Martin and Lewis at the FCC

John Wohlstetter
The American Prowler
March 7, 2003
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The Federal Communications Commission's February 20 ruling on telecom competition policy is truly beyond satire. Writing into the night like a high school student cobbling together a term paper just before semester's end, cutting and pasting a 400-page monstrosity, forming a majority by clandestine negotiations behind the chairman's back, is crazy enough. But then add the two Democratic commissioners, gifts to the FCC from Fritz Hollings and Tom Daschle, who admit in open session that they do not know the full order they are voting on, but that minor fact notwithstanding they will support it. (As Dave Barry says: "I am NOT making this up.") Stir in Republican usurper Kevin Martin, whose "Jeffords Jump" creates a Democratic FCC majority over key telecom policy rulings that drive a sector universally acknowledged as a cornerstone of robust economic recovery. The trio forming the majority thus did a star turn reminiscent of the zanier routines of Dean Martin and Jerry Lewis: Republican Martin as straight man Dino; the Democratic duo serving up slapstick worthy of Jerry.

The kindest explanation for Martin's crossover is ideological: a mechanical application of classical states' rights federalism to telecom policy. But fiber-optic and wireless technologies have made the marginal cost of calling across the street and of calling across the continent essentially the same. A unitary federal policy is thus the logical way to regulate telecommunications. Instead, the Martin-Lewis majority has superimposed upon the Clinton FCC's national infrastructure socialism a re-Balkanization of federal telecom policy, with 51 public utility commissions free to adopt network access rules subject to review by 12 federal appeals courts. Given likely divergent appellate court rulings, add yet another trip to the Supreme Court, the fourth key telecom case since passage of the 1996 Telecom Act. The FCC is batting .333 for the first three cases, a good average in baseball but spectacularly under par for a regulatory agency, whose policy rulings enjoy strong presumptive legal deference upon judicial review.

Add layers of regulatory micro-management, the policy signature of the FCC for three decades. And make the principles complicated, too. A few samples: Bell company (SBC, BellSouth, Verizon, Qwest) installed fiber to newly-built homes is free of regulation; Bell upgrades to fiber to old homes must give new entrants access to voice service but not to data services -- except that firms already offering data over such lines are grandfathered; Bell company "dark" fiber -- unused fiber in place -- must be shared with rivals; existing Bell copper plant remains de facto community property, available to new local market entrants at a steep network access price discount vis-à-vis the true cost of network access.

Just to be sure that nothing happens quickly, the FCC will phase out network access subsidies over three years -- but only if the state commissions concur; state review is market-specific, taking into account customer class, geography and service type. The earliest date for any sunset of network access rules -- which must be approved in each market for each separate part of the incumbent local carrier networks, is end-2006; more likely look for 2010. Worse for the Bells, the costs of adverse parts of the new FCC rules are paid up front, while benefits from favorable parts of the order are realized -- if at all -- much later. Given Bell company financial straits -- sagging capital investment and declining core voice businesses whose traffic is inexorably migrating to wireless and e-mail -- the Bells may well be airline-dead by the time regulatory relief comes.

Chairman Michael Powell's "Picasso-esque" characterization of the majority's product seems apt, except that the sheer artlessness of its decision makes it a stretch to associate the ruling with one of the twentieth century's acknowledged artistic geniuses. (Not germane are Picasso's Stalinist politics and Talibanesque behavior towards his ladies; however, his visual deformations are a fine parallel.)

Dean and Jerry were playing for laughs. What the FCC has done with national telecom policy is, alas, not funny at all. Insane asylum behavior in the movies leavens the burdens of this Earthly vale; similar conduct at a major federal agency ruling on questions crucial to American economic growth adds to them.

Among those who will not likely be laughing: (1) investors, who will shun not only the Bells, but also other telecom firms, due to protracted regulatory uncertainty; (2) Bell firm customers, who will see less Bell investment to upgrade service; (3) lenders to the Bells, who will see deteriorating Bell balance sheets; (4) lenders to major equipment manufacturers, who sell most of their product to the Bells; and (5) telecom industry employees, stuck in an industry meltdown now prolonged, possibly leading to a telecom nuclear winter. Winners: who else but the Democratic Party's favorite (Shakespeare's un-favorite) constituency, lawyers, who will make enough money litigating endless rounds to buy a zillion F-22s.

With a lagging telecom sector, the economy will be deprived of energy in a growth-driving sector. Alas, unless the White House wakes up the FCC is unlikely to make major changes to its order. With the White House and Congress distracted by such minor matters as Iraq, North Korea and al-Qaeda the FCC's opéra bouffe will likely stand -- and telecom values will fall further.

The FCC majority seems to believe that carriers whose core voice business is imploding will still invest in new technology upgrades. Investors, it seems, will ignore the core financial problems and concentrate on exciting new business ventures. To assess this premise, imagine President Bush trying this gambit in the 2004 election. Assume he defeats Saddam, while al-Qaeda captures Washington. If you believe voters would compartmentalize those two results, you can believe that investors will do the same in assessing the impact of the FCC's ruling on major telecom firms --ignore voice revenue declines while betting on new business profits rolling in. Investors are far more likely to prefer putting their 401k money into industries whose firms are not regulated by Dean and Jerry. And President Bush, after seeing the economic impact of the new rules, may wind up getting off the wagon and playing catch-up with Dino at the bar.

John C. Wohlstetter is a Senior Fellow with the Seattle-based Discovery Institute.