Politics & Policy

Dynamic Deregulation

The FCC should stop hindering the telecom industry.

If a telephone installer told you there would be an eight-year wait before you would be connected, you’d likely seek a different phone service. And in today’s world, you could find several. Yet the Federal Communications Commission has failed in every attempt over the last eight years to issue telephone-competition rules that pass judicial muster. The regulations have been rejected each time, deemed overly regulatory and thus in violation of the landmark Telecommunications Act of 1996.

Now, in response to the most recent judicial reversal, the FCC is yet again scheduled to vote (on December 15) on the rules governing the extent to which incumbent telephone companies must share their facilities with competitors. The word emanating from the commission is that the agency will not abandon what I have called “static regulated competition.” In this vision, the FCC assumes a monopoly environment where none exists.

Telephone customers today receive numerous pitches offering phone alternatives from traditional wire-line providers, wireless companies, and cable companies and voice-over internet protocol (VoIP) providers. In this fast-changing technological and marketplace environment, the FCC should embrace a market-oriented vision–what I call “dynamic deregulation.”

The commission’s overly expansive network-sharing mandates, which require incumbents to share virtually their entire local network with competitors at below-market rates, have substantial adverse effects on the national economy. Because it is less costly for many new entrants to demand access the incumbents’ networks than it is to build new facilities, these competitors don’t invest in new networks. Likewise, incumbents are deterred from investing in new facilities because they know they must turn around and share these facilities with competitors at below-market rates.

According to an October 2004 study released by the Chamber of Commerce, between March 2000 and July 2004 investment in the telecommunications-services industry fell from $1.1 billion to $375 billion, a decline of 67 percent. From March 2001 to May 2004, the telecom-services industry lost 380,000 jobs. The same report estimates that reform of the FCC’s rules could generate $58 billion in new capital investment and add $167 billion in GDP growth over the next five years.

The current regime based on regulatory arbitrage no longer makes sense in a world in which more and more of us are using the airwaves and high-speed Internet connections to make low-cost voice calls. The Yankee Group, a leading telecom-analysis firm, predicts that by the end of 2006 customers in more than half of all cable households will also be offered phone service. The same firm reports that by the end of 2002, average household cell-phone minutes used already surpassed the average per-person household wire-line minutes used. The FCC itself estimates that 6 percent of homes have cut their phone wires and now rely only on wireless service. IDC, another market-analysis firm, predicts that by 2007 the number of wireless-only households could reach 10 percent. Moreover, the Telecommunications Industry Association reports that at the end of 2003 there already were about 4 million VoIP lines, with the number expected to surpass 19 million by the end of 2007.

In anticipation of the FCC’s forthcoming action, there are several benchmarks the FCC should meet for its regulations to be considered deregulatory. It must finish the commendable job it started last year and completely free new broadband facilities from network-sharing obligations. Local telephone switching equipment and high-capacity facilities, which can generally be supplied economically on a competitive basis, should be removed promptly from the network-sharing requirements. Finally, in light of the tenacity shown throughout the history of the sharing regime by those competitors who benefit from below-market pricing, the commission should give detailed directions to ensure that relaxation of the sharing requirements is implemented promptly.

Continuing overly expansive network-sharing rules will inhibit new investment by both incumbent and existing telecom providers and slow the further development of long-term sustainable competition. It will harm the nation’s economy and all consumers who would benefit from new investment and facilities-based competition. And given the previous record of judicial reversals resulting from the FCC’s refusal to pare back its regulations, continuing to refuse would show a measure of disrespect for the rule of law.

Everyday now, American residential and business consumers are subscribing to new wireless, cable, and Internet telephone services in increasing numbers. It’s past time for the FCC to adopt a vision of dynamic deregulation that squares with today’s marketplace realities.

Randolph J. May is senior fellow and director of communications-policy studies at the Progress & Freedom Foundation in Washington, D.C. The views expressed are his own.

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