An Open Letter to Pro‐​Regulation Conservatives

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Eight years after the passage of the Telecommunications Act of1996, the contentious debate over telecom and broadband regulatorypolicy continues to rage. The same issues that animated policydiscussions prior to the act's passage continue to dominate today'sendless stream of regulatory proceedings and court battles.Opponents still debate the best way to ensure the development of amore competitive marketplace, improve service quality, and increaseoverall investment and innovation. But in the end, despite thecomplexity of the issues involved, the debate over telecom policyreally comes down to a simple question: Do you trust free marketsor government mandates to get this job done?

Surprisingly, recent editorials or letters penned byconservatives Jim Glassman of the American Enterprise Institute;grassroots activist Grover Norquist, president of Americans for TaxReform; and constitutional scholar Bruce Fein, have suggested thatmandates, not markets, are the solution. In their work, theseconservatives-who are typically tireless champions of free marketsand less government-seem to be singing a very different tune whenit comes to telecom and broadband regulation.

Sharing = Competing? For example, in numerouseditorials Glassman and Fein suggest that telecom "competition" candevelop only through the vigorous application ofinfrastructure-sharing rules and government-set price controls forthe networks owned by incumbent telcos. Of course, they don't stateit in those terms; rather, they argue that by requiring the BabyBells to share unbundled network elements (UNEs) with competitivelocal exchange carriers (CLECs), lawmakers are helping "incubatecompetition" and allowing CLECs to "compete on a level playingfield," in Fein's words. Likewise, Glassman argues that the FCC's UNE-P strategy-whichrequired incumbents to unbundle all their various network elementsand then recombine them into a single platform and wholesale themto CLECs at a generous discount-has been "a critical ingredient inthe plan for deregulation laid out . . . in the TelecommunicationsAct of 1996 [and] is bringing Americans lower prices and betterservice."

This is a curious theory of "deregulation." Deregulation usuallymeans 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 newinfrastructure-sharing rules have done little to bring about anytrue, facilities-based competition. While forced sharing rules didencourage new "rivals" to enter the market and begin resellingtelecom access over the lines owned by incumbent firms, suchsynthetic competition was never sustainable. Indeed, thisregulatory house of cards came crashing down recently as the markettanked and even the most generous infrastructure-sharing rulescouldn't save firms that hadn't deployed their own facilities.Proponents of UNE-P such as Glassman and Fein seem to convenientlyignore what former AT&T chairman Michael Armstrong eloquentlynoted in 1998: "No company will invest billions of dollars tobecome a facilities-based broadband service provider if competitorswho have not invested a penny of capital nor taken an ounce of riskcan come along and get a free ride on the investments and risks ofothers." Armstrong's comments dealt with forced access to cablenetworks, 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 themeof Glassman and Fein's work is that the Baby Bells are the greedyoffspring of the old Ma Bell monopoly and must atone for its sins.Forced access regulation, therefore, serves as a sort ofreparations policy to rectify previous wrongs. As Fein argues: "[The] Baby Bell monopolies were notearned by skill, foresight, and industry. Instead, they were thegifts of government bequeathed through decrees that prohibitedcompetitors until the 1996 Act."

The problem with this logic is twofold. First, the Bells nolonger have a monopoly in any sense of the word. The Telecom Actended all government protections from competition and ensured thatprivate shareholders were responsible for new investments. Therisks inherent in the investments now being made by the Bells fallsquarely on the shoulders of the firms and their investors.Moreover, the Bells do face legitimate competition today fromwireless carriers, and Internettelephony promises to revolutionize the industry. Since therationales for forced sharing have ceased to exist, incumbentsshould be accorded clear property rights in their networks and notbe forced to share the fruits of their investments with rivals.

Second, even if forced access is intended as punishment for thesupposed sins of the past, when is this debt paid in full? Areinfrastructure-sharing requirements to last in perpetuity? Onceviewed as a transitional halfway house on the road to pure marketderegulation, forced access regulation now seems to have become anenshrined part of the regulatory establishment with no sunset planin sight. Why would free-market conservatives support such apolicy?

Deregulation = Industrial Policy? In aninteresting new spin on things, ATR's Grover Norquist has arguedthat the White House should reject calls by manyderegulation-minded analysts for a "national broadband policy,"which he believes is tantamount to "an industrial policy." ButNorquist seems to miss the point that what we have in place todayis an elaborate industrial policy that must be dismantled ifinnovation and investment are to rebound in this sector. Therefore,the concept of a "national broadband policy" is not fundamentallyunsound so long as that national policy is based on deregulation,pricing liberalization, and even a fair degree of federalpreemption of state and local regulation.

Big Government: The Solution or the Problem? IfGlassman, Fein, and Norquist are content to stick with theregulatory status quo, how do they justify the staggering newamount of bureaucracy this regime has entailed? For example, theFCC's three major infrastructure-sharing orders alone resulted in 1,575 pages and 6,770footnotes worth of regulation, and thousands of additional pages ofrules have been penned by federal and state regulators on top ofthose. This has meant a bigger FCC and more lawyers lobbying theagency. A recent study by Greg Sidak of the AmericanEnterprise Institute found that the number of telecom lawyers grewby 73 percent in the late 1990s. Meanwhile, FCC spending jumped by37 percent and the number of pages of regulations in the FCC Recordtripled in the post-Telecom Act period.

How do Glassman, Fein, and Norquist square those unsettlingfacts with their usual limited-government philosophy? Have theyconvinced themselves that this is a justifiable one-time increasein government power to facilitate the goal of a more competitivetelecom marketplace? It's hard to believe that bureaucrats couldbring about such a communications nirvana through Soviet-stylemicromanagement of telecom markets. And where is all thisregulating leading us in the long haul? Are we to believe that thecentral planners will lay down their pens and gavels and allow theregulatory state to just wither away over time? There aren't manyhistorical examples of that.

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