April 27, 2005, 7:56 a.m.
High-Tech Federalism
The role of state regulators in a telecommunications age.

By Gov. John Engler, C. Boyden Gray, & Kenneth Starr

When the House Energy and Commerce Committee meets today to hear testimony from state public-utility regulators, the last of five hearings on the future of telecommunications, one question — whether asked or not — will hang in the air: In the competitive new world of converging voice, video, and data technologies, is there a constructive role for the states and their regulators?

The old telephone system was perfectly suited to state oversight. Networks were really assemblies of local exchanges tied together by long-distance lines. So a call from New York City to, say, Albany was routed through the boroughs, to wires that ran up the Hudson and into Albany's local exchange area, never leaving New York State. It traveled the route determined by the natural monopoly of New York Bell. It only made sense that it traveled under the watchful, protective-of-the-consumer eye of the state public-utility commission.

With every day that passes, that system becomes more completely a relic of the past. New fiber networks break digital signals into packets, shoot the packets in every direction, not stopping at state boundaries, only to reassemble them miraculously at the caller or reader or viewer's receiving device. Meanwhile, cable companies vie for our Internet accounts, phone companies for our TV and video business, and satellite and wireless companies for the whole package, in an often bewildering technological competition. We now make phone calls over cable wire, hear radio broadcasts over the Internet, watch television on wireless phones. Companies fight to get a step ahead of one another.

But companies are not the only ones struggling for market share. As Commissioner Susan Kennedy of the California Public Utility Commission said last year, "The primal instinct of most regulators is to preserve their jurisdiction, and the pull of that instinct is so strong that it often acts like blinders — impeding their ability to see anything that is off the path of achieving that goal." Kennedy was arguing for regulators to take a deep breath and ask themselves, what am I doing here anyway?

The answer is that they have a role — but not the old role.

We all know what happens when regulators try to apply antiquated rules to emerging technologies. Too often, rather than serving the needs of consumers, they become a tool of industries seeking advantage over competitors. Cable companies, for example, want telecom companies to jump through endless regulatory hoops before offering video services over their high-speed fiber networks. But does it advance competition to require telecom firms to assemble thousands of new specialized franchise agreements — in addition to the agreements they already hold to operate their networks — before going ahead with video service?

Here are a few questions that members of Congress could ask state regulators in today's hearing:

Should states create a regulatory environment that empowers consumers to choose between and among service providers and technological platforms?

How can states balance access to mandated services, such as, for example, 911 services, against the need not to erect an entry barrier against emerging technologies?

Should states treat like services in like ways, to open the door for more service providers to compete on equal regulatory terms?

Should states take a hands-off approach to new technologies, to create an incentive for their development and deployment?

Should states allow those who make the right bets on technology to profit from the risks they take, and refrain from shielding losers from their losses?

Is it better to allow free entry, exit, pricing, and product flexibility in the telecom market — or is the consumer better served when regulators require advance approvals?

Some legislatures and regulators have shown how forward-looking state policymakers can think anew. Several years ago, Michigan, for example, enacted legislation standardizing costs imposed by localities for rights of way. The purpose was to prevent local governments from making unreasonable demands on telecommunications carriers seeking to install new facilities, using the threat of construction delays to force unwarranted concessions. State authorities also know that they need to continue protecting against fraud and anti-competitive practices and to hear and resolve grievances.

So, yes, there is role for vibrant federalism in the new telecom world. But it is a very different role than before. The old natural monopoly required economic oversight from guardians of the public interest. Today regulators need a keen eye for government-imposed barriers that can be swept away, so that technology and competition can bring consumers the ever greater wonders of the telecommunications revolution. Lowering regulatory barriers to investment and competition is not an abandonment of the states' role, but a leadership strategy that will benefit everyone.

— John Engler was the governor of Michigan (1991-2003) and is president of the National Association of Manufacturers. C. Boyden Gray was the counselor to the president's task force on regulatory relief (1981-1989) and is chairman of Citizens for a Sound Economy. Kenneth Starr is the dean of the Pepperdine Law School.

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