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Will the real FCC please stand up?

Randolph J. May, a senior fellow at the Progress & Freedom Foundation, says the current FCC's legacy will be set by its decisions on telecom policy in the next few weeks.

It's finally show time at the Federal Communications Commission. After much delay, the FCC soon will decide whether broadband services will be deregulated and the extent to which telecommunications companies must continue sharing their networks with competitors.

The agency?s actions will determine whether the depressed telecommunications and high-tech sectors will get a deregulatory shot in the arm--or whether the current commission, with a chairman and four commissioners selected by President Bush, will leave in place the investment-stifling "managed-competition" regime concocted by the Clinton-appointed FCC.

The existing excessive regulations are not solely responsible for the industry?s woes. But they have contributed to the downturn. If the agency now takes a different path and adopts a dynamic deregulatory vision, it can help spur a telecom and high-tech recovery that will benefit the overall economy.

How will we know if the FCC has embarked on a new course after the dust settles? The agency could make hundreds of discrete decisions in the pending proceedings. But to keep your eye on the big picture, here is a scorecard for assessing whether the commission opts for a dynamic deregulatory vision or a managed competition plan:

• Sharing should not be required for new fiber or other non-copper networks.

In the Telecommunications Act of 1996, Congress required the FCC to devise rules that allow new entrants shared access to pieces of the local telephone networks of incumbent carriers like Verizon Communications. But the statute provides that the commission may mandate such facilities-sharing only if the new entrants are "impaired" from providing the network elements themselves. The FCC has exercised its discretion by requiring unlimited sharing of the incumbent?s entire local network at below-market prices.

Notwithstanding rebukes by both the Supreme Court and a federal appeals court that the unrestricted sharing regime is unlawful, it remains in place. Mandatory facilities-sharing deters new investment by the incumbents and new entrants alike. The incumbents are discouraged from investing because any competitive advantage derived from new facilities will be dissipated by the sharing requirement. And new entrants don?t build their own facilities because it makes economic sense to use the incumbents? networks without assuming investment risks.

The existing excessive regulations are not solely responsible for the industry?s woes. But they have contributed to the downturn.
One can argue about the degree to which the new entrants are impaired from competing with incumbents for voice services without access to the incumbents? legacy copper networks built to carry narrowband traffic. But there should be little argument that new competitors are no more impaired than the incumbents with regard to installing expensive new fiber lines or other new technologies. These new technologies, which typically would be installed to provide broadband services, should be removed from the sharing requirements.

• Regardless of technology, facilities used to provide broadband services should be deregulated.

The commission?s rules even require incumbent telephone companies to share facilities used to provide their broadband offerings--this despite the fact that broadband constitutes a new market, with cable operators garnering about two-thirds of the subscribers. Indeed, the commission is considering whether to impose the telephone-type regulations on cable operators.

The commission should deregulate all broadband services, regardless of the technology platform used to deliver the service. Several times, the commission has determined that the broadband market is competitive, with cable and telephone companies battling, and with wireless and satellite operators, and perhaps others, increasingly becoming marketplace forces.

While deregulation of voice telephone services may be premature, the commission would stimulate much new investment by immediately establishing a uniform deregulatory regime for all broadband providers.

• Switching should be removed promptly from the sharing regime.

The evidence shows that new entrants are not impaired from providing their own network switches. It is much less costly to install switches than the "last mile" loops that carry traffic to individual homes and businesses from the switch locations. New entrants already have installed 1,300 voice switches and 1,700 data switches, yet the FCC continues to require switches to be shared at below-market prices.

The agency could make hundreds of discrete decisions in the pending proceedings.
The new entrants complain that in some areas they may not secure enough customers to economically justify installing their own switches. But the appeals court already has rejected reliance on cost disparities that are simply attributable to scale economies. The FCC should promptly remove switching from sharing requirement.

• Inter-office facilities should be removed from the sharing requirement.

Inter-office transport typically involves high-capacity fiber lines that connect the local switches. Remember reading about the zillions of miles of fiber laid by the new entrants during the boom years of the ballyhooed fiber glut? It wasn?t laid to the homes and businesses where it will be needed to carry next-generation broadband services. Much of it was installed for transport between switching offices. Like switching, inter-office transport can be competitively supplied and should be removed from the sharing requirement.

• A presumptive sunset should be established for removing copper loops from sharing.

The parts of the incumbents? networks without access to which the new entrants are most impaired are the ?last mile? copper loops. It is much more costly to duplicate local loops than it is to acquire switches and inter-office facilities. The commission should not "flash cut" deregulate, but rather establish a presumptive deregulatory sunset several years out. In this way, the new entrants will have an opportunity to show they still need access to these loops before the sharing requirement is eliminated.

• The FCC should preempt states from imposing excessive sharing.

The majority of state public utility commissions are beseeching the FCC to allow them to impose sharing mandates that exceed the federal requirements. The 1996 federal act?s framers, understanding the reality of modern integrated networks that respect no state boundaries, saw the need for a national telecom policy. The Supreme Court already has held the FCC has the ultimate authority to define the scope of the incumbents? obligations. The commission should seek state input but refuse to turn over communications policy to 50 independent state agencies.

It is no exaggeration to say that this particular FCC?s legacy largely will be determined by its actions in the next few weeks. If it opts for a dynamic deregulation vision, investment in advanced telecommunications facilities will be stimulated, innovation in new services will be spurred, sustainable competition will be strengthened, and America?s consumers will be the beneficiaries.