March 16, 2004

March 16, 2004 | Commentary on Regulation

Light at the End of the Telecom Tunnel

The Federal Communications Commission is much in the news this year, with headline investigations into the antics of Janet Jackson and Howard Stern. Yet, regardless of the merits of its campaign against indecency, and the attention it generates, the average American likely will be much more affected by the agency's less glamorous, wonk-infested work in telephone policy.

Earlier this month, in a stinging rebuke to the FCC, a federal appeals court struck down the agency's rules for telephone competition. The decision, coming on the heels of an eight-year epic regulatory battle, not only will increase real competition in phone service, but will speed investment in next-generation Internet services. The winners include the U.S. economy, which could be boosted by hundreds of billions, and consumers, who will benefit from new, advanced on-line opportunities.

The debate over these rules began with passage of the 1996 Telecommunications Act, which, as a way to spur competition, authorized the FCC to require telephone companies to "unbundle," or lease, certain elements of their networks to potential competitors. Based on this, the FCC wrote a comprehensive list of such elements that required just about every part of a network, from switches to operators, to be shared with competitors.

Ever since, the rules have been embroiled in controversy - twice struck down by the courts for going too far, twice rewritten by the FCC.

Just over one year ago, the FCC re-wrote the rules a third time. The rules reduced unbundling requirements for advanced, hi-speed services. But it didn't substantially change the rules for standard "voice" telephone services. Instead, the FCC punted, asking state regulators to decide how or if the rules should be changed.

For a third time the issue went to court. This month, the court called strike three on the commission, ruling that the FCC couldn't hand off decision-making authority to the states, upholding its decision to eliminate rules for advanced telecom services, and holding the commission hadn't shown a need for the rest.

Supporters of the rule were apoplectic. Unconstrained Bell company monopolies, they warn, will drive out all competitors, leaving consumers with no choices and higher prices. But this is nonsense, and the court knew it. In one telling and colorful line, the court decried such Bell-bashing, stating that "in competitive markets" telephone companies "can't be used as a piñata," beaten up on all sides.

Is the market really competitive? There's certainly no bottleneck monopoly for many of the network elements covered under these rules. Switching equipment, for instance, is widely available, and firms can operate their own switches in competition with the Bells. (Many do just that.)

Even this element-by-element view of competition, however, misses the big picture. Communications competition is raging - in ways and from technologies never imagined eight years ago. Americans, for instance, are increasingly abandoning their wired phones for wireless ones (choosing their own provider in the process). One measure of the effect: Some colleges don't even bother anymore to put phone jacks in dormitories. Internet-based services are a second looming challenge to the Bell infrastructure. And in high-speed broadband service, incumbent telcos are far behind cable companies in the marketplace.

At the same time, by putting telco networks out for lease, new competitors were discouraged from building networks of their own. And the resulting "competition," among firms all using the same infrastructure, has been rather artificial. Worst, telcos were discouraged from upgrading their networks, leaving everybody worse off.

So, after eight years of warfare, can the armies of lawyers and lobbyists now be sent home? Unlike the two previous rulings, the judges this time tossed the rules outright, rather than merely "remanding" them for another round by the FCC and giving the agency only 60 days to try to write new ones. And Chairman Michael Powell has already asked firms to start negotiating voluntary access agreements, to replace the mandatory rules.

But the pro-regulation camp is not out of options yet. Supporters could ask the Supreme Court to overturn the decision. Three of the five FCC commissioners have already said they support this (although the Bush administration could help by refusing to join the request). There are also other sections of law requiring telcos to open their networks up, which the FCC could try to expand. Lastly, the states could pass their own rules requiring leasing, no doubt leading to still more litigation.

So the telco quagmire may yet remain. Still, this month's court decision is a significant step forward, providing a faint of glimpse of light, perhaps from a fiber optic cable, at the end of the tunnel.

James Gattuso is a research fellow in regulatory policy at The  Heritage Foundation, a Washington-based public policy research institute.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Regulation

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