--- From: "Faulhaber, Gerald" <faulhabeat_private> To: "'Declan McCullagh'" <declanat_private> Subject: RE: Mini-debate on Supreme Court ruling in FCC telco regulation c ase Date: Thu, 16 May 2002 23:54:23 -0400 My reply to Adam's (thoughtful) reply: It was Congress that established local loop unbundling in the 1996 Act, not the FCC. It's aim was a transitional device to true facilities-based competition. There was real economic precedent for this in 1979, when the FCC removed the Bell System's restrictions on resale of private line, so MCI and Sprint could be resellers in parts of the country their networks didn't reach yet. It's arguable that this strategy worked in the 1980's to help achieve competition in long distance. However, the current situation is much different, and Congress' attempt to bring competition to local telephone service has pretty much failed. This seemed like a good idea at the time, at least to many observers. Breyer has the benefit of hindsight (as do I) in questioning the connection between local loop unbundling and increased competition. In 1996, lots of folks thought this was real smart. As usual, the FCC gets blamed for this, but the Telecoms Act was a deal the RBOCs bought into in 1996. The FCC was simply the implementor of the Telecoms Act, albeit an enthusiastic one. But if the FCC decided tomorrow that TELRIC, local loop unbundling and UNEs were stupid, it couldn't change the law. It would still be required by the Act to pursue local loop unbundling. Now we are surprised when we get more regulation when we attempt to partially "deregulate." This always happens; achieving "partial competition" in a previously monopolized regulated industry always creates more regulation not less. See my paper "Policy-Induced Competition" at http://rider.wharton.upenn.edu/~faulhabe/Policy-Induced%20Competition.pdf, where I discuss this and other local loop unbundling issues. Professor Gerald Faulhaber <http://rider.wharton.upenn.edu/~faulhabe> Business and Public Policy Department Wharton School, University of Pennsylvania Philadelphia, PA 19104 215-898-7860 -----Original Message----- From: Declan McCullagh [mailto:declanat_private] Sent: Thursday, May 16, 2002 11:10 PM To: politechat_private Cc: athiererat_private; faulhabeat_private Subject: Mini-debate on Supreme Court ruling in FCC telco regulation case After the Supreme Court ruled in an FCC/RBOC case this week, Adam Thierer at the Cato Institute laid out his thoughts here: http://www.cato.org/dispatch/05-14-02d.html Then, on Dave Farber's IP list, UPenn prof. Gerald Faulhaber wrote: >Cato's point of view is pretty extreme. The Supreme Court's ruling >basically states that the pricing standard the FCC has been using for >Unbundled Network Elements (UNEs) is just fine, and it can continue to use >it to implement Congress' Telecommunications Act of 1996, just as it's been >doing for the past few years. Congress had in mind a way to reach >competition even with the RBOC's monopoly of the local access line. If Cato >doesn't like the Congressional mandate of the 1996 Act, well, go see >Congress. The FCC is simply implementing the mandate. > >Will this have much of an effect? I think not. With few exceptions, >offering local service using RBOC facilities has not been a very good >business model, for a variety of reasons. This Supreme Court ruling will >not change that situation at all; it's still not a good business model. Adam sent along his reply, which follows. -Declan --- Date: Tue, 14 May 2002 17:17:07 -0400 From: "Adam Thierer" <athiererat_private> To: "Declan McCullagh" <declanat_private> I agree Professor Faulhaber that Congress should ultimately resolve this mess, but there certainly are some important constitutional questions at stake regarding the FCC's TELRIC standard and its implementation. Can a regulatory agency simply demand that rivals be given access to an incumbent's network at any cost and by any means necessary? I think almost everyone would agree that at some point such a mandate would constitute a regulatory takings under the Fifth Amendment. Even though the Court didn't buy this argument concerning TELRIC, they were right to adjudicate this matter. Moreover, Justice Stephen Breyer's excellent dissent raised the important question of whether there was any rational connection between the regulations the FCC promulgated and the Telecom's Act stated goal of deregulating this sector. On page 22 of his dissent, Breyer notes: "[T]he problem before us - - that of a lack of 'rational connection' between the regulations and the statute - - grows out of the fact that the 1996 Act is not a typical regulatory statute asking regulators simply to seek low prices, perhaps by trying to replicate those of a hypothetically competitive market. Rather, this statute is a deregulatory statute, and it asks regulators to create prices that will induce appropriate new entry." Breyer goes on to correctly note that FCC's TELRIC pricing rule and unbundled network elements (UNE) provisions, "bring about, not the competitive marketplace that the statute demands, but a highly regulated marketplace characterized by widespread sharing of facilities with innovation and technological change reflecting mandarin decision-making through regulation rather than decentralized decision-making based on the interaction of freely competitive market forces. . The majority nonetheless finds the Commission's pricing rules reasonable. As a regulatory theory, that conclusion might be supportable. But under this deregulatory statute, it is not." (p. 25. Breyer dissent). For these reasons, Breyer concludes that the TELRIC standard should have been struck down since there is no rational connection between such cumbersome, investment-destroying rules and the stated purpose of the Telecom Act to promote a more deregulated marketplace. Even though I'm not particularly fond of judges making such determinations, I think he has a valid point. But again, I would agree with Professor Faulhaber that Congress (and to some extent the FCC itself) must ultimately clean up the mess they got us into. In one sense, I also agree with his contention that the decision does not make much of difference since it will not change the underlying economic reality that infrastructure sharing has not been a very good business model. On the other hand, the decision perpetuates that model and encourages companies to continue to petition the FCC or state PUCs to rig the rules to in favor of generously discounted access to existing (and future?) communications networks and technologies. One cannot help but shudder at the thought of years of additional regulatory proceedings on this matter and wonder what the implications will be for long-term investment and innovation in the U.S. telecommunication sector. - Adam Thierer, Director of Telecommunications Studies, Cato Institute ------------------------------------------------------------------------- POLITECH -- Declan McCullagh's politics and technology mailing list You may redistribute this message freely if you include this notice. 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