Testimony

Thinking About the Next Telecom Act

By Adam D. Thierer
April 8, 2004
Committee on Commerce, Science and Transportation
United States Senate

Good morning, my name is Adam Thierer and I serve as Director of Telecommunications Studies at the Cato Institute. Thank you Mr. Chairman for your invitation to testify here this morning as the Committee begins the important business of thinking about what the next Telecom Act should look like.

As someone who worked closely with members of this Committee a decade ago when we started getting serious about telecom reform, I think it’s safe to say that we all share a sense of frustration and disappointment that we were not able to advance the ball a little further last time around.

If I had to summarize what went wrong with the Telecom Act of 1996, I would use the following paradox: Congress wanted market competition but did not trust the free market enough to tell regulators to step aside and allow markets to function on their own.

Consequently, the FCC, the Department of Justice, state and local regulatory commissions, and the courts, have spent the last ten years treating this industry as a regulatory plaything to be endlessly toyed with. Today there is virtually no element of telecommunications that is not subject to some sort of meddling by some or all of these regulatory officials.

While it’s fair to say that it was probably wishful thinking to believe we could have undone a century’s worth of command and control regulatory policies in a few short years, one would have at least hoped that we would not be stuck still debating the same issues today that dominated the agenda over a decade ago. Indeed, if Rip Van Winkle fell asleep in 1994 and woke up in 2004, he wouldn’t think he’d missed a beat if telecom regulation was any guide.

But despite the ongoing regulatory quagmire, the good news is that we have witnessed amazing strides in terms of technological progress and we can confidently say that this marketplace has never witnessed such competitive forces at work. Whether it’s the wireless revolution that is allowing millions to cut the cord entirely, or the Internet and broadband revolution that is opening up a whole new world of opportunities that did not exist prior to 1996, by almost any measure, consumers are better off and have more choices now than ever before.1

Still, much remains to be done to clear out the regulatory deadwood that continues to hold back further innovation and competition. While there are dozens of important regulatory reform objectives I could outline,2 in my limited time here today it makes more sense to briefly discuss the three most important over-arching themes or priorities that should frame our current thinking about how to reform telecommunications policy. These priorities include:

(1) Rationalizing Regulatory Classifications
(2) Dealing with Jurisdictional Matters
(3) Getting Agency Power and Size Under Control

Regulatory Classifications

With respect to regulatory classifications, a general consensus exists today that Congress will need to formally close the book on the archaic regulatory classifications of the past, which pigeonhole technologies and providers into distinct vertical policy “silos.” That is, we still have Title II for common carriers, Title III for wireless, Title IV for cable, and so on, even though rapid technological change and convergence have largely wiped out such distinctions and pitted these formerly distinct sectors against one another in heated competition for consumer allegiance. Thus, although the communications / broadband marketplace is becoming one giant fruit salad of services and providers, regulators are still separating out the apples, oranges, and bananas and regulating them differently. This must end.

One way to do this is to replace the vertical silos model with a “horizontal layers” model that more closely resembles the way the new marketplace operates. We can divide the new industry into at least four distinct layers: (1) Content; (2) Applications; (3) Code; and, (4) Infrastructure, and regulate if we must, each accordingly.3 But I would caution Congress against formally enshrining a network layers model as a new regulatory regime. While this model provides a useful analytical tool to help us rethink and eliminate the outmoded policy paradigms of the past, we would not want these new layers to become the equivalent of rigid regulatory quarantines or firewalls on industry innovation or vertical integration.4

A second and better way to tear down the old regulatory paradigms and achieve regulatory parity would be to borrow a page from trade law and adopt the equivalent of a “most favored nation” (MFN) principle for communications. In a nutshell, this policy would state that: “Any communications carrier seeking to offer a new service or entering a new line of business, should be regulated no more stringently than its least regulated competitor.” This would allow us to achieve regulatory simplicity and parity not by “regulating up” to put everyone on equal difficult footing but rather by “deregulating down.” Given the confusion over the Brand X court case and the ongoing FCC investigation into a Title 1 “information services” classification for broadband, this “Most Favored Nation” approach might help us bring some resolution to this difficult issue.

Jurisdictional Matters

Next we come to jurisdictional matters, which could very well end up being the most controversial issue this Committee will take up if you choose to re-open the Telecom Act. Here I am speaking of the heated debate between federal, state and local regulators for control over the future of communications policy. 6

As I noted in my 1998 book The Delicate Balance: Federalism, Interstate Commerce and Economic Freedom in the Information Age, decentralization of political power almost always has a positive effect in terms of expanding human liberty.7 But as our Founders wisely realized when penning the Constitution, there are some important exceptions to that general rule.

Let me be perfectly blunt on this point: Telecommunications regulation is one of those cases where state and local experimentation doesn’t work so well. After all, at the very heart of telecommunications lies the notion of transcending boundaries and making geography and distance irrelevant. If ever there was a good case to be made for an activity being considered interstate commerce, this is it. And yet, America’s telecom market remains riddled with a patchwork of policies that actually thwart that goal and seek to divide the indivisible and place boundaries on the boundless.8

This must end. And the only way it will end is by Congress taking the same difficult step it had to take when deregulating airlines, trucking, railroads, and banking: pre-emption. We must get serious about the “national policy framework” mentioned in the preamble of the Telecom Act by comprehensively pre-empting state and local regulation in this sector. The rise of wireless and Internet-based forms of communications makes this an absolute necessity.

If you feel compelled to leave some authority to state regulators, why not devolve to them any universal service responsibilities that continue to be deemed necessary? This is one area where experimentation can work if the states devised targeted assistance mechanisms. But they should not be allowed to impose regulatory restraints or levies on interstate communications to do so.

Agency Power

My third and final “big picture” reform involves what may have been the most glaring omission from the Telecom Act of 1996: The almost complete failure to contain or cut back the size and power of the FCC. Again, we would do well to remember the lessons of the past. When Congress deregulated airlines, trucking and railroads, lawmakers wisely realized that comprehensive and lasting reform was possible only if the agencies that oversaw those sectors were also reformed or even eliminated.

In the telecom world, by contrast, the FCC grew bigger and more powerful in the wake of reform and we witnessed spending go up by 37 percent, a tripling of the number of pages in the FCC Record, and there were 73 percent more telecom lawyers after the Act than before. It is safe to say that you cannot deregulate an industry by granting regulators more power over that industry.9

This too must end. The next cut at a Telecom Act must do more than just hand the FCC vague forbearance language with the suggestion that the agency take steps to voluntarily regulate less. We can’t expect the regulators to deregulate themselves.10 We need clear sunsets on existing FCC powers, especially the infrastructure sharing provisions of the last Act.11 And then we need to impose sunsets on any new transitional powers we grant them in the next Telecom Act. And we need funding cuts too.

If we fail to do so, we’ll likely be sitting here again in 10 years having this same conversation all over again.

Conclusion: Ending “Chicken Little Complex”

In conclusion, it is my hope that Congress rejects the many doomsday-ers and nay-sayers in the telecom sector who claim the sky will fall without incessant regulatory oversight and intervention. “Chicken Little complex” seems to run rampant throughout this sector even though it is less warranted than ever before. We have a chance to make more than just a clean break with the past; we have the chance now to close the book on a regulatory past that has done little to truly benefit consumers. Regulators have been given over 100 years to conduct a grand experiment with the telecom sector. Why not give markets a chance for once?

Thank you, and I’m happy to take any questions you may have.



Footnotes

1. Adam Thierer, “Number Portability Decision Adds to Wireline Telecom Sector’s Perfect Storm,” Cato Institute TechKnowledge No. 66, November 20, 2003, http://www.cato.org/tech/tk/031120-tk.html

2. Adam Thierer, “A 10-Point Agenda for Comprehensive Telecom Reform,” Cato Institute Briefing Paper No. 63, May 8, 2001, http://www.cato.org/pubs/briefs/bp-063es.html

3. See generally: Richard S. Whitt, “A Horizontal Leap Forward: Formulating a New Public Policy Framework Based on the Network Layers Model,” MCI Public Policy Paper, Version 1.0, December 2003, http://global.mci.com/about/publicpolicy/presentations/horizontallayerswhitepaper.pdf

4. See: Adam D. Thierer, “Are ‘Dumb Pipe’ Mandates Smart Public Policy?: Vertical Integration, ‘Net Neutrality,’ and the Network Layers Model,” Presentation at Columbia University Institute for Tele-Information conference on Media Concentration and the Internet, (forthcoming), April 15, 2004; Adam D. Thierer, “Net Neutrality: Digital Discrimination or Regulatory Gamesmanship in Cyberspace?,” Cato Institute Policy Analysis No. 507, January 9, 2004, http://www.cato.org/pubs/pas/pa-507es.html

5. Adam D. Thierer, “Telecom Newspeak: The Orwellian World of Broadband ‘Deregulation’,” in Sonia Arrison, ed., Telecrisis: How Regulation Stifles High-Speed Internet Access, (San Francisco, CA: Pacific Research Institute, January 2003), pp. 9-31, http://www.pacificresearch.org/pub/sab/techno/telecrisis.pdf

6. Adam D. Thierer. “Federalism and Telecommunications,” Federalist Society, 2001, http://www.fed-soc.org/Publications/practicegroupnewsletters/telecommunications/federalism-telecomv3i1.htm; Robert W. Hahn, Anne Layne-Farrar, and Peter Passell, “Federalism and Regulation,” Regulation, Vol. 26, No. 4, Winter 2003-2004, pp. 46-50, http://www.cato.org/pubs/regulation/regv26n4/v26n4-7.pdf

7. Adam D. Thierer, The Delicate Balance: Federalism, Interstate Commerce and Economic Freedom in the Information Age, (Washington, D.C.: The Heritage Foundation, 1999).

8. See generally: Adam Thierer, “Will ‘States’ Rights’ Derail Telecom Deregulation?” Cato Institute TechKnowledge No. 49, March 14, 2003, http://www.cato.org/tech/tk/030314-tk.html

9. J. Gregory Sidak, “The Failure of Good Intentions: The WorldCom Fraud and the Collapse of American Telecommunications After Deregulation,” Yale Journal of Regulation, Vol. 20., 2003, pp. 207-267.

10. Alfred E. Kahn, Whom the Gods Would Destroy or How Not to Deregulate, (Washington, D.C.: AEI-Brookings Joint Center for Regulatory Studies, 2001), http://www.aei-brookings.org/admin/authorpdfs/page.php?id=112

11. See generally: Adam D. Thierer and Clyde Wayne Crews, What’s Yours is Mine: Open Access and the Rise of Infrastructure Socialism, (Washington, D.C.: Cato Institute, 2003), http://www.catostore.org/index.asp?fa=ProductDetails&pid=1441099