scarce radio spectrum licensed by the FCC to the highest bidder, market entry is not easy for wireless broadband. Joint ventures between telephone and satellite companies, as well as the former's ownership of terrestrial wireless systems, also could limit the effectiveness of wireless broadband competition.

2. Notice of Proposed Rulemaking, ET Dockets 03-104, 04-37, released Feb. 23, 2004.

3. See, Report and Order, ET Dockets 03-104, 04-37, released Oct. 28, 2004 (FCC 04-245). For example, in the new Part 15 BPL rules, operation in designated frequency bands is precluded only for systems using "overhead medium voltage power lines." (15.615 (f)(1)). In addition, only prior "consultation" procedures are required in designated areas rather than the formal frequency coordination advocated by NTIA. (15.615 (f) (3)).

4. NTIA subsequently withdrew this claim. See, Letter and enclosure from Frederick R. Wentland, NTIA, to Edmond J. Thomas, Chief, Office of Engineering and Technology, FCC, in ET Docket 04-37, Sept. 24, 2004 (search along power line for peak emissions unnecessary).

5. See, Yoo, Christopher S., "Would Mandating Broadband Network Neutrality Help or Hurt Competition? A Comment on the End-to-End Debate," Journal of Telecommunications and High Technology Law, Vol. 3, 2004 (http://ssm.com/abstract=495502).

6. See, Brand X Internet Servs. v. FCC, 345 F.3d 1120 (9th Cir. 2003), rehearing denied, pet'n. for cert. pending. The court adhered to a prior ruling that cable modem was in part a "telecommunications service" subject to common carrier regulation and thus overruled an FCC determination that cable modem was a non-common carrier "information service." If the court's view prevails, the FCC will have to "forbear" from regulation to exempt cable modem and other broadband "telecommunications service" from common carrier obligations.

7. See, Yoo, supra note 5. The FCC has announced adoption of a Notice of Proposed Rulemaking in which it tentatively concludes that the Communications Assistance for Law Enforcement Act applies to "facilities-based providers of any type of broadband Internet access" including "powerline." FCC News Release, Aug. 4, 2004.

8. See, Yoo, supra, note 5.

9. For an argument that the benefits of standardization outweigh the costs of an uncompetitive broadband transport platform market, see, Wu, Tim, "Broadband Policy: A User's Guide" (2004) (http://faculty.virginia.edu/
timwu/guide.pdf
). Standardization of the interface between In-house BPL and Access BPL systems, however, would support competition between different Access BPL systems.

10. See, Farrell, Joseph & Weiser, Philip J., "Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age," 17 Harvard Journal of Law & Technology, No. 1 at 102-105 (2003).

11. See, e.g., The New York Public Service Commission's Statement of Policy on Unbundling and Order directing Tariff Filings, in Case 00-M-0504, issued Aug. 25, 2004, in which the agency established in a separate proceeding principles for allocating common costs between competitive commodity service and monopoly distribution service offered by New York electric utilities.

12. See, Kahn, Alfred E., The Economics of Regulation, Vol. 1, at 79-82. (John Wiley & Sons 1970). Variable common costs can and should be allocated between the regulated and competitive services. Id. at 78-79.

13. See, Weiser, Philip J., "Toward a Next Generation Regulatory Strategy", 35 Loyola University Chicago Law Journal at 74-84 (2003), in which the author argues that the FCC's broadband regulatory policy should be based on antitrust law principles.