Commentary

Why The Telecommunications Act is Failing

Last February President Clinton signed the Telecommunications Act of 1996, which was supposed to bring on an era of deregulation and vigorous competition in the telephone cable television and broadcasting industries. A year later the terms for local telephone competition are being disputed in the courts, the Federal Communications Commission is setting up a new telecommunications entitlement program under the guise of a “universal service” and arguments are breaking out between the local and long-distance telephone companies over the access fees that the latter pay the former. The FCC itself, far from fading away like the agencies that regulate trucking and civil aviation, has expanded budgets.

In fact, the 1996 Telecommunications Act is not so much deregulation as regulation reformed. Congress lost its nerve when it came to allowing the invisible hand to bring the benefits of the new communications technologies to the American people. And the FCC has showed itself to be even more mistrustful of the marketplace.

Nothing illustrates the current attitudes at the FCC better than the so-called interconnection issue. New entrants into the local telephone business must connect their networks to the networks of the existing companies. Otherwise callers who are within a local calling area and who subscribe to different telephone companies cannot reach each other except over the long-distance network. The 1996 act, while requiring such interconnection, left a great deal of room for negotiation between existing telephone companies and new entrants. That was wise. Economic costs of interconnection can vary considerably from place to place. Interconnection between two telephone networks is exactly the kind of messy problem that is best suited to the dealmaking that underpins the business process.

Unfortunately, the FCC jumped in and set detailed terms for interconnection based on economic cost models bearing only a passing resemblance to markets. The FCC’s models attempt to establish the cost of interconnection to the existing telephone companies and, in the view of those companies, they do so in a confiscatory manner, by setting the value of interconnection at a point that is well below what the market would have established. As a result, the telephone companies are challenging the FCC’s requirements in the courts under the “takings” clause of the Constitution and local telephone competition — one of the main prizes the 1996 act was supposed to bring about — could be delayed.

Constitutional issues aside, the concept of a centralized planning authority establishing the price of interconnection on the basis of economic models could be called many things, none of them deregulation. That would also be inappropriate nomenclature for the plans of an advisory board to the FCC that recently recommended telecommunications subsidies for rural and low-income consumers along with similar subsidies for schools, libraries and some health care institutions. Universal service subsidies of that kind were already an established part of regulatory practice. But the supposedly deregulatory 1996 act might have been used as an opportunity to abolish universal service mandates not extend them.

More of the same can be expected when the FCC considers the issue of access fees paid by long-distance companies to local telephone companies. Those fees compensate the local telephone companies for carrying traffic from the long-distance networks to the called party. But in their current form they also include a premium that codifies the traditional subsidy of local telecommunications by long-distance communications. There is agreement that such subsidies are supposed to disappear in a competitive marketplace. But judging from its previous actions the FCC will do so by examining the entrails of economic models to determine what access costs are, not by allowing the market process to work its wonders.

For government agencies to try to second-guess the marketplace always involves hubris. Second-guessing the telecommunications marketplace — which appears to offer new services and even entirely new kinds of services — is pure folly. To date, the FCC’s actions under the 1996 act have been intellectually dishonest — they are economic micromanagement cloaked as deregulation. The government is merely putting its fingers in the proverbial dike as electronic communications becomes increasingly ungovernable.

It is time for Congress to revisit the 1996 act. This time its efforts should focus not on reforming regulation but on setting a date certain for abolishing regulation of the telephone industry and for abolishing of the FCC itself. Some work would need to be done before that could occur — most notably the establishment of private property rights to the spectrum — but full deregulation could most certainly occur in an 18-month or two-year period if the political will is there.

Unfortunately, whether Congress possesses such a will remains in doubt.

Lawrence Gasman is director of telecommunications and technology studies at the Cato Institute.