TechKnowledge No. 74

An Open Letter to Pro-Regulation Conservatives

By Adam D. Thierer
February 17, 2004

Eight years after the passage of the Telecommunications Act of 1996, the contentious debate over telecom and broadband regulatory policy continues to rage. The same issues that animated policy discussions prior to the act’s passage continue to dominate today’s endless stream of regulatory proceedings and court battles. Opponents still debate the best way to ensure the development of a more competitive marketplace, improve service quality, and increase overall investment and innovation. But in the end, despite the complexity of the issues involved, the debate over telecom policy really comes down to a simple question: Do you trust free markets or government mandates to get this job done?

Surprisingly, recent editorials or letters penned by conservatives Jim Glassman of the American Enterprise Institute; grassroots activist Grover Norquist, president of Americans for Tax Reform; and constitutional scholar Bruce Fein, have suggested that mandates, not markets, are the solution. In their work, these conservatives-who are typically tireless champions of free markets and less government-seem to be singing a very different tune when it comes to telecom and broadband regulation.

Sharing = Competing? For example, in numerous editorials Glassman and Fein suggest that telecom “competition” can develop only through the vigorous application of infrastructure-sharing rules and government-set price controls for the networks owned by incumbent telcos. Of course, they don’t state it in those terms; rather, they argue that by requiring the Baby Bells to share unbundled network elements (UNEs) with competitive local exchange carriers (CLECs), lawmakers are helping “incubate competition” and allowing CLECs to “compete on a level playing field,” in Fein’s words. Likewise, Glassman argues that the FCC’s UNE-P strategy-which required incumbents to unbundle all their various network elements and then recombine them into a single platform and wholesale them to CLECs at a generous discount-has been “a critical ingredient in the plan for deregulation laid out … in the Telecommunications Act of 1996 [and] is bringing Americans lower prices and better service.”

This is a curious theory of “deregulation.” Deregulation usually means the removal of rules that encumber an industry and consumers, not the imposition of new regulatory regimes such as UNE-P and the FCC’s TELRIC pricing methodology. And these new infrastructure-sharing rules have done little to bring about any true, facilities-based competition. While forced sharing rules did encourage new “rivals” to enter the market and begin reselling telecom access over the lines owned by incumbent firms, such synthetic competition was never sustainable. Indeed, this regulatory house of cards came crashing down recently as the market tanked and even the most generous infrastructure-sharing rules couldn’t save firms that hadn’t deployed their own facilities. Proponents of UNE-P such as Glassman and Fein seem to conveniently ignore what former AT&T chairman Michael Armstrong eloquently noted in 1998: “No company will invest billions of dollars to become a facilities-based broadband service provider if competitors who have not invested a penny of capital nor taken an ounce of risk can come along and get a free ride on the investments and risks of others.” Armstrong’s comments dealt with forced access to cable networks, but that’s really what the UNE-P regime is all about too: privatizing the risks and socializing the rewards.

Demonizing the Baby Bells. Another major theme of Glassman and Fein’s work is that the Baby Bells are the greedy offspring of the old Ma Bell monopoly and must atone for its sins. Forced access regulation, therefore, serves as a sort of reparations policy to rectify previous wrongs. As Fein argues: “[The] Baby Bell monopolies were not earned by skill, foresight, and industry. Instead, they were the gifts of government bequeathed through decrees that prohibited competitors until the 1996 Act.”

The problem with this logic is twofold. First, the Bells no longer have a monopoly in any sense of the word. The Telecom Act ended all government protections from competition and ensured that private shareholders were responsible for new investments. The risks inherent in the investments now being made by the Bells fall squarely on the shoulders of the firms and their investors. Moreover, the Bells do face legitimate competition today from wireless carriers, and Internet telephony promises to revolutionize the industry. Since the rationales for forced sharing have ceased to exist, incumbents should be accorded clear property rights in their networks and not be forced to share the fruits of their investments with rivals.

Second, even if forced access is intended as punishment for the supposed sins of the past, when is this debt paid in full? Are infrastructure-sharing requirements to last in perpetuity? Once viewed as a transitional halfway house on the road to pure market deregulation, forced access regulation now seems to have become an enshrined part of the regulatory establishment with no sunset plan in sight. Why would free-market conservatives support such a policy?

Deregulation = Industrial Policy? In an interesting new spin on things, ATR’s Grover Norquist has argued that the White House should reject calls by many deregulation-minded analysts for a “national broadband policy,” which he believes is tantamount to “an industrial policy.” But Norquist seems to miss the point that what we have in place today is an elaborate industrial policy that must be dismantled if innovation and investment are to rebound in this sector. Therefore, the concept of a “national broadband policy” is not fundamentally unsound so long as that national policy is based on deregulation, pricing liberalization, and even a fair degree of federal preemption of state and local regulation.

Big Government: The Solution or the Problem? If Glassman, Fein, and Norquist are content to stick with the regulatory status quo, how do they justify the staggering new amount of bureaucracy this regime has entailed? For example, the FCC’s three major infrastructure-sharing orders alone resulted in 1,575 pages and 6,770 footnotes worth of regulation, and thousands of additional pages of rules have been penned by federal and state regulators on top of those. This has meant a bigger FCC and more lawyers lobbying the agency. A recent study by Greg Sidak of the American Enterprise Institute found that the number of telecom lawyers grew by 73 percent in the late 1990s. Meanwhile, FCC spending jumped by 37 percent and the number of pages of regulations in the FCC Record tripled in the post-Telecom Act period.

How do Glassman, Fein, and Norquist square those unsettling facts with their usual limited-government philosophy? Have they convinced themselves that this is a justifiable one-time increase in government power to facilitate the goal of a more competitive telecom marketplace? It’s hard to believe that bureaucrats could bring about such a communications nirvana through Soviet-style micromanagement of telecom markets. And where is all this regulating leading us in the long haul? Are we to believe that the central planners will lay down their pens and gavels and allow the regulatory state to just wither away over time? There aren’t many historical examples of that.

Glassman, Fein, and Norquist have asked the free-market movement to follow them down a path that essentially rejects free markets and instead embraces big government solutions. In light of the miserable failures of the post-Telecom Act regulatory regime, they need to rethink their support for infrastructure sharing and give free markets and real deregulation a chance.

Adam Thierer (athierer [at] cato [dot] org) is the director of telecommunications studies at the Cato Institute and coauthor of What’s Yours Is Mine: Open Access and the Rise of Infrastructure Socialism. To subscribe or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.