March 2005

The Future of Telecom Deregulation: Two Alternative Visions

Philip Weiser and John Nuechterlein discussed some of the main ideas on telecom deregulation put forth in their recent book, Digital Crossroads: American Telecommunications Policy in the Internet Age. They generally advocated reforming the FCC and relevant telecom regulations to make them more manageable to all parties involved, an approach described by moderator Robert Litan as the “keep the FCC but cool it” approach. Thomas Hazlett’s view, while overlapping with the other presenters in many respects, was described as somewhat more “radical,” calling for less regulatory intervention, and a significantly scaled back role for the FCC.

Philip J. Weiser
University of Colorado

Mr. Weiser began by calling attention to the need to improve telecommunications policy at a critical technological moment and to set aside politics and the “blame game” for what went wrong with the Telecommunications Act of 1996. He emphasized some of the failures of the existing policy, such as the lack of incentives for line-sharing competitors to transition to self-sufficiency, as well as the ambiguity in the network sharing requirements that resulted in substantial litigation. Turning to newer broadband technology and future regulatory reform, Mr. Weiser advocated a mostly hands-off framework, allowing providers the opportunity to maximize their potential via the market. He allowed for some exceptions where he found it reasonable for regulatory intervention, including one example in which he thought line-sharing access was appropriate for internet provision in the enterprise market.

Jonathan E. Neuchterlein
Wilmer Cutler Pickering Hale and Dorr LLP, and former deputy general counsel, Federal Communications Commission

Mr. Neuchterlein argued that telecom policy should generally be guided by an antitrust perspective that pays attention to the subtleties of a particular competitive environment, rather than one that is suspicious of all vertical integration.  The FCC, rather than the general court system, should be responsible for telecommunications antitrust matters. Mr. Neuchterlein outlined four overarching principles that he felt should guide institutions or parties involved in regulating the telecommunications industry. The first was determinacy--creating more certainty in the law over a longer term would help stimulate more investment and bring down litigation costs. The second was technological expertise, for which he gave the FCC credit and suggested would be the basis for their continued participation in the regulatory process. The third principle was neutrality, in that these issues should be decided on their legal and economic merits, free from bureaucratic politics to the extent possible. Finally, Mr. Neuchterlein emphasized the need for humility on the part of regulators and judges to admit mistaken predictions and to realize that trying to control the market can have unintended consequences.

Thomas W. Hazlett
Manhattan Institute and AEI-Brookings Joint Center

Mr. Hazlett reaffirmed the goal of healthy competition across different network types, and was skeptical about forced line sharing as a means to achieve competition. He questioned court rulings requiring open access to networks, noting the failure of unbundling policies to encourage transition to independence, as well as the legal complexity that stifles investment. Mr. Hazlett presented data comparing the impact of unbundled network elements-platform (UNE-P) line resale under forced sharing rules to that of more recent years, after such requirements for DSL were overturned by the FCC. He argued that non-cable competitive local exchange carrier (CLEC)-owned lines had actually decreased over time as competitors substituted cheaper leased lines from incumbents. He claimed that the recent increase in cable-based phone subscriptions could at least in part be attributed to the elimination of artificially cheaper phone service via UNE-P. He also attributed the increase in market share of DSL relative to cable modem to the abandonment of line sharing, as the incumbents have enjoyed better returns on their investments. Mr. Hazlett encouraged looking at the big picture and taking into account the competition that occurs across different platforms, and he expressed hope that future policies would evenhandedly foster the growth of broadband, wireless, and new technologies such as VoIP.

Gregory L. Rosston
Stanford Institute for Economic Policy Research and former deputy chief economist, Federal Communications Commission

Mr. Rosston, commenting on Weiser and Neuchterlein’s work, first noted that it may be more essential to have an FCC chief who is market-oriented than to actually rewrite the 1996 Telecommunications Act, which may not even happen. While agreeing that the act was poorly designed, he questioned the desirability of replacing it, especially now that the most burdensome and confusing UNE-P provisions have been largely eliminated, and cautioned that an overhaul may create more problems and uncertainty than it resolves. He suggested having a single FCC commissioner rather than five in order to improve the clarity and timeliness of decisions. He also recommended having a single court that specializes in telecommunications policy questions. Finally, Mr. Rosston argued for a new, single standard, such as consumer welfare, to guide FCC decision-making, as he lamented the unproductive balancing act it performs in meeting the current, vague standard of serving public interest.

Scott Wallsten
AEI-Brookings Joint Center

Mr. Wallsten applauded Mr. Hazlett’s paper as a good overview of the telecom policy situation. He particularly agreed with Hazlett’s analysis of spectrum allocation. Mr. Wallsten’s main criticism of Hazlett’s presentation related to the impact of the UNE-P regime on telecom investment. He argued that by defining the communications sector more broadly, it could be argued that UNE-P may not have interfered much with the general upward investment trend as Hazlett suggests. However, Wallsten maintained that UNE-P at best had little impact on industry investment and that it should still be considered failed policy in light of the lobbying, litigation, and other costs it spurred. Mr. Wallsten also emphasized the limits of technological foresight, and echoed additional calls for a regulatory approach that allows providers the flexibility to adapt their offerings in such a rapidly evolving market.

John W. Mayo
Georgetown University

Mr. Mayo asserted that telecom is on the cusp of major advances, particularly as it begins to merge voice, video, data, and other content into a single, integrated platform. He focused on four aspects of the industry that made him comfortable and confident moving forward. The first was the existing level of competition offering a range of communication choices to consumers. The second was the new economies of scale and scope that are fundamentally changing the structure of the industry, which will continue to flourish if consumers, rather than regulators, are free to choose the products that suit them best. The third encouraging aspect was the fresh attention to retooling the regulatory environment, which he said was clearly needed. Finally, Mr. Mayo expressed hope that the new telecom mergers would be reviewed thoroughly, without any political rush to support or condemn any particular one, and within the broad context of a diverse, evolving industry.

Question and Answer

Mr. Hazlett elaborated his desire for the scaling back of the FCC. He noted that the agency is pulled in multiple directions when making decisions, often helping political constituencies over consumers. He argued that shifting policy decisions away from bureaucracies to courts and relying on an antitrust framework and a consumer welfare standard would be more straightforward and beneficial to everyone.

Mr. Weiser challenged Mr. Hazlett’s enthusiasm for significantly reducing the FCC, emphasizing the political infeasibility of it and also maintaining that the agency makes some positive contributions in technological expertise and policy guidance. He also rejected the notion that leaving more decisions to the court system would be desirable, pointing to the mess of costly litigation following the 1996 Telecommunications Act.

Mr. Weiser reiterated his support for unbundling requirements in specific situations when an incumbent has considerable market power and thus is significantly inflating its rates, as is the case in some small business broadband markets. Mr. Hazlett disagreed, arguing that an unrestricted environment without unbundling requirements would naturally result in multiple options with competitive prices. Mr. Neuchterlein noted his divergence of opinion from his own coauthor on this issue and added as a downside the significant costs of physically adapting networks to a line-sharing regime, which were often underestimated by regulators in advance.

Mr. Hazlett clarified his definition of consumer welfare as the combination of both consumer and producer surplus, or total social welfare, in response to a question about his earlier support for using consumer welfare as the single measure for evaluating policies.

Mr. Rosston called for increased effort to recruit talent to the FCC and to improve data gathering and sharing methods. Mr. Hazlett remained skeptical that any serious reformation of the FCC would take place, suggesting that bold new leadership or mandates from Congress and the president were the only likely ways to achieve real progress, neither of which were in sight.

Mr. Litan noted the apparent agreement among all panel members that broadcasting spectrum needed to be reallocated to relieve the unnecessary and harmful artificial scarcity seen in the current environment.

Keynote Speaker

David Dorman
AT&T

Mr. Dorman began by calling the current telecom era an “inflection point,” a restructuring period which he welcomed and hoped would result in more competition, investment, and innovation in the industry. He argued that a lower level of regulation going forward would help foster these goals by allowing consumers, rather than regulators, to decide which services best suit their needs.

Mr. Dorman discussed some of the background leading up to the recent merger between AT&T and SBC. He noted the overly ambitious capital investing of major telecom companies in the late 1990s, regretting the market value and jobs lost in the aftermath but praising some of the technological breakthroughs that resulted. He explained that too many companies spending too much money against a backdrop of regulatory policy switching and legal uncertainty put significant strain on the industry. He pointed to AT&T’s recent withdrawal from consumer and small-business wireline services and movement into high-end business enterprises and IP as a result of the FCC’s reversal on UNE-P policy.

Mr. Dorman expressed optimism that some of the newly formed telecom mergers, combined with a reformed regulatory environment, would ensure successful business and investor confidence in the coming years. He highlighted the compatibility of AT&T’s networking, enterprise, and IP expertise with SBC’s broadband and wireless delivery capabilities. He suggested that vertical integrations of this sort made sense in an increasingly interconnected communications climate and that healthy competition among efficient, versatile conglomerates would optimize service allocation and innovation. He mentioned in particular VoIP and wireless communications as areas in which AT&T/SBC would stay on the forefront as their use rapidly becomes widespread.

Question and Answer

In response to a question regarding his view on the Telecommunications Act, Mr. Dorman supported repealing it and moving toward an environment with as little regulatory interference as possible. Admitting that having no regulation at all was not realistic, he expressed hope that any new legislation would deal primarily with universal coverage, intercarrier compensation, and resolution of federal versus state disputes. He also suggested that treating different platforms--such as wireline, cable, and wireless services (or even various forms of the same service such as VoIP)--differently even as they increasingly performed similar functions, made little economic sense. He maintained that a beneficial amount of competition would continue to arise among integrated communications companies and that regulatory planning and favoritism only resulted in inefficiencies, costly litigation, and reduction in investment.

In discussing AT&T’s complicated business history, Mr. Dorman remained confident that they had made the right moves at each stage over the years. He shared his beliefs about the 1984 divestiture of the company, expressing uncertainty that the breakup had been justified on the grounds it was argued but conceding that many price and service gains were enjoyed by consumers as a result.

AEI-Brookings Joint Center research assistant Jesse Gurman prepared this summary.