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

August 29, 2003 • TechKnowledge No. 57

On August 21, the Federal Communications Commission finally got around to issuing its long‐​awaited ruling in its massive Unbundled Network Element (UNE) Triennial Review. The 576‐​page, 2,447-footnote final order reevaluated the unbundled network elements that incumbent local exchange carriers (ILECs) or Baby Bells must share with competitive local exchange carriers (CLECs) at regulated rates. Before going into detail about what is substantively wrong with the new rules in Part 2 of this newsletter, a few words must be said about the regulatory process surrounding this rule.

Keeping the Industry on Hold. On February 20, a four‐​page preliminary summary of the rules was released and passed by the Commission by a controversial 3–2 decision. In an unusual move that left many guessing as to motive, Republican Commissioner Kevin Martin defected to join sides the agency’s two Democratic FCC commissioners and thwart the more deregulatory approach favored by Chairman Michael Powell and Commissioner Kathleen Abernathy. Martin brokered a complicated deal with the commission’s Democrats that (1) proposed keeping the core elements of old infrastructure sharing rules intact, (2) delegated generous regulatory discretion to state regulators to determine how these rules would be structured in the future, and (3) attempted to generally carve advanced services and broadband technologies out of this mix. But the final details would be left for a later rulemaking.

Six months and a day would go by from the time the preliminary decision was voted on until the 576‐​page final order was released. For six months, telecom industry officials, employees, shareholders, investors, analysts, suppliers, and consumers sat waiting patiently and wondering what the final rules would look like. This process raises some “good government” questions. Is there any other agency or bureau in the U.S. government that does business this way? It’s hard to find any other government body that has the audacity to let the world hang its market planning and investment hopes on a four‐​page memo and then wait six months before turning out the actual rules that will govern the sector. Apparently the FCC didn’t notice that the industry’s market meltdown threatens to devolve into what Discovery Institute senior fellow John Wohlstetter has labeled a “telecom nuclear winter.” While the agency’s delay in getting the final rules out does not likely violate anything in the Administrative Procedures Act or similar regulatory process rules, this is no way for an agency to be doing business if it really cares about the health of the industry it oversees.

Swimming in Oceans of Paper. Worse yet, the clock on this rulemaking process should start much further back than February 20 of this year. In reality, the clock starting ticking in 1996 with the passage of the Telecommunications Act and the FCC’s now infamous Local Competition Order‐​containing 737 page and 3,200 footnotes‐​released in August 1996. In the intervening seven years, thousands of additional pages of regulatory and judicial interpretations have been added to this stack. In fact, let’s take a quick tally of the paperwork burden the FCC has managed to churn out in three of the major “competition” rules it has issued since 1996:

That’s 1,575 pages and 6,770 footnotes worth of regulation in just three orders, not counting the dozens of other rules and clarifications the agency has issued to implement telecom “deregulation.” Nor does it include the hundreds of additional rules issued by state public utility commissions (PUCs), who actually received expanded authority under the latest FCC order.

A Bonanza for Lawyers. Does anybody really understand all of these rules? That’s where the lawyers come in‐​by the boatload. Lawyers have done very well thanks to the FCC’s endless stream of litigation‐​prone rulemakings, as demonstrated in by a recent study by Greg Sidak of the American Enterprise Institute. Sidak found that the number of telecom lawyers‐​as measured by membership in the Federal Communications Bar Association‐​grew by 73 percent in the late 1990s. That was largely driven by a 37 percent hike in FCC spending and a tripling of the number of pages of regulations in the FCC Record in the post‐​Telecom Act period. Sidak argues, “If one assumes (very conservatively) that the average income of an American telecommunications lawyer is $100,000, then the current membership of the FCBA represents an annual expenditure on legal services of at least $340 million.”

Telecom lawyers across the country must be licking their chops at the prospect of litigating the latest FCC revision all the way up to the Supreme Court so that the nation’s highest courts can cast judgment on the regulations for a third time. “Every word will be challenged,” telecom lawyer Dana Frix of the firm Chadbourne & Parke recently told the New York Times. “My children will go to college on this stuff. This is a lawyer’s dream.” (In fact, ILECs have already filed a lawsuit asking the D.C. Circuit Court of Appeals to vacate the rules.) But what’s good for telecom lawyers is 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 thing all this rulemaking activity has produced in sustained numbers. This creates a serious drain on the industry and the broader economy, and, despite claims to the contrary, the FCC’s latest UNE order only threatens to make things worse.

Early reports by investment analysts and market watchers are already bemoaning the apparent inevitability of ongoing litigation that the UNE Order will spawn. Morgan Stanley notes, “We expect dozens of lawsuits from the carriers,” and Deutsche Bank predicts that a “massive round of litigation… will follow the Order.” Lehman Brothers argues that with legal battles likely to continue for a number of years “we think that it will be at least one year, if not two, before any of these regulatory changes are truly finalized and implemented.” A headline from a recent Jefferies Group release says, “FCC’s Big Order Finally Out‐​So Let The Lawsuits Begin!” And a U.S. Bancorp Piper Jaffray report predicts the ruling will result in “a legal nightmare … that will take years to settle and is clearly a negative for the still fragile telecommunications industry.”

Ironically, despite the agency’s best effort to provide greater investment certainty through the promulgation of almost 600 pages of new rules, the UNE Triennial Review will have almost exactly the opposite effect: more confusion and controversy than ever before. This is especially likely given the expanded role envisioned in the order for state regulators, a move that promises to unleash a torrent of new regulatory proceedings from 51 state PUCs and push this teetering sector in the great abyss of regulatory hyper‐​balkanization. More on that in Part 2 of this memo.

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