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Forget Federalism
Deregulate the phones.


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If forced to choose, most of us would now surrender our wireline phone before we’d give up our wireless phone, e-mail, and high-speed web connections. Things were quite different six years ago, when Congress passed the 1996 Telecommunications Act — back then, ordinary, local and long-distance wired voice calls still generated 90 percent of the telecom industry’s total revenues, with wireless and data evenly splitting the rest. Today, the numbers are about 40-30-30; in five years, they’ll be 20-40-40.

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This profound shift in the structure of telecom markets now threatens to topple century-old regulatory bureaucracies. But the regulators are fighting back. And standing on opposite sides at the center of the controversy are two Republican commissioners appointed to the Federal Communications Commission by President Bush.

Michael Powell, the FCC’s chairman (and son of the secretary of state) is ready to assert federal authority to force state regulators to back off in step with the feds themselves. Kevin Martin, his colleague down the hall, says he favors a slower, “more granular” approach, under which the FCC would trim its own mandates, but leave state commissions free to go on regulating as much as they please. With the Republicans on the five-member commission divided, the two Democratic appointees hold the balance of power. Which will mean maintaining the regulatory status quo, at best, or quite possibly piling still more regulation on to an industry that’s already badly over-regulated.

The new telecom media have emerged so fast in the last decade because the technology came of age, and because regulators stepped — or were pushed — out of its way. In the 1970s, the FCC fully deregulated dial-up “information services” — everything we now think of as low-speed web — and told state regulators they couldn’t touch this turf either. The FCC never did regulate the prices of wireless phone service, and in 1993, Congress told state regulators they couldn’t either. The rise of cable — which now provides about two-thirds of high-speed data connections to homes — can be traced back to FCC regulations and federal laws enacted in 1984 and 1996, which sharply curtailed state power to regulate rates; last year, the FCC took the next step and preempted state regulation of cable-modem service altogether. A similar, preemptive plan is in the works for the DSL services offered by telephone companies.

Until 1996, however, state telecom regulators held fast to the oldest and biggest piece of the regulatory action — local phone service. Then Congress passed sweeping new telecom legislation which was supposed to finish the job of getting competition into every telecom market, and regulators out.

In a nutshell, the idea was to add a new layer of wholesale regulation to local phone service, which would facilitate competitive entry; that would then set the stage for deregulating local markets entirely. The law’s cheery beginnings soon gave way to the dismal reality of the Clinton Administration’s regulate-everything FCC. But competition from wireless, cable and (for large businesses) new fiber-optic lines advanced nevertheless. And in two major rulings, the Supreme Court and then a federal appellate court ordered the Commission to get on with stage two of the 1996 master plan, which was to dismantle the wholesale regulatory scheme bit by bit, as competition took hold.

That’s what Powell now wants to do — and what many state regulators vehemently oppose. For six years they’ve been busier than ever, and they like their work. They have continued to administer all the old rules that regulate what Verizon or SBC can charge retail customers like your great-aunt Gwendolyn; they’ve also played a major role in implementing the new wholesale regulations that determine what these local carriers can charge AT&T, WorldCom, Sprint, and hundreds of other competitive carriers. In running the gargantuan machinery of wholesale regulation, state regulators set thousands of prices for “unbundled network elements,” and that provides endless opportunity to jigger things to give to people they like, and take from people they don’t.

The party is now coming to an end, however, or at least it will, step by step, if Powell gets his way. What the feds gave state commissions in new regulatory authority during the Clinton administration, Powell is now planning to take away.

Few state regulators, however, are eager to join Powell in working themselves out of a job. State utility commissions have their own national association, which has lobbied tirelessly to have state commissions take control of the rules that Powell would repeal. California and New York have announced that they won’t feel bound by any federal regulatory rollback, regardless. If he gets his way, Michael Powell will tell them all that a federal mandate to deregulate in 2003 is as mandatory as the requirement to regulate was back in 1996, when a Clinton appointee was running the FCC, and the courts will back him up in the end. But Kevin Martin seems ready to join the two Democrats on the commission and leave it to state regulators to pick up where Al Gore’s protégés at the commission left off. Some state commissions are already forging ahead. California regulators, for example, are preparing to vote on a telecom “bill of rights” — 50 pages of dense regulations that will cover all carriers in the state, including wireless.

For much of the last century, Washington regulated railways, trucks, and airlines; when deregulators finally gained the upper hand, they passed federal laws that preempted reactionary state regulators, too. Most conservatives are federalists, and reflexively oppose made-in-Washington solutions because experience teaches that they generally don’t work. But regulatory swamps created in Washington have to be drained there too. The federalists lost the fight for a “more granular” approach to telecom regulation in 1996. They shouldn’t want to win it now.

Peter Huber is a senior fellow of the Manhattan Institute and coauthor of Federal Telecommunications Law. He is also a partner in a Washington, D.C. firm that represents numerous telecom clients, including several Bell companies.



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