Will “States’ Rights” Derail Telecom Deregulation?

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During the 11th hour of a heated Federal CommunicationsCommission debate last month over the complicated rules governinglocal telecommunications networks, a disagreement about the ongoingrole of the states in the regulatory process became the keystumbling block to a much-needed revision of current regulatorypolicies. Although this dispute over "states' rights" and telecommarkets may seem like an arcane matter of fleeting importance, inreality it will have profound ramifications for the long-termliberalization and economic revitalization of the ailing telecomsector.

The FCC's February 20 decision in the Unbundled Network ElementTriennial Review, which reevaluated the unbundled network elementplatform (UNE-P) that incumbent local exchange carriers (ILECs) orBaby Bells must share with competitive local exchange carriers(CLECs) at regulated rates, came down to a split 3-2 decision.Republican commissioner Kevin Martin ended up siding with the twoDemocratic FCC commissioners to thwart the deregulatoryalternatives favored by FCC chairman Michael Powell andCommissioner Kathleen Abernathy. Commissioner Martin's maverickmove was premised on the notion that a more "granular" regulatoryapproach was advisable, meaning state regulators should be given anongoing or even expanded oversight role. The theory behind hisendorsement of such state oversight is that it will help "preservelocal competition," primarily by allowing state regulators tosecure continued low-priced access to UNEs by rivals. During thisprocess, a handful of conservative groups also initiated anadvertising campaign to lend their support to Martin's "granular /states' rights" position.

Sharing Is Not Competing. There are threeprimary deficiencies in the logic espoused by Commissioner Martinand these conservative groups. First, the states' rights rallyingcry has become a convenient front for the forces who oppose serioustelecom reform. Commissioner Martin and these conservativeactivists have now become the unwitting champions of those whobelieve that only extensive and ongoing regulatory interventionswill bring about a competitive nirvana in telecom. That ethos wasformulated and enshrined into law by former FCC commissioner ReedHundt, whose expansive reading of the Telecommunications Act of1996 focused on encouraging short-term entry by guaranteeing rivalscheap access to virtually every element of the Baby Bells'networks. Enter they did, by the dozens, but only on a resale basisfor the most part. The rules encouraged infrastructure sharing overfacilities-based investment.

More important, Hundt's FCC encouraged creative interpretationsof the rules by the states that went beyond what the FCC required.State regulators were all too happy to oblige pushing access priceslower and lower in the name of competition. The theory behind allthis subsidized network sharing was that (1) no rival wouldseriously consider competing against local wireline networkproviders (apparently 137 million cellular subscribers don't countfor much!), and, therefore, (2) we might as well let everyone shareexisting networks at the cheapest rate possible so that consumerscan enjoy the myth that infrastructure socialism offers themcredible competitive alternatives.

With Commissioner Martin's recent coup d'état,this truly Orwellian "sharing-is-competing" philosophy has receivedrenewed justification at the FCC despite Powell's best effort tocurtail this corrupt regulatory regime. The fact that telecommarkets have tanked-and lost $12 billion more in marketcapitalization in the wake of this latest decision-challenges thewisdom of extending the UNE-P infrastructure sharing regime,especially now that 51 different state regulatory agencies havebeen given expanded authority over national telecommunicationscarriers.

Dividing the Indivisible? The second problemwith this logic is that it is based on an improper interpretationof federalism principles as applied to telecommunications markets.Federalism is a two-sided coin; the flip side of "states' rights"is interstate commerce. There is little doubt that the vastmajority of tasks undertaken by the federal government since theNew Deal era have been an unjustifiable usurpation of the powersthat the Constitution granted to the states or the citizenry. Butthe Constitution was also an explicit rejection of the Articles ofConfederation: the disadvantages of untrammeled "states' rights"were trade disputes, protectionism, and interference with the flowof interstate commerce. Consequently, the Founders wisely grantedCongress the authority to take steps to regulate commerce among thestates-that is, to keep open the channels of interstate commerce toensure that free trade would win out over factionalism.

Applying the Founders' vision to high-tech markets they couldnot have envisioned is tricky, but not impossible. Fifteen yearsago, Brookings Institution economist Roger Noll argued, "The notionthat there is a meaningful technical and economic distinctionbetween federal and state services was always a fiction, but it hasbecome increasingly so." That is, the idea that telecom markets canbe neatly carved into geographical units and regulated differentlyhas always been based on a fundamental misunderstanding of thenature of the beast in question. After all, at the very heart oftelecommunications is the notion of transcending boundaries andmaking geography and distance irrelevant. And from an economicviewpoint, the marginal cost of placing a call a mile away is aboutthe same as placing one 1,000 miles away. So it seems that if everthere was a good case to be made for an activity being consideredinterstate commerce, this is it. And yet, America's telecom marketremains riddled with a patchwork of policies that actually thwartthat goal and seek to divide the indivisible and place boundarieson the boundless.

Is Deregulation an Impossible Dream? Whichleads to the final problem with Commissioner Martin's logic: Inendorsing a more "granular," state-led approach, does he honestlybelieve that serious deregulation will be achieved any time in thenear future? Thanks to his efforts, 51 state regulatory commissionsare now free to continue their experiment with telecom markets.Where is the end to this process? Will state regulators ever saythat enough is enough, lay down their guns, and call it a day? Notlikely. More likely, they will find creative ways to expand theirpowers and justify their continued existence. Open access for cablesystems is still on the agenda for some, as is the question ofuniversal service for broadband. And what about the Internet? Is amore "granular" regulatory approach advisable there as well? We'llsee what happens as Internet telephony begins to catch on.

It is important to recall that not so long ago, before theTelecom Act preempted it, most states had laws on the books wellinto the 1990s that made it illegal to compete in telecom marketsat all. It is difficult to recall any case in which stateregulators have proposed freeing up a communications service;almost all serious deregulatory initiatives began at the federallevel. And that has been the case in other industries as well. Ifthe United States is ever to see the "pro-competitive, deregulatorynational policy framework" mentioned in the first line of theTelecommunications Act of 1996, misguided states' rights logic likethat espoused by Commissioner Martin must be overcome.

Adam D. Thierer

Adam Thierer (athierer@cato.org) is the Director of Telecommunications Studies at the Cato Institute in Washington, D.C. and coauthor of the forthcoming Cato book "What's Yours Is Mine: Open Access and the Rise of Infrastructure Socialism." To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html.