Uncertain Utility - The price of federalism and enlightened trial and error

Tech Central Station ^ | March 5, 2003 | Bruce Fein

[HAL9000]

Chairman Michael K. Powell sharply dissented from the portion of the Federal Communications Commission's Order of February 20, 2003, which retained obligations of incumbent local exchange carrier (ILEC) monopolists to unbundle network elements to facilitate budding competitive carriers. On the other hand, the Chairman celebrated the withholding of corresponding unbundling obligations for new fiber lines capable of a dazzling array of broadband services, such as Internet, television, movies, or high speed data. Both positions seem ill-conceived.

According to the Chairman, new fiber construction by the gang of four ILECs-Verizon, SBC, Qwest, and BellSouth-would spurt because its broadband profit opportunities would be unshared. In other words, fiber investments would be freed of common carrier obligations. Mr. Powell rhapsodized: "I begin with the momentous step we take today to create a broadband regulatory regime that will stimulate and promote deployment of next generation infrastructure, bringing a bevy of new services and applications to consumers...Today's decision makes significant strides to promote investment in advanced architecture and fiber by removing impeding unbundling obligations."

But the Chairman was duped by the ILECs and their alter egos, like false promises of unmetered nuclear generated electricity a half century ago. Before February 20, the ILECs' calling card was "new wires new rules." It was said that ILECs were biting at the bit to make whopping fiber investments as soon as unsaddled of unbundling burdens. SBC's CEO Ed Whitacre, for example, urged in a May 16, 2001 speech that, "[Broadband] should be deregulated. We should all go after it. You get a better deal. America gets a better deal." A comparable argument was advanced by more than a score of House Members captained by House Energy and Commerce Committee Chairman W.J. Billy Tauzin in a letter to the F.C.C. applauding the putative investment stimulus to ILECs of ending broadband sharing. Both the ILECs and the Chairman seemed oblivious to the adage of taking care of what you wish for because you might get it.

The Commission's February 20 Order, like a fairy godmother, granted their wishes. Broadband was generally deregulated. ILECs were shorn of any obligation to share their new fiber investments with any rival. But then the surprise O Henry ending. Verizon, SBC, Qwest, and BellSouth all denied any substantial plans for the new fiber facilities that had tantalized Congress and the F.C.C. The four aped one another in insisting that maintaining unbundling for their voice grade networks to incubate flourishing local phone competition would thwart the profits needed to underwrite broadband.

But the argument is troubling. The quadrumvirate of monopolists prior to February 20 had never insinuated that an immediate end to unbundling network elements for competitive carriers would be a necessary condition of new fiber construction. Their failure to disclose that material fact to Congress and the Commission smacks of duplicity for the predatory purpose of stifling competition. Thus, Chairman Powell assailed the Baby Bells: "Here is a lot of crying, crybaby reaction to the decision." Congressman John Dingell, the Democratic ally of Chairman Tauzin, was equally chagrined over the fiber investment duping: "I have read in recent days...that certain Bell [chief executive officers] have announced that they will not invest in advanced networks because they did not receive all the relief that they were seeking. I hope this is not true. I expect the Bells to use this new-found regulatory freedom to do what they have promised, which is to invest rapidly and on a significant scale in local broadband networks."

The Baby Bells' paucity of investment funds argument against fiber investment is unpersuasive. If broadband were an attractive business proposition, banks or investors would be eager to loan. Further, SBC is flirting with the purchase of DIRECT TV for a staggering $10 billion, a sum that could be diverted to new fiber.

Chairman Powell also struck out in decrying continued ILEC unbundling for competitive local exchange carriers (CLECs) by neglecting history and economics. The ILEC monopolists attained their dominance not by Horatio Alger-type daring and enterprise, but because the States generally made competition illegal until the 1996 Telecommunications Act. Unbundling network elements for leasing by competitive carriers at reasonable rates is required to dissipate that colossal government-created advantage. It enables the newcomers to enjoy the enormous economies of scale enjoyed by the ILECs in providing local loops, switches, and transport lines. The Chairman asserted that every local exchange carrier should build separate networks to create redundance if terrorists strike and to avoid the need for unbundling regulation. But multiplication of local phone networks would produce more bankruptcies like Worldcom or Global Crossing than insurance against terrorism. Further, when a single network coupled with leasing to rivals is the most economically efficient means of serving customers, replication would waste real economic resources. Competitive local exchange carriers (CLECs) are eager to build facilities when market signals are positive, verified by more than $75 billion in new investments since unbundling commenced under the 1996 Act. They envision unbundling as a provisional, not a permanent fixture of the regulatory landscape.

Like Iago to Othello, Chairman Powell represented himself as a friend of CLECs in opposing the Order's continuation of unbundling: "And, I fear as much or more for the CLECs as I do for the ILECs, for the prolonged uncertainty of rights and responsibilities may prove stifling." The Chairman correctly observes that the F.C.C.'s unbundling regulatory partnerships with 50 separate States necessarily engenders short-term investment uncertainty. That is the price of federalism and enlightened trial and error in fashioning telecommunications policy. A monarch-like decree from federal authorities instantly knifing the unbundling obligations of ILECs would dispel uncertainty. But CLECs would be dispatched to the graveyard and local phone service would backslide to slothful and costly monopolies.

Bruce Fein is a former general counsel of the Federal Communications Commission, contributing editor of TCS, and founding partner of Fein & Fein.