The Telecom Act of 1996:
Promoting Investor Confidence, Imposing Gridlock
By
Prof. Eli Noam
Director, Columbia Institute for Tele-Information
and
Robert C. Atkinson
Executive Director, Columbia institute for
Tele-Information
The
Telecommunications Act, for all of its well-meaning intentions and rhetoric
about loosening the grip of government, ended up centralizing all fundamental
telecommunications policy in the FCC, effectively federalizing the 50 states
with respect to local competition and preempting the judicially-supervised MFJ
with respect to BOC entry into long distance. This centralization satisfied
investors’ desire for greater “certainty” and “predictability,” unleashing a
torrent of inexpensive capital. This
increase in investor confidence was, by far, the most positive result of the
Act.
However,
to assuage the concerns of the habitually warring and suspicious factions in
the industry (and in the Congress itself), the Telecom Act did not simply
establish broad policy goals (i.e., competition in all markets and less
regulation) and then leave it to the FCC to achieve the goal. Rather, Congress, perhaps concerned that the
majorities of the FCC and Congress were usually from different political
parties, and in any case enjoying the attentions of all the industry factions,
felt it necessary to micromanage the implementation. For example, the statute
specified three separate pricing methodologies for interconnection between
incumbent and new local telephone companies, established a detailed system for
negotiating, mediating and arbitrating interconnection agreements, and
specified a 14 point checklist to be
satisfied before a BOC can offer long distance services. There is nothing substantively wrong with
these policies except that they took away much of the freedom of the
implementing agency—the FCC--to adjust policies later in light of unexpected or
changed circumstances. While this micromanagement may have been necessary to
get broad support for the Act, the result has been a legal gridlock that has,
so far, thwarted the achievement of the Act’s fundamental objectives.
If
the Act took flexibility from the FCC, it took even more from the States. With respect to local competition, it is
useful to recognize that the Telecom Act was neither revolutionary nor
innovative. This has been often
overlooked by Washington-centric reporters and financial analysts. The Act
largely codified into national law and policy the results of many experiments
conducted by State public utility commissions (PUCs) for over a decade to
introduce local competition.[1]
Unfortunately,
this state-by-state process—with its admittedly untidy look of “muddling
through”--did not provide the certainty and predictability sought by
investors. Because the PUCs were
operating under often archaic state laws that broadly directed them to regulate
in the “public interest,” PUC decisions were neither predictable nor uniform.
Even “pro-competition” PUC decisions sometimes looked serendipitous, and where
local competition emerged, its foothold seemed tenuous. And there was a general perception that the
telephone incumbents wielded political power in many state capitals.
Thus,
by establishing one law encompassing one local policy and by federalizing the
PUCs' competition policy under the direction of the FCC, the Telecom Act of
1996 dramatically changed institutional investors’ risk assessment and hence
willingness to sink capital into all industry segments, particularly local
start-ups.
But
the certainty and predictability proved illusory. The state-by-state
experimentation, which was inexorably leading to vigorous local competition
wherever there was a substantial market demand, largely ceased. The Act froze much of local competition
around the technological and market perceptions and realities of the mid-1990s.
Of course, the Internet--virtually unmentioned and un-considered in the
Act--has emerged dramatically and challenged some of the foundations of the
Act, making it less relevant with each passing year.
It
turns out, ironically and not appreciated by investors, that the “muddling
through” of local competition is actually less risky than a single federal
policy because it allows for a continuous and low-risk process of field
experimentation, testing and fine-tuning of policy before major investment bets
are placed. By contrast, it is
difficult for the FCC to make any small decisions: everything becomes a case of
national significance. And since almost every FCC decision leads not to
finality but to litigation, fundamental decisions end up made not by an expert
agency but by judges and their law clerks.
Similarly, because the FCC is a national agency, it is almost impossible
for it make rules that are tailored to the circumstances of a particular
locality. Yet local telecommunications, by definition, vary across the country
and require different approaches: New York and Montana are so different from
each other in needs and circumstances that no national policy will be optimal
for either state or for the investors in each state’s telecommunications
infrastructure.
The
Telecom Act also gridlocked the entry of the BOCs into long distance markets.
The flexible standard of sec. VIII(C) of the MFJ[2]
became the detailed, specific and rigid
“14 point checklist” of the Telecom Act. Each of the14 points on the checklist became a point of
contention, friction, and delay.
Ironically, by the end of 1995, at least two BOCs (New York Tel and
Illinois Bell) had been ready to seek interLATA relief under the VII(C)
standard on the basis of competition in their major markets (i.e., New York and
Chicago). Whether their initial
applications would have been granted is, of course, unknowable. But it is
certainly arguable that Judge Greene and the Department of Justice would have
allowed them to enter to establish the regulatory carrot that would encourage
other BOCs to open up and to begin to free themselves from the MFJ stick.
One
major strength of telecommunications policy innovation in the Untied States has
been its ability to make incremental but steady changes based on real-world
experience and observation. In contrast, other countries’ policy changes were
part of big “omnibus” national communications legislation, involving blue
ribbon commissions, national coalition politics at the highest level, and labor
versus government strife, all of which tied up the process forever. The US, in
contrast, progressed towards competition in a series of many regulatory
skirmishes before commissions, courts, and legislatures, but without a single
plan or a decisive battle. That is, until the 1996 Act which emulated the
omnibus model. And, sure enough, the
progress to competition and deregulation has slowed down since then. In the
guise of promoting competition, the Act and its follow-up have created an
enormous regulatory apparatus and set of requirements. And while there are many
beneficiaries of such detailed regulations--not the least of them the
communications bar—the Act has created a set of companies and industries whose
very survival is by the good graces of regulators. This dependency relation is
not one that makes for a healthy policy environment or acceptable investment
risk.
An
evaluation of the Telecom Act must therefore consider whether the temporary
gain in investor confidence has been worth the loss of innovation,
experimentation and lower policy risk?
With the benefit of 20-20 hindsight, it probably was not.
If
telecommunications competition is presently gridlocked, what should be
done? If statutory micromanagement is a
root cause of the gridlock, additional statutory micromanagement in the form of
further amendments is not the solution.
For better or for worse, everyone now understands the current version of
the Telecom Act.
Rather
than micromanaging the substance of telecommunications policy, Congress should
focus on broad goals and an easy process.
Congress needs to have greater confidence that the FCC will not undercut
it, and the FCC needs to have more confidence in the state PUCs. The FCC and the states should have clear
authority to promote competition through focused experiments and with
regulatory flexibility. Gridlock can also be reduced by a “Telecommunications
Regulation Sunset Act” that requires every regulation to sunset at a
date-certain (which can be extended by affirmative decision) or when objective
measures are achieved.
Clearly,
we are not yet at the stage of substantial competition and complete
deregulation, but it is time to chart an end-game scenario and work towards it.
[1] Local competition (at least in the modern era) started when the New York Public Service Commission, in mid-1985, issued a Certificate of Public Convenience and Necessity to a company (Teleport Communications) proposing to provide local high capacity private lines. By the early 1990’s, many other PUCs had authorized “Competitive Access Providers” (CAPs) to provide unswitched local services. In so doing the States had required “central office interconnection” (later known as “collocation” after the FCC ratified the various PUC decisions) and some forms of loop unbundling to facilitate non-switched competition. The pattern repeated for switched local services: in 1994 the NYPSC authorized the first competitive local exchange service in the country and by the end of the following year 14 “Competitive Local Exchange Carriers” (CLECs) had installed 70 competitive central office switches. Such issues as mutual compensation (now known as “reciprocal compensation”), number portability and database interconection were being addressed and had been at least partially resolved on a state-by-state basis.
[2] “The restrictions…shall be removed upon a showing by the petitioning BOC that there is no substantial possibility that it could use its monopoly power to impede competition in the market it seeks to enter.”