FC: Last word in mini-debate on Supreme Court ruling in FCC/telco case

[Declan McCullagh <declan () well com>]

---

From: "Faulhaber, Gerald" <faulhabe () wharton upenn edu>
To: "'Declan McCullagh'" <declan () well com>
Subject: RE: Mini-debate on Supreme Court ruling in FCC telco regulation c
        ase
Date: Thu, 16 May 2002 23:54:23 -0400

My reply to Adam's (thoughtful) reply:

It was Congress that established local loop unbundling in the 1996 Act, not 
the FCC.  It's aim was a transitional device to true facilities-based 
competition.  There was real economic precedent for this in 1979, when the 
FCC removed the Bell System's restrictions on resale of private line, so 
MCI and Sprint could be resellers in parts of the country their networks 
didn't reach yet.  It's arguable that this strategy worked in the 1980's to 
help achieve competition in long distance.  However, the current situation 
is much different, and Congress' attempt to bring competition to local 
telephone service has pretty much failed.  This seemed like a good idea at 
the time, at least to  many observers.  Breyer has the benefit of hindsight 
(as do I) in questioning the connection between local loop unbundling and 
increased competition.  In 1996, lots of folks thought this was real smart.

As usual, the FCC gets blamed for this, but the Telecoms Act was a deal the 
RBOCs bought into in 1996.  The FCC was simply the implementor of the 
Telecoms Act, albeit an enthusiastic one.  But if the FCC decided tomorrow 
that TELRIC, local loop unbundling and UNEs were stupid, it couldn't change 
the law.  It would still be required by the Act to pursue local loop 
unbundling.

Now we are surprised when we get more regulation when we attempt to 
partially "deregulate."  This always happens; achieving "partial 
competition" in a previously monopolized regulated industry always creates 
more regulation not less.  See my paper "Policy-Induced Competition" at 
http://rider.wharton.upenn.edu/~faulhabe/Policy-Induced%20Competition.pdf, 
where I discuss this and other local loop unbundling issues.

Professor Gerald Faulhaber <http://rider.wharton.upenn.edu/~faulhabe>
Business and Public Policy Department
Wharton School, University of Pennsylvania
Philadelphia, PA 19104
215-898-7860



-----Original Message-----
From: Declan McCullagh [mailto:declan () well com]
Sent: Thursday, May 16, 2002 11:10 PM
To: politech () politechbot com
Cc: athierer () cato org; faulhabe () wharton upenn edu
Subject: Mini-debate on Supreme Court ruling in FCC telco regulation
case


After the Supreme Court ruled in an FCC/RBOC case this week, Adam Thierer
at the Cato Institute laid out his thoughts here:
http://www.cato.org/dispatch/05-14-02d.html

Then, on Dave Farber's IP list, UPenn prof. Gerald Faulhaber wrote:
>Cato's point of view is pretty extreme.  The Supreme Court's ruling
>basically states that the pricing standard the FCC has been using for
>Unbundled Network Elements (UNEs) is just fine, and it can continue to use
>it to implement Congress' Telecommunications Act of 1996, just as it's been
>doing for the past few years. Congress had in mind a way to reach
>competition even with the RBOC's monopoly of the local access line. If Cato
>doesn't like the Congressional mandate of the 1996 Act, well, go see
>Congress.  The FCC is simply implementing the mandate.
>
>Will this have much of an effect?  I think not.  With few exceptions,
>offering local service using RBOC facilities has not been a very good
>business model, for a variety of reasons.  This Supreme Court ruling will
>not change that situation at all; it's still not a good business model.

Adam sent along his reply, which follows.

-Declan

---

Date: Tue, 14 May 2002 17:17:07 -0400
From: "Adam Thierer" <athierer () cato org>
To: "Declan McCullagh" <declan () well com>

I agree Professor Faulhaber that Congress should ultimately resolve this
mess, but there certainly are some important constitutional questions at
stake regarding the FCC's TELRIC standard and its implementation. Can a
regulatory agency simply demand that rivals be given access to an
incumbent's network at any cost and by any means necessary? I think almost
everyone would agree that at some point such a mandate would constitute a
regulatory takings under the Fifth Amendment. Even though the Court didn't
buy this argument concerning TELRIC, they were right to adjudicate this matter.

Moreover, Justice Stephen Breyer's excellent dissent raised the important
question of whether there was any rational connection between the
regulations the FCC promulgated and the Telecom's Act stated goal of
deregulating this sector. On page 22 of his dissent, Breyer notes: "[T]he
problem before us - - that of a lack of 'rational connection' between the
regulations and the statute - - grows out of the fact that the 1996 Act is
not a typical regulatory statute asking regulators simply to seek low
prices, perhaps by trying to replicate those of a hypothetically
competitive market. Rather, this statute is a deregulatory statute, and it
asks regulators to create prices that will induce appropriate new
entry."  Breyer goes on to correctly note that FCC's TELRIC pricing rule
and unbundled network elements (UNE) provisions, "bring about, not the
competitive marketplace that the statute demands, but a highly regulated
marketplace characterized by widespread sharing of facilities with
innovation and technological change reflecting mandarin decision-making
through regulation rather than decentralized decision-making based on the
interaction of freely competitive market forces. . The majority nonetheless
finds the Commission's pricing rules reasonable. As a regulatory theory,
that conclusion might be supportable. But under this deregulatory statute,
it is not." (p. 25. Breyer dissent).

For these reasons, Breyer concludes that the TELRIC standard should have
been struck down since there is no rational connection between such
cumbersome, investment-destroying rules and the stated purpose of the
Telecom Act to promote a more deregulated marketplace. Even though I'm not
particularly fond of judges making such determinations, I think he has a
valid point.

But again, I would agree with Professor Faulhaber that Congress (and to
some extent the FCC itself) must ultimately clean up the mess they got us
into. In one sense, I also agree with his contention that the decision does
not make much of difference since it will not change the underlying
economic reality that infrastructure sharing has not been a very good
business model. On the other hand, the decision perpetuates that model and
encourages companies to continue to petition the FCC or state PUCs to rig
the rules to in favor of generously discounted access to existing (and
future?) communications networks and technologies. One cannot help but
shudder at the thought of years of additional regulatory proceedings on
this matter and wonder what the implications will be for long-term
investment and innovation in the U.S. telecommunication sector.

- Adam Thierer, Director of Telecommunications Studies, Cato Institute




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