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Telecommunications Reform

Mitch Daniels: Heartland Reformer

Broadband Leadership from the Hoosier State

When Mitch Daniels was elected, Indiana ranked 40th in the nation in broadband deployment. Only 18 percent of households had broadband access. AT&T executives had told members of the Indiana General Assembly who had pushed for better broadband in Indiana that the Hoosier state was “absolutely the worst telecom environment” in the nation.

Daniels had read an analysis of Indiana’s neighbor to the north, Michigan, which projected that recent broadband deployment in that state stood to generate more than $440 billion in Gross State Product over twenty years, not to mention several hundred thousand new jobs. He wondered why Indiana wasn’t on the same track. He heard regularly from business leaders that companies were increasingly factoring broadband capacity into their location decisions. Plus, while campaigning he heard regularly from residents and business owners that Internet access wasn’t what it should be.

As with so many of Daniels’ reforms, his goal with broadband was from the outset not to reach the middle of the pack nationally, but to emerge as a national leader by pushing through the farthest-reaching telecom reforms any state had seen yet.

The Backdrop: A Failed Policy Environment

The Federal Telecommunications Act of 1996 was hailed at the time of its passing as a landmark bill that would modernize telecom, save the country hundreds of billions of dollars, and create more than a million jobs. Ultimately, though, it failed to deliver on its goal to increase Internet connectivity across the country. States were no better when it came to telecom. They overregulated telecom with layers upon layers of outdated rules and governing bodies, and yet in the wake of federal failure, states began to get active on telecom liberalization.

Indiana was a classic case. Its utilities regulatory commission operated in a manner one could find in many states: without an eye toward competition or economic development. That’s because the state never had an identifiable policy in this regard. In the decade preceding Daniels’ election, fiber-optic technology in America had increased by a factor of 64,000, and yet Indiana was still operating under a telecom law its legislature passed in 1985.

Indiana’s regulatory commission imposed floor-and-ceiling price controls on telecom, including the most severe controls on voice communications in the nation. The commission had micro-managerial restrictions on all aspects of the products, sales, and marketing efforts of telecommunications companies.

Like the AT&T executives who lambasted Indiana’s telecom environment, other industry executives routinely complained that Indiana was inhospitable to their products and services. As a result, lower levels of investments in new technologies flowed into Indiana. While DSL enjoyed about one-third of the residential broadband market nationwide, despite being more regulated in general than cable broadband, it only accounted for 18 percent of the residential market in Indiana. The Hoosier state was leading the national average, once again, in the wrong way: by being more burdensome.

A New Normal for Telecom in Indiana

During the transition period between his election and inauguration as Governor, Daniels looked into the issue more deeply and tasked his team with designing the best possible telecom reform for Indiana: one that would have an immediate impact and help make the Hoosier state a magnet for investment instead of the repellent it had been for too long.

They worked with leaders in the legislature who had been trying for some time, albeit with limited success, to bring Indiana into the 21st century. Daniels was insistent that any prospective bill:

  • Recognize the ultra-competitive environment telecommunications had become. Any law or regulation should acknowledge the rapid evolution in cable, wireless, satellite, voice-over-IP, DSL and related technologies.
  • Phase out the regulation of most if not all traditional telecom products.
  • Deregulate wholesale pricing and bundling to the extent allowed by the Federal Communications Commission.
  • End the micromanagement of telecom’s products, sales practices, and marketing efforts.

By making the case alongside their Assembly allies to skeptical members of the legislature that Indiana’s economy would suffer without proper telecom reforms, Daniels’ team succeeded in the first year of his administration. Daniels signed Indiana House Bill 1279 in 2006, which was immediately praised by industry experts as the most far-reaching telecommunications reform package in the country. The bill was the first attempt to improve telecommunications in Indiana in 20 years and cleared away obtrusive, decades-old regulations.

The law prohibited regulation of broadband and information services, deregulated basic telecom services over three years, created a statewide video franchising system, and additional measures to liberalize the telecom sector. More specifically, it provides for deregulation of broadband when access to service reached 50 percent of the local telephone exchange area and requires full disclosure from companies during the transition. It also capped how much providers can increase service charges during the transition period, in addition to a number of other provisions to stimulate development and expansion, while allowing Indiana’s utility regulatory commission to maintain regulatory control over certain aspects of telecommunications services including 211 call centers, cramming laws, interconnection agreements, and disputes among providers. The bill also provides quick and easy approval to telecommunication providers looking to expand within the state and has opened the door for expansion of high-speed fiber optic networks. The bill passed with broad bipartisan support and passed by wide majority.

Around the time of the bill’s passage, a national survey of CEOs found that broadband communication was the number one factor in persuading companies to move to a particular state. Indiana’s bill was therefore widely regarded as a forward-looking economic development initiative based on a proper understanding of broadband’s role in regional economies – and it was enacted nearly five years before President Obama made a similar case for broadband expansion in his 2011 State of the Union address.

The Results

Almost immediately after Indiana passed its sweeping telecom reforms, the state jumped ahead of its neighbors – who only months earlier had never considered Indiana a force to be reckoned with – in terms of broadband achievement.

It leapt from 34th to 18th on the FCC’s rankings of state Internet connectivity almost overnight, and it moved from the backwaters on broadband speed to the forefront soon after the bill passed. Indiana has remained among the top ten states nationally ever since.

For instance, in Akamai’s State of the Internet report, widely considered the authoritative evaluation of broadband coverage worldwide, Indiana ranks 6th in average peak connection speeds. It also stands out as the lone Midwestern outpost in the top ten.

When measured by average measured connection speeds, Indiana ranks 10th. And once again, it stands alone in middle America as the lone leader.

Within a year and a half after the bill was passed, Indiana saw $400 million in new investment and thousands of new telecommunications jobs.