TCS Daily

Free-Marketer Furchtgott-Roth To Leave; Foresees More Market Oriented FCC

By James K. Glassman - February 5, 2001 12:00 AM

Current commission's "overly aggressive interpretation" of its discretion has led to paralysis in deregulation under the Telecommunications Act of 1996, says Commissioner Harold Furchtgott-Roth. He tells TechCentralStation host James Glassman, "A lot of power has accumulated here, and a lot of power that, frankly, is not in the law. It's just been aggressively taken by force." The commission, he says, hasn't done enough to enforce reciprocal compensation for Internet service providers, to deregulate long distance and "is requiring long-distance companies to lie to their customers." After six years in government, he hopes to "renew" his batteries in the private sector.

Jim Glassman:You've decided to not seek reappointment by the Bush administration as a commissioner to the Federal Communication Commission. Why?

Commissioner Harold Furchtgott-Roth: I think primarily, I've been in government for six years and it's time for me to go back to the private sector. When one is a free market advocate in government you need to go back and renew your batteries in the private sector from time to time, and I'm ready.

Glassman: Do you think that the FCC will pursue free market policies without you?

Furchtgott-Roth: I think the FCC will be more market oriented than it's been in the past eight years.

Glassman: OK. Many in Congress are now calling for changes in the Telecommunications Act of 1996. Such as the Tauzin-Dingell bill, which would allow the regional Bell operating companies into long-distance data service. Do you think that such changes would, in effect, gut or change the law in such a way that it'll be more difficult to actually deregulate telecommunication?

Furchtgott-Roth: Well, I have stated on many occasions I think the proper role of an FCC commissioner is to interpret the law that's written, to be an advocate for the law as it's written and not to be up on Capital Hill lobbying to have the law changed, unless there is some administrative reason that the agency simply can't perform the law. I just don't know that we have that situation. I think problems that occur at the agency are of its own making, that it had a tendency toward micromanagement, a tendency towards a form of industrial policy wanting to get into all kinds of technical details that had been unnecessary. I personally have not followed closely the legislative developments on Capitol Hill related to telecommunications. I think it would be, from my perspective, inappropriate to engage in lobbying up there on that matter. Although, my views on this are definitely not shared by my colleagues, and I do not need to impugn their behavior when they may in fact be lobbying one way or another on legislation up there.

Glassman: Are you willing to say though that the 1996 Telecommunications Act was an adequate blueprint for getting telecommunications, the telephone business, deregulated?

Furchtgott-Roth: I think it is. I think if it were faithfully implemented it would be an excellent blueprint. What it essentially does is say the government is out of the business of creating barriers to entry into telecommunications markets and that relationships among companies will be on a contract basis that will have some potentially minor oversight from state commissions. I think if the FCC had stayed faithful to the actual language of the act, we'd be in much better shape than we are today. Instead, what we've had is just an awful lot of detailed micromanagement that has not been helpful. Now we've gotten into lots of silly games of people trying to resolve contract issues by coming to the FCC, or even worse to go to Congress to have laws changed when what is really at issue is a contract problem.

Glassman: You agreed to the SBC-Ameritech merger and you supported SBC and Verizon's move into interLATA long-distance service saying that they met the act's requirements. Go ahead. Am I wrong by that?

Furchtgott-Roth: I voted for the license transfers from Ameritech to SBC. I voted against all of the conditions and specifically noted all of the kind of secret deals that were going on. That is correct.

Glassman: Does it bother you at all that the RBOCs continue to hold 95% to 98% of the local phone market today almost five years after the passage of the Telecommunications Act?

Furchtgott-Roth: Am I bothered that market shares have worked out the way they have? The question is has the federal government, or our state and local governments, constructed regulatory or legal barriers that prohibit someone from entering the market? If the answer is no, then to some extent I think we've done our job here at the commission. Now, to the extent there is anti-competitive behavior going on out in the marketplace, if there are violations of antitrust law, for that I think we have federal antitrust agencies that are the more appropriate places to look at those problems. I think that it's difficult to paint a single number for market share. First of all, in a lot of states, business markets are far more competitive than our area. The market shares for the business market are a bit more even than that. Residential markets in a lot of states are, frankly, probably worse. But in the states where approval under Section 271 of the act has been granted (for long-distance entry by the incumbent Bell operating company), New York and Texas in particular, the distribution for local entry into residential markets is probably a bit better picture than you just described. It just varies a lot from local geographic market to local geographic market. Are there still a lot of problems out there? You bet. There still are a lot of problems, some of which are, in my view, an artifact of regulation here at the commission, and some of which may be an artifact of regulation at the state and local level.

Glassman: Could you give us an idea of what you mean by that?

Furchtgott-Roth: Oh, certainly. During 1997 and 1998, the commission was involved with litigation on just exactly what Section 251 of the act meant in a case involving the Iowa Utilities Board. The commission's view was roundly defeated in the Eighth Circuit Court of Appeals. In the Supreme Court, there was kind of a mixed verdict, which largely gave a lot of deference to the FCC in many parts of Section 251, but not entirely. And it requested that the commission clarify what it meant by "necessary and impaired standard for unbundled network elements" and a few other areas. So, there was two years of uncertainty. If the commission were truly deregulatory, it would have immediately, within a matter of weeks, clarified what the Supreme Court sent it on remand. Instead, the commission took nine months to vote and nearly 12 months to actually issue new rules on what it meant by "necessary and impaired," which would have again been litigated in court. The commission is just very slow to react to defeats in court. A lot of this comes from, in my view, kind of an overly aggressive interpretation of what the commission's discretion is. We should adopt roles that we believe in the first instance are narrowly crafted and will survive court scrutiny so that people will take them seriously.

Glassman:What do you see happening instead?

Furchtgott-Roth: What happens is we issue rules that are at times so far outside of the law that people don't even take them seriously in the first instance; they know they're going to go to court, and they know they are probably going to win. They know after they win that this commission will take a year or two to think about even responding. So, in the interim, there is this paralysis. There is no clear interpretation of what the law means. Frankly, a lot of this has been devastating to the competitive local exchange carrier industry. We have an item on reciprocal compensation. This agency has been exactly wrong for the past two or three years on reciprocal compensation. The statute is very clear, and because we keep trying to do things that are not in the statute, we keep losing in court to the detriment of all parties. If you are a small new entrant in a market, you can't afford to have the type of uncertainty that has been created by this commission.

Glassman: Someone on the commission once said the FCC's job in telecommunication deregulation is to put itself out of business. Do you think that's ever going to happen?

Furchtgott-Roth: Boy, I'd like to see the citation of that quote. Will the FCC ever go out of business? I think there are a lot of statutory requirements on the FCC, for instance for spectrum licensing, that I don't think are ever going to go away. Do they have to be done by the FCC? No, you can have some other agency do them, but I think some of the core functions of the FCC will always be here. I would say the same thing about the motor vehicle administration in each state. I think you're always going to have licensing of drivers and licensing of cars. Do you read about those agencies on the front page of the business section of your local newspapers? In all likelihood you don't? I am always amazed, frankly, at just how much attention this agency gets, and it's because a lot of power has accumulated here, and a lot of power that, frankly, is not in the law. It's just been aggressively taken by force, and this agency exercises a lot of power that is just clearly outside of the law.

Glassman: Do you think that the FCC has adequately eliminated regulation of the long-distance market?

Furchtgott-Roth: No.

Glassman: In what areas has it not?

Furchtgott-Roth: Let me just give you two examples; I might just think of a third while I am still talking. First, tariffing (for charges). Did you know that AT&T is still required to file tariffs on long-distance calls? It's outrageous. In this year 2001, that any company files tariffs, do you think there's anyone in America who, even if they knew tariffs were filed, bothers to check with the FCC what the tariffs are rather than calling up AT&T and saying, you know, "Tell me how much it'll cost me to get long-distance service?" Other companies don't have to file them. This is purely for some contractual basis for certain business customers as far as I can tell.

Glassman: Is there also at the same time some kind of rate averaging requirement? Am I right about that?

Furchtgott-Roth: By statute. Jim, you know this stuff very well. It's called geographic de-averaging, or rate integration, which means if you're a long-distance carrier, you have to offer the same rate in Maryland as you do in Hawaii. You can't offer a different rate.

Glassman: What do you think of that?

Furchtgott-Roth: That's what the law says and I am going to defend the law as long as I am here.

Glassman: [Laughs]. OK.

Furchtgott-Roth: Another crazy thing with long distance is that it's illegal, according to the FCC, for long-distance carriers to tell their customers the truth about what their bill actually means. They are not allowed to tell them that a certain percentage of their bill is going to something called the Schools and Libraries Corporation. They are specifically prohibited from putting that on their bill. I think it is completely outrageous, and this only applies to contributions to the federal universal fund, which only comes on interstate calls. In essence, the federal government, the FCC, is requiring long-distance carriers to lie to their customers. We did it in a proceeding called Truth-in-Billing. Anytime the federal government uses the word truth, you know you're in trouble.

Glassman: Do universal service charges only apply to long-distance calls?

Furchtgott-Roth: They apply to interstate, which is a funny term. So if you have a calling rate plan with Verizon from your home in Maryland or Virginia and in the metropolitan area, you don't pay each time you call from Maryland to Virginia or vice versa in the metropolitan area. Also, with wireless phones, because the billing isn't the same as for local billing, there are broader calling areas. The commission came up with kind of a fudge factor and said, "All right, we don't know how much is interstate or how much is intrastate, we'll set a number and the number we came up with was 15%. So 15% of wireless phone calls are placed in the intrastate domain. Let me rephrase that. That's for broad area-calling plans. Now some calling plans are point to point, in which case you can tease out the long-distance calls a bit better.

Glassman: Regarding access charges paid by long-distance companies to local phone companies to connect customers to long-distance networks, do you think they should exist?

Furchtgott-Roth: Let me give you an economic theory answer and then let me give you a practical answer. The economic theory answer would be that you want to allow companies to price at marginal cost or close to marginal cost. The marginal cost of originating -- providing transport -- in terminating the telephone call is pretty close to zero, whether you are making a local call or a long-distance call. The economically efficient way to price for telephone services would be to have a very high fixed price to have access to the network, but then allow people to use the network as much as they want as long as they are not really causing congestion or incurring some real economic cost on the network. The way we do pricing of long distance is the exact opposite. We in essence charge zero to access the long-distance network, but once you are on it we are going to charge you for every minute of use even though there is very little economic cost that's incurred for every minute. That is reflected largely in access charges. So that is the economic theory answer, which is you want to move towards flat fixed fees, low or even zero incremental cost. There is a second reason you would want to do that and that is, it turns out the demand for long-distance calling is very price sensitive, and if you lower the price even a little bit per minute then the minutes and use goes way up. So the consumer surplus that's lost is enormous by having these high access charges.

Glassman:And the practical answer?

Furchtgott-Roth: The reality is it's very difficult to come up with inter-carrier compensation schemes that compensate companies for terminating calls, particularly if, for example, they are small carriers in rural areas. There is just not a lot going on out there if you are providing the line that allows people to call their grandma or to call someone in a rural area. How do you make these companies haul? Right now what we've done is do this largely through access charges. It probably is not the most efficient way of doing things.

Glassman: So it distorts the market?

Furchtgott-Roth: I think it's difficult to look at the long-distance network today and not come to the conclusion that access charges do distort the network. Even more than the network, they distort usage patterns -- they discourage use by consumers whose use of the network would actually not create any economic cost.

Glassman: You have said that the most important thing in regulation is to treat similarly situated parties as much as possible in a similar way. In deregulating communications, is it right to put ownership limits on cable firms, but not on phone companies?

Furchtgott-Roth: Well, there's a statutory problem here. The statute from the 1992 Cable Act specifically requires the commission to set an ownership cap for cable. Nowhere in the law is the commission required to put an ownership cap on telephone service. There are a lot of asymmetries in the law and that's problematic. I would prefer to see ownership issues, issues of abuse of market power, addressed by the appropriate antitrust agencies and not by this agency, except where we are specifically instructed to do so by statute. For better or worse, one area where we are specifically instructed to do so by statute is the cable ownership cap. There is no reason in my mind that the current limits couldn't be substantially raised.

Glassman: Regarding universal service charges for schools and libraries, do you think that the chairman would have it within his rights to simply say to Congress, you know, this amounts to a tax, and tell them that the commission doesn't have the power to tax, and essentially say he is not going to impose this charge anymore, and send it back Congress and tell them to pass a tax the way they are suppose to?

Furchtgott-Roth: Well, Jim, I think you are quite right. I don't know if the chairman unilaterally could vacate the commission's orders on schools and libraries, but the commission certainly could. I have maintained all along -- but have always lost on a four-too-one vote -- that not all but the large part of the schools and libraries program is outside of the law and could be scaled back, not only could be but also should be scaled back accordingly. I have no idea whether Chairman Powell will pursue any of that.

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