June 15, 2004
By James L. Gattuso, Randolph J. May and Adam D. Thierer
When the D.C. Circuit Appeals Court in March once again threw
out the Federal Communications Commission's rules requiring
incumbent telephone companies like Verizon to share their network
facilities at regulated rates, the court handed the
telecommunications industry a huge opportunity. In short, there is
an opportunity to replace the traditional public utility,
litigation-oriented regulatory regime with a less-regulated,
commercially oriented regime in which telecom providers wishing to
share facilities are free to enter mutually acceptable
But this chance may be squandered by state regulators, and
federal regulators too, if they insist on putting their own
regulatory stamp on the freely negotiated agreements. In the last
century's telecom world, communications services were largely
provided on a monopoly basis. In that old environment, a regime
heavily weighted toward regulation and litigation may have been
appropriate, or at least acceptable.
In today's Internet Age environment, however, wireline telephone
companies, cable companies and wireless telephone companies, not to
mention new Voice over Internet Protocol ("VoIP") and electronic
messaging providers all compete. Consumer welfare will be greatly
enhanced if these service providers are allowed to do what they do
in other competitive markets -- freely negotiate private contracts
that best meet their mutual needs.
The appeals court held that the FCC's existing rules are
inconsistent with the 1996 Telecom Act because they mandate that
incumbent telecoms provide competitors with virtually unlimited
access to the incumbents' networks even if the new entrants are not
impaired from providing their own facilities. This came after the
FCC received two previous judicial rebukes of these rules for the
same reason. The court's frustration, in chastising the
"commission's failure, after eight years, to develop lawful
unbundling rules, and its apparent unwillingness to adhere to prior
judicial rulings," was understandable. After the court's decision,
one option open to those who favor continuing the old regime is to
just keep litigating by asking the Supreme Court to review the
appeals court decision.
With the opening provided by the decision, however, the
previously bitterly divided commission came together March 31 to
urge telecom providers to "begin a period of commercial
negotiations designed to restore certainty and preserve competition
in the telecommunications market." Observing that the incessant
litigation has unsettled the market, the commissioners "ask[ed] all
carriers to engage in a period of good-faith negotiations to arrive
at commercially acceptable arrangements" for interconnection and
facilities-sharing. They noted the 1996 Telecom Act clearly
contemplated "the role of commercial negotiations as a tool in
shaping a competitive communications marketplace."
So far, so good. The negotiations between the incumbent telecoms
and their competitors even got off to a modestly encouraging start,
with incumbent SBC and Sage Telecom, the third-largest competitive
carrier in SBC's territory, announcing they had entered into a
seven-year commercial agreement. This was followed by an
announcement that incumbent Qwest had negotiated a three-year
commercial agreement with Covad, a leading provider of broadband
Internet services. But now it looks as if some of the state public
utility commissions are determined to throw roadblocks into the
negotiating process, and there have been indications the FCC may be
meddling as well by, say, requesting negotiating information and
pressuring parties to use mediators.
For example, the Michigan Public Service Commission has issued
an order requiring submission of the SBC/Sage agreement for
approval so it can "determine whether agreement discriminates
against other competitors and is in the public interest." The
California, Texas and Kansas commissions have indicated the
SBC/Sage agreement should be subject to their OK. Not surprisingly,
the National Association of Regulatory Utility Commissioners, the
state commissioners' trade association, has urged that all
commercial agreements be reviewed by the state commissions.
Although the matter is not free from doubt, there is a good
argument that as a legal matter these private agreements need not
be filed with state commissions to the extent they involve network
elements no longer subject to FCC access requirements. There is no
doubt, however, that if the agreements must be filed publicly and
are subject to an undefined "public interest" review by state
regulators, the commercial negotiations the FCC commissioners (and
even many state commissioners) wish to succeed, in fact, will
likely fail since the incentive to negotiate will be severely
If negotiated agreements are required to be filed at all, at a
minimum state regulators should use existing authority to protect
the confidentiality of commercially sensitive terms and conditions.
And they should presume such individually negotiated agreements are
in the public interest. After all, the ability of private parties
to negotiate binding agreements tailored to meet their individual
needs is at the heart of an unregulated competitive marketplace.
Such agreements provide long-term stability and facilitate sound
business plans. It is no accident the SBC/Sage and the Qwest/Covad
agreements are for seven and three years respectively.
The D.C. Circuit decision has opened a window of opportunity to
escape the regulatory and litigation morass that has prevailed
since the 1996 Telecom Act passed. But if regulators act as if
nothing has really changed, then nothing will. It is past time for
regulators to abandon the last century's public utility model in
favor of a market-oriented regime in which industry participants
have contract freedom so, like others in a competitive marketplace,
they can decide themselves how to meet customer needs by voluntary
Randolph J. May is senior fellow and director of
communications policy studies at the Progress & Freedom
Foundation. James L. Gattusso is research fellow in regulatory
policy at the Heritage Foundation. Adam Thierer is director of
telecommunications studies at Cato Institute.
This essay originally appeared in The Washington Times.
When the D.C. Circuit Appeals Court in March once again threw out the Federal Communications Commission's rules requiring incumbent telephone companies like Verizon to share their network facilities at regulated rates, the court handed the telecommunications industry a huge opportunity.
James L. Gattuso
Senior Research Fellow in Regulatory Policy
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