FCC Chairman Michael K. Powell says the best remedy for the telecom sector's economic woes is to undo the very regulations that helped bring about innovation in the first place.

by Patricia Fusco ISP-Planet Managing Editor [October 18, 2002]

Telecommunications was key driving force behind the economic boom of the late 1990s. At the climax of the growth surge, the telecom industry accounted for nearly six percent of the U.S. Gross Domestic Product (GDP). On the regulatory front, much of the credit for producing such dramatic economic growth went to the Telecommunications Act of 1996, which caused a blossoming in the Competitive Local Exchange Carrier (CLEC) business. Of course, the high-powered telecom lobbyists who helped craft the law were also responsible for generating much of the law's praise.

Six years later the now beleaguered telecom industry carries its hat in its hands, howling for further regulatory relief. Today, the 1996 Act is seen just a first step toward complete deregulation of the industry. In other words, lobbyists and lawyers representing the telecom industry want to take another crack at making federal policy.

One official who will be held responsible for turning the telecom industry around is Federal Communications Commission (FCC) Chairman Michael K. Powell. By Powell's own admission, government has all the necessary tools required to cure what ails the telecom market.

Powell's remedy is deregulation. Powell has already redefined telephone-based broadband services as "information services" since becoming FCC chair. A designation once intended for content providers, defining broadband access an information service now allows Regional Bell Operating Companies (RBOC) to ban other service providers from transmitting data over their lines.

The distinction has profound legal ramifications. According to the 1996 Act, telecom services have to grant open access to their facilities, but information services do not. But Powell didn't stop there. The Commission next redefined cable-based broadband as an "interstate information service." The designation not only restricts access to facilities, it also prevents local authorities from charging license fees and enforcing customer service standards.

It should come as no surprise that when Powell took the stage to speak before Wall Street analysts gathering in New York City to outline his plan for economic recovery, deregulation was the center of his theme. The FCC chair asked that federal, state, and local governments, as well as Wall Street and Main Street stakeholders, help rebuild the telecom industry—returning it to a era of sustainable, well-founded prosperity.

In contrast to the initial implementation of the 1996 Act, Powell said the FCC is armed with more than predictive theory to develop new rules.

"We have nearly seven years of experience," Powell said. "We have seen the criticality of tailoring our policies to respect the capital needs of the market. And we have seen how monumental the impact of our economy is when things go seriously wrong."

"Government must now approach the review of its regulatory structures with these lessons understood and digested," he added. "It can advance and implement a regulatory structure that more faithfully answers more to capital investments, rather than airy political imperatives."

The FCC is ahead of the curve when it comes to reviewing telecom regulations. As it happens, many of the crucial orders the Commission put forth to foster competition in accordance with its 1996 mandate are already under routine review. This list includes the 1999 line sharing order that directed local telephone companies to share their telephone lines with providers of high-speed Internet access and other data services, as well as rules regarding unbundled network elements that specify which parts of local telephone networks must be made available to competitors to provide rival local telephone services.

Powell said the Commission is only a few short months away from concluding these proceedings, as well as wrapping up others initiatives intended to assist the telecom industry's economic recovery. He said that real policy failings that have played a role in the telecom industry's demise, so regulatory reform will be a part of government's drive toward economic recovery. He stated, "regulators have at their disposal tools of sufficient power to drive forward economic growth and productivity by altering the telecommunications regulatory landscape."

History conflicts with Powell's assumption that deregulation is the cure for telecom companies' financial malaise. More than a century ago, during the years of the "rail barons," we learned that the way to encourage competition in an industry that tends toward a natural monopoly is through strong federal regulation. We need only to look back over a few years to see that deregulation of the energy industry failed miserably in California. But deregulating the telecom industry would not just fail one state, it would fail the nation, allowing the market to further consolidate and stifle technological innovation.

Powell vehemently rejects these arguments, stating that his views are often mischaracterized as anti-competitive or pro-monopolistic. "I reject these homonyms completely—competition can and will succeed, but only if fundamentals represent genuine and sustainable economic competition," he said. "Only through facilities-based competition can an entity bypass the incumbent completely and force the incumbent to innovate to offset lost wholesale revenues."

Narrowing the field for last-mile delivery of telecommunications, Internet and broadband services is anti-competitive and pro-monopolistic. What else could anyone call it? Deregulation of the telecom industry would be a violation of the public trust. Now isn't the time to lock out rivals from incumbent carriers' facilities. Now is the time to unlock the door and throw away the key.

Powell concedes that the 1996 Act is far from perfect. To this end, he believes that it is time to rewrite telecom policy. "Times have changed and policies must change," Powell said. "There is little prospect Congress will act soon, so the task falls to us—and we welcome it."

With Powell at the helm of the FCC, the telecom industry is on the verge of revolutionary regulatory changes. Unfortunately for independent CLECs and ISPs struggling to compete with RBOCs, the regulatory regime is about to become hostile—especially when it comes to facilities-based broadband services. Ultimately the real losers will be American consumers, once again charged with the burden of subsidizing federally sanctioned monopolies in the telecom industry.

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