TCS Daily

Runaway Regulator

By James K. Glassman - February 14, 2003 12:00 AM

There are two powerful Powells in Washington. While Powell pere has been laying the groundwork for war with Iraq, Powell fils, the 39-year-old lawyer who chairs the Federal Communications Commission, has been getting ready for his own showdown. Two weeks ago, The New York Times reported grandiosely that Michael Powell was "poised to fulfill a long-held vision by unshackling the nation's largest telephone companies ... from decades of regulation."

Not so fast! Lately, many of the likely friends of such an approach - including conservative groups like David Keene's American Conservative Union and Grover Norquist's Americans for Tax Reform, and small-business organizations, including President Bush's own Small Business Administration and the powerful National Federation of Independent Businesses - are sounding the alarm against Powell's proposal. And for good reason. What they see in Powell's plans is not deregulation triumphant but competition nipped in the bud.

On Feb. 10, Powell was forced to postpone a scheduled vote on his plan. He'll try again this coming Thursday, but it appears he lacks a majority.

Conservative Principles Violated

The problem is not merely the economic effects of reduced competition - like higher phone and broadband rates for small businesses and deteriorating services for families. Opponents also see Powell's vision violating basic principles of conservatism, including the authority of the legislature, not unelected regulators, to set the rules, and the rights of states superseding those of the federal government in important economic matters.

As Bruce Fein, a conservative legal scholar and former general counsel to the FCC, said in a recent letter to Powell: "For an unelected commission to trump the policy wisdom of elected and accountable representatives of the people in the Congress wrenches separation-of-powers principles and epitomizes agency arrogance."

Powell's proposal would certainly unshackle the four Bell giants - and the results could be devastating, especially for small, entrepreneurial businesses. Why would Powell go ahead? As a protégé of Bill Clinton's antitrust chief, Joel Klein, he simply may have some of the same urges to forge top-down industrial policy. He's also frustrated that telecom companies have not modernized as fast as he'd like. He evidently believes that, after those pesky competitors are gone, the Bells will have more incentive to invest in improving their networks. But he's got it backwards. A basic tenet of economics holds that monopolists don't increase supply, they restrict it - in order to increase prices.

Roots of Reform

Some background: In the early 1980s, a federal judge split up the nation's telephone monopoly, which had been nurtured, subsidized and protected by government for nearly a century. AT&T became a long-distance carrier, and it was forced into competition immediately. The law required the company to lease its lines to firms like MCI and Sprint, which built up customer bases over the years and then started to build their own facilities, forcing intense rate-cutting and quality-raising.

In 1996, Congress - with the support of every conservative member of the Senate - decided to use the long-distance model to bring competition to local service, which, under the court order, was in the hands of seven regional "Baby Bells" (today merged into just four). The Bells had to lease parts of their system (called unbundled network elements, or UNEs) to competitors (called competitive local exchange carriers, or CLECs). If the Bells opened up sufficiently, then they would be given, state by state, permission to enter long distance.

The Bells first supported the law, then fought it for seven years through lawsuits, lobbying and foot-dragging. Now, against all odds, it's working. The Bells now sell long-distance service in 35 states and have grabbed a big share of the market. Last year, CLECs used UNE pricing to win more than 10 million lines away from the Bells, in addition to millions of other gained through building their own facilities. In Michigan, for example, 2,000 residents a day are switching from the Bell incumbent, rates have dropped as much as 30 percent, and competitors have gained 20 percent of the market, up from 4 percent in 1999.

In addition, another early concern - that not enough Americans were using broadband - is being assuaged. There are now 16 million subscribers, and broadband is, by some calculations, the fastest growing new technology in U.S. history - despite the fact that it remains expensive and offers, at this point, no "killer app" (or application, like spreadsheet software for computers or e-mail for dial-up Internet access, that practically forces consumers to buy it).

Powell's Usurpation

Enter Michael Powell. He's unhappy with the system that Congress asked him to administer, and he wants to change it. His proposal is to restrict the power of the states to set UNE rates - even though the Telecommunications Act of 1996 explicitly gives them that authority. The Bells have been grousing that they can't make money with rates so low. That's nonsense. The real problem is that they don't like the competition that's suddenly been thrust on them.

But are rates really so low? Here's one test. If rates are low, you would expect the Bells themselves to use them to compete with each other. It's perfectly legal, for example, for Verizon, a Bell that concentrates on the northeastern states, to enter Illinois, where SBC is the incumbent. Verizon could rent parts of the system at UNE rates there and give SBC a run for its money. But it doesn't - either because it wants to maintain an obnoxious cartel or because its managers don't think it can compete.

In addition, Powell is resurrecting an old idea that died a couple years ago in Congress when the Senate refused to take action. That's the Tauzin-Dingell bill, which would prevent CLECs from connecting with key parts of the Bells' network, again as the 1996 required.

There are two ironies here that conservatives will appreciate. First, Congress too often shirks its responsibility when it passes a law and leaves it up to regulators to work out the details. But, to its credit, with the 1996 Telecom Act, Congress was far more explicit. Reps. Billy Tauzin, R-La., and John Dingell, D-Mich., knew that, in order to change the rules, they would have to change the law. But Powell seems to think that he can fulfill his own "long-held vision," law or not.

Second - and this is what bothers groups like the ACU - Powell's proposal tramples on the rights of states. Fein wrote that "a humble federal stance on UNEs is both compelled by the Constitution's time-honored federalism and saluted by the principles of enlightened government."

Other than telecom insiders, few Americans of any political persuasion have paid much attention to the telecom battle of the past seven years. Now, with Powell turning into a runaway regulator, conservatives are getting properly exercised. If Powell gets his way, the beneficial effects of competition, which consumers in key battlegrounds like Illinois, Michigan and Ohio are already seeing in their phone bills, will vanish, with dangerous political consequences in these dangerous times.

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