Thinking About the Next Telecom Act

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

As someone who worked closely with members of this Committee adecade ago when we started getting serious about telecom reform, Ithink it's safe to say that we all share a sense of frustration anddisappointment that we were not able to advance the ball a littlefurther last time around.

If I had to summarize what went wrong with the Telecom Act of1996, I would use the following paradox: Congress wanted marketcompetition but did not trust the free market enough to tellregulators to step aside and allow markets to function on theirown.

Consequently, the FCC, the Department of Justice, state andlocal regulatory commissions, and the courts, have spent the lastten years treating this industry as a regulatory plaything to beendlessly toyed with. Today there is virtually no element oftelecommunications that is not subject to some sort of meddling bysome or all of these regulatory officials.

While it's fair to say that it was probably wishful thinking tobelieve we could have undone a century's worth of command andcontrol regulatory policies in a few short years, one would have atleast hoped that we would not be stuck still debating the sameissues today that dominated the agenda over a decade ago. Indeed,if Rip Van Winkle fell asleep in 1994 and woke up in 2004, hewouldn't think he'd missed a beat if telecom regulation was anyguide.

But despite the ongoing regulatory quagmire, the good news isthat we have witnessed amazing strides in terms of technologicalprogress and we can confidently say that this marketplace has neverwitnessed such competitive forces at work. Whether it's thewireless revolution that is allowing millions to cut the cordentirely, or the Internet and broadband revolution that is openingup a whole new world of opportunities that did not exist prior to1996, by almost any measure, consumers are better off and have morechoices now than ever before.1

Still, much remains to be done to clear out the regulatorydeadwood that continues to hold back further innovation andcompetition. While there are dozens of important regulatory reformobjectives I could outline,2 in my limited time heretoday it makes more sense to briefly discuss the three mostimportant over-arching themes or priorities that should frame ourcurrent thinking about how to reform telecommunications policy.These priorities include:

(1) Rationalizing RegulatoryClassifications
(2) Dealing with Jurisdictional Matters
(3) Getting Agency Power and Size UnderControl

Regulatory Classifications

With respect to regulatory classifications, a general consensusexists today that Congress will need to formally close the book onthe archaic regulatory classifications of the past, whichpigeonhole technologies and providers into distinct vertical policy"silos." That is, we still have Title II for common carriers, TitleIII for wireless, Title IV for cable, and so on, even though rapidtechnological change and convergence have largely wiped out suchdistinctions and pitted these formerly distinct sectors against oneanother in heated competition for consumer allegiance. Thus,although the communications / broadband marketplace is becoming onegiant fruit salad of services and providers, regulators are stillseparating out the apples, oranges, and bananas and regulating themdifferently. 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 thenew marketplace operates. We can divide the new industry into atleast four distinct layers: (1) Content; (2) Applications; (3)Code; and, (4) Infrastructure, and regulate if we must, eachaccordingly.3 But I would caution Congress againstformally enshrining a network layers model as a new regulatoryregime. While this model provides a useful analytical tool to helpus rethink and eliminate the outmoded policy paradigms of the past,we would not want these new layers to become the equivalent ofrigid regulatory quarantines or firewalls on industry innovation orvertical integration.4

A second and better way to tear down the old regulatoryparadigms and achieve regulatory parity would be to borrow a pagefrom trade law and adopt the equivalent of a "most favored nation"(MFN) principle for communications. In a nutshell, this policywould state that: "Any communications carrier seeking to offer anew service or entering a new line of business, should be regulatedno more stringently than its least regulated competitor." Thiswould allow us to achieve regulatory simplicity and parity not by"regulating up" to put everyone on equal difficult footing butrather by "deregulating down." Given the confusion over theBrand X court case and the ongoing FCC investigation intoa Title 1 "information services" classification for broadband, this"Most Favored Nation" approach might help us bring some resolutionto this difficult issue.

Jurisdictional Matters

Next we come to jurisdictional matters, which could very wellend up being the most controversial issue this Committee will takeup if you choose to re-open the Telecom Act. Here I am speaking ofthe heated debate between federal, state and local regulators forcontrol 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 InformationAge, decentralization of political power almost always has apositive effect in terms of expanding human liberty.7But 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: Telecommunicationsregulation is one of those cases where state and localexperimentation doesn't work so well. After all, at the very heartof telecommunications lies the notion of transcending boundariesand making geography and distance irrelevant. If ever there was agood case to be made for an activity being considered interstatecommerce, this is it. And yet, America's telecom market remainsriddled with a patchwork of policies that actually thwart that goaland seek to divide the indivisible and place boundaries on theboundless.8

This must end. And the only way it will end is by Congresstaking the same difficult step it had to take when deregulatingairlines, trucking, railroads, and banking: pre-emption. We mustget serious about the "national policy framework" mentioned in thepreamble of the Telecom Act by comprehensively pre-empting stateand local regulation in this sector. The rise of wireless andInternet-based forms of communications makes this an absolutenecessity.

If you feel compelled to leave some authority to stateregulators, why not devolve to them any universal serviceresponsibilities that continue to be deemed necessary? This is onearea where experimentation can work if the states devised targetedassistance mechanisms. But they should not be allowed to imposeregulatory restraints or levies on interstate communications to doso.

Agency Power

My third and final "big picture" reform involves what may havebeen the most glaring omission from the Telecom Act of 1996: Thealmost complete failure to contain or cut back the size and powerof the FCC. Again, we would do well to remember the lessons of thepast. When Congress deregulated airlines, trucking and railroads,lawmakers wisely realized that comprehensive and lasting reform waspossible only if the agencies that oversaw those sectors were alsoreformed or even eliminated.

In the telecom world, by contrast, the FCC grew bigger and morepowerful in the wake of reform and we witnessed spending go up by37 percent, a tripling of the number of pages in the FCCRecord, and there were 73 percent more telecom lawyers afterthe Act than before. It is safe to say that you cannot deregulatean industry by granting regulators more power over thatindustry.9

This too must end. The next cut at a Telecom Act must do morethan just hand the FCC vague forbearance language with thesuggestion that the agency take steps to voluntarily regulate less.We can't expect the regulators to deregulatethemselves.10 We need clear sunsets on existing FCCpowers, especially the infrastructure sharing provisions of thelast Act.11 And then we need to impose sunsets on anynew transitional powers we grant them in the next Telecom Act. Andwe need funding cuts too.

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

Conclusion: Ending "Chicken Little Complex"

In conclusion, it is my hope that Congress rejects the manydoomsday-ers and nay-sayers in the telecom sector who claim the skywill fall without incessant regulatory oversight and intervention."Chicken Little complex" seems to run rampant throughout thissector even though it is less warranted than ever before. We have achance to make more than just a clean break with the past; we havethe chance now to close the book on a regulatory past that has donelittle to truly benefit consumers. Regulators have been given over100 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 WirelineTelecom Sector's Perfect Storm," Cato InstituteTechKnowledge No. 66, November 20, 2003, https://www.cato.org/tech/tk/031120-tk.html

2. Adam Thierer, "A 10-Point Agenda for Comprehensive TelecomReform," Cato Institute Briefing Paper No. 63, May 8,2001, https://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 NetworkLayers 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 PublicPolicy?: Vertical Integration, 'Net Neutrality,' and the NetworkLayers Model," Presentation at Columbia University Institutefor Tele-Information conference on Media Concentration and theInternet, (forthcoming), April 15, 2004; Adam D. Thierer, "NetNeutrality: Digital Discrimination or Regulatory Gamesmanship inCyberspace?," Cato Institute Policy Analysis No. 507,January 9, 2004, https://www.cato.org/pubs/pas/pa-507es.html

5. Adam D. Thierer, "Telecom Newspeak: The Orwellian World ofBroadband 'Deregulation'," in Sonia Arrison, ed., Telecrisis:How Regulation Stifles High-Speed Internet Access, (SanFrancisco, 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, "Federalismand Regulation," Regulation, Vol. 26, No. 4, Winter2003-2004, pp. 46-50, https://www.cato.org/pubs/regulation/regv26n4/v26n4-7.pdf

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

8. See generally: Adam Thierer, "Will 'States' Rights' DerailTelecom Deregulation?" Cato Institute TechKnowledge No.49, March 14, 2003, https://www.cato.org/tech/tk/030314-tk.html

9. J. Gregory Sidak, "The Failure of Good Intentions: TheWorldCom Fraud and the Collapse of American TelecommunicationsAfter Deregulation," Yale Journal of Regulation, Vol. 20.,2003, pp. 207-267.

10. Alfred E. Kahn, Whom the Gods Would Destroy or How Notto Deregulate, (Washington, D.C.: AEI-Brookings Joint Centerfor 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 ofInfrastructure Socialism, (Washington, D.C.: Cato Institute,2003), http://www.catostore.org/index.asp?fa=ProductDetails&pid=1441099

Adam D. Thierer

Committee on Commerce, Science and Transportation
United States Senate