Key Public Policy Issues

Under the Communications Act of 1934, jurisdiction over telecommunications is split between the Federal Communications Commission at the federal level and public utility commissions in the 50 states and the District of Columbia. Because of that split, statutes and PUC rules and regulations at the state level can effectively thwart or at least significantly delay national policy initiatives on telecommunications. When I was directly involved in the policymaking process at the federal level in the mid-1970's, we were generally successful in preempting state regulations that conflicted with our policy initiatives. As a result of a subsequent series of federal court decisions, however, the ability of the FCC to preempt the states has been seriously restricted.

Thus, the fundamental issue is: Where should policy toward telecommunications be set at the federal or the state level of government? Because of the tremendous importance of telecommunications to the future of the nation as a whole and the nationwide and global reach of these networks, I am convinced that the fundamental decisions the fundamental policies, if you will should be established at the federal rather than the state level. Telecommunications is simply too crucial to allow each jurisdiction to go in different and often conflicting directions. I will readily admit that my feelings in this area are shaped by my belief in the wisdom of encouraging competition in local exchange facilities and services, and by what I have perceived as open hostility toward competition on the part of some state regulators. But whether or not you believe in competition, I would argue that we need a national policy on the issue and that fundamental decisions such as this should be made at the federal level.

Having said that, I want to make absolutely clear that I am not in favor of regulating all telecommunications at the federal level. I was in Washington when Texas still did not have a PUC, and I am painfully aware of how difficult it is for a bureaucrat in Washington to help a subscriber who is having trouble with his or her local telephone company hundreds of miles away. But I do think that the Commission would have clear power to override conflicting state regulations when issues of national importance like local exchange competition are involved.

The second important issue is one that I have already touched on namely, the role of competition in the provision of local exchange services. I am in favor of permitting such competition; however, I would like to make several observations regarding that competition.

First, as long as the local exchange carriers and, in particular, the Bell operating companies have a significant amount of monopoly power in the provision of local exchange facilities and services, there is a serious threat that they will use that monopoly power to cross-subsidize and discriminate in favor of their own competitive activities that may depend upon those monopoly facilities and services. As long as they have such market power, I have serious reservations about any further lifting of the line-of-business restrictions that were imposed as a result of the AT&T divestiture, or the current statutory barrier to their provision of cable television services.

Second, while some states are moving in the direction of allowing at least limited forms of local exchange competition, there are still significant legal barriers to competition at the state level. As I indicated before, I am strongly in favor of overriding such barriers through legislative and regulatory actions at the federal level.

Third, even if the legal barriers to entry are removed, there are still significant other barriers that may deter entry. These barriers include:

1. the capital investment required to duplicate the subscriber access or local loop portion of the local exchange network on anything approaching a ubiquitous basis,
2. the nonfungible or sunk cost of nature of that investment once made, and
3. the difficulties and hence costs of gaining access to rights-of-way, ducts, pole lines, and radio sites.

Fourth, because of the "iffy" prospects for actual competition with the local loop, I am concerned about the ability of the local exchange carriers to leverage their monopoly power into the provision of switching, transport, intelligent network functions, and enhanced services. Consequently, my firm and I have been strong advocates of unbundling the local exchange network into the four major parts I described before. Such unbundling would diminish the ability of local exchange carriers to leverage off of their monopoly power, and would facilitate the development of competition in the other parts of the local exchange network namely, switching, transport, and some level of service logic. I am encouraged by the recent actions by the FCC ordering the unbundling of the transport function, by actions requiring unbundling of the local loop in some state jurisdictions, and by actions by some local exchange carriers to voluntarily unbundle (for example, by Ameritech).

The third major issue is the pricing and other terms and conditions of accessing the local exchange network. This is critical from a number of standpoints.

First, the emerging competitors will be critically dependent upon the existing local exchange carriers for the termination of traffic generated on their networks. Thus, ensuring reasonable, cost-based access to and from the switched local exchange network including, but not limited to, numbering plan access and number portability is crucial to the development of competition.

Second, competitive pressures will inevitably cause a further restructuring of ordinary local exchange telephone rates. Indeed, the fear of substantial local rates increases and the perceived political consequences of such increases if they materialize is the reason some state regulatory commissions and other groups are opposed to, or at least concerned about, the advent of local competition. While I think some of the concerns are overstated, there are very real issues associated with maintaining universal service, and these must be confronted head-on.

Third, the pricing of access to the local exchange network must be such that local exchange carriers are provided incentives to invest in their networks while sending the correct pricing signals to their potential competitors.

If all the legal barriers to local exchange competition are lifted, if full unbundling is accomplished either voluntarily or by regulatory action, and if good progress toward reasonable, cost-based access is made, then I would feel much more comfortable with the relaxation of some of the current business restrictions imposed upon the Bell operating companies, and with deregulation of the local exchange carriers more generally.

>Authority to Deregulate

The next issue of importance is the authority of the FCC to deregulate. The Communications Act is outdated. It does not contemplate the possibility of competition in the provision of telecommunications services, but rather assumes the 1934 monopoly structure in the telephone industry and hence a need to regulate. Arguably, at least, that regulation was introduced to protect consumers against price-gouging by providers of essential services who had monopoly power.

With the successful entry of multiple competitors, however, the need for full, traditional tariff-type regulation disappears, because the market can protect consumers against such price-gouging. Unfortunately, the Commission's ability to deregulate carriers without market power providers the FCC refers to as "nondominant" carriers was successfully challenged in federal court. This has forced the Commission to require carriers to file tariffs even where competition is sufficient to protect consumers. While the Commission has tried to lighten the practical burden of this requirement somewhat, I strongly believe that the FCC's ability to deregulate should be explicitly established by appropriate amendment to the Communications Act. Coupled with the changes necessary to permit the FCC to override state actions that are not in the overall national interest, this amendment would among other things allow the Commission to ensure appropriate deregulation in the local exchange area as competition develops.

The fifth and final major issue concerns the rate of deployment of the fiber optic-based broadband facilities in the subscriber access portion of the network. Once again, I am confident that all of you are aware of this debate, given the attention that the new administration has given the issue of telecommunications infrastructure and "broadband superhighways." This issue alone would warrant an entire conference, and I will not address it beyond raising a couple of caveats.

First, as long as the established local exchange carriers are dominant and, in particular, if they are rate-of-return regulated or even if a strong component of rate-of-return regulation remains under alternative forms of regulation, as is now typically the case there is a strong reason for them to garner political support and convince policymakers that they should be allowed to make massive investments in the local loop.

Second, as long as established local exchange carriers have monopoly power in the provision of local exchange services, they have the incentive to load the bulk of those investment costs on ordinary telephone ratepayers in order to subsidize the provision of new broadband services.

Third, as a practical matter, it is almost beyond comprehension that regulators would allow a local telephone company to fail if there were not alternative providers of service available. Thus, if uneconomic investments by local exchange carriers are made in broadband facilities in the subscriber access portion of the network, the inevitable result will be that ordinary ratepayers will be stuck with the bill not the stockholders of the local exchange company. This is especially true if such investments are made at the behest of the policymakers and regulators themselves.

I am not convinced that there is some sort of marketplace failure taking place that is resulting in fiber being deployed too slowly. Hence, there is a danger that the ordinary ratepayer will end up holding the bag if the deployment of fiber-in-the-loop is artificially accelerated in advance of market demand. In short, I have little trouble with the government encouraging demonstration projects and educating consumers on the potential applications and benefits of broadband networks but I have very real concerns about artificially encouraging the deployment of fiber that may not be economically justified. Government leadership on the demand side of the equation is one thing, manipulating the supply side of the equation, with ordinary consumers footing the bill, is something entirely different.