Negotiation, not Litigation

Published July 1, 2004

When the D.C. Circuit Appeals Court in March once again threw out the Federal Communications Commission’s (FCC) rules requiring incumbent telephone companies like Verizon and SBC Communications to share their network facilities at regulated rates, it handed the telecommunications industry a huge opportunity. The traditional public utility, litigation-oriented regulatory regime could be replaced with a less-regulated, commercially oriented structure in which telecom providers wishing to share facilities would be free to enter mutually acceptable agreements.

But state and federal regulators stand to squander this chance if they insist on putting their own regulatory stamp on freely negotiated agreements.

Litigation Giving Way to Negotiation

The appeals court determined the FCC’s existing rules are inconsistent with the 1996 Telecom Act because they require incumbent local exchange companies to provide competitors with virtually unlimited access to their networks, even if the new entrants are not impaired from providing their own facilities.

This decision came after the FCC received two previous judicial rebukes of the rules for the same reason. The court’s frustration, in chastising the “commission’s failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings,” was understandable.

After the court’s decision, one option open to those who favor continuing the old regime is to just keep litigating.

With the opening provided by the decision, however, the previously bitterly divided FCC came together March 31 to urge telecom providers to “begin a period of commercial negotiations designed to restore certainty and preserve competition in the telecommunications market.”

Observing that the incessant litigation has unsettled the market, the commissioners “ask[ed] all carriers to engage in a period of good-faith negotiations to arrive at commercially acceptable arrangements” for interconnection and facilities sharing. They noted the 1996 Telecom Act clearly contemplated “the role of commercial negotiations as a tool in shaping a competitive communications marketplace.”

So far, so good. The negotiations between the incumbent telecoms and their competitors even got off to a modestly encouraging start, with incumbent SBC and Sage Telecom, the third-largest competitive carrier in SBC’s territory, announcing they had entered into a seven-year commercial agreement.

This was followed by an announcement that incumbent Qwest had negotiated a three-year commercial agreement with Covad, a leading provider of broadband Internet services. In late May, Qwest followed with a similar agreement with MCI.

Regulators Still Interfere

But now it looks as if some of the state public utility commissions are determined to throw roadblocks into the negotiating process, and there have been indications the FCC may be meddling as well, by requesting negotiating information and pressuring parties to use mediators.

For example, the Michigan Public Service Commission has issued an order requiring submission of the SBC-Sage agreement for approval so it can “determine whether the agreement discriminates against other competitors and is in the public interest.” The California, Kansas, and Texas commissions also have indicated the SBC-Sage agreement should be subject to their approval.

Not surprisingly, the National Association of Regulatory Utility Commissioners, the state commissioners’ trade association, has urged that all commercial agreements be reviewed by the state commissions.

Although the matter is not free from doubt, there is a good argument to be made that as a legal matter these private agreements need not be filed with state commissions to the extent they involve network elements no longer subject to FCC access requirements. There is no doubt, however, that if the agreements must be filed publicly and are subject to an undefined “public interest” review by state regulators, the commercial negotiations the FCC commissioners (and even many state commissioners) wish to succeed will likely fail, since the incentive to negotiate will be severely diminished.

Acting in the Public Interest

By contrast, the “public interest” will be greatly enhanced if these service providers are allowed to do what they do in other competitive markets: freely negotiate private contracts that best meet their mutual needs.

At minimum, if state regulators are going to demand negotiated agreements be filed, they should use existing authority to protect the confidentiality of commercially sensitive terms and conditions. And they should presume such individually negotiated agreements are in the public interest.

After all, the ability of private parties to negotiate binding agreements tailored to meet their individual needs is at the heart of an unregulated competitive marketplace. Such agreements provide long-term stability and facilitate sound business plans. It is no accident the SBC-Sage and Qwest-Covad agreements are for seven and three years, respectively.

The D.C. Circuit decision has opened a window of opportunity to escape the regulatory and litigation morass that has prevailed in the industry since the 1996 Telecom Act passed. But if regulators act as if nothing has really changed, then nothing will.

It is past time for regulators to abandon the last century’s public utility model in favor of a market-oriented regime in which industry participants have contract freedom so, like others in a competitive marketplace, they can decide themselves how to meet customer needs by voluntary agreements.

Randolph J. May ([email protected]) is senior fellow and director of communications policy studies at the Progress and Freedom Foundation. James L. Gatusso ([email protected]) is research fellow in regulatory policy at The Heritage Foundation. Adam Thierer ([email protected]) is director of telecommunications studies at Cato Institute.