Bad Law, Bad Policy, and Bad for Consumers

Published November 1, 2003

Today, the Commission concludes one of its most significant proceedings ever. The Triennial Review has been a complicated and difficult undertaking, but one that will set critical parameters for competition and broadband deployment for years to come. There are some important achievements in this Order that have long been objectives of mine–namely, substantial broadband relief. Yet, regrettably, there are some fateful decisions as well that I believe represent poor policy and which flout the law. …

In opening this proceeding, this Commission committed itself to conduct a thorough review of its unbundling policies. This review took on greater importance in light of a slumping telecommunications sector and the D.C. Circuit’s USTA decision vacating the rules that unbundled every element of an incumbent’s network. Thus, the Commission was ordered to reconstruct its list of unbundled elements from the ground up–making an element available only if the Commission could show a competitor was significantly impaired without it.

As we have endeavored to do so, the most controversial judgment rested with the switching element. The importance of this element is not in its particular functionality, but that it represents the capstone of what has become known as the unbundled platform or UNE-P. UNE-P is nothing more than a complete use of the incumbent’s network, priced by element. This results in a substantially lower price than the statute allows for resale.

If switching is available, it is very likely a carrier can resell the entire incumbent’s network, at heavily discounted rates set by regulators, without having to provide anything in the way of its own infrastructure. After one sorts through the legal contortions of the Majority’s switching decision he will find an Order remarkably similar to the prior two fatal decisions–one that preserves UNE-P as the favored mode of competition, without any meaningful consideration of the social and economic costs of unbundling. This is bad policy and bad law.

Consistently underlying my position is a commitment to promote and advance competition that is meaningful and sustainable, and that will eventually achieve Congress’ goal of reducing regulation and promoting facilities-based competition. The benefits of such a policy are straightforward:

  • Facilities-based competition means a competitor can offer service differentiated from the incumbent.
  • Facilities-based competitors own more of their network and can control more of their costs, thereby offering consumers real potential for lower prices.
  • Facilities-based competitors are less dependent on the incumbent thereby reducing the need for regulation–an explicit Congressional goal.
  • Facilities-based competitors also create vital redundant networks that can serve our nation if other facilities are damaged by those hostile to our way of life.

Apparently, the Majority is a big fan of UNE-P, because it has contorted the letter and spirit of the statute and the court’s interpretation of our responsibilities in an effort to ensure its indefinite preservation. What is remarkable about this decision is that one looks in vain to find a clear or coherent federal policy in the Majority’s choices. Today’s decision clearly steps back from a pro-facilities policy, by favoring extensive regulatory management of incumbent networks. Under this regime, state regulators set retail rates, state regulators set all wholesale rates, and state regulators determine what elements will be made available.

More distressing than giving facilities providers the back of their hand, I see no meaningful federal policy put in its place, other than vague and solicitous pronouncements about the states playing the lad role in making these determinations and a commitment to “competition,” no matter how anemic or artificial. Congress demanded the Commission not be so demur when it vested it with responsibility for the unbundling regime.

This proceeding began properly as an exercise to determine what elements should be unbundled. It was transformed into a battle not over what should be unbundled, but who should decide–this Commission or the states. Make no mistake, the role of the states dominated this proceeding solely because states were perceived as a more favorable venue for preserving the status quo of aggressive unbundling rights. Indeed, this perception is not without support as the states, through the National Association of Regulatory Utility Commissions (NARUC), supported the “universal availability of UNE-P.”

Competitors who once viewed states as less than perfect protectors of competition, swapped positions and took refuge in a states rights debate that was a stalking horse for a policy of maximum unbundling. In this environment, the Majority decided to take a politically expedient course instead of the right course: they decided not to make any of the difficult calls that this proceeding demanded. Notwithstanding the tens of thousands of pages of record evidence compiled over the course of a full year and the tireless work of Commission staff, the Majority ruled that there was little basis in the record for any conclusive decision and that states, instead, should make the lion’s share of unbundling determinations. The record was beside the point, the goal was to keep UNE-P in place. …

The nation will now embark on 51 major state proceedings to evaluate what elements will be unbundled and made available to competitors. These decisions will be litigated through 51 different federal district courts. These 51 cases will likely be decided in multiple ways–some upholding the state, some overturning the state and little chance of regulatory and legal harmony among them at the end of the day. These 51 district court cases are likely to be heard by 12 Federal Courts of Appeals–do we expect they will all rule similarly? If not, we will eventually be back in the Supreme Court of the United States to resolve any conflicts–the same Court that vacated our excessively permissive unbundling regime in 1999. This process will take many years and will hardly be the quieting and stabilizing regime that was so craved by a rocky market. It is, in short, a litigation bonanza.

This Majority’s UNE-P decision could prove harmful to consumers in the long-run, and I cringe to see their welfare raised on the staff of the Majority’s decision. Make no mistake, UNE-P may have very limited merits as a transitional strategy, but it is fatally flawed as sustainable local competition. This is not the low lying plateau on which the high aspirations of the 1996 Act should be planted. It is a model that only works if hundreds of stars align perfectly and stay that way: every state needs to continue to make every last element available; every decision to do so must be sustained by every court that examines it; the Commission must never tamper with it and Congress better not ever alter the rights. The regulatory arbitrage bubble expands ever more perilously with each regulatory variable and is sure to eventually pop, like dot coms of old, if government policy does not diligently steer the balloon to stable ground. …

I sincerely hope that those carriers who fought so fiercely for this result will now prove their value in the marketplace and actually deliver the local competition, lower prices and more innovative services that they insisted they would if they prevailed. I, for one, will be watching.

Michael K. Powell is chairman of the Federal Communications Commission. This essay is an excerpt of his statement on August 21, 2003 following release of the Triennial Review. The complete statement can be found at