Regulating the regulators

Jun 14, 2002 12:00 PM, Robert A. Saunders

Recently, two landmark court decisions sent shockwaves through the telecom industry. First, the U.S. Supreme Court reaffirmed the status quo regarding the Federal Communications Commission's ability to set national pricing for unbundled network elements, or TELRIC, and the combination of elements, or UNE-P. Soon after this decision was issued, the U.S. Court of Appeals for the District of Columbia handed down another decision that will have much greater impact on investment and the evolution of competition. The Court has in effect told the FCC to start using reality rather than theory to regulate the local communications sector.

The Court's decision undoubtedly demonstrates a nascent recognition of the intensely complex situation that has developed in the wake of the Telecommunications Act of 1996. The good news is that there is a lot of competition in the local communications marketplace.  The bad news is that this competition is neither ubiquitous nor uniform. Hitherto, the FCC has taken, for the most part, a "one size fits all" approach to regulation. However, the Court's opinion clearly urges the Commission to begin to participate in a much more involved process of regulation. Not that Chairman Michael Powell minds all that much. In reading the notice of proposed rulemaking issued for the FCC's Triennial Review, it is obvious that the Commission is looking to engage in a more clinical, as opposed to holistic, approach to regulating competition, dissecting it into markets, products and regions rather than the prior approach, which could euphemistically be called high-handed and simplistic.

The crux of the Court's argument was related to high-speed Internet access where cable companies dominate two-thirds of the market, yet DSL providers (principally, but not exclusively, the Baby Bells) are treated as the market's dominant carriers. The Court's decision boldly attacks the slavish mindset of regulation that says if a telecom company is providing a service then it must be regulated as a telecom service; if it's anybody else, treat them differently. Using terse language such as "naked disregard of the competitive context," the Court called the FCC to the carpet for sending out reams of reports attesting to cable's domination of the broadband industry while regulating the Bells like they were nefarious monopolists controlling a bottleneck to high-speed Internet service. The decision is a clear victory for the Bells. Verizon, BellSouth and SBC have been quick to point out the alternatives that exist in particular markets such as broadband, special access, switching, etc., but until now, it seemed like no one was listening.

The impact of the Appeals Court ruling will most likely manifest in a continued path toward increased complexity in regulation (with the ultimate goal of deregulation). More than six years have passed since President Clinton signed the Act into law, and during that time competition has developed in fits and starts, but it's clear that many sectors are highly competitive. The Court recognizes, as does the FCC, that "one size" no longer fits all. Each market is different. The broadband market in suburban New Jersey is different from the telephony market in the Four Corners of Utah, Colorado, New Mexico and Arizona. Understanding these complexities is part and parcel of regulating a dynamic industry like the local communications market. The Court's ruling is but an opening salvo in what will be a long and drawn out process. As competition grows in different markets, regulation should be decreased and market rule introduced. To do otherwise would endanger the very competition created by the Act and cripple the viability of the U.S. communications network.

Robert A. Saunders is a senior analyst with The Eastern Management Group, Inc., a management consulting firm focused exclusively on the communications industry. He can be reached at rsaunders@easternmanagement.com.