Almost exactly one
year after the FCC adopted new regulations governing competition in
telephone service, telecom regulation is once again under debate.
Rules that require telephone companies to lease parts of their
networks to competitors were intended to increase consumer choice
but instead have hindered investment and actually reduced real
competition. Within the next few weeks, a federal appeals court may
rule on challenges to last year's FCC decision. The betting is that
the rules will be struck down, leaving the FCC the task of writing
new ones. With or without a court order, the FCC - or Congress -
should act to scale back these telecommunications regulations.
The regulations in
question stem from the 1996 Telecommunication Act, which requires
that telephone companies provide competitors with access to parts
of their network. Exactly which parts were left to the FCC to
decide. Under the chairmanship of Clinton-appointee Reed Hundt, a
comprehensive list of so-called "unbundled network elements" or
"UNEs" was drawn up - including switches, transport lines, and
"local loop" lines to individual homes and businesses - allowing
competitors to lease virtually any or all of an incumbent telephone
company's facilities at rates set by regulators.
Within a year,
however, a federal appeals court found that the FCC had gone too
far, pointing out that, under the statute, the regulated elements
must be "necessary" to competitors and, without them, competition
would be "impaired." The rules went back to the FCC, which
marginally revised them. They were then challenged in court a
second time, and again, the appeals court rejected them - this time
providing firm instructions to the FCC to reduce their scope. Thus,
last year, the FCC once again considered the rules. On a 3-2 vote -
with the chairman of the FCC dissenting - the Commission adopted
The new rules -
which were not actually published until six months later - reduced
unbundling requirements for facilities used for advanced, broadband
services. But it didn't substantially change the rules for standard
"voice" telephone services. Instead, it asked state regulators to
decide how and if they should be changed. The states are now in the
beginning stages of proceedings on these issues; few are expected
to grant relief, which, in any case, would take years to
supporters of these rules argue that they comprise a pro-market
approach to telecommunications, since they foster competition in an
otherwise monopolistic industry. They also argue that conservatives
should support the FCC's delegation of decision-making to the
states, since it is consistent with notions of federalism. They are
wrong on both counts:
fostering real competition, the rules undercut it. The UNE rules
encourage a second-best sort of competition: competition is only
among firms sharing the same infrastructure at artificially low
rates ordered by regulators. The benefits to consumers are limited.
Not only are competitors not truly independent, but the market is
dependent on, and pervasively controlled by, the rules set by
government. We can do better. True competition among firms using
their own facilities is possible, and in fact exists. One need look
no farther than wireless phones or Internet telephony services to
see this at work.
The UNE rules discourage such real competition by encouraging
potential rivals to focus on renting facilities, rather than
building their own. As harmful, they discourage incumbent telephone
companies from investing in their networks, since any benefits
would be shared with their rivals.
not require a patchwork, state-by-state, approach to rulemaking.
Telecommunications service is a key part of interstate commerce.
Its impact goes beyond state lines, and decisions made in any one
state tend to have effects outside its borders. This does not mean
that states should not have a leading role in many areas of
telecommunications. The line between state and federal authority is
not an easy one to draw. In this case, given the interstate
importance of competition and investment in telecom networks,
federal decision-making is justified and appropriate.
The upcoming court
decision may determine, to a large degree, the next step in this
long-running telecommunications drama. The court may require
specific deregulatory steps by the FCC. Even if it does not, the
FCC should review its UNE rules, and substantially reduce their
scope. At a maximum, network access to competitors should be
required only for those elements where the marketplace has
demonstrable natural monopoly characteristics. Going further, given
the growth of wireless and Internet telephony, even those minimal
requirements should be re-examined.
Gattuso is Research Fellow in Regulatory Policy in the Thomas
A. Roe Institute for Economic Policy Studies at The Heritage