Runaway Regulator - FCC Chairman Michael Powell violates conservative principles

Tech Central Station ^ | February 14, 2003 | James K. Glassman

[HAL9000]

There are two powerful Powells in Washington. While Powell pere has been laying the groundwork for war with Iraq, Powell fils, the 39-year-old lawyer who chairs the Federal Communications Commission, has been getting ready for his own showdown. Two weeks ago, The New York Times reported grandiosely that Michael Powell was "poised to fulfill a long-held vision by unshackling the nation's largest telephone companies -- from decades of regulation."

Not so fast! Lately, many of the likely friends of such an approach - including conservative groups like David Keene's American Conservative Union and Grover Norquist's Americans for Tax Reform, and small-business organizations, including President Bush's own Small Business Administration and the powerful National Federation of Independent Businesses - are sounding the alarm against Powell's proposal. And for good reason. What they see in Powell's plans is not deregulation triumphant but competition nipped in the bud.

On Feb. 10, Powell was forced to postpone a scheduled vote on his plan. He'll try again this coming Thursday, but it appears he lacks a majority.

Conservative Principles Violated

The problem is not merely the economic effects of reduced competition - like higher phone and broadband rates for small businesses and deteriorating services for families. Opponents also see Powell's vision violating basic principles of conservatism, including the authority of the legislature, not unelected regulators, to set the rules, and the rights of states superseding those of the federal government in important economic matters.

As Bruce Fein, a conservative legal scholar and former general counsel to the FCC, said in a recent letter to Powell: "For an unelected commission to trump the policy wisdom of elected and accountable representatives of the people in the Congress wrenches separation-of-powers principles and epitomizes agency arrogance."

Powell's proposal would certainly unshackle the four Bell giants - and the results could be devastating, especially for small, entrepreneurial businesses. Why would Powell go ahead? As a protégé of Bill Clinton's antitrust chief, Joel Klein, he simply may have some of the same urges to forge top-down industrial policy. He's also frustrated that telecom companies have not modernized as fast as he'd like. He evidently believes that, after those pesky competitors are gone, the Bells will have more incentive to invest in improving their networks. But he's got it backwards. A basic tenet of economics holds that monopolists don't increase supply, they restrict it - in order to increase prices.

Roots of Reform

Some background: In the early 1980s, a federal judge split up the nation's telephone monopoly, which had been nurtured, subsidized and protected by government for nearly a century. AT&T became a long-distance carrier, and it was forced into competition immediately. The law required the company to lease its lines to firms like MCI and Sprint, which built up customer bases over the years and then started to build their own facilities, forcing intense rate-cutting and quality-raising.

In 1996, Congress - with the support of every conservative member of the Senate - decided to use the long-distance model to bring competition to local service, which, under the court order, was in the hands of seven regional "Baby Bells" (today merged into just four). The Bells had to lease parts of their system (called unbundled network elements, or UNEs) to competitors (called competitive local exchange carriers, or CLECs). If the Bells opened up sufficiently, then they would be given, state by state, permission to enter long distance.

The Bells first supported the law, then fought it for seven years through lawsuits, lobbying and foot-dragging. Now, against all odds, it's working. The Bells now sell long-distance service in 35 states and have grabbed a big share of the market. Last year, CLECs used UNE pricing to win more than 10 million lines away from the Bells, in addition to millions of other gained through building their own facilities. In Michigan, for example, 2,000 residents a day are switching from the Bell incumbent, rates have dropped as much as 30 percent, and competitors have gained 20 percent of the market, up from 4 percent in 1999.

In addition, another early concern - that not enough Americans were using broadband - is being assuaged. There are now 16 million subscribers, and broadband is, by some calculations, the fastest growing new technology in U.S. history - despite the fact that it remains expensive and offers, at this point, no "killer app" (or application, like spreadsheet software for computers or e-mail for dial-up Internet access, that practically forces consumers to buy it).

Powell's Usurpation

Enter Michael Powell. He's unhappy with the system that Congress asked him to administer, and he wants to change it. His proposal is to restrict the power of the states to set UNE rates - even though the Telecommunications Act of 1996 explicitly gives them that authority. The Bells have been grousing that they can't make money with rates so low. That's nonsense. The real problem is that they don't like the competition that's suddenly been thrust on them.

But are rates really so low? Here's one test. If rates are low, you would expect the Bells themselves to use them to compete with each other. It's perfectly legal, for example, for Verizon, a Bell that concentrates on the northeastern states, to enter Illinois, where SBC is the incumbent. Verizon could rent parts of the system at UNE rates there and give SBC a run for its money. But it doesn't - either because it wants to maintain an obnoxious cartel or because its managers don't think it can compete.

In addition, Powell is resurrecting an old idea that died a couple years ago in Congress when the Senate refused to take action. That's the Tauzin-Dingell bill, which would prevent CLECs from connecting with key parts of the Bells' network, again as the 1996 required.

There are two ironies here that conservatives will appreciate. First, Congress too often shirks its responsibility when it passes a law and leaves it up to regulators to work out the details. But, to its credit, with the 1996 Telecom Act, Congress was far more explicit. Reps. Billy Tauzin, R-La., and John Dingell, D-Mich., knew that, in order to change the rules, they would have to change the law. But Powell seems to think that he can fulfill his own "long-held vision," law or not.

Second - and this is what bothers groups like the ACU - Powell's proposal tramples on the rights of states. Fein wrote that "a humble federal stance on UNEs is both compelled by the Constitution's time-honored federalism and saluted by the principles of enlightened government."

Other than telecom insiders, few Americans of any political persuasion have paid much attention to the telecom battle of the past seven years. Now, with Powell turning into a runaway regulator, conservatives are getting properly exercised. If Powell gets his way, the beneficial effects of competition, which consumers in key battlegrounds like Illinois, Michigan and Ohio are already seeing in their phone bills, will vanish, with dangerous political consequences in these dangerous times.

[plain talk]

The article is pure crap. Powell wants to fix what the previous FCC did in forcing Bells to lease circuits BELOW COST. Hopefully Powell will be successful in fixing this and allow for a more level playing field.

[HAL9000]

Powell wants to fix what the previous FCC did in forcing Bells to lease circuits BELOW COST.

The U.S. Supreme Court ruled that those "below cost" claims were baloney. The wholesale rates are not "below cost".

Furthermore, the "previous FCC" did not make the law. Powell is trying make new regulations to undo a law enacted by Congress.

And while we're on the subject - Powell was a member of the "previous FCC". He was appointed to the commission by Bill Clinton. The Bush administration is obviously disappointed with his performance since he was elevated to chairman.

[Bogey78O]

This title is misleading and the article is rhetoric.

Since when are conservative principles pro-heavy regulation? This is doublespeak on your part. It's regulation that gives us CLEC's. It's not free competition when the feds mandate you have competition.

And in regards to facilities can you cite me how many miles of cable feeding the last mile have CLEC's laid down? Any?

So what are we gonna do when Bellsouth stocks becomes a penny stock and no one wants to invest in telephony and no one wants to buy a business that offers returns (possibly) 20 years down the road?

And you still never told me how China and Japan are able to give fast reliable hi tech service without gov't mandated competition.

[Bogey78O]

'The U.S. Supreme Court ruled that those "below cost" claims were baloney. The wholesale rates are not "below cost". '

It makes me feel reassured knowing that the Supreme Court is full of economists and accountants. It is isn't it?

[jayef]

Bells are not leasing circuits below cost. This is an out and out lie.

[jayef]

Hi Bogey, good to see you again. Too bad we can't get more people involved in this debate.

First of all, the feds did not mandate competition. What they did was accept the ILEC's (Bell's) entry plan for Long Distance. Lest everyone forget, the Telecom Act of 1996 was a creation of the ILECs. In it they promised to unbundle their networks in exchange for the right to sell long distance. This right has now been granted as the ILECs have been deemed (rightly or wrongly) to have sufficiently opened their networks to competition.

Now that this is done, the ILECs are now engaged in a strategy of usurping State Commission authority and working at the federal level to kill their competition. Complaints about rates are utterly bogus, as the ILEC rates were established and agreed to in every State PUC. ILECs, for the most part, got almost exactly the rates they negotiated.

Does it make sense to anyone that for consumers to have a choice of provider that each and every provider must have a wire into their home or business? Imagine the scenario. I have chosen a competitor for my service. That competitior runs a wire to my home or business. My contract expires with that competitor and now I wish to choose someone else as my provider, now that competitor runs a wire to my home or business. 15 years from now, every home or business in the US would have 5 or 6 entrance facilities running to thier premise. Does this make sense? The wire is there now. ILECs promised to make that wire available in order to gain LD entry. ILECs negotiated favorable rates for that wire. Competitors PAY those costs.

To insinuate that BellSouth is going to become a penny stock because of competition is utterly ridiculous. I've seen your balance sheet. Any company with nearly 6 billion dollars in revenues gets no sympathy from me, and is most assuredly not in danger of becoming a penny stock. BellSouth's financials can be seen here:

http://www.bellsouth.com/investor/

ILEC carping about intermodal competition is another red herring. For instance, BellSouth complains about losing share to wireless. Does BellSouth think that everyone doesn't know that Cingular is run by BellSouth. So BellSouth is complaining about losing share (in part) to BellSouth. Cute, huh?

BellSouth is really being killed by those cable guys too, right? WRONG! Fact of the matter is, BellSouth (to its credit) is selling its broadband product (FastAccess) at a phenomenal clip. In my state of South Carolina BellSouth has (since 4Q01) increased its DSL subscribership from 621,000 to 1,021,000 subsribers. That's a 65% increase. Gee, those cable guys are really putting the hurt on BellSouth.

The truth is, BellSouth is not competing with Cable and Wireless for the most part. Who they are competing with are CLECs. And that is who they are now targeting with their anti-competitive lobbying effort. Trust me, I fight this battle every day and they are doing this at every level. Small companies like mine just do not have the resources to fight all of these battles. It's death by a thousand cuts. The ILECs have long engaged in this strategy and it continues today.

The monopoly has deep pockets friends. Their warchests have been built on the backs of ratepayers for over 100 years. Now that they face competition they are squealing like a scalded pig. Many competitors have failed . . . quite remarkable when you consider that according to the ILEC they were purchasing their product below cost. Many competitors fight on. We provide value to our customers and have introduced them to services heretofore unavailable to them through the ILEC and at rates never before offered. With competition the ILECs and CLECs are in price wars benefiting consumers.

Six years is not a long time to deregulate a 100 year old monopoly. Investors will come back, but only if the regulatory environment stabilizes and competitors are not daily threatened with being regulated out of existence. This is what is underway right now. This is what must be resisted, for the benefit of all consumers.

[plain talk]

The Supremes were looking at law not pricing details and aren't even qualified to make such a judgement. Reed Hundt, the previous FCC Chairman, was a socialist leaning, Clinton butt-boy. Steal from the big Bells and give to the pathetic poor CLECs. What a load of crap.

[plain talk]

Yes they are. Hundt and his socialist crowd decreed that forward-looking fictional costs had to be used to calculate leasing rates instead if the actual investment. So the Bells got screwed and the politicians and CLECs won. Even then the CLECs tanked because ... duh ... it's expensive running a telephone company. It's like stealing from the rich to give to a bunch of kids trying to run a business who then run it into the ground anyway. And the public picks up the tab for all this mismanagement and socialism. What a crock.

[jayef]

So you don't like TELRIC, eh? What a shock. So why did the ILECs agree to those rates? Couldn't wait to sink your teeth into those LD revenues, eh? It was a deal, remember. Quid pro quo. Now the ILECs are trying to weasel out.

Exlplian to me how the public has picked up the tab for CLECs that have failed? By the way, my company is profitable and I assure you there are no kids or socialists here.

[jayef]

Stealing? I sure do wish you could see the Line Cost bills that my company pays every month. I assure you we are stealing nothing. We pay mightily for the privelege of offering our customers a choice.

[Pietro]

"The wholesale rates are not "below cost". "

I meant to mention this on your last FCC thread. That SC decision, I believe, had more to do w/ the state PUCs having the authority to set rates. The supremes bowed to federalist considerations. I don't think they specifically addressed the cost structure, after all there are 50 DIFFERENT tarriff structures in place.

[jayef]

Read about what SBC pulled in Oklahoma. Now BellSouth is doing the same thing in South Carolina. Broadband parity, eh? It's about investment, eh? The ILECs are sure getting screwed, hmmmm? Sure . . . right!

http://kotv.com/pages/viewpage.asp?id=41426

[HAL9000]

And you still never told me how China and Japan are able to give fast reliable hi tech service without gov't mandated competition.

I don't think it's a good idea for the Bells to follow the ChiCom or Japan, Inc. economic models. Why don't they try good old fashioned American free market competition? It works for everyone else.

Only in upside down world of the Bell monopoly cartel do we hear that Bork, Fein, Glassman, the American Conservative Union and those evil states rights advocates are all wild-eyed flaming liberals - and William Daley is a righteous conservative.

[jayef]

Exactly. William Daley . . . political hire? Hmmmmmm.

[Bogey78O]

The long distance market fell out. The Bells didn't mind a bad deal when they were getting a good deal on LD but now that's gone.

Sure the public didn't take the hit from failed CLEC's. Lucent and Nortel stockholders did though.

[jayef]

That's business. Lucent gambled and Lucent lost. Lucent made claims about products that were a bit of a reach. I am saddened by the amount of money that was lost in this industry. Believe me when I tell you that I have very selfish reasons for prefering that this was not the case. What's done is done, and there are competitors out here who are going to survive, IF the FCC, State PUCs, State Legislatures and yes, even the ILECs do the right thing.

I think the industry as a whole, and certainly consumers will be better off in this new environment. It is even very possible that BellSouth employees might profit from working for a leaner, more competitive BellSouth. In the end it is my sincere hope that we can all compete fairly and openly and that the whole industry becomes more prosperous. To blame the pain of the last 2 years on CLECs who are just now beginning to capture market share is completely insane.

[jayef]

But there was a deal, right? You admit that. And it was an ILEC deal, right? CLECs did not write the Telcom Act. We didn't even really have meaningful input into the creation of "The Checklist." That was an ILEC creation too, right? I'm sure you know all this.

[Bogey78O]

'It is even very possible that BellSouth employees might profit from working for a leaner, more competitive BellSouth.'

No, unfortunately not.

Here's how it works.The two expenditures Bell controls is copper and manpower. So when they need to get lean they do it from those 2 areas. After all, why pay 10 technicians when you can squeek by with 9? BellSouth's cutting even more jobs next quarter. Mine's relatively safe.

I'm still waiting for CLEC's to help out with the last mile, the part of phone service where money essentially goes right down the drain.