knowledge@wharton The FCC¹s Latest Telecom Ruling: Far-Reaching, Yes, But Also Far From Clear

[Dave Farber <dave () farber net>]

The FCC¹s Latest Telecom Ruling: Far-Reaching, Yes, But Also Far From Clear

A recent vote on deregulation by the Federal Communications Commission left
many questions unanswered and none of the players in the telecommunications
industry entirely satisfied. It was the kind of decision, however, that will
affect the future of telecom companies in far-reaching ways, some of them
not yet fully understood, according to experts at Wharton and two think
tanks.
 
The February 20, 2003, vote was both technical and confusing and held little
immediate import for consumers who use telephones, digital subscriber lines
(DSL) and cable Internet connections. What¹s more, nothing the commissioners
decided is likely to be final until key issues are challenged and sorted out
in federal court. Indeed, it is not clear exactly what the five-member panel
decided: Aside from some summary sheets handed out on the day of the vote,
details will not be known until the agency issues a lengthy report later
this spring.
 
But telecom experts say the vote was a defeat for the FCC¹s chairman,
Michael Powell, and his attempt to push for continued deregulation of the
nation¹s local telephone companies. ³There were no clear winners and losers
in this game,² says David Farber, a professor of telecommunications systems
at the University of Pennsylvania who also teaches at Wharton. ³Nobody in
the telecom industry is very happy. Nobody got everything they wanted.²
 
³The main news is this is a hit for the chairman, a bad hit,² notes Gerald
Faulhaber, professor of business and public policy and management at Wharton
and a former AT&T executive.
 
The scenario leading up to the vote began last year when the U.S. Court of
Appeals for the District of Columbia ordered the FCC to revisit some
important telecom rules. Powell saw this as an opportunity to make sweeping
changes in regulations affecting local phone companies. He wanted to put an
end to requirements that the former regional Bells lease their networks at
discounted rates to competitors. He also wanted to codify regulations so
that states would have little say in telecom regulations in the future. But
a fellow Republican commissioner, Kevin Martin, joined forces with two
Democrats on the commission to block Powell¹s aims, at least in part.
 
The commission voted 3-2 that the regional Bells must continue to abide by
current rules requiring them to lease their existing telephone networks to
WorldCom, AT&T and other competitors at low prices established by state
regulators. The rules had been put in place following the breakup of AT&T to
encourage local phone competition. This vote by the FCC was seen as a defeat
for the Bells, which had lobbied for years to do away with the rules. With a
Republican administration in the White House and in the GOP in control of
Congress ­ and with Republicans in the majority on the FCC ­ the Bells hoped
their time had come.
 
However, one part of the split decision went Powell¹s way. The commission
also voted to end requirements that the Bells lease to their competitors new
or upgraded networks for high-speed Internet access (as opposed to their
voice lines for telephone service). The Bells have already been installing
fiber-optic equipment to replace old network components but have held off
making big investments in new broadband services. This part of the decision
was considered a victory for the Bells. With the Bells free to set rates,
subject to regulatory approval, competitors of the Bells are put on the
defensive: They now have to figure out whether they can still afford to
offer broadband services to their customers ­ or should construct their own
networks.
 
Powell issued a partial dissent. That part of the ruling allowing the states
to continue their active role in writing their own rules for local telephone
rates, he complained, would result in confusion and inconsistency. He also
said the vote would spur court challenges and dampen investment in America¹s
telephone system.
 
On the day of the vote, the stock prices of the Bells ­ BellSouth, Qwest,
SBC and Verizon ­ dropped.
 
³The regional Bells wanted all the restrictions lifted but that was never
going to happen,² Faulhaber says, adding that while the Bells have
complained about the compromise vote, he suspects the regionals are, all in
all, ³secretly pleased by the whole thing. Going forward, it gives them more
incentives to put in new technologies [for broadband services],² which he
sees as a positive development.
 
³I think it¹s damaging that the chairman did not win on the
local-competition part of this decision; that could hold back the advent of
real competition for a long time,² says James L. Gattuso, a research fellow
in regulatory policy at the Heritage Foundation. ³The question is whether
that¹s outweighed by liberalizing the rules for broadband, which was a very
good thing in my mind.²
 
Gattuso, a former FCC staff member, adds: ³If you had to have a choice and
could do only one thing right, [the commissioners] handled the future right.
Broadband is the future. Standard voice telephony [belongs to] the past.²
 
Robert W. Crandall, an economist at the Brookings Institution, says cable
companies could be hurt because the vote may make it harder for them to
offer telephony service to their customers, an area of potential growth.
Crandall notes that the stocks of cable companies fell slightly on the news
of the FCC¹s decision.
 
Farber and Faulhaber agree that the vote will hurt small companies that are
broadband service providers of high-speed Internet and network access
through DSL lines, T1 lines and dial-up services. The biggest financial
impact will be felt by companies, such as Covad Communications, that offer
DSL services because they are almost entirely dependent on leasing lines
from the Bells, according to Faulhaber. ³The companies offering DSL over
phone-company lines are small players and they have not been a significant
market force for several years.²
 
Crandall cautions that the complete impact of the FCC¹s decision will not be
certain for months because of likely legal challenges by the Bells and
others. As soon as the commission¹s final report is published, ³it will be a
race to the courthouse.²
 
Powell¹s inability to produce a majority for policies he supports could be a
warning sign that deregulation of the telecom sector may slow down, Crandall
adds. ³Things are changing rapidly in telecommunications. It¹s a highly
politicized environment. [The commissioners] are subject to enormous
political pressures. What I¹d like to see is someone willing to make tough
political decisions and do something bold. If [Powell] can¹t even muster a
majority when he has three Republicans on the commission, this doesn¹t bode
well for doing daring things in the future.²
 
The next major item on the commissioners¹ agenda, Crandall points out, is a
set of decisions about how far the government should go in easing
regulations restricting the number of TV stations that broadcast networks
and newspapers can own. ³There¹s a lot of populist pressure on them to do
something. I fear they won¹t be able to take any decisive, bold steps.²

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