For the third time in eight years, federal regulations governing competition in local calling have been struck down as unlawful. The ruling issued Tuesday is a victory in terms of both marketplace practicalities and constitutional principles.
At issue in the case were thousands of pages of rules devised by the Federal Communications Commission (FCC) that force major wire-line companies such as Verizon, BellSouth, SBC, and Qwest to allow rivals to use their networks at regulated rates. Such forced access was conceived by Congress as a fallback method for new entrants to gain market share in local calling services.
Twice before, the rules put forth by the FCC were judged to be wholly arbitrary and well beyond the scope envisioned by lawmakers. The third incarnation, issued in October, was likewise ruled unacceptable by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit. In its ruling, the panel chided the FCC for “irrationality,” in part, and “embarrassing” legal reasoning, in part. And underscoring their displeasure, the judges set an unusual 60-day deadline for a rewrite of the regulations.
“This deadline is appropriate,” the ruling states, “in light of the Commission’s failure, after eight years, to develop lawful…rules, and its apparent unwillingness to adhere to prior judicial rulings.”
The costs of the commission’s intransigence are incalculable. Years of regulatory uncertainty and flawed policy have stifled the telecom industry, robbing consumers of new products and services and the economy of jobs and investment.
The latest version of the regulations actually delegated to states the authority to determine under what conditions rivals would enjoy subsidized access to the incumbent networks–the result of which would have been 50 different sets of regulations for technologies designed precisely to overcome geographic boundaries.
On this regulatory “punt” to the states the court was unambiguous: “The Commission’s position is based on a fundamental misreading of the relevant case law,” the ruling states. Moreover, the commission “made no visible effort” to determine whether forced access is, in fact, justified nationwide. On this issue, the court characterized the FCC’s findings as “vague almost to the point of being empty.”
For all their constitutional failings, the regulations do have the enthusiastic backing of companies that benefit from the network access subsidies. In response to yesterday’s ruling, for example, AT&T General Counsel Jim Cicconi warned that the court has jeopardized “the right of all Americans to choose their local telephone service.” It is a claim that undoubtedly will be repeated often in coming days.
In fact, the forced-access regime has actually restricted telecom competition and thus curtailed consumer choice. With access rates set artificially low, rivals have had no incentive to invest in independent facilities. Thus, most of the service billed by competitors is actually provided by incumbent networks.
A study of wire-line service in Michigan by the Mackinac Center for Public Policy found that 89 percent of the local wire lines billed by competitors in 2002 actually were serviced in whole or in part by an incumbent network, up from 62 percent in 1999. Meanwhile, there has been a corresponding decline in the proportion of lines served by independent facilities. Competitors utilized their own facilities to service a mere 10 percent of their customers in 2002, down from 29 percent in 1999.
Moreover, faced with the prospect of having to “share” their facilities, many incumbents have sharply curtailed capital investment that otherwise would produce new products and services. And to the extent that capital expenditures have been restricted, the entire chain of technology supply has been rattled, including software firms, chipmakers, and fiber-optic manufacturers.
Simply put, the forced access regime has failed to achieve its most basic policy objectives.
To its credit, the FCC declined to require subsidized access to broadband facilities, recognizing that to do so would jeopardize investment in deployment. The appeals court upheld this aspect of the commission’s rules, citing the vigorous competition among various broadband providers.
Indeed, given the range of product and service options, it is a tough to justify forced access under any circumstances. Some 90 percent of the U.S. population lives in areas served by at least three wireless carriers, while cable firms and Internet Service Providers increasingly are adding telephone service to their offerings. Cable telephony serves 33 million subscribers, an increase of 33 percent since 2001. And although voice-over-Internet currently accounts for only about 3 percent of calls worldwide, its revenues are projected to grow from $2.2 billion in 2001 to $160 billion by 2007.
It is ironic that the Telecommunications Act of 1996, the statute that gave rise to the forced access regime, was intended as an instrument of regulatory reform. In a major departure from six decades of state and federal policy, Congress rightfully sought to end the monopoly franchise system in local calling. Unfortunately, lawmakers presumed that government could create a competitive market through regulation. But as yesterday’s appeals-court ruling demonstrates yet again, it was a conceit that doomed their good intentions.
–Diane Katz is director of science, environment, and technology policy for the Mackinac Center for Public Policy, a Michigan-based research and education institute.