Rules of engagement

While last year's hype over telecommunications reform promised to let the market reign supreme, today's headlines blare news of court cases, federal hearings, and 700-page government rulebooks on how to deregulate.

It's no small job to create sufficient incentives for competition to dispense with the need for regulation of monopolies. -- Reed Hundt, FCC chairman

These apparent contradictions beg an obvious question: In spite of its professed intent to get government out of the way, is the Telecommunications Act of 1996 just another example of heavy-handed Washington bureaucracy?

The answer lies in the understanding that the historic legislation was not as much about deregulation as it was about increasing competition. And while it will surely reduce the government's regulatory role in the long run, it requires the one agency in particular--the Federal Communications Commission--to take on a Herculean task until that time.

In the few short years immediately following the law's enactment, the FCC is charged with the massive responsibility of creating fair rules for a new era of competition and market-driven prices. Those regulations will determine how much of the world communicates, from telephones and cable transmissions to the Internet, and will reorient the dynamics of an industry that is fast approaching one-sixth of the entire U.S. economy.

"I understand why people are asking why the FCC hasn't gone out of existence yet," said Jim Casserly, legal counsel to the commission. "But there is whole lot that we have to do to get to the point where the market can provide lower prices and more choice. One needs to be realistic about how long it takes the seeds of competition to be sown, and then to grow and flower."

That realistic timetable is certain to be more than the 12 months since the Telecommunications Act became law. Take as an example the long distance phone industry, the first communications market to be deregulated. MCI, the first long distance carrier authorized to compete with AT&T, filed an application to provide service in 1963. The long distance business wasn't declared truly competitive until 1995, more than 30 years after the FCC opened the market to new players.

The commission's task today is do what it did for long distance for the entire spectrum of telecommunications industries, including local phone and cable services, radio and television broadcasting, and the new Internet and digital broadcasting industries. Its jobs range from approving multibillion-dollar telecommunications mergers to overseeing the minute details of local phone interconnection and consumer cable rates. For the Internet, it means that in the two years it was allotted by Congress, the FCC must set rules that provide incentives for investment and innovation in communications networks.

In the last year, the agency has conducted about 75 rulemaking proceedings in an attempt to fill in the many blanks left by the legislation. One example underscores the job's complexity.

According to the law, Internet service providers had the right to buy "unbundled loops" from telephone companies. This allows them to use the telco wires and put their own electronics, such as advanced hubs or routers, on each end to achieve higher data rates over a single phone line.

Sounds relatively simple, but to make it happen, the FCC had to go through a number of laborious steps. First the commissioners had to write regulations allowing the ISPs to buy unbundled parts. The agency then had to specify what parts could be sold off and what prices would encourage competition.

These regulations were completed by August 8, exactly six months after the legislation was enacted. But the local phone companies immediately mounted a legal challenge to the pricing guidelines on grounds that the FCC had not only overstepped its bounds by setting pricing in the first place but also that the prices were far too low.

"The FCC shouldn't be setting the rates," Bell Atlantic spokesman Michel Daley said. "The FCC has history and expertise in setting interstate policy, but no experience in setting intrastate policy. The states, which have been setting these rates for 100 years, know about the true costs for providing rates locally...The FCC used economic models that are out of sync with reality and much too restrictive."

The issue is still tied up in the court system, where a ruling is expected by this summer.

But that is only the half of it. Once a court decides if the FCC pricing rules stand, the commission will need to oversee the pricing rules in every state and then adjudicate any complaints about them. The FCC will also be vigilant, according to Casserly, about striking down any state or local laws--including city council actions, public utility rulings, and commission regulations--that prohibit people from providing service and enforcing the new laws that encourage competition.

Despite this, there is little worry in the industry that the FCC is too involved.

According to Bell Atlantic's Daley, "The FCC for the last several years has gone out of its way to promote deregulation and competition. They have made some changes that make regulations clearly less burdensome. When there is a robust, competitive environment, [the FCC's] role will be less than it is today."

But, he added, "the reality is that the commission is being lobbied from various sides for implementing regulation, and the stakes are very high. When we think that it is out of sync, we will fight."

That's precisely what is most troublesome to some. "I wouldn't worry about whether the regulators are doing a good job. I would worry about the players, who don't have really have an interest in competition," one industry source said. "Despite the best efforts of regulators, the AT&Ts of the world don't want competition but monopoly. This law threatens all of those of those monopolies."

And that is not the only reason that the FCC's role in telecommunications will never disappear entirely. For even if the commission successfully ushers in an era of fair competition, Chairman Reed Hundt says the agency's "finest moment" will be tempering that free-wheeling capitalism by ensuring that services go to people who don't help companies turn a profit. In November, the FCC's Joint Board recommended that $2.25 billion be available every year to subsidize telecommunications services for schools and libraries.

A recent speech by Hundt outlining the FCC's 1997 agenda said it all: "The paradox of competition [is] that although firms compete to win, the ultimate victory is monopoly. So the ever-present job of government is to write the rules that invent, revive, and sustain competition, while inviting instead of deterring or inhibiting innovation, entrepreneurship, and investment."

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