TechKnowledge No. 82

Negotiate, Not Litigate

By Randolph J. May, James L. Gatusso and Adam D. Thierer
June 7, 2004

When the D.C. Circuit Appeals Court in March once again threw out the Federal Communications Commission’s rules requiring incumbent telephone companies like Verizon to share their network facilities at regulated rates, the court handed the telecommunications industry a huge opportunity. In short, there is an opportunity to replace the traditional public utility, litigation-oriented regulatory regime with a less-regulated, commercially oriented regime in which telecom providers wishing to share facilities are free to enter mutually acceptable agreements.

But this chance may be squandered by state regulators, and federal regulators too, if they insist on putting their own regulatory stamp on the freely negotiated agreements. In the last century’s telecom world, communications services were largely provided on a monopoly basis. In that old environment, a regime heavily weighted toward regulation and litigation may have been appropriate, or at least acceptable.

In today’s Internet Age environment, however, wireline telephone companies, cable companies and wireless telephone companies, not to mention new Voice over Internet Protocol (“VoIP”) and electronic messaging providers all compete. Consumer welfare will be greatly enhanced if these service providers are allowed to do what they do in other competitive markets — freely negotiate private contracts that best meet their mutual needs.

The appeals court held that the FCC’s existing rules are inconsistent with the 1996 Telecom Act because they mandate that incumbent telecoms provide competitors with virtually unlimited access to the incumbents’ networks even if the new entrants are not impaired from providing their own facilities. This came after the FCC received two previous judicial rebukes of these rules for the same reason. The court’s frustration, in chastising the “commission’s failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings,” was understandable. After the court’s decision, one option open to those who favor continuing the old regime is to just keep litigating by asking the Supreme Court to review the appeals court decision.

With the opening provided by the decision, however, the previously bitterly divided commission came together March 31 to urge telecom providers to “begin a period of commercial negotiations designed to restore certainty and preserve competition in the telecommunications market.” Observing that the incessant litigation has unsettled the market, the commissioners “ask[ed] all carriers to engage in a period of good-faith negotiations to arrive at commercially acceptable arrangements” for interconnection and facilities-sharing. They noted the 1996 Telecom Act clearly contemplated “the role of commercial negotiations as a tool in shaping a competitive communications marketplace.”

So far, so good. The negotiations between the incumbent telecoms and their competitors even got off to a modestly encouraging start, with incumbent SBC and Sage Telecom, the third-largest competitive carrier in SBC’s territory, announcing they had entered into a seven-year commercial agreement. This was followed by an announcement that incumbent Qwest had negotiated a three-year commercial agreement with Covad, a leading provider of broadband Internet services. But now it looks as if some of the state public utility commissions are determined to throw roadblocks into the negotiating process, and there have been indications the FCC may be meddling as well by, say, requesting negotiating information and pressuring parties to use mediators.

For example, the Michigan Public Service Commission has issued an order requiring submission of the SBC/Sage agreement for approval so it can “determine whether agreement discriminates against other competitors and is in the public interest.” The California, Texas and Kansas commissions have indicated the SBC/Sage agreement should be subject to their OK. Not surprisingly, the National Association of Regulatory Utility Commissioners, the state commissioners’ trade association, has urged that all commercial agreements be reviewed by the state commissions.

Although the matter is not free from doubt, there is a good argument that as a legal matter these private agreements need not be filed with state commissions to the extent they involve network elements no longer subject to FCC access requirements. There is no doubt, however, that if the agreements must be filed publicly and are subject to an undefined “public interest” review by state regulators, the commercial negotiations the FCC commissioners (and even many state commissioners) wish to succeed, in fact, will likely fail since the incentive to negotiate will be severely diminished.

If negotiated agreements are required to be filed at all, at a minimum state regulators should use existing authority to protect the confidentiality of commercially sensitive terms and conditions. And they should presume such individually negotiated agreements are in the public interest. After all, the ability of private parties to negotiate binding agreements tailored to meet their individual needs is at the heart of an unregulated competitive marketplace. Such agreements provide long-term stability and facilitate sound business plans. It is no accident the SBC/Sage and the Qwest/Covad agreements are for seven and three years respectively.

The D.C. Circuit decision has opened a window of opportunity to escape the regulatory and litigation morass that has prevailed since the 1996 Telecom Act passed. But if regulators act as if nothing has really changed, then nothing will. It is past time for regulators to abandon the last century’s public utility model in favor of a market-oriented regime in which industry participants have contract freedom so, like others in a competitive marketplace, they can decide themselves how to meet customer needs by voluntary agreements.

Randolph J. May is senior fellow and director of communications policy studies at the Progress & Freedom Foundation. James L. Gatusso is research fellow in regulatory policy at the Heritage Foundation. Adam Thierer is director of telecommunications studies at Cato Institute. This essay originally appeared in The Washington Times on May 30, 2004.