TCS Daily

Telecom's Catch 22

By Duane D. Freese - June 3, 2004 12:00 AM

The author Joseph Heller would love the current telecommunications mess. Talk about situation in which legal minds have cooked up a catch, a real Catch-22, and it's this field.

You know what a Catch 22 is, of course. It's that if you're crazy, you can get out of the military, but to get out of the military for being crazy, you have to say you are, but if you say you are crazy you prove your sanity by trying to get out of combat and therefore can't get out of the military.

That is exactly the kind of craziness that the DC Circuit Court has created in striking down key provisions of the Telecommunications Act of 1996, which may become a nullity this week if the decision isn't appealed.

A bit of background to understand this. The 1996 act was aimed primarily at introducing local telephone competition in hopes of spurring lower prices and innovation. The regional Bell operating companies agreed to open up their local loops to competitors as part of a quid pro quo for themselves being allowed into other telecommunications fields, in particular long distance.

Immediately after passage of the act, though, the Bells balked. They accepted $2 billion in fines and fees for failing to do what they promised. Finally, the Federal Communications Commission, assigned by Congress the responsibility for encouraging competition, struck on a pricing formula and method for opening the local loops.

The pricing formula, called TELRIC, set costs not at historical rates of costs, because costs of new switches and other items have dropped, but at forward looking prices reflecting that reality, plus a profit. This rate plan passed Supreme Court muster last year. The methodology for implementing the rate structure called for wholesale leasing of unbundled network elements by the Bells to competitors for their entire platform, called UNE-P.

It's the courts interpretation -- or more specifically, the D.C. Circuit Court's interpretation -- of the law governing UNE-P that has turned the act into a Catch-22 for competition.

As AT&T President David Dorman told a breakfast group of reporters at the American Enterprise Institute on Wednesday, June 2, the Bells have gotten their quid -- long distance service -- big time. Thanks to the fact that a competitive market in long distance means that long distance sellers there are trying to fill their networks, the Bells now have 40 million long distance customers.

But the pro quo? Well, their competitors for local service, including AT&T, MCI and Sprint, have about 20 million local phone customers thanks to UNE-P, only UNE-P has been declared by the D.C. Circuit to be essentially illegal.

First, when the FCC tried to implement UNE-P by itself, the D.C. court said its approach wasn't "granular" enough. It hadn't determined local market by local market and network element by network element what facilities competitors really required. Without that determination, the FCC couldn't decide what elements the Bells by law really ought to be required to supply.

That was an impossible task for the FCC to perform locality by locality, element by element, competitor by competitor without becoming the equivalent size of the U.S. military. So, the FCC went back to the drawing boards, and a majority of the commissioners decided -- state utility commissions have expertise in this, they've regulated the Bells for years. Let them apply the FCC's policy in the TELRIC formula for the essential facilities in their area.

Conservatives should have applauded. After all, conservatives believe in subsidiarity -- having the closest governmental agency make decisions whenever possible. And it seemed to suit the "granularity" requirement.

But, no. The Bells appealed to the DC appeals court, and it ruled in March that the FCC couldn't delegate the decisions about essential elements in localities to those who know something about it. It had to do so itself, or not do so at all.

What to do? Well, the FCC could have immediately sought an appeal of the decision to the Supreme Court, but instead it delayed, got a stay from the appeals court that ends this week. In the interim, it has encouraged negotiations between the Bells and their competitors to come to an agreement.

Over the Memorial Day weekend, FCC Chairman Michael Powell called the Bells and their major competitors in hopes that commercial negotiations would bear the fruit of producing competition under the FCC's watchful eye where eight previous years of effort between the parties failed. What they got was a deal between Qwest, the smallest Bell and an anomalous one because it is a joint long distance and local company, and MCI, Qwest's biggest competitor in the 14 state region. The rest of the Bells essentially told the other competitors pay up or tough luck.

Yet, despite this expression of raw monopoly power by the Bells, at a Progress and Freedom Foundation debate on the issue on Tuesday, former Solicitor General Ken Starr said the current solicitor general shouldn't appeal the DC courts decision. It was the FCC that had made a naked reach for power, he said, in delegating the fact-finding about competition and decision making about which elements were essential in various localities to the state utility commissions.

Horrors. Some day, some federal marshal might deputize a local cop to help nab a terrorist, and the whole federal system will crumble.

Of course, the fact that the 1996 act explicitly gave state utility commissions a role to determine how they wanted to promote competition in their states, as a CLEC lawyer, Christopher Wright, told the Freedom Forum audience, makes such doom-sounding pronouncements a little overblown.

The one thing as a practical matter is this. The Supreme Court has said the antitrust laws don't apply to telecom because of the 1996 act, and that it is the best way to promote competition, not the courts. So competition depends upon the FCC's enforcement of the act, at this stage. The court also has approved the FCC's methodology for setting appropriate rates. But the DC Circuit says that to set those rates, it must do so locality by locality. It can't do that efficiently without going to the state utility commissions. But doing that is illegal, too, according to the DC court. So, the FCC has no way to really enforce the rules.

There's always a catch, a Catch 22. And it will soon hoist consumers, in particular small business, on its petard if the administration doesn't appeal the appeals court decision soon.


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