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The two faces of the FCC

Policy analyst Randolph J. May says that when it comes to fostering broadband growth, government regulators are still hampered by too timid thinking about how best to proceed.

On Aug. 21, the Federal Communications Commission finally released the monstrous official text of its inelegantly denominated triennial review of unbundled network elements-?all 500 single-spaced pages and 2400 footnotes of it.

This is the long-awaited decision governing the extent to which incumbent telephone companies such as Verizon Communications and SBC Communications must share their local networks with competitors at government-mandated discounted prices.

Although worse epitaphs could be hurled at the agency, the best that can be said is that the FCC's order is decidedly two-faced.

Two-faced in that in one part of its decision, the commission's gaze, remains firmly fixed on the rear view mirror, looking backwards at a legacy of regulatory micromanagement that contributed to the telecom bust, while in the other part, the commission looks forward toward a less regulatory, healthier telecom future.

Another way of thinking about the FCC's action is to imagine an aging Goliath, with disruptive marketplace changes created by new competition swirling all about, having one foot firmly stuck in the morass of the outdated public utility regulatory regime and the other foot struggling to break free from the muck.

Let me explain.

In effect, the commission decided to retain the existing regulations that require incumbent telecoms to share with competitors like AT&T and MCI their in-place analog network facilities at below-market prices. The Telecommunications Act of 1996 allows the FCC to mandate such facilities-sharing only if it finds competitors are "impaired" from providing services without access to the incumbents' networks.

Both the Supreme Court and a federal appeals court already have held unlawful the FCC's existing regulations on the basis that by mandating facilities-sharing on a virtually unrestricted basis they rendered meaningless the statutory impairment standard. No matter. Even following these two judicial spankings, the agency stubbornly avoided narrowing the sharing mandates to apply only to facilities competitors cannot economically supply themselves. The commission refused, for example, to remove analog switches from the list of mandated shared facilities, even though it is widely acknowledged that competitors can install their own switches.

Although worse epitaphs could be hurled at the agency, the best that can be said is that the FCC's order is decidedly two-faced.
Instead, the FCC punted to state public utility commissions the ultimate determination concerning facilities-sharing, with guidelines almost certain to leave untouched for the foreseeable future the existing unbridled regime. As FCC Chairman Michael Powell remarked in dissent, this part of the commission's decision means "it is very likely that a carrier can resell the entire incumbent's network, at heavily discounted rates set by regulators, without having to provide anything in the way of its own infrastructure."

In other words, this commission continues to discourage competitors from investing in any part of their own networks, even though competition is sustainable in the long run only when service providers control their own facilities. As Chairman Powell aptly put it, here the commission eschews a pro-facilities policy by "favoring extensive regulatory management of incumbent networks."

Don't bet on this part of the commission's decision surviving the next round of judicial scrutiny.

Fortunately for the nation and its long-run economic future, the commission showed another face when it came to broadband. This time with Chairman Powell in the majority, it ruled that incumbent telephone companies are not required to share with competitors newly deployed fiber lines or packet switched capabilities used to deliver broadband services to homes and businesses. This deregulatory aspect of the commission's decision should spur investment in new broadband networks. The commission deserves credit for taking what Powell referred to as "some vital steps across the desert from the analog world to the digital one."

This commission continues to discourage competitors from investing in any part of their own networks, even though competition is sustainable in the long run only when service providers control their own facilities.
Perhaps we should look at the commission's two-faced order as a glass-half-full one rather than half-empty one, and hope the dubious legality of the narrowband part does not infect the whole. Digital broadband is clearly the wave of the future, and to stimulate investment in broadband networks it is crucial that the commission turn away from the legacy regulatory regime. No one reasonably can argue that competitors are impaired in an economic sense from deploying their own broadband "greenfields." Or, conversely, that the incumbents will undertake the huge financial risk of building such new networks if they are required to share them at below-market prices.

Before we can realize the full benefits of the commission's turn toward the broadband future, however, it should quickly take the following steps:

• Revise the methodology that determines the prices at which existing network facilities must be shared to better reflect the actual costs incumbent telecoms have incurred in building and operating them. This fairer return would put the incumbents in a better position to risk the large amounts of capital necessary to build out a new infrastructure to compete with cable, wireless, and other broadband platforms.

• Reject calls in still other pending proceedings that the agency adopt new antidiscrimination regulations for cable and telecom broadband networks. These new regulations, offered in the name of achieving "Net neutrality," would import into the competitive broadband world the very type of public utility type of regulation that is the legacy of the monopolistic narrowband world. The likely result: Net neutering.

No doubt about it, the triennial review order was two-faced. For the sake of the social and economic benefits that more ubiquitous broadband can bring, let's hope that the commission shows more of the forward-looking deregulatory side of its face and less of the backward-looking side.