In a
speech before the National Cable Television Association on June 15,
1999, Federal Communications Commission Chairman William Kennard
called for the creation of "a national, competitive, deregulatory
telecommunications policy" to bring the promise of broadband
communications networks and services "to all Americans wherever
they live." "Broadband
telecommunications"--the technology and services that will enhance
access to the Internet and other high-speed telecommunications
networks--is, without doubt, the hottest phrase in the
communications lexicon today. The evolving broadband industry
promises to revolutionize communications by offering Americans
greater online capabilities and higher quality at reasonable
prices.
Regrettably, however, the broadband debate
has become extremely contentious, as a cacophony of contradictory
proposals from corporate leaders, policymakers, regulators, and
industry-watchers compete for the government's attention. The
Federal Communications Commission (FCC), through lengthy
proceedings, voluminous filings, a multitude of conferences, and a
myriad of publications, is considering this issue, and within the
past few months, several legislators have introduced bills in
Congress to address what is increasingly perceived as a crisis in
the telecommunications industry.
Indeed, Peter Huber, a Senior Fellow at
the Manhattan Institute for Policy Research, estimates that "Demand
for digital bandwidth is increasing at annual rates ranging from 50
percent to 200 percent." Moreover, "[b]y
every plausible projection, it will continue growing at those rates
for the foreseeable future. It will increase at least five-fold
over the next few years." Huber also
notes:
If
demand is going to grow five-fold--and it is--then network
capacities will have to increase as much. But the existing phone,
cable, broadcast, wireless, and satellite networks still rely, in
significant part, on yesterday's analog technology, and they are
already stretched to capacity. Systems deployed a decade ago cannot
begin to accommodate five-fold increases in traffic. So new
networks must be built.... Which means, in turn, that 80 percent or
more of the wires, trunks, cables, transmitters, receivers,
switches, and routers that we will be using for digital transport
five years from now will be built and put into commission between
now and then. Nobody owns them yet. Hardware manufacturers have to
build them. Phone, cable, broadcast, wireless, and satellite
companies have to deploy them...for as long as demand continues to
grow at these explosive rates.
Clearly, it is important that broadband
communications capabilities are developed and deployed on an
expedited basis. But how Congress legislates will have an impact on
the process. Currently, for example, Congress is considering five
bills that take various approaches to regulating this industry. In
a companion paper, "Broadband Telecommunications in the 21st
Century: A Legislative Report Card," these bills are compared using
four industry-specific criteria. But before enacting
new legislation to reform the telecommunications industry, Congress
should decide what principles and economic incentives should govern
broadband policymaking for the next century to ensure rapid
innovation and widespread deployment of new services.
A
model can be found in the "hands-off" approach the government took
with the computer industry that encouraged, rather than restricted,
its development over the past two decades. Legal governance of the
computer industry followed simple, uniform, time-tested, and
market-oriented standards--such as strict contract enforcement,
patent and trademark protection, property rights, voluntary
common-law resolution of disputes, voluntary standard-setting, and
free and open national markets for its goods and services. Five
overriding principles behind this approach should be applied in any
forthcoming legislation to reform the broadband telecommunications
industry.
Specifically, to ensure that Americans
have adequate and reliable broadband technologies and services in
the future, a new federal policy must promote:
-
Deregulation and open
markets.
New forms of regulation or ways to manage markets only impede
development of technologies and services. Policymakers must resist
the temptation to micromanage every facet of this complex new
industry and, instead, allow voluntary-market decisionmaking to
govern its development.
-
Legal simplicity and
stability.
Today's complex, contradictory, and changing regulatory regimes
inhibit innovation and investment in the telecommunications sector.
Current standards should be re-evaluated, updated, and
simplified.
-
Regulatory parity and
uniformity.
In the current market, the same rules are not applied to all.
Congress should ensure all companies in the industry are regulated
equally. Archaic regulatory distinctions must be dropped.
-
A single open market system.
Consumers must be free to purchase the services they want from any
national provider without encountering conflicting state or local
mandates. State and local regulations that interfere with
interstate communications commerce must be prohibited.
-
Agency constraint and
downsizing.
Regulatory reform alone will not solve Washington's propensity to
expand agency missions and funding. A deregulated
telecommunications market should also be free of constant federal
micromanagement. Regulatory interference should be intentionally
restricted to allow the unfettered and dynamic development of this
new industry.
Continuing a hopelessly convoluted and
ever-changing system of regulatory policies will not promote the
development and deployment of broadband. A better approach must be
based on these sound, market-oriented, and proven principles.
UNDERSTANDING THE BROADBAND MARKET
Broadband, or advanced telecommunications
services, are perhaps best understood as something other than the
"plain old telephone service" (or, as many industry-watchers call
it, "POTS") most Americans currently use. Congress defined
"advanced telecommunications capability" in Section 706(c)(1) of
the Telecommunications Act of 1996 as the "high-speed, switched,
broadband telecommunications capability that enables users to
originate and receive high-quality voice, data, graphics, and video
telecommunications using any technology."
To
distinguish advanced communications technologies and services from
the older forms of telephony, many industry observers call the new
broadband offerings "PANS," or "pretty amazing new stuff." It is an
accurate description, because what really distinguishes the old and
new communications technologies is the latter's almost unlimited
potential to expand the capacity and capabilities of the
communication infrastructure to satisfy the present, seemingly
insatiable demand for greater and better access.
At
the heart of the current effort to promote the deployment of
broadband services and technologies is the realization that
yesterday's communications system cannot meet today's demand.
America's communications infrastructure remains heavily dependent
on copper wires and analog transmission methods used to complete a
simple two-way telephone call. But in the digital age of faxes,
high-speed modems, data and satellite communications, Personal
Communications Services (PCS), and Internet-based telephony and
commerce, this analog system is quickly becoming a technological
relic.
Almost every commercial sector in America
relies on advanced telecommunications technologies, especially the
Internet. Whether it is automobiles or agriculture, computers or
consumer electronics, electricity or nuclear power, pharmaceuticals
or medical care, maritime or trucking, financial or travel
services--industries depend on sophisticated communications to
remain competitive in an increasingly global economy. Moreover,
Americans of any background are accustomed to communications
technologies that help them communicate, work, shop, and enjoy
their hobbies efficiently.
In
short, America--once an agrarian and then an industrial society--is
now a communications society in "the Information Age." Broadband services
are the oil, steel, electricity, and automobiles of modern times.
Broadband technology is no less significant to Americans today than
those developments were in their day.
Communications and computing firms are
taking impressive steps to roll out new services or upgrade
existing systems to satisfy consumers' demands for access and
capabilities. Fiber optic lines, extensive terrestrial wireless
networks, space-bound satellite networks, and digital upgrades to
older analog networks are currently being deployed to meet those
needs.
|
AMERICANS PLUG IN AND POWER UP A NEW MARKET
On June 24, 1999, various industry officials testified before
the House Commerce Committee's Subcommittee on Telecommunications,
Trade and Consumer Protection about the growth of e-commerce and
telecommunications:
"A few short years ago, the Internet was something that only
serious researchers and computer jockeys knew about. Electronic
commerce was not part of our vocabulary. In 1995, revenues
generated by the Internet were a mere $5 billion. Since then, the
growth of the Internet has been astounding, far outstripping the
predictions of most experts. Last year, Internet revenues rose to
an astronomical $301 billion."1
- Thomas Tauke, Senior Vice
President of Government Relations, Bell Atlantic
Corporation
"The Internet today features over 42
million domains…containing in excess of 830 million pages of
web content. To put things in perspective, it is useful to
benchmark these statistics against 1996, the year that the
Telecommunication Act was signed. In that year, the Internet
contained an estimated 240,000 domains, and roughly 72 million web
pages. Such growth can only be described as explosive. Nor is it
slowing. Inc. Magazine recently estimated that 17 new web pages
appear on the World Wide Web every second."2
- Howard A. Lenox, Director of
Federal Relations and Technology Issues, SBC
Telecommunications
"More than half of American households-a total of 53 million-now
own PCs. And about one-third…have access to the Internet.
Every month, nearly 1.5 millions Americans join the online world
for the first time, bringing the percentage of the US population
online from nearly zero in 1990 to over 30 percent today. Indeed,
the number of online households in the United States grew by a
factor of eight between 1994 and 1998. In five years, nearly 60
percent of Americans are expected to be online. This same rapid
growth path can be seen throughout the world, where the number of
online users is expected to reach 250 million by the year 2002. As
one would expect from all of these users online, traffic on the
Internet is doubling every 100 days and analysts are predicting
that by 2002 consumers will spend nearly $43 billion a year online,
compared to $8 billion last year."3
- George
Vradenburg, Senior Vice President of Global and Strategic Policy,
America Online
-
Thomas
Tauke, testimony before the Subcommittee on Telecommunications,
Trade and Consumer Protection, Committee on Commerce, U.S. House of
Representatives, 106th Cong., June 24, 1999.
-
Howard A.
Lenox, testimony before the Subcommittee on Telecommunications,
Trade and Consumer Protection, Committee on Commerce, U.S. House of
Representatives, 106th Cong., June 24, 1999.
-
George
Vradenburg, testimony before the Subcommittee on
Telecommunications, Trade and Consumer Protection, Committee on
Commerce, U.S. House of Representatives, 106th Cong., June 24,
1999.
|
Impressive as these efforts are, however,
they have not satisfied the stunning increase in demand for
communications services. And as Peter Huber testified before
Congress last March, the demand will only increase. By all
statistical measures, in fact, the numbers will likely continue to
exceed annual projections. A significant portion of this demand
results from the proliferation of online or interactive computing
services and activities, including electronic sales and commerce
(or "e-commerce"), telecommuting, teleconferencing, long-distance
learning programs, telemedicine, and the use of the Internet by
average Americans. As Wall Street Journal senior writer
George Anders recently observed in a story on e-commerce, "The
Internet economy is growing far faster than even the optimists
expected a year ago." (See textbox,
"Americans Plug In and Power Up a New Market.")
The
astounding growth in the numbers of Americans online has even
forced the U.S. Department of Commerce to begin tracking the
"emerging digital economy." In its recently
released report, The Emerging Digital Economy II, the
Commerce Department acknowledges the remarkable size of the
e-commerce and information technology (IT) market: "Between 1995
and 1998, [IT producers] contributed on average 35 percent of the
nation's real economic growth." And "By 2006,
almost half of the U.S. workforce will be employed by industries
that are either major producers or intensive users of information
technology products and services."
Despite the efforts of the communications
and computer sectors of the American economy to roll out advanced
services to meet the mounting demand, the market has been
restricted by various factors. Generally, broadband investment is
an expensive and risky undertaking, and serious regulatory
impediments exist that discourage investment. These market
deflators need to be studied before adequate reforms can be
drafted.
Expenses and Risks
Rolling out an advanced telecommunications
network is quite unlike most other business undertakings. Although
firms in other industries certainly hope that they will be able to
convert every consumer into a customer, it is not essential that
they do so to be successful. Winning the allegiance of a small
segment of the market or a certain niche of consumers is enough to
keep many businesses thriving.
New
telecommunications offerings work differently, especially for
network-based services. Rolling out new networks can be
prohibitively expensive, requiring a significant up-front financial
investment. Usually, companies seek assistance from external
sources or form strategic alliances with other companies. Unlike
offerings in other fields, new network services rarely can be
targeted to one segment of the economy. For a network to be
successful, it needs to be ubiquitous. Indeed, ubiquity is the key
to increasing value in the telecommunications field because the
value of a network is closely linked to the number of customers
using it. Communications
consumers expect to be given access to as many individuals or
organizations as possible through the network they use. Network
developers factor consumer expectation as well as the risks
involved in meeting those expectations into their business plans
and investment strategies. The failure to capture a significant
market share of consumers or subscribers can cause an entire
investment to turn sour. Success will depend largely on the ability
of the network to convince a diverse group of shareholders,
investors, and consumers that it will be comprehensive and
sophisticated at the same time it also is affordable and
reliable.
Thus, the stars have to be aligned
properly if firms are to have the motivation to deploy advanced
broadband networks and services. Still, investors and consumers
have been willing to gamble on such ambitious, albeit risky,
business ventures in the past. Certainly, with demand growing at
the pace Peter Huber predicts, more companies would be willing to
assume the potential risks of financing, building, and deploying
broadband communications networks.
Yet
only limited investment is currently taking place in this sector.
In fact, there is evidence that throughout the 1990s the industry
leaned toward disinvestment. Statistical research conducted
by Erik R. Olbeter, former director of the Advanced Telecom and
Information Program at the Economic Strategy Institute, supports
this finding. In testimony before the Senate Commerce Committee in
April 1998, Olbeter noted: "Current investment in broadband
networks is lagging behind current and projected demand.
Specifically, the local exchange carriers (LECs) lack the
technology to provide the next generation of broadband services and
network applications." At least from 1991
to 1996, investment by LECs generally declined or remained flat,
especially for investments in network modernization and
maintenance. Olbeter also noted
that the capital expenditures made by the LECs during this period
were limited primarily to the extension of existing networks rather
than the addition of advanced infrastructure.
Fortunately, since 1996, there has been a
slight improvement in net investment figures--suggesting that an
upturn in investment trends may be developing. Nonetheless, more
needs to be done to meet the rising demand for broadband services.
The question remains: What is driving network disinvestment over
this decade and discouraging new investments? The answer lies in
the legal incentives as well as disincentives governing the
telecommunications market.
Legal and Regulatory Impediments in the
Broadband Market
The
primary deterrent to increased broadband investment and deployment
is the heavy-handed, intrusive, meticulously detailed, and
ridiculously complex system of federal, state, and local laws and
regulations governing the telecommunications industry. Laws and
legal regimes have an important bearing on decisions made by
corporations, consumers, and investors in any given market. If
companies are to deploy the most advanced, highest quality,
affordable, and technologically feasible networks, they must
convince investors to lend them billions of dollars for research,
development, and deployment. If telecommunications firms and
potential investors fear that the legal environment is not
hospitable to their multibillion-dollar capital expenditure,
however, they will not invest in the project. Even if resources are
available to launch a new communications service or network, the
decision to invest in it might be delayed by the mere presence of
regulatory uncertainty.
In
large measure, this uncertainty contributes to the lack of
investment taking place in the broadband market today. Many legal
disincentives exist or have been proposed that discourage the
development and deployment of advanced broadband capabilities.
Although the following list is not comprehensive, it demonstrates
the regulatory disincentives to investment in and rollout of
broadband technologies:
- Restrictions on incumbent network
providers.
Incumbent local exchange carriers (ILECs)--which include Bell
South, Bell Atlantic, U.S. West, SBC, and Ameritech--face a variety
of unique restraints that hinder their ability to offer broadband
services to the public. The two primary types of regulations that
contribute to this problem are line-of-business restraints and the
forced access unbundling and mandatory discounted resale
requirements.
Line-of-business restraints have
been imposed on the so-called Baby Bells since the AT&T
divestiture in 1984. They prohibit the RBOCs from offering
services across long-distance (InterLATA) boundaries. Such
rules forbid extending broadband services to consumers based on
their geographic location. An important new study by Erik Olbeter
and Matt Robinson on behalf of the iAdvance Coalition shows
that
interLATA data regulations have slowed the
growth and diffusion of the high-speed Internet...backbone hubs.
Over 60 percent of metropolitan areas do not have access to these
hubs, and in rural areas they are virtually non-existent. If there
were no interLATA data regulation, we would expect there to be
twice as many backbone hubs in the country today.
Another factor that influences investment
in broadband is the FCC's implementation of Section 271 of the
Telecommunications Act. Under Section 271's forced access and
unbundling requirements, the Bell operating companies must open
their voice networks to their competitors so that competitors can
purchase unbundled network elements at a discounted resale rate.
Regulators determine the services that the Bell operating companies
must unbundle and the discounted price they must charge. The FCC is
considering applying these rules to data. Such regulations
indirectly discourage investment in broadband network services
because they adversely affect the potential return on investment
and encourage industry "free-riding" by rivals who would rather use
existing local network elements under a rent-control scheme than
risk capital building their own.
-
Threat of new "open access"
requirements on other sectors.
Forced access and discounted resale are potential threats to other
communications sectors and firms as well. Cable companies recently
have been the target of open-access proposals (primarily from local
regulators) that would require them to open their networks in a
similar fashion to their competitors. Some industry
experts even foresee the application of forced access mandates to
wireless or satellite-based networks. Such mandates discourage
competitive new forms of broadband network investment in these
industry sectors, since firms are less likely to make risky and
expensive investments when they do not expect a fair return.
-
Threat of merger prohibition,
restrictions, or conditions.
Federal, state, and local regulators subject every
telecommunications-related merger or acquisition to frequently
overlapping regulatory reviews. Often through crude forms of
regulatory extortion, they attempt to extract promises from the
firms in exchange for approval of the new alliance. For example,
the FCC recently approved a proposed merger between the two Baby
Bells, SBC and Ameritech, but only after imposing a variety of
regulatory conditions with billion-dollar fines attached for
noncompliance. One condition of that particular agreement will
force SBC-Ameritech to provide network access to rivals at a
discount rate of 32 percent or more. In addition, it will be
required to compete in at least 30 local telephone markets outside
its own service area and create separate operating subsidiaries to
deliver advanced high-speed services to consumers.
Such blatant industrial engineering
efforts by the FCC (and the Department of Justice) are imposed on
top of various state and local merger conditions, and
communications firms face this type of regulatory extortion in
every region they serve. Such merger conditions and the delays that
result increase their costs significantly and discourage
innovation, deployment, and entrepreneurialism.
-
Universal service requirements and
special concurrent regulatory obligations.
Other regulatory obligations can delay the introduction of
broadband services. For example, the current universal service
system and the hidden subsidies to administer the program can alter
price signals and discourage market entry or the rollout of new
services. More traditional "obligation to serve" requirements may
discourage companies from deploying services for fear that
regulators will force them to roll out the services to all
customers in a certain geographic area on the same timetable, no
matter how costly or inefficient it would be to do so.
-
Spectrum socialism.
Although often forgotten in the debate over broadband deployment,
terrestrial wireless technologies and space-based satellite systems
could radically transform the broadband market in America. If
regulators were to grant companies the spectrum and regulatory
freedom to offer wireless broadband service, they likely would
discover that it is more efficient and less costly to consumers
than wireline telephone or cable.
At present, wireless firms do not have
either the spectrum or the regulatory freedom to offer this
service. The FCC continues to claim that the spectrum, as a
socialized natural resource, cannot be privately owned. The legal
incentives at work in the wireless market, while improving through
auctions and limited spectrum flexibility, still discourage market
innovation by disallowing more creative forms of spectrum use. Further, recent
spectrum auctions forced firms to spend billions more than perhaps
was necessary to purchase spectrum from the government--leaving
less to invest in the broadband market in recent years. The primary
goal of spectrum auctions should not be to swell the federal
government's coffers, but to transfer publicly held spectrum
frequencies to the private sector in a way that is both efficient
and fair.
- General tax disincentives.
Telecommunications providers face a myriad of tax assessments that
deplete their economic resources to invest in new services. For
example, a unique federal excise tax was assessed on telephone
companies in 1898 to help fund the Spanish-American War; it has not
been repealed and still accounts for a 3 percent tax appearing on
ratepayers' telephone bills. Universal service
charges are also assessed to help pay for certain social programs
at the state and local levels. Like other public utilities,
telecommunications carriers must pay certain industry-specific fees
or assessments to state and local governments to administer
parochial social programs or pad their budgets. Coupled with the
general federal and state corporate taxes, these multiple layers of
taxation can constitute a significant disincentive to the
deployment of new services. This has led Progress and Freedom
Foundation president Jeffrey A. Eisenach to ask:
[I]n a world in which building out the
telecommunications infrastructure is policy goal Number One--why
would we place discriminatory taxes on telecommunications?... We're
talking about levels of taxation between 20 and 40 percent,
depending on the state and the locality...[and] about a level of
complexity that is just stunning. There are 38 different kinds of
taxes paid by telecommunications companies just in the telephone
business.... The tax structure...is not only too high, it's also
regressive. Virtually all of the taxes that we levy on
telecommunications providers are excise taxes or line taxes, line
charges, equivalent of poll taxes. And so they go directly against
our objective of making Internet access and the information
revolution available to people regardless of their income.
- General state and local
interference.
The FCC and Congress do not deserve all the blame for creating
perverse legal incentives in the market for telecommunications
services. State and local legislators and regulators impose a
volume of regulatory requirements that firms must tolerate as well.
For example, state bureaucrats regulate the rates many carriers
charge their customers and even tell carriers which customers they
must serve. Such requirements and restrictions often are built on
the edifice of existing federal law or regulation. Overlapping and
often contradictory regulatory policies skew investment decisions
by region and discourage the development of robust national markets
on a timely basis.
Countless regulatory requirements remain
on the books at every level of government. Understanding the
overall effect of this regulatory activity helps unlock the
broadband disinvestment riddle: Firms will not invest in new
technologies when the legal climate is inhospitable and void of a
potential for profit; and potential backers will not invest when
the technologies are overly burdened by heavy-handed
regulation.
WHY THE TELECOM ACT FAILED TO SOLVE THE
PROBLEMS
In
theory, the Telecommunications Act of 1996 should have solved the
broadband deployment crisis. In this statute, which is notable for
its stunning ambiguity, Congress made clear that deploying
broadband services on the most rapid timetable possible was in the
national interest. In Section 706(a), Congress established an
unambiguous broadband policy:
The
[FCC] and each State commission with regulatory jurisdiction over
telecommunications services shall encourage the deployment on a
reasonable and timely basis of advanced telecommunications
capability to all Americans (including, in particular, elementary
and secondary schools and classrooms) by utilizing, in a manner
consistent with the public interest, convenience, and necessity,
price cap regulation, regulatory forbearance, measures that promote
competition in the local telecommunications market, or other
regulating methods that remove barriers to infrastructure
investment.
Thus, Congress expressed its intent to
encourage the rollout of advanced broadband telecommunications
services. Unfortunately, it was much less clear about how this goal
should be accomplished. Beyond its general call for the use of
regulatory forbearance, the FCC and the states found no roadmap in
the Telecommunications Act on the steps needed to ensure that its
intent became reality. In essence, state and federal regulators
received carte blanche to make up their own plans for the
deployment of broadband services.
The
results are discouraging. Federal and state regulators are so
cautious as to be counterproductive. The few FCC actions on this
front are primarily pro-regulatory proposals that make the legal
environment even more convoluted. Worse, few actions have been
truly deregulatory in nature. Regulators refuse to
relinquish control of the industry and subject most decisions of
importance to the industry and consumers to layers of filings,
hearings, debates, conferences, rulemakings, court cases, and
appeals. As a result, only rarely are decisions made on a timely
basis.
This
should not be surprising. Regulators exist to regulate and
therefore, to justify their own existence, have a tendency (perhaps
even a desire) to perpetuate the system that causes so many of the
industry's problems. It is simply not in the best interest of
bureaucrats to remove regulatory obstacles to innovation if doing
so places their own jobs at risk and diminishes the scope of their
power. Rather, it is in their interest to create regulatory
theories or regimes that will provide them with a raison
d'être in the future. As J. Gregory Sidak of the American
Enterprise Institute and Daniel F. Spulber, professor of management
strategy at Northwestern University's Graduate School of
Management, explain:
How
should regulators approach the competitive transformation of
network industries? The temptation is to "manage" the competitive
transition to determine the outcome of competition. Thus,
paradoxically, deregulation often brings increased regulatory
intervention in the marketplace and correspondingly greater
administrative costs and market inefficiencies. The result is
neither fish nor fowl, neither a regulated market nor a competitive
one. The benefits of competition do not materialize. Partial
deregulation distorts economic incentives far worse than do
traditional rate-of-return regulation or new forms of incentive
regulation. The staffs and budgets of regulatory agencies swell as
they undertake the impossible task of managing markets.
As
Robert Crandall of the AEI-Brookings Joint Center for Regulatory
Studies argues, "In telecommunications...there is little
`deregulation.' Instead, managed competition is replacing managed
monopoly under the assumption that government can manage the
transition better than market forces could."
The
Telecommunications Act is so vague, in fact, that it has caused a
plethora of court filings by firms and regulators to seek judicial
resolution of their legal disputes. In the most prominent case,
AT&T Corp., et al. v. Iowa Utilities Board, et al. (AT&T
v. Iowa Utilities), the Supreme Court rendered a harsh verdict
on the nature of the Act itself. Speaking for the majority, Justice
Antonin Scalia noted:
It
would be gross understatement to say that the Telecommunications
Act of 1996 is not a model of clarity. It is in many important
respects a model of ambiguity or indeed even self-contradiction.
That is most unfortunate for a piece of legislation that profoundly
affects a crucial segment of the economy worth tens of billions of
dollars.
Indeed, because of this legal ambiguity,
the Act has done little to help consumers and, instead, has done
more to enrich and empower the legions of bureaucrats and special
interests who interpret the Act's many legal ambiguities. As Henry
Geller, former general counsel of the FCC and a communications
analyst for the Markle Foundation, told The Washington Post
shortly after passage of the Telecommunications Act in February
1996, "This is full employment for lawyers, lobbyists and
economists." Leonard S. Hyman,
Edward DiNapoli, and Richard C. Toole, in The New
Telecommunications Industry, describe lawyers' reactions to the
passage of the Act:
At
a seminar at Columbia University Law School in November, 1996,
presenters, both lawyers and economists, described the
Telecommunications Act of 1996 as an employment act for lawyers.
The air in this prestigious seat of legal learning seemed
positively jubilant, as if the cat had found a new toy to play
with.
They
concluded: "There should be no doubt that the legal wrangling which
will surround the implementation of the Telecommunications Act of
1996 will exceed in length and cost the unbelievable lobbying which
preceded the Act itself."
Such
comments were remarkably farsighted. It is not at all uncommon at
hearings or conferences today for industry analysts to state that
the Telecom Act may result in more costs than benefits to society.
Yet few critics offer policymakers a clear and coherent model for
solving the broadband crisis and governing this industry with sound
policy. Overarching principles are needed to encourage the
deployment of high-speed broadband communications capabilities and
establish a superior legal framework for industry investment
decisions.
BROADBAND POLICY FOR THE FUTURE
The
Telecommunications Act, although notable in its expressed support
of competition, did not lay out a legal and economic framework to
guide the development of the broadband telecommunications industry.
If Congress wants to understand why the expected investments in
broadband services and deployment have not materialized, it should
first define a set of clear market-oriented rules that will apply
to all industry players. There are three broad models of regulation
with very different track records from which to choose. (See box on
Page 13.)
Why Regulated Monopoly and Managed
Competition Are Less Effective
Of
the industry regulatory models described in the sidebar, only one,
Model No. 3, is capable of achieving the objectives of increased
competition and broadband investment, superior service quality, and
more affordability in the modern telecommunications industry. Many
industry observers and policymakers certainly will agree that the
old regulated monopoly/public interest model of regulation is an
abject failure. Nonetheless, much of the substance of this outdated
model lives on in the rhetoric of managed competition or
deregulatory industrial policy that many regulators and legislators
now espouse.
The
managed competition approach seems to offer what some call a "Third
Way" to regulate the telecommunications industry. That is, it
appears to offer a balanced mix of market competition and
government-imposed "public interest" requirements with benevolent
regulation. Such a system is more appropriately labeled
"corporatism" since it involves wide-ranging efforts by the
government to direct corporate behavior and accomplish various
sociopolitical objectives. But like other "Third Way" systems, the
managed competition model has been unable to spur the development
of a more competitive, pro-consumer industry for two reasons:
First, as explained above, the
current "don't rock the boat" mentality behind the FCC's oversight
of the telecommunications industry has resulted in limited
deregulation and, in many cases, has increased regulation of
the industry. The suffocating hand of regulatory oversight and
micromanagement has been substituted for the spontaneity and
unencumbered evolution of a deregulated market environment. Today,
the few freedoms allowed come at a heavy price to industry and
consumers who must endure continual delays, mounds of paperwork,
and concurrent regulatory obligations or requirements. The Third
Way approach has not created a telecommunications nirvana, as
Congress hoped, but rather an industry riddled with discontented
providers and dissatisfied consumers.
Second, in its worst form, the
FCC's managed competition approach has given one set of competitors
an advantage over others, which has less to do with encouraging
competition than with predetermining specific market outcomes.
Current FCC policies are preoccupied with giving long-distance
providers advantages over local carriers; cable competitors and
Internet firms over traditional telephone carriers; and wireline
over wireless providers. It is unclear how such industrial policy
benefits consumers, since restricting market options and picking
winners and losers hardly constitute a pro-consumer approach.
|
MODELS OF INDUSTRY REGULATION
Model No. 1: Regulated Monopoly/Public Interest Policy.
The traditional model of utility industry regulation employed
throughout most of this century.
Legal Foundation:
Radio Act of 1927, Communications Act of 1934, and subsequent
federal and state regulatory law. Regulations characterized by
heavy-handed controls, rate-of-return and price regulation,
geographic monopoly franchising, market entry and exit
restrictions, standard-setting, line-of-business controls, and
general "public interest" oversight by overlapping layers of
government.
Result:
No market competition, limited innovation and entrepreneurialism,
poor service quality, limited choices, no price competition.
Model No. 2: Managed Competition/Deregulatory Industrial
Policy.
Followed the 1984 AT&T divestiture, which was sparked by
several important FCC and court decisions in the 1960s and
1970s.
Legal Foundation:
AT&T antitrust case and divestiture agreement, Cable Act of
1992, Telecommunications Act of 1996, and the extensive body of
regulatory and case law developed during this period. Regulation
distinguished by a willingness to allow and encourage market entry
and competition, but only within the confines of the regulated
monopoly era's legal environment. Competition seen as
beneficial but possible only by conscious design and guiding hand
of benevolent regulators. Entry and rate controls continue and are
used like the sword of Damocles by regulators to encourage the
industry to evolve in a predetermined direction. Similarly,
regulators often use the merger approval process to extort favors
from industry.
Result:
Limited deregulation in certain sectors and status quo in
others, innovation and investment hindered by regulatory delays,
limited price and entry competition, consumer choice limited to
sectors with regulatory freedom.
Model No. 3: New Internet/Computer Industry Free-Market
Principles.
During the past two decades, free-market principles have allowed
the American computer industry to develop quickly and
efficiently.
Legal Foundation:
No industry-specific laws governed the computer sector or the
Internet. Time-tested legal standards of contract enforcement,
patent and trademark protections, common-law resolution of
disputes, and free and open national markets for goods and services
are characteristic of this legal environment. No central regulatory
authority, state or local interference, or extensive body of
regulations interfered with development. Uniform and universal
legal principles and business standards apply. Self-regulation and
voluntary standards are common.
Result:
Vigorous competition, unparalleled innovation and
entrepreneurialism, high-quality products and services, extensive
choices, serious price competition.
|
Why the Computer Industry Model Is
Better
The
only realistically advantageous model for governing the vibrant
telecommunications industry is the approach used during the
development of the computer industry and the Internet. In less than
20 years, this model transformed the computer sector from an
obscure niche industry dominated by techno-nerds and garage-based
operations into a vibrant, innovative, high-growth,
export-enhancing, and job-producing industry. It is one of the most
remarkable stories of spontaneous market development and growth in
the history of the republic, rivaling those of the steel, railroad,
and automobile industries.
What
is most remarkable about the computer industry is that its growth
was predicted by few and planned by none. The success of the
Internet and computer industry can be attributed largely to the
hard work, ingenuity, and risk-taking of ordinary American citizens
and small business start-ups. No "Federal Computer Commission"
guided the evolution of this sector, and no single law or
regulation gave rise to it or encouraged its explosive growth.
Markets evolved free of federal, state, or local interference; and
the wisdom of the consumer was trusted more than the whims of
bureaucrats. A simple, predictable, and uniform legal environment
provided a hospitable atmosphere for investment and
entrepreneurialism on an unprecedented scale.
This
free and open national market explains why millions of Americans
use and benefit from computer-based technologies, while the FCC's
century-long experiment in communications bears limited fruit. The
vision and legal framework that allowed the computer industry to
grow can and should be applied to the evolving telecommunications
sector in order to encourage broadband investment and
deployment.
Not
surprisingly, the computer industry has proposed that the FCC take
this approach. Last December, 13
respected officials of major U.S. computer-related corporations
delivered a joint letter to the FCC advocating a hands-off policy
for broadband deployment. The presidents, vice presidents, CEOs,
and corporate partners from such corporations as Intel, Cisco
Systems, Novell, Compaq Computer, and IBM signed a joint
declaration of principles that outlined how the application of a
market-oriented approach would help solve the broadband crisis. The
computer industry firms agreed on two fundamental points:
-
"The marketplace is building multiple
competitive broadband networks, but needs to move faster," and
-
"The government should avoid actions that
will dampen the willingness of financial markets to finance the
construction of broadband facilities."
The
declaration clarified why misguided past and current regulatory
models should not be applied to efforts to encourage broadband
deployment:
It
is a simple but undeniable reality that new and unnecessary
regulations will diminish the willingness of capital markets to
finance the construction of new broadband networks.... As a
threshold matter, such investments are very risky and lack any
guaranteed return. Government regulation would actually limit the
return on investment, and cause investors to be less willing to
risk the billions of dollars necessary to build out the networks.
Government intervention is particularly misplaced in the case of
new broadband networks deployed by entities that lack the market
position of the traditional telephone companies. Not only is
broadband investment in its infancy, there is plenty of competition
from existing networks and there will be plenty of competition from
emerging networks. Further, the uncertainty created by even
potential government regulation increases the cost of capital for
new networks.
We
share the [FCC's] view [that] the public interest will best be
served by the deployment of multiple broadband networks as widely
as possible. But that goal will only be realized if the Commission
maintain a "hands off" approach that trusts markets to determine
how the emerging broadband networks will be built and utilized.
Simply put, what was good for the computer
industry will be good for communications companies as well. Of
course, computer companies have good reason to advocate the
hands-off, market-oriented model. After all, broadband
communications technologies are essential to the delivery of most
computer-based services today. Computer industry executives most
likely realize that as computer and communications technologies
converge, there is a serious risk that "back door" regulating of
the computer industry will follow. A hands-off model for the
communications sector would ensure that the computer industry will
not be sucked into the FCC's regulatory morass.
Although these arguments for a hands-off
broadband policy are convincing, a recent FCC working paper
entitled "The FCC and the Unregulation of the Internet" provides
conclusive evidence that markets rather than mandates offer the
best hope for the future of the industry. In the paper, Jason
Oxman, counsel for advanced communications in the FCC's Office of
Plans and Policy, notes: "The success of the Internet has not been
an accidental development. Market forces have driven the Internet's
growth, and the FCC has had an important role to play in creating a
deregulatory environment in which the Internet could flourish."
Despite giving regulators too much credit
for encouraging the development of the Internet, the FCC report
nonetheless makes clear that it was the FCC's regulatory
forbearance (or reluctance to regulate) that helped to facilitate
the growth of the Internet and online services. Furthermore, the
report appropriately concludes that it would be a mistake to impose
older forms of regulation on new technologies, and "When
Internet-based services replace traditional legacy services, [the
FCC should] begin to deregulate the old instead of regulate the
new." Now that even the
FCC understands and accepts the logical benefits a hands-off,
computer industry model of regulation offers, there is little
reason for Congress not to apply this approach to the entire
telecommunications sector.
AN ACTION PLAN FOR BROADBAND
DEPLOYMENT
To
ensure the timely rollout of broadband services, policymakers must
translate the free-market principles that worked so well for the
computer industry into an immediate action plan for the
telecommunications sector. Five general principles should be
incorporated:
-
Deregulation and free markets, not
new forms of regulation or managed markets.
-
Legal simplicity and stability,
rather than complex, contradictory, and changing regulatory
regimes.
-
Uniformity and regulatory parity,
so that the same rules apply to all players.
-
A single open market system,
without conflicting state and local mandates.
-
Agency constraint and downsizing,
to avoid the encumbrances that follow an expansion of the agency's
mission and funding.
PRINCIPLE NO. 1: Telecommunications
reforms should promote deregulation and free markets, not new forms
of regulation or managed markets.
Congress should focus first on getting
back to basics by issuing a new call for across-the-board
deregulation. Specifically, to advance the rollout of broadband
services, a truly deregulatory agenda must end all line-of-business
restraints, especially long-distance (InterLATA) restrictions on
the Baby Bells that discourage broadband deployment. It should
never be a crime for communications firms to offer consumers
legitimate new services, yet current line-of-business restrictions
essentially make the extension of high-speed broadband service to
certain customers a criminal offense. These rules and the logic
that supports them should be scrapped to enable a free market in
the provision of new services.
A
free-market broadband agenda should also require the "sunsetting"
of current forced access regulations for ILECs to encourage future
broadband deployment. Finally, recommendations to adopt
industry-wide forced access regulations to protect future market
innovation should be ignored.
It
is important to understand why true industry deregulation and
forced access proposals cannot coexist. Forced (or open) access
regulation is becoming a regulatory cancer within the body of
modern telecommunications law. Supporters of forced access,
interconnection, and mandatory resale requirements argue that such
mandates break down the traditional market power of incumbent firms
to "level the playing field" for their potential rivals.
There is some truth to this, since open
access regulation places substantial demands on larger or incumbent
firms, requiring them to play by special rules to give other firms
a chance to break into the industry and compete. But most
supporters of open access and interconnection requirements argued
originally that this arrangement was to be (1) temporary and
transitional in nature and (2) limited to core services
where incumbent telecommunication firms held significant market
power--namely, the local telephone exchange. Forced access was
viewed as a second-best solution to deregulation, a means of
getting from one point to another. Therefore, open access was
intended to be a deregulatory halfway house, not a regulatory end
in itself.
In
the current legal environment, however, there is no end in sight
for the open access and interconnection rules crudely forced on
local exchange carriers through volumes of federal and state
rulemakings. Now many supporters of forced access are claiming that
it should be applied more broadly to new technologies and industry
segments. In their view, everything could be opened to competitors
via forced access, interconnection, or mandatory resale
arrangements. They see nothing wrong with demanding that all
current and future network elements--such as wires, cables, loops,
switches, transport services, modems, computer systems, and
operational and support services--are forcibly opened to
competitors that have no financial stake in the inventing,
building, or assembling of these systems or technologies.
Thus, forced or open network access is
framed as the cure-all for every problem in the communications
sector. In an ironic
twist, some incumbent telephone companies even support the
extension of forced access requirements to their rival
long-distance or cable companies to ensure that their rivals are
burdened by the same forced access requirements they face. In other
words, as the old adage goes, these firms have come to believe "if
you can't beat 'em, join 'em."
Problems with the current
framework.
The problems with this emerging legal structure are numerous and
manifest themselves in various ways. For example:
-
Forced access is re-regulatory in
nature.
Notably, forced access requires the continuation of price
regulation. Many policymakers thought price controls would become a
policy relic, but the open access era simply enshrined price
regulation under new names like interconnection charges, unbundling
rates, and resale pricing. Today, regulators must consider whether
interconnection or resale rates are "fair and reasonable" both for
the party given access to the network and for the owners of the
networks who must provide access. Deregulation should mean that
rates and prices are determined by the voluntary interaction of
buyers and sellers. Instead, forced access relies on the "wisdom"
of bureaucrats.
-
Forced access increases regulatory
bureaucracy.
Deregulation and agency downsizing should go hand in hand.
Forced access regulations require additional oversight and
therefore increase bureaucratic meddling and paperwork. They also
lead to repeated calls for more regulatory agency funding and
staffing.
-
Forced access creates serious
disincentives to investment and innovation.
Legal arrangements can have important economic consequences. In
the case of the open access, interconnection, unbundling, and
mandatory resale arrangements, the consequences could discourage
investment in new services, including the broadband market.
Economist Robert Crandall argues:
[I]t is obvious that by creating such
ample opportunities for entrants to use incumbents' network
facilities, the [Telecommunications] Act discourages investment in
new facilities. But if "deregulation" and liberalization are to
accomplish their principal purpose, they must encourage the
construction of new facilities--by entrants and incumbents
alike--that are designed to serve today's market with today's and
tomorrow's technology. The major benefits of deregulation would be
lost if the exercise were simply to collapse into a sharing of
facilities built while the numbing effects of regulation were in
place. Leasing yesterday's technology to today's rivals at
tomorrow's cost may sound good in the political arena, but it makes
little economic sense and surely provides no incentives for
investment for either lessor or lessee.
Equally as caustic are the comments of
noted regulatory economist Alfred E. Kahn, former head of the
now-defunct U.S. Civil Aeronautics Board and author of The
Economics of Regulation and Letting Go: Deregulating the
Process of Deregulation. In a recent filing with the FCC on
these matters, Kahn argued:
If rivals can share use of whatever ILEC
facilities they ask for--with their mere asking constituting
sufficient demonstration that access is "necessary" to them--at
prices explicitly intended to recover only the minimum cost of
supply employing the most modern technology, it cannot but have a
fatally discouraging effect on their own imitative and innovative
efforts: when every applicant can be a free rider, at such minimum
prices, who is going to build the vehicle? The Commission appears
completely to have ignored the discouraging effect of their rules
on facilities-based competition with the ILECs.
Finally, as Supreme Court Justice Stephen
Breyer summarized in the recent case of AT&T v. Iowa
Utilities:
A
totally unbundled world--a world in which competitors share every
part of an incumbent's existing system, including, say, billing,
advertising, sales staff, and work force (and in which regulators
set all unbundling charges)--is a world in which competitors would
have little, if anything, to compete about.
As Crandall, Kahn, and Justice Breyer
cogently observed, the current forced
access/interconnection/mandatory resale regime creates a textbook
example of "free-rider" problems. The extension of those rules into
new industry sectors such as cable will have the same free-rider
effect, dampening investment incentives in those markets as well.
Consider what might occur if the warped logic of forced access and
mandatory resale was applied to automobile manufacturing or the
fast-food business. If a car manufacturer is required to let its
competitors resell every new car model it makes under a different
name and at a lower price, what incentive is there for the
manufacturer to offer new models in the first place? Or if every
large fast-food chain was required to sell each new sandwich it
created to smaller competitors at a substantial wholesale markdown
so that they could then sell them in their own stores, would the
large chains create new sandwiches at all?
In these hypothetical examples, investment
and innovation suffer for two reasons. First, the producers will
not want to invest in new products if they are required to
surrender those products to rivals. The producers' potential return
on those new goods or services would depreciate, discouraging them
from making the investment in the first place. Second, competitors
will have little need to develop or offer new goods or services if
they can acquire them from a larger firm at a significant discount
and then resell them at a healthy markup.
This is essentially what is taking place
in the telecommunications market because of forced access and
mandatory resale requirements. True deregulation should mean, as it
does in the computer industry, the freedom to enter into
arrangements or contracts on a voluntary basis. Instead,
forced access and mandatory resale demand that certain companies
give an advantage to competitors that regulators currently favor.
Such regulatory extortion is antithetical to a free market.
Open access is a regulatory euphemism for
mandatory infrastructure sharing, or the equivalent of
quasi-socialistic network management. As such, it undermines
private property rights and interferes with the efficient and
voluntary market interaction of producers, investors, and
consumers. Supporters of forced access will continue to argue that
the forced access regime must be given more time to whittle away
the market power of incumbent firms; but if investment suffers as a
result of this exercise, the logical course of action would be
either to curtail the experiment or to subject it to a time
limit.
Indeed, the market power of incumbent
firms has decreased in recent years and will continue to do so as a
variety of competitors, industry sectors, and technologies emerge
that have the potential to become the broadband providers and
services of choice. In addition to local telephone providers and
cable companies, there are long distance firms, satellite
providers, terrestrial wireless companies, global underwater
network carriers, and electric utilities that are gearing up to
provide broadband communications services.
In other words, there is now no such thing
in telecommunications as an "essential facility" or "bottleneck
service." The notion that one firm, or even one sector, will be
able to monopolize this industry and provide consumers with all the
communications services they desire is farfetched. Therefore, no
additional forced access, interconnection, or resale mandates need
be imposed. In addition, existing regulations should be phased out
on a rapid timetable to achieve complete deregulation.
PRINCIPLE NO. 2: Telecommunications
reforms should promote legal simplicity and stability, not complex,
contradictory, and ever-changing regulatory regimes.
After deregulation, few of the complex
regulatory regimes designed by regulators for the communications
industry should remain on the books. Any regulations that do remain
should be straightforward and "simple rules for a complex world,"
to borrow a phrase from University of Chicago law professor Richard
Epstein in an influential book on legal incentives. Epstein argues for
a return to a common-law vision of simple and time-tested legal
standards--such as strict property rights, freedom of contract, a
sensible system of torts and just compensation, and voluntary
dispute resolution--to avoid the complex legal quagmires typical of
modern times.
Just
as these traditional, universal legal standards guided the birth,
growth, and market evolution of countless American industries and
firms, so can common-law principles guide telecommunications firms
toward a beneficial end. Peter Huber charts such a bold course in
his new book, Law and Disorder in Cyberspace: Abolish the FCC
and Let Common Law Rule the Telecosm. Even the Clinton
Administration, in its surprising 1997 Framework for Global
Electronic Commerce, argued that "Where governmental
involvement is needed, its aim should be to support and enforce a
predictable, minimalist, consistent and simple legal environment
for commerce." The computer
industry model shows how such simple and timeless legal standards
can promote entrepreneurialism and investment. Meticulously
detailed, hopelessly convoluted, and ever-changing regulations have
not produced and will not produce beneficial results in broadband
deployment.
PRINCIPLE NO. 3: Uniformity and parity
should govern the new telecommunications market so that the same
rules apply to all players.
After a century's worth of failed
regulatory policies, legislators still do not grasp the importance
of making sure that the same rules apply to all players within the
same industry. For decades, regulators quarantined firms and
technologies into neatly defined but highly illogical boxes in
order to keep cable separate from broadcasting, long distance
separate from local telephony, wireless separate from wireline,
voice separate from data, and so on. These regulatory distinctions
were established in the Communications Act of 1934 (Title II for
common carriers, Title III for broadcasting, and Title VI for
cable). Distinct FCC bureaus were created to oversee each sector
and keep the distinctions intact. The result of this "regulatory
apartheid" has been limited consumer choice, restricted output,
deterred innovation and entrepreneurialism, fewer job
opportunities, and artificially high prices.
Regrettably, instead of altering this
archaic structure when it passed the Telecommunications Act of
1996, Congress ignored market realities and kept the increasingly
unworkable regulatory distinctions intact. Of course, it could be
argued that pragmatic political limitations kept Congress from
changing the system and that the Act incorporated the only possible
compromise. Nonetheless, the continued existence of these
regulatory distinctions is a serious impediment to the
technological advancement of the communications sector in relation
to other global players who are not constrained by outdated and
inefficient regulations. It would be a mistake to establish new
regulations or incentives to force or encourage one segment of the
industry to roll out advanced broadband services and then refuse to
apply those same standards to other industry segments. Yet that is
exactly what is being proposed by many on Capitol Hill and at the
FCC. Instead, one simple standard should apply to all industry
players. In the computer sector, for example, every business
operates under the same market rules.
The
goal of federal telecommunications policy should be to provide
clear and simple rules for any company that wants to offer services
to its customers. Any rules left on the books after deregulation
should be carrier- and technology-neutral. To ensure this is
the case, federal legislators could adopt a principle from trade
law by creating the equivalent of a "most favored nation" (MFN)
clause for telecommunications. In the context of global trade laws
and systems, MFN requires that countries offering special treatment
or favors to another country must offer that same treatment or
favor to all other countries within a given trading system.
Essentially, MFN demands nondiscriminatory and symmetrical
treatment of all trading partners. In short, MFN normalizes trade
relations with all players in a given system.
To
apply the MFN principle to telecommunications, Congress could pass
a one-sentence statute declaring that "Any communications carrier
seeking to offer a new service or enter a new line of business
should be regulated no more stringently than its least regulated
competitor." This rule would ensure both that no business becomes
the victim of disparate regulatory treatment and that regulatory
parity exists within the U.S. telecommunications market as the line
between existing technologies and new industry sectors blurs.
Treating everyone equally on a deregulated playing field
should be the heart of telecommunications policy to ensure
non-discriminatory treatment, across all levels of government, of
competing providers and technologies.
PRINCIPLE NO. 4: Telecommunications policy
should promote a single open market, unencumbered by conflicting
state or local mandates.
The
fourth principle builds on the principle of legal parity and
uniformity. A national broadband policy should ensure the rapid
rollout of advanced services, since state and local interference is
neither economically efficient nor constitutionally sound. Just as
computer companies market their goods and services free of state
and local barriers to trade, so too should national markets be open
in the communications sector.
The
economic argument against permitting state and local regulatory
actions and initiatives for broadband rollout is relatively
straightforward. As Brookings Institution economist Roger Noll
argued in 1988:
The
notion that there is a meaningful technical and economic
distinction between federal and state services was always a
fiction, but it has become increasingly so. This fiction is likely
to become even more costly as the federal government withdraws from
regulation, thereby increasing the capability of the states to
impose mutually inconsistent requirements on what amounts to a
national network providing national information services using
equipment manufactured for a national market.
Indeed, numerous city governments have
aggressively pursued or considered the imposition of forced access
mandates on cable companies interested in offering broadband
Internet services to their customers. Late last year, for example,
regulators in Portland, Oregon, proposed that, as a condition of
AT&T's acquisition of the local cable franchise, rivals should
be given access to its lines on regulated terms. Despite the FCC's
efforts to discourage city regulators from enforcing such
burdensome mandates, Portland won a showdown with AT&T in
federal court--opening the door for forced access regulation in
thousands of other municipalities. Several other
cities, including San Francisco, Los Angeles, and Fort Lauderdale,
have discussed applying forced access regulations on AT&T as a
condition of its ongoing acquisition of cable franchises. AT&T has
appealed the Portland decision, noting that continued regulation
will only delay the rollout of high-speed Internet service in these
communities.
The
criticisms of forced access are just as applicable to municipal
efforts to regulate broadband communications networks, such as
telephone, cable, or wireless networks. As FCC Chairman Kennard
noted:
There are 30,000 local franchising
authorities in the United States. If each and every one of them
decided on their own technical standards for two-way communications
on the cable infrastructure, there would be chaos.... [T]he
Information Superhighway will not work if there are 30,000
different technical standards or 30,000 different regulatory
structures for broadband. The market would be rocked with
uncertainty; investment would be stymied.
State-by-state or city-by-city attempts to
regulate these services along strict geographical lines are
tantamount to "dividing the indivisible," in the words of legal
scholars Michael K. Kellogg, John Thorne, and Peter Huber, the
authors of Federal Telecommunications Law. Attempting to
partition regulatory responsibility along interstate (versus
intrastate) lines is highly problematic, as these experts
note:
The
fundamental problem with this verbally neat division of the
regulatory turf is that nothing in telephony is purely intrastate,
nor would many telephone users wish it to be. The same telephones
and most of the same wires and switches are used for both
intrastate and interstate activity.
Moreover, "There is, indeed, a fundamental
paradox in the idea that a service whose entire purpose is to
obliterate distance and transcend geographic boundaries can be
regulated by dual authority divided along strictly geographic
lines."
This
regulatory arrangement is not only economically indefensible, but
also constitutionally suspect. A careful reading of the U.S.
Constitution establishes that the federal government is
legitimately empowered to exercise only a few enumerated powers.
The regulation of legitimate interstate commerce qualifies as one
of those enumerated federal powers in Article I, Section 8, Clause
3. And the deployment
of nationwide broadband communications capabilities, whether
wireline or wireless, is an unambiguous example of interstate
commerce that deserves federal protection from state and local
interference.
This
statement does not imply that states and localities should be
stripped of all their oversight functions. In fact, there are many
tasks that should remain exclusively within the purview of state or
local governments. Zoning policy and oversight of rights of way are
good examples. Localities should retain the right to determine
their own land use policies so long as those policies do not
unjustly interfere with the ability of communications carriers to
roll out interstate services. Universal service safety net policies
should be devolved to the local authorities. To the extent that
governments attempt to encourage broadband deployment directly or
solve a "digital divide" within their communities,
however, such assistance should be targeted to those individuals
who need service and not enforced through new mandates on
communications providers.
State and local officials also should
investigate ways to eliminate cumbersome intrastate regulations and
taxes and sunset their Public Service Commissions (PSC), or at
least the portion of their PSC that regulates communications. These
Commissions are quickly becoming more irrelevant, and thus
unnecessary.
Placing boundaries on the boundless makes
little sense and makes no one happy. Telecommunications companies
should be free to offer consumers the broadest range of services
under a single brand name, at the lowest price possible, anywhere
they want, and on whatever terms they find mutually agreeable. Such
an open market is possible only if state and municipal regulators
are prohibited from imposing restrictive regulations that hinder
the ability of communications firms to roll out new services in a
timely fashion. Thus, a limited dose of federal preemption is
required to protect the lanes of interstate commerce and encourage
rapid broadband deployment nationwide.
PRINCIPLE NO. 5: Telecommunications policy
should focus on defining down the regulators' roles rather than
expanding agency missions or funding.
None
of the goals and objectives listed above can be accomplished so
long as federal regulators have the ability and resources to tinker
with telecommunications markets. No matter how much they claim to
be in favor of competition and free markets, their very existence
and their disposition to render a judgment on any industry question
serve as a powerful disincentive to entrepreneurialism and
investment.
Consider the computer industry.
Unconstrained by volumes of regulatory restrictions or guidelines,
and confident that new ideas and investment decisions would not be
met with bureaucratic resistance or interference, the computer
industry flourished. No grand federal design created its success.
Claims that the industry or consumers would have been better off
had such regulatory oversight existed have no merit.
Compare this approach with managed
competition of the communications industry today. FCC staffing and
spending are growing and producing more
paperwork than ever before. The Congressional Review Act of 1996
requires agencies to track the volume of rules they publish,
including "major rules" that result in an impact on the economy of
more than $100 million. From 1997 until
March 1999, the FCC promulgated 497 final rules. This is almost
exactly the total number of rules promulgated by the Department of
Defense (165), Veterans Administration (81), Department of State
(42), Department of Justice (133), and Department of Education
(133) combined during that same period. Incredibly, in fiscal year
(FY) 1998, no other federal agency produced as many major rules as
had the FCC, which published 27 percent of all federal agency major
rules. The Department of Health and Human Services ranked second
with 21 percent of all major rules, and the Environmental
Protection Agency ranked third with 10 percent.
This
stunning increase in regulatory activity is proof that little
deregulation is taking place under the FCC today. Yet it is unclear
what companies or consumers have gained from this much regulation.
Defenders of the FCC often claim that increased spending, staffing,
and rule promulgation show that the agency is busy deregulating,
just as Congress stipulated in the Telecommunications Act of 1996.
Nothing could be further from the truth. The majority of the
paperwork produced by the FCC in recent years has been
re-regulatory in nature.
Indeed, if the agency is deregulating the
industry, little paperwork should be required. Regulations can be
eliminated without issuing voluminous rulemakings. Instead, FCC
officials are determined to increase both the agency's budget and
its powers to micromanage the "deregulatory" process. In recent
years, moreover, Congress has obliged them by appropriating
generous increases in the FCC budget.
As
John C. Wohlstetter, GTE Service Corporation's Director of
Technology Affairs, argues, "It is a given today that the telecom
future is less predictable than ever before. To micro-manage market
evolution in such a period smacks of unbounded regulatory
hubris."
Conclusion
To
promote broadband telecommunications technologies and services for
Americans in the next century, Congress must take an approach that
is based not on regulatory distinctions, but on a "predictable,
minimalist, consistent, and simple legal environment for commerce,"
as the Clinton Administration espoused in its Framework for
Global Electronic Commerce. As J. Gregory Sidak and Daniel F.
Spulber conclude in "Deregulation and Managed Competition in
Network Industries," "Government policy makers must be willing to
forsake power and influence over the economy, and to trust what
they sometimes view as the `chaos' of the marketplace." Until policymakers
are willing to do so, rapid broadband deployment will not become a
reality.
Adam D. Thierer is a
former Alex C. Walker Fellow in Economic Policy in the Thomas
A. Roe Institute for Economic Policy Studies at The Heritage
Foundation.
William E. Kennard,
"The Road Not Taken: Building a Broadband Future for America,"
remarks before the National Cable Television Association, June 15,
1999,available at
http://www.fcc.gov/commissioners/kennard/speeches.html.