A REVOLUTION THAT HAS YET TO OCCUR:
Why Deregulation Is The Only Solution For A Telecom Industry In Crisis

By RANDOLPH J. MAY

Thursday, Oct. 03, 2002

Our nation's telecommunications industry is in crisis. In the past two years, over 60 telecom companies have filed for bankruptcy. And since 2000, telecom capital expenditures have plummeted from $100 billion to $50 million - with the drop in investment causing cellphone "deadzones" in some areas, according to the Wall Street Journal. Meanwhile, over half a million jobs have been lost to industry layoffs.

The Federal Communications Commission finally has promised to consider action by the end of the year. The solution it should settle upon is deregulation.

To be sure, the dramatic industry downturn - and especially the precipitous drop in the stock prices of even industry stalwarts - is to some extent attributable to the country's loss of the "irrational exuberance" that pumped up stock prices not only for dotcoms, but for telecom sector as well. And the recently disclosed accounting shenanigans at companies like WorldCom haven't helped either.

The History of Telecom Regulation, and the Promise of Revolution

For most of the last century, communications services were provided in a largely monopolistic environment--think Ma Bell--and thus were rightly subjected to traditional public utility regulation. That meant that telephone companies' rates were regulated, and their services were required to be provided on a non-discriminatory basis. The original Communications Act was passed in 1934, in the era of communications monopolies.

By the time Congress enacted the 1996 Telecommunications Act, however, it faced a radically different environment - one that was much less monopolistic. In the face of rapid technological changes, competition had been taking root for over a decade in all segments of the communications marketplace. And traditional distinctions used for regulatory purposes - such as the distinctions between voice, data, and video services - were breaking down as well.

Thus, it was not surprising that Congress declared the new, 1996 act was intended to be "pro-competitive and deregulatory," in order to accelerate private sector deployment of advanced networks. Indeed, at the February 1996 signing ceremony, Bill Clinton pronounced the act "truly revolutionary legislation," proclaiming that "with the stroke of a pen, our laws will catch up with the future."

In the same vein, in 1998, Michael Powell - then an FCC commissioner, and now Chairman (and thus agenda-setter) of the five-member agency - wrote in an essay that "[w]e are in the throes of a revolution."

Powell added that the 1996 Act "seeks to change forever the legal and regulatory structure that governs the communications industry as we know it." Pointing to the rapid technology-driven marketplace changes already occurring, Powell also warned that "[p]olicymakers...are fast approaching moments of truth."

The Revolution Has Yet to Come: Overregulation Dogs the Industry

Well, the revolution has yet to occur, and the moments of truth, if they have come, so far have not been heeded.

Post-1996, the FCC pretty much has continued to regulate under the traditional public utility model. That is, it has regulated an increasingly competitive industry as if it were a highly monopolistic one - leading to some very harmful results.

Indeed, the prices are so low that neither incumbents nor new entrants now have sufficient incentives to invest in new facilities. If the incumbents invest, they have to share the new network facilities with rivals. And why would the rivals invest, when they can just free-ride on the incumbents' networks? The commission's policies encouraged new entrants to rely on resale of the incumbents' facilities, rather than building their own.

Why the Supreme Court and the D.C. Circuit Court of Appeals Intervened

The Supreme Court recognized the agency's rules were inconsistent with the act's purposes. In 1999, in AT&T v. Iowa Utilities Board, the Court held unlawful the FCC's first set of network sharing rules. The Court found fault with them on the ground that they improperly gave the CLECs "blanket access" to the incumbents' networks.

In a concurring opinion, Justice Stephen Breyer explained: "It is in the unshared, not the shared, portions of the enterprise that meaningful competition would likely emerge. Rules that force firms to share every resource or element of a business would create not competition, but pervasive regulation...."

In other words, Breyer suggested, the idea of the 1996 Act was to create not merely competitors who could enter the market, but sustainable competition between incumbents and their new rivals.

The agency then revised its rules - but did not do so sufficiently, and again the judiciary intervened. This past May, in United States Telecom Association v. FCC, the U.S. Court of Appeals for the D.C. Circuit again remanded the agency's rules for another round of revisions.

The rules still required excessive network sharing by the incumbents, the court held. The court reasoned that, as a result, under the agency's regulations "the incentive to invest plainly declines" for incumbents and CLECs alike.

The FCC's Second Chance to Revise Its Rules Should Lead to Deep Changes

Now the FCC must try yet again to fashion lawful network sharing rules. It has already received reams of public comment. Among those commenting was a coalition of trade associations representing the computer, telecommunications equipment, semiconductor, consumer electronic, software, and manufacturing sectors.

By acting promptly to reduce the current regulatory requirements, the FCC could spur investment in new facilities. That new investment would, in turn, lead to more consumer choice and sustainable competition. It could also jump-start a telecom sector turnaround that would have positive repercussions not only for the industry, but also for the economy as a whole.

As 2002 draws to a close, the "moments of truth" Chairman Powell referred to in 1998 are long overdue. It's high time for the FCC finally to bring its actions more in line with the deregulatory thrust of the 1996 Act.


Randolph J. May is a Senior Fellow and Director of Communications Policy Studies at The Progress & Freedom Foundation, Washington, DC. The views expressed are his own.

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