Texas Enacts Sweeping Telecommunications Reform

Published December 1, 2005

A new telecommunications law in Texas has opened the door to increased telecom competition and innovation in the state, including the deployment of new technologies such as video programming over phone lines. Its effects are already being seen.

Gov. Rick Perry (R) signed Senate Bill 5 on September 7. Within 45 days of the law’s enactment, 64 new companies had received state video franchises to operate in municipalities, and some incumbent cable companies had slashed their rates to stay competitive.

“We salute the Texas state legislature, especially Representative Phil King [R] and Senator Troy Fraser [R], as well as Governor Perry, for their combined leadership and decisive action in favor of Texas consumers and the Texas economy,” said former U.S. House Majority Leader Dick Armey, co-chairman of FreedomWorks, which launched a grassroots effort to reform telecommunications law in Texas several years ago. “S.B. 5 is an important step forward and will promote competition and innovation, paving the way for new choices and improved technologies for consumers.”

Armey noted new players and new technologies have altered the telecommunications marketplace. He said the reforms give Texas “some of the most forward-looking telecom policies in America.

“Before S.B. 5,” Armey said, “Texas had been chafing under outdated telecommunications laws that were enacted to govern a world that no longer exists. The old rules were never meant to apply to the dynamic new market that is beginning to emerge.”

Access Charges to Fall

Jake Posey, general counsel for the Texas House Regulated Industries Committee, said the bill, which covers some 300 pages, takes a three-pronged approach.

The first deals with telephone service. In markets of 100,000 or more customers, providers are freed from pricing restrictions. Markets of 30,000 to 100,000 customers must meet a market test to show they can be deregulated fully. Smaller markets need deregulation approval from the state.

“We have big reductions in access charges,” Posey said. “Citizens can start benefitting from better long-distance prices within the state.”

New Technologies Unleashed

The second part focuses more on advanced data deployment, such as broadband over powerlines.

“We have companies that are retail reps, others that are generators of electricity, and others that own wires and poles,” Posey said. “The company that has wires and poles in the Houston market is CenterPoint Energy. They have an absolutely phenomenal pilot project looking at how to wire the whole Houston area. Texas law didn’t really delineate this process. We cleared the way for these companies that own wires and poles to be free to invest and deliver another broadband option to homes to provide phone and video services.”

The system would allow consumers to receive phone and video services and access the Internet simply by plugging a device into an existing electrical outlet. King noted broadband over power lines also makes the extension of broadband service to small towns and rural areas much more feasible, because companies do not have to invest in expensive new fiber optic lines or other infrastructure. The power lines are already there.

The third part of the Texas bill addresses video franchising.

“We set out to understand how to level the playing field regarding the taxes and fees various providers are paying,” Posey said. “We came up with a state-issued franchise” that breaks the virtual monopoly cable providers enjoyed with municipal franchise agreements. The result? “The cable company in my town [Keller, near Dallas-Fort Worth] has slashed prices 50 percent to compete with Verizon,” Posey said.

Innovation Outpaced Regulation

According to King, S.B. 5 promotes competition while creating incentives to invest in the networks that will place Texas at the forefront of the emerging new telecommunications market.

King said he became a strong proponent of telecom reform because of recent technological innovations. Today’s telecom market is changing rapidly, with growing competition among phone, wireless, cable, satellite, and other providers.

“We can no longer draw a bright line between the telephone company, video, cable, and other services,” King said. “We can have voice, video, and data over the same medium, yet we had a statutory scheme that treated companies like all they did was deliver one service. We were taxing each group differently, even though they were providing the same services. And in terms of how they entered the market, they were treated differently.

“I decided we needed a statutory platform that was technology-neutral and treated like services and products the same, regardless of the medium they were being delivered over,” King said. “The idea was to level the playing field.”

Benefits Immediately Realized

King said he is pleased by the early results, which began showing up almost immediately after the bill was signed.

“Texas already has 64 new competitors that have gotten state video franchises. That’s 64 cities that are now going to have competition,” King said. “Over the last three years, we maybe would have seen one or two getting franchises. Verizon has made Texas their flagship market for video. SBC has chosen us as the flagship for IP [Internet Protocol] video. Texas has the first major city [Houston] that will be under BPL [broadband over power lines]. There will be a big economic impact on jobs and new services and products.”

Posey said the state projects the telecom reform will create 13,000 permanent jobs in Texas and generate an additional $2 billion in annual investments.

Local Franchising Obstacle

Posey said the biggest roadblock to such competition had been local video franchising agreements. King acknowledged it was one of the most contentious parts of the legislation.

“We understood they [cities] would be cautious about giving up a revenue stream,” King said. “What we didn’t expect was how much [the city governments] would not want to give up control over who does business in their communities. That’s not a free-market perspective, but that’s the perspective many municipalities had.”

Posey said the legislation gives municipalities slightly higher franchise fees and takes away “in-kind” contributions most cities were getting.

“One city got $4 million, and that’s now passed to consumers” because it is no longer collected, Posey said.

Deregulation Not Complete

Cable companies argued against the bill, noting that allowing statewide video franchises for telephone companies while cable providers remained locked into franchise agreements with local municipalities put the latter at a regulatory disadvantage to their competitors.

“Deregulation of telecommunications recognizes and reflects the reality of competitive markets, but the Texas bill unfairly favors one type of provider, telephone companies,” said Brian Dietz, vice president of communications for the National Cable & Telecommunications Association. “All providers should compete on a level playing field,” Dietz said, adding, “any updates, reforms, and deregulation of telecommunications should treat all technologies and services equally.”

Sean Parnell, vice president of The Heartland Institute, a think tank that addresses telecommunications issues, thinks the cable companies have a legitimate concern. “The Texas deregulation bill was a great first step, but that’s all it was–a first step. Texas needs to continue lifting regulations and other barriers that prevent consumers from benefitting from free competition,” Parnell said.

Muni Wi-Fi Surprises Lawmakers

King said the biggest surprise to lawmakers was how many cities were providing free municipal wi-fi service.

“We never expected municipal wi-fi,” King said. “That caught us off-guard more than anything else. Some municipalities were providing it or were well down the road, and some were wanting to do it for profit.

“Our concern was that in most communities, there were already Internet providers, wireless and wireline. Those municipalities would be competing against existing investments in their community. It’s unnecessary. The marketplace is brutal and is the best regulator.”

Tina Peyton ([email protected]) is Texas state director for FreedomWorks.