TechKnowledge No. 91

Twilight for Traditional Telecom Regulation?

By Adam D. Thierer
October 25, 2004

Slowly but surely, change is coming to the world of telecommunications regulation. While it’s easy to get pessimistic about the sluggish pace of reform in the eight years since the not-so-revolutionary Telecommunications Act of 1996 passed, recent developments prove that central planning is finally starting to give way to a future of free markets and consumer choice.

Consider that, on October 14, the Federal Communications Commission quietly promulgated a new rule allowing incumbent telephone companies to run “fiber-to-the-curb” (FTTC) lines within 500 feet of a customer’s home or office without fear of infrastructure-sharing mandates. (A previous FCC decision had already liberated “fiber-to-the-home” (FTTH), making it clear that telcos would not be forced to share lines that ran all the way to the customer’s premises.) On the same day, the FCC announced new rules allowing energy and electricity carriers to offer Broadband over Power Line (BPL) service to their customers.

Those unfamiliar with the mysteries of modern communications regulation might reasonably ask: Why does the government have any say over these decisions to begin with? Shouldn’t these companies be free to offer consumers these innovative new services without asking “Mother, May I”? Of course they should, but that’s not the way telecom regulation has long worked. In the eyes of many regulators, you are guilty of being a monopolist until proven innocent.

Yet, many regulators are finally coming to see that there is no denying the realities of our competitive communications marketplace. Shackling one set of players with unique rules no longer makes any sense in a world where every home or office has two or three wires to choose from, and wireless options too. As these two recent FCC decisions illustrate, the war over telecom is drawing to a close. But let’s step back for a moment and consider just how costly and unproductive this war has been.

Leave No Telecom Consultant Behind. A few years ago, a rather remarkable advertising/public relations battle took place over a piece of telecom reform legislation sponsored by Representatives Billy Tauzin (R-La.) and John Dingell (D-Mich.). Ads both praising and blasting the “Tauzin-Dingell” bill littered the papers, television and radio, and even Internet websites. The industry combatants who waged this battle spent countless millions. A lot of lawyers, consultants and PR companies got very rich by coming up with crafty bumper-sticker slogans and slick-looking ads. The funny (or perhaps sad) thing is, despite all the time, energy, and money devoted it, few even knew what this fight was really all about.

Nonetheless, the fight was important. At stake was the question of how future communications and broadband markets, networks, and technologies would be regulated. Simply put, the Tauzin-Dingell bill stood for the proposition that it didn’t make sense to regulate the new stuff the same way we regulated the old stuff. More specifically, the bill proposed a regulatory quarantine of sorts between the rules governing old telecom networks and those for next generation high-speed broadband services. The Tauzin-Dingell bill exempted new investments and networks from the infrastructure sharing rules that governed old copper telecom systems.

The legislative war over Tauzin-Dingell was epic, but ultimately little came of it. After years of shelling from both sides, the guns fell silent on Capitol Hill as the battle shifted to other fronts, namely the FCC and the courts. Things weren’t much better at the FCC. Agency officials engaged in protracted debates over the regulations spawned by the Telecom Act. Among many other things, the question of the old rules-new networks problem was raised again. And, again, policymakers delayed giving the industry specific answers about what to expect.

Uncertainty ruled. Markets tanked. Carriers scratched their heads, wondering whether to deploy new systems. Many equipment vendors closed their factories. And Washington telecom lawyers and consultants continued to get very rich.

The Beginning of the End. In March of this year, the D.C. Circuit Appeals Court said enough is enough. The court tossed out most of the FCC’s revised infrastructure-sharing rules. In June, the Bush administration announced it would not seek Supreme Court review of that decision. Since then, the FCC has been trying to find a way to backpedal out of this mess and save face at the same time. Revised rules are slowly trickling out to comply with the Court’s order.

Which brings us back to the FCC’s decisions liberating new fiber deployment. The decisions free the telcos to play catch up to cable operators-much like the Tauzin-Dingell bill had proposed many years ago. But is it too little, too late? Cable already enjoys a sizeable lead in the high-speed broadband market, thanks in large part to more than $80 billion in investments cable operators made throughout the late 1990s to deploy all-digital, interactive broadband systems. That allowed cable to offer consumers faster broadband than what most telcos can provide, as well as voice services through voice over Internet protocol (VoIP). Meanwhile, cable companies still have plenty of video services, including high-definition TV (HDTV) channels. Telcos don’t have comparable video services to offer their customers.

Thus, cable has the infrastructure in place today to offer consumers the Holy Grail of communications service-voice, video, and data bundled into one bill. And cable continues to enjoy freedom from infrastructure-sharing mandates. By contrast, the telcos have a core competency in voice services, but they are struggling to catch up in the data business and have few video offerings ready to go. Worse yet for them, wireless and VoIP providers are cannibalizing their voice market. Despite this, the telcos remain buried underneath mountains of regulatory mandates that require them to share much of their infrastructure with rivals. Hardly seems fair when you think about it.

More than five years ago, policymakers had a chance to rectify this unjust regulatory asymmetry with the Tauzin-Dingell bill, but they delayed and continued to delegate the important decisions to the FCC and the courts. Consequently, more than eight years after the passage of the Telecom Act, we’re still struggling to get out of this regulatory mess.

Though the war is not over yet, many important battles have been won. With the FCC’s latest BPL order, the “freedom for fiber” decisions, and other proceedings like the pending IP-enabled services rulemaking, there is a chance to make more than just a clean break with the past. There is the chance that we can close the book on the traditional public utility, litigation-oriented regulatory regime and replace it with a marketplace governed by property rights, pricing freedom, and voluntary contracts. The old regime is not dead yet, but its days are numbered.

Adam Thierer (athierer [at] cato [dot] org) is the director of telecommunications studies at the Cato Institute in Washington, D.C. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.