DC Court Ruling Is Victory for Telecom Consumers

Published April 1, 2004

On March 2, the U.S. Court of Appeals for the District of Columbia rejected the latest attempt by the Federal Communications Commission to set forth rules determining when telephone companies–called incumbent local exchange carriers, or ILECs–must share their lines and equipment with competitors.

The District Court’s decision in U.S. Telecom Association v. Federal Communications Commission was a genuine victory for telecommunications consumers throughout the country. If the FCC follows the court’s guidance–something it has failed to do twice before–it will enhance competition in the telecommunications industry, unlock the doors to new investment, and clear the path for exciting new technologies.

The U.S. Court of Appeals was asked to rule on a complex system of regulations adopted by the FCC to determine when and at what price local telephone companies must share their lines and switches with competitors. The origin of the controversy lies in the Telecommunications Act of 1996, which said this mandate should be enforced when the failure to provide access to network elements would “impair” the ability of new firms to compete for customers.

According to a U.S. Supreme Court ruling in 1999, the FCC defined “impairment” too broadly, imposing the mandatory sharing requirements in virtually all markets. The FCC narrowed the definition slightly, but had it rejected a second time in 2002. The FCC tried again with its “triennial review” last August. It was that latest set of rules, which included provisions that would have given state public utility commissions more authority in ruling when “impairment” existed, that the court ruled were still too vague and broad to fulfill the spirit of the 1996 Act.

Consumers (and state policymakers) should celebrate this decision for three reasons. First, the FCC’s rules on “impairment” failed to promote the kind of real facilities-based competition the authors of the 1996 Act sought and that most economists believe is necessary to benefit consumers. Instead, it encouraged a kind of fake competition that consists largely of arbitrage–entrepreneurs simply re-branding and selling telephone services that are still provided by the incumbent local exchange carrier, benefitting from government-controlled prices that enable them to undersell the incumbents. Ending this entitlement to incumbents’ lines and equipment will end the free ride and encourage investment in new facilities.

Second, the FCC’s rules were discouraging investment in ILECs. Investors are holding up hundreds of billions of dollars in investment capital, waiting to see if the new infrastructure they build will also have to be shared with competitors paying below-market prices.

According to Diane Katz, a telecom analyst with the Michigan-based Mackinac Center for Public Policy, capital spending on telecommunications facilities nationwide fell from $100 billion in 2000 to less than $40 billion in 2003, while the value of publicly traded telecom stocks on the NASDAQ index plunged 80 percent in three years. The result, says Katz, was “a $2 trillion reduction in the value of publicly traded telecom firms, a $1 trillion increase in corporate debt, and the loss of 500,000 jobs.” Outdated and uncertain regulations weren’t responsible for all of this decline, but there is little doubt they prevent the industry’s recovery.

Third and finally, the old rules ignore the reality that new technologies have brought the age of telecom monopolies to an end. Conventional wireline service faces withering competition from cable, wireless, and soon Internet-based competitors. Voice over the Internet Protocol (VoIP), for example, uses the Internet’s alternate “packet-switching” technology to carry telephone conversations wirelessly or over cable, fiber optic lines, DSL lines, or even (possibly) common electric powerlines. The New Millennium Research Council thinks 40 percent of all calls made in the U.S. will be carried over the Internet by 2009. That’s real competition.

Line sharing was a failed strategy for encouraging competition and choice in telecommunications. Technology has largely done what regulators could not: free consumers from monopoly wireline telecoms and drive prices down dramatically while expanding the variety and quality of services. It’s time regulators at the FCC and state public utility commissions got the message … and got out of the way.

Joseph L. Bast ([email protected]) is president of The Heartland Institute.

For more information …

The full text of the Court of Appeals decision can be found at http://www.heartland.org/Article.cfm?artId=14611.