Negotiate, Not Litigate

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When the D.C. Circuit Appeals Court in March once again threwout the Federal Communications Commission's rules requiringincumbent telephone companies like Verizon to share their networkfacilities at regulated rates, the court handed thetelecommunications industry a huge opportunity. In short, there isan opportunity to replace the traditional public utility,litigation-oriented regulatory regime with a less-regulated,commercially oriented regime in which telecom providers wishing toshare facilities are free to enter mutually acceptableagreements.

But this chance may be squandered by state regulators, andfederal regulators too, if they insist on putting their ownregulatory stamp on the freely negotiated agreements. In the lastcentury's telecom world, communications services were largelyprovided on a monopoly basis. In that old environment, a regimeheavily weighted toward regulation and litigation may have beenappropriate, or at least acceptable.

In today's Internet Age environment, however, wireline telephonecompanies, cable companies and wireless telephone companies, not tomention new Voice over Internet Protocol ("VoIP") and electronicmessaging providers all compete. Consumer welfare will be greatlyenhanced if these service providers are allowed to do what they doin other competitive markets -- freely negotiate private contractsthat best meet their mutual needs.

The appeals court held that the FCC's existing rules areinconsistent with the 1996 Telecom Act because they mandate thatincumbent telecoms provide competitors with virtually unlimitedaccess to the incumbents' networks even if the new entrants are notimpaired from providing their own facilities. This came after theFCC received two previous judicial rebukes of these rules for thesame reason. The court's frustration, in chastising the"commission's failure, after eight years, to develop lawfulunbundling rules, and its apparent unwillingness to adhere to priorjudicial rulings," was understandable. After the court's decision,one option open to those who favor continuing the old regime is tojust keep litigating by asking the Supreme Court to review theappeals court decision.

With the opening provided by the decision, however, thepreviously bitterly divided commission came together March 31 tourge telecom providers to "begin a period of commercialnegotiations designed to restore certainty and preserve competitionin the telecommunications market." Observing that the incessantlitigation has unsettled the market, the commissioners "ask[ed] allcarriers to engage in a period of good-faith negotiations to arriveat commercially acceptable arrangements" for interconnection andfacilities-sharing. They noted the 1996 Telecom Act clearlycontemplated "the role of commercial negotiations as a tool inshaping a competitive communications marketplace."

So far, so good. The negotiations between the incumbent telecomsand their competitors even got off to a modestly encouraging start,with incumbent SBC and Sage Telecom, the third-largest competitivecarrier in SBC's territory, announcing they had entered into aseven-year commercial agreement. This was followed by anannouncement that incumbent Qwest had negotiated a three-yearcommercial agreement with Covad, a leading provider of broadbandInternet services. But now it looks as if some of the state publicutility commissions are determined to throw roadblocks into thenegotiating process, and there have been indications the FCC may bemeddling as well by, say, requesting negotiating information andpressuring parties to use mediators.

For example, the Michigan Public Service Commission has issuedan order requiring submission of the SBC/Sage agreement forapproval so it can "determine whether agreement discriminatesagainst other competitors and is in the public interest." TheCalifornia, Texas and Kansas commissions have indicated theSBC/Sage agreement should be subject to their OK. Not surprisingly,the National Association of Regulatory Utility Commissioners, thestate commissioners' trade association, has urged that allcommercial agreements be reviewed by the state commissions.

Although the matter is not free from doubt, there is a goodargument that as a legal matter these private agreements need notbe filed with state commissions to the extent they involve networkelements no longer subject to FCC access requirements. There is nodoubt, however, that if the agreements must be filed publicly andare subject to an undefined "public interest" review by stateregulators, the commercial negotiations the FCC commissioners (andeven many state commissioners) wish to succeed, in fact, willlikely fail since the incentive to negotiate will be severelydiminished.

If negotiated agreements are required to be filed at all, at aminimum state regulators should use existing authority to protectthe confidentiality of commercially sensitive terms and conditions.And they should presume such individually negotiated agreements arein the public interest. After all, the ability of private partiesto negotiate binding agreements tailored to meet their individualneeds is at the heart of an unregulated competitive marketplace.Such agreements provide long-term stability and facilitate soundbusiness plans. It is no accident the SBC/Sage and the Qwest/Covadagreements are for seven and three years respectively.

The D.C. Circuit decision has opened a window of opportunity toescape the regulatory and litigation morass that has prevailedsince the 1996 Telecom Act passed. But if regulators act as ifnothing has really changed, then nothing will. It is past time forregulators to abandon the last century's public utility model infavor of a market-oriented regime in which industry participantshave contract freedom so, like others in a competitive marketplace,they can decide themselves how to meet customer needs by voluntaryagreements.

Randolph J. May, James L. Gatusso, and Adam D. Thierer

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.