Bundles of Trouble: The FCC’s Telephone Competition Rules

Published April 29, 2004

Almost exactly one year after the FCC adopted new regulations governing competition in telephone service, telecom regulation is once again under debate. Rules that require telephone companies to lease parts of their networks to competitors as so-called “unbundled network elements (UNE)” were intended to increase consumer choice but instead have hindered investment and actually reduced real competition. Within the next few weeks, a federal appeals court may rule on challenges to last year’s FCC decision. The betting is the rules will be struck down, leaving the FCC the task of writing new ones. With or without a court order, the FCC or Congress should act to scale back these telecommunications regulations.

Confusingly, supporters of these rules argue they comprise a pro-market approach to telecommunications, since they foster competition in an otherwise monopolistic industry. They also argue conservatives should support the FCC’s delegation of decision-making to the states, since it is consistent with notions of federalism. They are wrong on both counts.

First, rather than fostering real competition, the rules undercut it. The UNE rules encourage a second-best sort of competition: competition only among firms sharing the same infrastructure at artificially low rates ordered by regulators. The benefits to consumers are limited. Not only are competitors not truly independent, but the market is dependent on, and pervasively controlled by, the rules set by government. We can do better. True competition among firms using their own facilities is possible, and in fact exists. One need look no farther than wireless phones or Internet telephony services to see this at work.

The UNE rules discourage such real competition by encouraging potential rivals to focus on renting facilities, rather than building their own. As harmful, the rules discourage incumbent telephone companies from investing in their networks, since any benefits would be shared with their rivals.

Second, federalism does not require a patchwork, state-by-state, approach to rulemaking. Telecommunications service is a key part of interstate commerce. Its impact goes beyond state lines, and decisions made in any one state tend to have effects outside its borders. This does not mean states should not have a leading role in many areas of telecommunications. The line between state and federal authority is not an easy one to draw. In this case, given the interstate importance of competition and investment in telecom networks, federal decision-making is justified and appropriate.

The upcoming court decision may determine, to a large degree, the next step in this long-running telecommunications drama. The court may require specific deregulatory steps by the FCC. Even if it does not, the FCC should review its UNE rules and substantially reduce their scope. At a maximum, network access to competitors should be required only for those elements where the marketplace has demonstrable natural monopoly characteristics. Going further, given the growth of wireless and Internet telephony, even those minimal requirements should be re-examined.

James L. Gattuso ([email protected]) is research fellow in regulatory policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.