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Strike Three at the FCC

original article (subscription to The Wall Street Journal required to access article)
Apart from its steel tariffs, the Bush Administration’s biggest economic blunder has been the hash it has made of telecom regulation. The good news is that a federal court has just handed the White House a chance to make amends.

The opportunity comes courtesy of a Tuesday D.C. Circuit Court of Appeals decision rejecting Federal Communication Commission rules that force the Baby Bells to open their phone networks to rivals at regulated rates. Twice before the same court has told the FCC to justify these “unbundling” requirements, but each time the bureaucrats have ignored the law and bowed to lobbying pressure from state regulators and AT&T. The result has been to extend the investment depression in U.S. telecom and (as George Gilder argues here) drive the cutting edge of the industry overseas.

This time around the judges’ frustration at being ignored was palpable. Instead of remanding the issue back for yet another turn on the FCC’s merry-go-round, the court vacated the rules after 60 days pending motions to reconsider. “This deadline is appropriate,” said the court, “in light of the Commission’s failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings.” That’s legalese for, “What part of ‘back off’ don’t you understand, pal?”

In its colorful 62-page ruling, the court says Baby Bells “can’t be used as a pinata” and describes the FCC’s definition of competitive disadvantage as “vague almost to the point of being empty.” The court also struck down the agency’s decision to “punt” to 50 states the responsibility for determining which parts of a local phone network should be available to rivals at cut-rate prices.

A little history: After Congress passed the 1996 Telecommunications Act, then-FCC Chairman Reed Hundt and Vice President Al Gore decided they had license to micro-manage the telecom sector to their hearts’ content — so long as everything was done in the name of “competition.” Rival companies were invited to piggyback on the Baby Bells’ infrastructure — from the switches to the transport lines into homes and businesses — at prices determined by the government, not the market.

Predictably, this has done more to undercut competition (and prices on the Nasdaq) than to foster it. Upstart companies that can rent existing networks have little incentive to build their own. Such incumbent carriers as Verizon and BellSouth are also in no hurry to upgrade networks that the government will force them to share with competitors. And potential telecom investors look askance on the idea of regulators arbitrarily determining their rate of return.

Michael Powell, the current FCC chairman, understands all this. He opposed the unbundling mandates but was outvoted last year when Commissioner Kevin Martin, a fellow Republican, sided with Democrats to keep the rules in place. Tuesday’s decision vindicates Mr. Powell, while rebuking Mr. Martin and those inside the Bush White House who backed him up. If President Bush loses in November because voters don’t believe the economy has recovered strongly enough, Mr. Martin should get the credit.

Unfortunately, sensible telecom policy seems to have no champion inside the Administration. Treasury Secretary John Snow and economic adviser Stephen Friedman haven’t paid much attention, as far as we can tell, so Mr. Martin and Beltway lobbyists have been able to run the show. We wonder if Mr. Bush even realizes the damage that’s been done and how much the debilitating Gore-Hundt regulatory model has become his own. Now that the courts have given the White House an opportunity to change policies, there’s no more excuse for keeping President Martin in charge.