Was the UNE Triennial Review Worth the Wait? Part 1: The Process

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On August 21, the Federal Communications Commission finally gotaround to issuing its long-awaited ruling in its massive Unbundled Network Element (UNE) TriennialReview. The 576-page, 2,447-footnote final order reevaluatedthe unbundled network elements that incumbent local exchangecarriers (ILECs) or Baby Bells must share with competitive localexchange carriers (CLECs) at regulated rates. Before going intodetail about what is substantively wrong with the new rules in Part2 of this newsletter, a few words must be said about the regulatoryprocess surrounding this rule.

Keeping the Industry on Hold. On February 20, afour-page preliminary summary of the rules wasreleased and passed by the Commission by a controversial 3-2decision. In an unusual move that left many guessing as to motive,Republican Commissioner Kevin Martin defected to join sides theagency's two Democratic FCC commissioners and thwart the morederegulatory approach favored by Chairman Michael Powell andCommissioner Kathleen Abernathy. Martin brokered a complicated dealwith the commission's Democrats that (1) proposed keeping the coreelements of old infrastructure sharing rules intact, (2) delegatedgenerous regulatory discretion to state regulators to determine howthese rules would be structured in the future, and (3) attempted togenerally carve advanced services and broadband technologies out ofthis mix. But the final details would be left for a laterrulemaking.

Six months and a day would go by from the time the preliminarydecision was voted on until the 576-page final order was released.For six months, telecom industry officials, employees,shareholders, investors, analysts, suppliers, and consumers satwaiting patiently and wondering what the final rules would looklike. This process raises some "good government" questions. Isthere any other agency or bureau in the U.S. government that doesbusiness this way? It's hard to find any other government body thathas the audacity to let the world hang its market planning andinvestment hopes on a four-page memo and then wait six monthsbefore turning out the actual rules that will govern the sector.Apparently the FCC didn't notice that the industry's marketmeltdown threatens to devolve into what Discovery Institute seniorfellow John Wohlstetter has labeled a "telecom nuclear winter." While the agency'sdelay in getting the final rules out does not likely violateanything in the Administrative Procedures Act or similar regulatoryprocess rules, this is no way for an agency to be doing business ifit really cares about the health of the industry it oversees.

Swimming in Oceans of Paper. Worse yet, theclock on this rulemaking process should start much further backthan February 20 of this year. In reality, the clock startingticking in 1996 with the passage of the Telecommunications Act andthe FCC's now infamous Local Competition Order-containing 737 pageand 3,200 footnotes-released in August 1996. In the interveningseven years, thousands of additional pages of regulatory andjudicial interpretations have been added to this stack. In fact,let's take a quick tally of the paperwork burden the FCC hasmanaged to churn out in three of the major "competition" rules ithas issued since 1996:

That's 1,575 pages and 6,770 footnotes worth of regulation injust three orders, not counting the dozens of other rules andclarifications the agency has issued to implement telecom"deregulation." Nor does it include the hundreds of additionalrules issued by state public utility commissions (PUCs), whoactually received expanded authority under the latest FCCorder.

A Bonanza for Lawyers. Does anybody reallyunderstand all of these rules? That's where the lawyers come in-bythe boatload. Lawyers have done very well thanks to the FCC'sendless stream of litigation-prone rulemakings, as demonstrated inby a recent study by Greg Sidak of the AmericanEnterprise Institute. Sidak found that the number of telecomlawyers-as measured by membership in the Federal Communications BarAssociation-grew by 73 percent in the late 1990s. That was largelydriven by a 37 percent hike in FCC spending and a tripling of thenumber of pages of regulations in the FCC Record in thepost-Telecom Act period. Sidak argues, "If one assumes (veryconservatively) that the average income of an Americantelecommunications lawyer is $100,000, then the current membershipof the FCBA represents an annual expenditure on legal services ofat least $340 million."

Telecom lawyers across the country must be licking their chopsat the prospect of litigating the latest FCC revision all the wayup to the Supreme Court so that the nation's highest courts cancast judgment on the regulations for a third time. "Every word willbe challenged," telecom lawyer Dana Frix of the firm Chadbourne& Parke recently told the New York Times. "Mychildren will go to college on this stuff. This is a lawyer'sdream." (In fact, ILECs have already filed a lawsuit asking the D.C. Circuit Court ofAppeals to vacate the rules.) But what's good for telecom lawyersis not likely to be good for the rest of the industry, the economy,or consumers. Future historians may well label this era of telecom"The Age of Litigation," because lawsuits are about the only thingall this rulemaking activity has produced in sustained numbers.This creates a serious drain on the industry and the broadereconomy, and, despite claims to the contrary, the FCC's latest UNEorder only threatens to make things worse.

Early reports by investment analysts and market watchers arealready bemoaning the apparent inevitability of ongoing litigationthat the UNE Order will spawn. Morgan Stanley notes, "We expectdozens of lawsuits from the carriers," and Deutsche Bank predictsthat a "massive round of litigation… will follow the Order."Lehman Brothers argues that with legal battles likely to continuefor a number of years "we think that it will be at least one year,if not two, before any of these regulatory changes are trulyfinalized and implemented." A headline from a recent JefferiesGroup release says, "FCC's Big Order Finally Out-So Let TheLawsuits Begin!" And a U.S. Bancorp Piper Jaffray report predictsthe ruling will result in "a legal nightmare . . . that will takeyears to settle and is clearly a negative for the still fragiletelecommunications industry."

Ironically, despite the agency's best effort to provide greaterinvestment certainty through the promulgation of almost 600 pagesof new rules, the UNE Triennial Review will have almost exactly theopposite effect: more confusion and controversy than ever before.This is especially likely given the expanded role envisioned in theorder for state regulators, a move that promises to unleash atorrent of new regulatory proceedings from 51 state PUCs and pushthis teetering sector in the great abyss of regulatoryhyper-balkanization. More on that in Part 2 of this memo.