What happened to telecom deregulation? That was the question last week after the House Commerce Committee staff released proposed legislation to reform the nation's telecommunications laws. The product of months of discussion and negotiation, the draft was billed as an effort to sweep away antiquated rules. "New telecommunications services," said committee chairman Rep. Joe Barton (R-TX), "shouldn't be hamstrung by old thinking and outdated regulations."

Unfortunately, the actual proposal falls far short of this goal. While eliminating many unneeded rules, it also imposes many others. In all, the 77-page draft includes some 80 private-sector mandates and restrictions. Not only would telecommunications firms would remain over-regulated, but new rules would be imposed on previously unregulated Internet services. This attempted rewrite of telecommunications laws needs a rewrite itself.

A Changed World

The telecommunications world has changed dramatically since Congress last visited the issue nine years ago. When the Telecommunications Act of 1996 was enacted, the Internet was in its infancy and only a few million Americans possessed cellular phones, which were mostly confined to their cars. Since that time, these and other technologies have turned the communications industry upside down-creating choices, competition, and capabilities undreamed of in 1996.

Over the past few years, the Federal Communications Commission (pushed, in part, by the courts) and many states have taken steps to modernize telecom laws to fit this new reality. Left unchanged were the federal laws regulating communications, which are still largely geared to a monopoly industry providing only basic services.

Three New Services

The discussion draft circulated last week modifies current law by creating three new categories of communications services:

1.      "Broadband Internet Transmission Service" (BITS), roughly defined as the transmission of information using "Internet Protocol" (IP). At a minimum, this would include broadband services such as DSL from telephone companies and cable modems.
 

2.      "Voice over Internet Protocol Service" (VoIP), roughly defined as IP-based services that allow users to make telephone calls over the Internet, such as that provided by Vonage.
 

3.      "Broadband Video Service" (BVS), roughly defined as video services provided on an interactive basis (i.e., subscribers can send as well as receive data), coupled with full Internet access.

Importantly, the draft would prohibit regulation of these services by the Federal Communications Commission and by state or local governments-except where otherwise provided. Thus, regulators would generally not be permitted to set prices or terms of service for these services. For instance, states would not be able to regulate VoIP service as they do standard telephone service, nor would they be able to regulate broadband services such as DSL or cable modems (largely reaffirming recent FCC and court decisions to this effect). And critically, local governments would lose the power to keep new Internet-based television systems from competing with incumbent cable providers-but only if the new services fall within the bill's definitions. These changes are important steps in the right direction.

Eighty Mandates and Restrictions

The draft proposal would do nothing to ease regulation of existing telephone services, even though these services now largely operate in a competitive environment. Even more troubling, the draft provides for over 80 new or expressly retained restrictions and mandates on the three new types of services. Among them:

• Providers of BITS, VoIP, and BVS would have to register with the FCC and could not begin to provide service until 30 days after registering. This would apply not just to currently regulated firms, such as Verizon and BellSouth, but also to firms now free of FCC regulation, such as VoIP providers Vonage and Skype. As currently written, this requirement and others like it may apply to other Internet-based services, such as Google's new instant messaging service and e-mail services like Microsoft's Hotmail.
   
• BITS and VoIP providers would have to interconnect their traffic with other BITS providers, regardless of whether they exercise undue, or any, market power. Again, this mandate would apply to many firms that currently interconnect on a voluntary basis, such as cable and VoIP firms.
   
• BITS providers are barred from "blocking, impairing or interfering" with the content they provide over the Internet to customers-again, without any showing of market power. Not only is such a "net neutrality" rule unnecessary-there has yet been no showing that any provider discriminates based on content-but it would be a major step toward FCC regulation of Internet content.
   
• VoIP telephone services would be required to pay into the FCC's telephone subsidy fund if the FCC finds it necessary. They also would be required to provide 911 service, portable phone numbers, and access to the disabled. These mandates would drive up costs and could stifle the young industry.
   
• BITS, VoIP, and BVS providers would be subject to an extensive set of national "consumer protection" rules, ranging from disclosure and recordkeeping requirements to mandated service standards.

Under the draft proposal, BVS providers would enjoy expedited FCC franchising, a big step up from the rather cumbersome city-by-city franchising processes that are now required. But to qualify for the FCC franchising, BVS providers would have to offer full Internet access as an integral part of their service. While many firms, including Verizon and SBC, plan to offer Internet-based television, none currently plan such an integrated offering. In effect, the draft proposal would impose a form of industrial policy on this emerging market. Rather than open the doors to innovations and services that the market demands, it would only grant regulatory relief to services that meet Washington's view of what should be offered.

Conclusion

The stated goals of this proposal are worthwhile-to bring communications rules up to date and ensure that new services are not hamstrung by outdated regulations. And the proposal does take some significant steps forward. But those steps are outweighed by new mandates and the continued presence of old, outdated rules. In effect, the draft exemplifies, rather than overturns, the "old thinking" that has long dominated telecommunications-burdening innovation and imposing Washington's preferences over those of consumers. This rewrite needs a rewrite.

James L. Gattuso is Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation.