August 27, 2002

Honorable Michael K. Powell
Chairman
Federal Communications Commission
445 12th Street, S.W.
Room 8-B201
Washington, DC  20554

     RE:  Ex Parte Presentation in a Non-Restricted Proceeding
     Initial Regulatory Flexibility Analysis for Appropriate
     Framework for Broadband Access to the Internet over Wireline
     Facilities (CC Dkt. No. 02-33)

Dear Mr. Chairman:
     
As part of its statutory duty to monitor and report on an
agency's compliance with the Regulatory Flexibility Act of 1980
("RFA"), as amended by the Small Business Regulatory Enforcement
Fairness Act of 1996 ("SBREFA"),(1) the Office of Advocacy of the
U.S. Small Business Administration ("Advocacy"), has reviewed the
Federal Communications Commission's ("FCC" or "Commission")
compliance with the RFA's requirements for the Notice of Proposed
Rulemaking ("NPRM") in the above-captioned proceeding.(2)

In the NPRM, the Commission seeks to classify the provision of
wireline broadband Internet access service and identify the
ramifications of such classification.(3) The Commission
tentatively concludes that wireline broadband Internet access
service is an information service. (4)While the Commission
conducted an Initial Regulatory Flexibility Analysis ("IRFA"),
the Commission did not analyze the impact of this classification
on small Internet Service Providers ("ISPs").  According to
commenters, classifying broadband Internet access as an
information service would affect more than 7,000 small businesses
and could cost those businesses an estimated $8 billion in
revenue.

To comply with the RFA, Advocacy recommends that the Commission
revise its IRFA to include an analysis of what impact that
classification of wireline broadband Internet access service
would have on small ISPs.  If the Commission declines to take
this step, we encourage the Commission to address the impact in
the Final Regulatory Flexibility Analysis ("FRFA") when it adopts
the final rule.

Furthermore, Advocacy urges the Commission to adopt the
alternative proposed by commenters and classify wireline
broadband Internet access service as composed of two separate
services - the transmission of broadband signals as a
telecommunications service, and the the provision of Internet
access service as an information service.  This alternative will
accomplish the Commission's regulatory goal of encouraging
broadband deployment, while minimizing the disproportionate
impact on small businesses.

1.    Advocacy Background.

Congress established the Office of Advocacy in 1976 by Pub. L.
No. 94-305(5) to represent the views and interests of small
business within the Federal government.  Advocacy's statutory
duties include serving as a focal point for the receipt of
complaints concerning the government's policies as they affect
small business, developing proposals for changes in Federal
agencies' policies, and communicating these proposals to the
agencies.(6) Advocacy also has a statutory duty to monitor and
report to Congress on the Commission's compliance with the RFA.

The RFA was designed to ensure that, while accomplishing their
intended purposes, regulations did not unduly inhibit the ability
of small entities to compete, innovate, or to comply with the
regulation.(7) The major objectives of the RFA are:  (1) to
increase agency awareness and understanding of the potential
disproportionate impact of regulations on small business; (2) to
require that agencies communicate and explain their findings to
the public and make these explanations transparent; and (3) to
encourage agencies to use flexibility and provide regulatory
relief to small entities where feasible and appropriate to its
public policy objectives. (8)The RFA does not seek preferential
treatment for small businesses.  Rather, it establishes an
analytical requirement for determining how public issues can best
be resolved without erecting barriers to competition.  To this
end, the RFA requires the agencies to analyze the economic impact
of proposed regulations on different-sized entities, estimate
each rule's effectiveness in addressing the agency's purpose for
the rule, and consider alternatives that will achieve the rule's
objectives while minimizing any disproportionate burden on small
entities.(9)

On August 14, 2002, President George W. Bush signed Executive
Order 13272 that requires federal agencies to implement policies
protecting small businesses when writing new rules and
regulations.(10) This Executive Order authorizes Advocacy to
provide comment on draft rules to the agency that has proposed or
intends to propose the rules and to the Office of Information and
Regulatory Affairs of the Office of Management and Budget.(11) It
also requires agencies to give every appropriate consideration to
any comments provided by Advocacy regarding a draft rule.  The
agency shall include, in any explanation or discussion
accompanying publication in the Federal Register of a final rule,
the agency's response to any written comments submitted by
Advocacy on the proposed rule, unless the agency certifies that
the public interest is not served by doing so.(12)

2.    Defining Wireline Broadband Internet Access Services as
  Information Services Will Heavily Burden Small ISPs.

After reviewing the Commission's proposed rule, the IRFA and
comments, Advocacy is concerned the Commission has understated
the impact on small ISPs of its tentative conclusion classifying
broadband access service as an information service.  Classifying
broadband access service as an information service would remove
the requirements set forth in the Commission's Computer II(13)
and Computer III(14) rulemakings that provide carriage to
ISPs.(15) Such an action will severely hamper the ability of
small ISPs to provide broadband service, stifling competition and
slowing down deployment.  Although Advocacy shares the
Commission's commitment to deregulation to bolster competition
and spur economic growth, in this instance, complete deregulation
will create impenetrable barriers to entry, eliminating
competition from small businesses and removing consumer choice.
     
     a.   Small ISPs Provide a Substantial Number of Competitors
          and Bring Competition to Rural Areas.

In the IRFA, using 1997 data, the Commission identifies small
ISPs as an affected class of entities and estimates there are
between 2,829 to 2,940 small ISPs.(16) One commenter noted that
industry sources estimate the number of ISPs at more than
7,200.(17) The latest numbers available to Advocacy support this
claim.  Based on 1999 North American Industry Classification
System ("NAICS") data broken down by firm size,(18) there are a
total of 7,099 ISP firms, of which 6,975 have less than 500
employees.(19) While this number is based on data that is three
years old in a rapidly changing industry, it supports the
commenters' assertion that there are approximately 7,000 small
ISPs.

Small ISPs have a substantial share of the Internet service
market and are crucial to competition.  Together, small ISPs
serve 77 million customers, which represent 55 percent of the
market.(20) In addition, small ISPs have been instrumental in
bringing service to rural areas where costs are high and returns
on investment low.(21)
     
     b.   Small ISPs Are Disproportionately Burdened by the
Proposed Rule.

Out of all the entities identified as affected classes in the
IRFA, small ISPs are the most significantly affected.  Small
ISPs, which constitute the majority of ISPs nationally, are
dependent upon transport over wireline carriers' facilities.  An
overwhelming number of ISPs have access arrangements with
wireline carriers rather than cable providers,(22) and 93 percent
of all digital subscriber lines are provided by incumbent local
carriers.(23) As an ISP organization noted, a small ISP's options
other than carriage on a wireline carrier's lines are virtually
non-existent.(24) Therefore, small ISPs are dependent on the
incumbent wireline carriers to carry their signals.(25) Even for
small ISPs dealing mainly with the provision of broadband, the
total reliance upon carriage over wireline carriers' facilities
is undisputed.

This dependence is born from 80 years of government-sanctioned
monopoly that enabled incumbent wireline carriers to construct a
pervasive network to almost every home and business in the
nation.  Such a network will take decades to replicate, if it is
possible to replicate at all, considering changes in the
regulatory environment and the reluctance of local communities to
installing new wires.  The "last mile" of the network, which
extends from a home or business to the central office of the
incumbent wireline carrier, is particularly difficult for small
alternative carriers to replicate or bypass, which grants the
incumbent carrier a near monopoly in residential areas and a
substantial economic advantage in business districts.

In the NPRM, the Commission appears to operate under the
assumption that broadband is a completely separate service from
voice telephone.  Several commenters question this assumption,
and claim that broadband is an extension of existing wireline
telephony systems.  One commenter states that no separate
broadband network exists.  Instead, wireline carriers are using
the same copper structure that is used to carry voice
telephony.(26) Another commenter states that the voice telephony
market and the broadband market are inextricably joined and that
recent broadband investments are just on-going upgrades to
existing networks.(27)
There is merit to both of these comments because wireline
broadband is currently using last-mile physical structure.  Small
ISPs do not have an alternative when it comes to reaching their
wireline broadband customers; they rely upon carriage over
wireline carriers facilities, as detailed in Computer II and
Computer III.  If the Commission removes the requirements for
local carriers to carry the broadband traffic of small ISPs,
incumbent wireline carriers have significant economic reasons to
stop doing so.  Without that carriage, small ISPs will face a
harsh economic future, as Internet service migrates from dial-up
to broadband.

Without the carriage requirement of Computer II and Computer III,
control over the last mile gives wireline carriers an enormous
bargaining advantage when dealing with ISPs, and the potential
for discrimination by wireline carriers is a real concern.  Small
ISPs have no leverage and no alternatives but to take whatever
deal is offered to them by the wireline carriers.   As commenters
noted, the potential for discrimination by the wireline carriers
in the absence of the Computer II and Computer III safeguards is
real,(28) and a different regulatory treatment for broadband
would encourage wireline carriers to close their networks or
engage in anti-competitive and supra-competitive pricing.(29)

If the incumbent wireline carriers refuse to provide broadband
access services to small ISPs, one commenter estimates the cost
to small ISPs at $8 billion in lost revenue.(30) Such a blow
would cripple the ISP industry and force hundreds of small
businesses into bankruptcy, further endangering the prospect of
sound economic recovery.  Furthermore, competition would be
thwarted, as these small ISPs and other alternative providers are
driven out of the marketplace.(31) Should small ISPs cease
operating, the Internet access market will be controlled by a
duopoly - a wireline carrier monopolist that dominates in the
provision of Internet services to businesses, and the cable
monopolist that dominates in the provision of Internet services
to residences.

     c.   Commission Should Analyze Impact of Reclassification on
          Small ISPs in a Revised IRFA and in the FRFA.

The IRFA did not address these issues described above nor analyze
what the impact will be on 7,000 small ISPs.  The Commission is
proposing changes to the regulatory foundation for an entire
industry, which will have a sweeping and dramatic impact on all
small ISPs.  The Office of Advocacy recommends that the
Commission revise its IRFA to include an analysis of the impact
that classifying wireline broadband Internet access service as an
information service would have on small ISPs.

If the FCC does not take the step of issuing a revised IRFA,
Advocacy urges the Commission to analyze the issues raised by
commenters in a FRFA when the final rule is adopted(32) and
describe the steps that the agency has taken to minimize the
costs on small businesses.(33) Specifically, the Commission
should address the issues discussed above and explain what steps
the FCC has taken to minimize the impact of a rule that could
remove 7,000 small businesses from the broadband marketplace.  If
the Commission adopts the rule as proposed, it should explain how
the rule serves the public interest, defined by the Commission in
the NPRM as encouraging competition and broadband deployment, by
removing small business from the marketplace.

3.    Commission Should Consider Alternatives Less Burdensome to
  Small Businesses.

The RFA requires carriers to propose alternatives in the IRFA and
to consider alternatives proposed by commenters in the FRFA.(34)
After reviewing the comments, Advocacy recommends that the
Commission consider and adopt the alternative proposed by
commenters to encourage deployment of broadband by facilitating
competition.  The Commission can do this by classifying the
transmission portion of broadband Internet service as a
telecommunications service while the Internet service should be
classified as an information service.
     
     a.   Facilitating Competition Will Encourage the Deployment of
          Broadband.

As stated by commenters, competition drives innovation, and it is
competition that will drive the deployment of broadband.(35) This
has been borne out time and again in the telecommunications
field.  Long distance service was revolutionized by the advent of
competition.  The costs of wireless telecommunications dropped
and a myriad of services proliferated as more competitors entered
the field.   In the Internet field, it was the competitive forces
of thousands of ISPs, many of them small, who brought the World
Wide Web and e-mail to consumers.  Many parts of rural America
would still be without Internet access but for competitive forces
that forced small ISPs to find niche markets.

When there is a lack of competition, innovation stagnates, and so
will the deployment of broadband.  One commenter noted that
wireline carriers delayed introduction of broadband until
competition forced them to enter the market,(36) while another
states that carriers will always choose to deploy broadband in
areas where there is competition first.(37) Another commenter
states that maintining the diversity of ISPs is the best way to
ensure that there are broadband choices, as small ISPs will cater
to the needs of niche broadband consumers, which will encourage
deployment.(38)

To maximize broadband deployment, there must be competition
within the type of carriages as well as between types of
transport.  The Commission should not rely upon cable as the sole
source of competition to wireline broadband, because cable is not
a perfect substitute for wireline broadband.  The physical plants
do not generally overlap; cable dominates the residential
broadband market, while wireline carriers dominate the business
market and have a presence in every single home in the United
States.(39)

If the incumbent wireline carrier is the sole source for wireline
broadband communications, large numbers of small business
consumers will have a single choice for broadband Internet
service and will likely face higher rates, more restricted
service, and delays on deployment of broadband service.  Because
of the incentive structure faced by the incumbent wireline
carrier, rural consumers, and consumers in low-density areas
would have little chance of receiving broadband services.
Deployment, then, becomes a classic case of "cherry picking" and
is not consistent with the Commission's goals.

     b.   Broadband Internet Service Should Be Classified as Two
          Distinct Services.
     
Consistent with comments received by the FCC, Advocacy recommends
that the Commission revisit its conclusion that broadband
Internet access service is an information service. (40)In fact,
we urge the Commission to classify the transmission of broadband
signals as a telecommunications service, and the provision of
Internet access service as an information service, as originally
determined in Computer II and Computer III.  By deciding that
broadband Internet service consists of two distinct services, the
Commission will minimize the disproportionate impact on small
ISPs and will encourage competition in the broadband market,
which will in turn encourage deployment of broadband as discussed
above.

Computer II and Computer III created a regulatory environment
that allowed a new sector of business to grow and thrive.  In
those two rulemakings, the Commission declared that the provision
of Internet service was an information service and that incumbent
wireline carriers were required to provide carriage of signals to
and from ISPs.(41) This allowed the ISP industry to blossom and
thrive, because it did not burden them with unnecessary
regulations, while at the same time allowing them to interconnect
with the telephone network and access customers.  If the carriage
requirement was not there, it is unlikely that ISPs would have
been able to interconnect and reach their customers.  As one
commenter warned, premature elimination of Computer II and
Computer III carriage requirements will diminish the competition
that currently exists.(42)

In addition, if the Commission finds that broadband Internet
access is an information service, it raises the specter of
regulatory gaming(43) by incumbent wireline carriers.  Broadband
networks do not distinguish between data or voice, and wireline
carriers will have enormous incentive to avoid regulation by
transmitting voice communications as broadband transmissions.
This regulatory gaming would undermine many of the FCC's public
interest goals, such as local competition and Universal Service.
By categorizing the transmission component of broadband Internet
service as a telecommunications service, the FCC can minimize
regulatory gaming and promote greater competition.(44)

     c.   Swift and Proper Enforcement of Current Rules Will Encourage
          Broadband Deployment.
     
Several commenters raised the alternative that the Commission
more stringently enforce the rules requiring carriage of Internet
signals.(45) Because small ISPs are completely dependent upon
wireline carriers to carry their signals due to difficulties in
circumventing the last mile, these carriers have a tremendous
economic advantage.  Advocacy agrees with these commenters and
recommends that the Commission consider alternatives proposed by
the commenters.  In order to ensure that competition thrives and
the wireline carrier does not leverage its position, the
Commission should mandate availability of broadband unbundled
network elements and enforce its unbundling requirements.(46) In
addition, the Commission should ensure that ISPs are afforded
just, reasonable, and non-discriminatory access to wireline
transmission services as required by Computer II and Computer
III.(47) Finally, the Commission should consider establishing an
enforcement process for resolving ISP-related issues.(48)

4.  Conclusion.

Deployment of broadband is squarely in the public interest.
Broadband holds the promise of technological innovation, better
communications, and bridging vast distances within our nation.
Congress has recognized this and has mandated that the Commission
should do all in its power to encourage broadband deployment.

Regrettably, the rapid and universal deployment of broadband has
been elusive.  The recent economic slowdown in the technology
sector has frustrated efforts to deploy service.  In addition,
the Internet has not yet reached the point where consumer demand
for broadband drives deployment as rapidly and as universally as
lawmakers and regulators would hope.  It is coming, but it is
coming slowly.

When crafting regulation to encourage broadband deployment, the
Commission should not overlook the impact that its actions will
have on small businesses, particularly the thousands of small
ISPs.  The small ISPs have played a crucial role in bringing the
Internet to the American public and are poised to play an equally
crucial role in the deployment of broadband.  The proposed rule's
IRFA did not analyze the severe and disproportionate impact on
small ISPs that classifying wireline broadband Internet access
service as an information service would have.  Advocacy urges the
Commission to revise its IRFA to include an analysis of this
impact.

If the Commission declines to take this step, we encourage the
Commission to analyze the issues raised by commenters in a FRFA.
In particular, the Commission should consider the alternatives
proposed by commenters.  Advocacy particularly recommends that
the Commission adopt the alternative proposed by commenters that
would classify wireline broadband Internet access service as
composed of two separate services - the transmission of broadband
signals as a telecommunications service, while the provision of
Internet access service as an information service.  This
alternative will accomplish the Commission's regulatory goal of
encouraging broadband deployment, while minimizing the
disproportionate impact on small businesses.

Thank you for your consideration of these matters, and please do
not hesitate to contact me or Eric Menge of my staff at (202) 205-
6933 or eric.menge@sba.gov if you have questions, comments, or
concerns.

Sincerely,

Thomas M. Sullivan
Chief Counsel for Advocacy

Eric E. Menge
Assistant Chief Counsel for Telecommunications

Radwan Saade, Ph. D.
Regulatory Economist

cc:
Commissioner Kathleen Q. Abernathy
Commissioner Michael J. Copps
Commissioner Kevin J. Martin
William Maher, Chief, Wireline Competition Bureau
Carolyn Fleming Williams, Director, Office of Communications
Business Opportunities
John D. Graham, Administrator, Office of Information and
Regulatory Affairs, Office of
     Management and Budget.
     
ENDNOTES

1.   Pub. L. No. 96-354, 94 Stat. 1164 (1980) (codified at 5
U.S.C.  601 et seq.) amended by Subtitle II of the Contract with
America Advancement Act, Pub. L. No. 104-121, 110 Stat. 857
(1996). 5 U.S.C.  612(a).
2.   In the Matter of Implementation of Subscriber Carrier
Selection Changes Provisions of the Telecommunications Act of
1996 and Policies and Rules Concerning Unauthorized Changes of
Consumers Long Distance Carriers, Third Report and Order and
Second Order on Reconsideration, CC Dkt. No. 94-129, FCC 00-255
(rel. Aug. 15, 2000).
3.   NPRM at para. 9.
4.   Id. at para. 17.
5.   Pub. L. No. 94-305 (codified as amended at 15 U.S.C.  634
a-g, 637).
6.   15 U.S.C.  634(c)(1)-(4).
7.   5 U.S.C.  601(4)-(5).
8.   See generally, Office of Advocacy, U.S. Small Business
Administration, The Regulatory Flexibility Act: An Implementation
Guide for Federal Agencies, 1998 ("Advocacy 1998 RFA
Implementation Guide").
9.   5 U.S.C.  604.
10. Exec. Order. No. 13272  1, 67 Fed. Reg. 53,461 (2002).
11. Id. at  2(c).
12. Id. at  3(c).
13. Amendment of Section 64.702 of the Commissions Rules and
Regulations, 77 FCC 2d 384 (1980)("Computer II").
14. Amendment of the Section 64.702 of the Commission's Rules and
Regulations (Computer III Phase I Order), 104 FCC 2d 958 (1986)
("Computer III").
15. NPRM at paras. 42-44.
16. Id. at para 98.
17. Comments of TeleTruth to the Notice of Proposed Rulemaking in
CC Dkt. No. 02-33, p. 34, (May 3, 2002) ("TeleTruth Comments").
18. NAICS #514191 (Online Information Services).
19. "Employer Firms and Employment by Employment Size of Firm by
NAICS (1999) (last visited August 19, 2002)
<http://www.sba.gov/advo/stats/us99_n6.pdf>.  The SBA defines
small "Online Information Services" as those businesses having
$18 million or less in revenue in a year.  The U.S. Census data
is listed by number of employees. The only data based on revenue
dates back to 1997, which will not capture the growth during the
technological boom of the late 1990s.  Therefore, we are
utilizing the most recent data (1999) which is broken down by
employment size.
20. TeleTruth Comments at 35.
21. Id. at 45; Comments of TDS, Telecommunications Corporation,
Madison River Communications, and North Pittsburgh Systems, Inc.
to the Notice of Proposed Rulemaking in CC Dkt. No. 02-33, at 15,
(May 3, 2002) ("TDS Comments").
22. Reply Comments of the High Tech Broadband Coalition to the
Notice of Proposed Rulemaking in CC Dkt. No. 02-33, at 7 (May 3,
2002) ("HTBC Reply Comments").
23. Reply Comments of the Ad Hoc Telecommunications Users
Committee to the Notice of Proposed Rulemaking in CC Dkt. No. 02-
33, at 17 (May 3, 2002) ("Ad Hoc Reply Comments").
24. Reply Comments of California Internet Service Providers
Assoc. to the Notice of Proposed Rulemaking in CC Dkt. No. 02-33,
at 23 (May 3, 2002) ("Calif. ISPA Reply Comments").
25. TeleTruth Comments at 43.
26. TDS Comments at 10.
27. Calif. ISPA Reply Comments at 29.
28. Calif. ISPA Reply Comments at 16; HTBC Reply Comments at i.
29. TDS Comments at 12; Ad Hoc Reply Comments at ii.
30. TeleTruth Comments at 46.
31. TDS Comments at 2.
32. 5 U.S.C. . 604(a)(2).
33. Id. at  604(a)(5).
34. 5 U.S.C.  603(c); 5 U.S.C.  604 (a)(5).
35. TDS Comments at 7; Comments of AOL Time Warner, Inc. to the
Notice of Proposed Rulemaking in CC Dkt. No. 02-33, at 23 (May 3,
2002) ("AOL Comments").
36. Calif. ISPA Reply Comments at 7.
37. TDS Comments at 7.
38. AOL Comments at 23.
39. Calif. ISPA Reply Comments at 25-6; Ad Hoc Reply Comments at
7.
40. New York Dept. of Public Service, p. 3 Comments of New York
State Dept. of Public Service to the Notice of Proposed
Rulemaking in CC Dkt. No. 02-33, at 3 (May 3, 2002); TDS Comments
at 14; AOL Comments at 3.
41. See Computer II and Computer III, supra notes 13 and 14.
42. Ad Hoc Reply Comments at 9.
43. Regulatory gaming is defined as using regulations in a manner
in which they were not intended to gain a competitive advantage.
44. TDS Comments at 14.
45. TDS Comments at 8; HTBC Reply Comments at 12; AOL Comments at
21.
46. TDS Comments at 8.
47. AOL Comments at 14.
48. Id. at 31.