Politics & Policy

Three Strikes For The Fcc

Government regulation stifles the telecom industry.

By ordering the Federal Communications Commission (FCC) to toss out its Byzantine rulebook for micromanaging the telecom sector, the U.S. Court of Appeals has handed the Bush administration a golden opportunity to shuck eight years of chaos created by the Clinton-Gore FCC and put a vital American industry on the road to recovery. The court concluded–for the third time–that the FCC’s rules requiring local telephone companies (“Baby Bells”) to open their networks at government-set giveaway prices are unlawful and sent the Commission back to the drawing board.

The FCC has 60 days to act, but the clock is ticking. Any effort to circumvent the court’s ruling through another fruitless appeal to the Supreme Court would only extend the telecom crisis and leave in place the remnants of the Clinton-Gore FCC’s unlawful regulatory regime.

How did we get here? The Telecommunications Act of 1996 was the product of an unusual consensus on Capitol Hill. Intended to foster competition in the local telephone market, the act was heralded as a triumph in Washington and on Wall Street. It requires Baby Bells to “un-bundle” their equipment so that competitors can offer phone service without having to build an entire network overnight. It was thought that competition would bring a new generation of telecom products and services to market, all at a lower cost to consumers. Yet, under the Clinton-Gore administration, the FCC got an inch and ran a mile–in the wrong direction. The commission has been bent on forcing the Bells to un-bundle everything–right down to the electrician’s box on the outside wall of a house–and make it available to would-be competitors at below-market prices. In effect, the FCC has taken an act that was supposed to encourage competition and made it into a modern-day land-grab.

The FCC has met resistance from the courts at every turn, initiating a costly tug-of-war that has devastated the telecom sector. While the FCC fiddled in the courts, the market capitalization of the telecommunications and equipment manufacturing sectors shrank by some $2 trillion, overall investment by wireline telecommunications carriers declined by more than $60 billion, and more than 900,000 jobs were lost in the telecommunications and information industries. The FCC’s rules aren’t just unlawful–they’re a poison pill for our economy.

The unfairness of the FCC’s unbundling policies are troubling enough–in some cases forcing the “incumbent” company to operate at or near a loss on local phone service. Worse are FCC rules that stifle innovation. After all, what is to gain by encouraging new market entrants to piggyback on the Bells’ innovations, all in hopes of getting in at the ridiculous below-cost rates imposed on the Bells by the FCC? This disincentive, mandated by the FCC, largely explains the telecom sector’s drop in investment and jobs–not quite what Congress intended back in 1996. And it need not be this way in 2004: If the FCC would simply pass rules that encourage all telephone companies–Bells and new entrants alike–to invest in new infrastructure, then investment and jobs will necessarily follow.

The appellate court’s ruling shows the way. It upheld the Commission’s rules wherever the FCC decided not to require unbundling. For example, with respect to new broadband technologies, the court observed that the “[a]bsence of unbundling . . . will give all parties an incentive to take a shot at this potentially lucrative market.” Now the FCC should apply this common-sense approach to the rest of the market and impose unbundling only where it is truly necessary to promote competition and prevent monopolistic behavior. After all, as the court held, the purpose of the law “is not to provide the widest possible unbundling, or to guarantee competitors access to [Bell-company] network elements at the lowest price that government may lawfully mandate. Rather, its purpose is to stimulate competition–preferably genuine . . . competition.”

Some on the FCC are threatening to appeal this ruling. That would be a mistake. With the telecom industry bleeding jobs, it’s time the administration told the FCC: Three strikes and you’re out.

Jay Lefkowitz is the former head of the White House Domestic Policy Council. John O’Quinn is a former law clerk to Justice Antonin Scalia.

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