OPINION
Time To Clean Up the Nation's Telecom Mess

Last week, a U.S. court invalidated key telecommunications regulations created by the Federal Communications Commission (FCC). This is the third time the Commission's rules have been struck down, making it imperative that the Bush Administration act to fix the nation's telecommunications mess.

In its ruling, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit showed incredulity and disdain that in eight years, the FCC still hasn't been able to properly interpret telecom law. It ordered the Commission to reverse its decision to delegate its regulatory responsibilities to the states and scrapped the FCC's rules requiring local phone companies to share their equipment with competitors at government-set rates, a policy known by the ungainly name of "unbundling."

The courts recognize that it makes no sense to treat local phone companies as if they are still the Ma Bell monopoly of yesteryear. After all, phone companies are no strangers to competition, fighting tooth and nail with cable, wireless and Internet telephony for market share in communications service. Consumers see this every day; there is an astonishing array of communications choices, from cell phones and instant messaging to BlackBerry and voice-over-the-Internet phone calls.

Giving Credence to Industry Leaders

In issuing their ruling, the judges gave credence to what dozens of industry leaders, economists and telecom experts already acknowledge: that the FCC's unbundling policy generates damage throughout the U.S. economy. It's easy to see why this is the case.

Imagine a regulation forcing Southwest Airlines to let JetBlue sell tickets on Southwest's new air routes. Suppose, furthermore, that the government mandates Southwest give away its seats to JetBlue at a discount set by regulators. The predictable result in aviation, under this fanciful scheme, would be no new flights. The predictable result of unbundling in the IT industry, of course, is the active discouragement of investment in new communications products and services.

FCC policies have created uncertainty and inflexibility, keeping the local phone companies starved for capital and undermining the incentive of competitors to raise money to build facilities of their own. Partly as a result of this perverse regulation, communications companies and equipment providers of all sorts have been walloped with about US$2 trillion in stock losses in the last few years.

Chronicle of Bureaucracy

The story of the FCC's resistance to the rule of law is a chronicle of bureaucratic stubbornness. Last February, the FCC appeared ready to simplify its rules, a step many were hailing as the beginning of the high-speed Internet era and rational regulation of telephone services. American industry awaited these new rules with all the anticipation of a drowning man in need of a life preserver.

Instead, the Commission threw out the equivalent of the proverbial lead weight. Rather than simplifying regulations, the FCC passed the buck to the states, turning over much of its regulatory authority to Public Utilities Commissions in every state and the District of Columbia.

Congress intended for the 1996 Telecom Act to create a coherent national policy, but the FCC interpreted this as the freedom to allow the states to balkanize U.S. telecommunications into 51 different regulatory fiefdoms.

Inability To Set Rational Policy

And what about the court order that the FCC had to set "clear limits" on its unbundling policy of forcing companies to share their equipment at below-market rates? Once again, the FCC took a clear mandate as freedom to do the exact opposite. The predictable result was yet another judicial dressing-down last week.

Given the FCC's current inability to set rational policies for a healthy telecommunications sector, the responsibility for kick-starting real reform now lies with the Bush Administration. FCC Chairman Michael Powell tried to deliver reasonable telecom rules last February, but he was hamstrung by White House-appointed Commissioner Kevin Martin.

The administration must realize that the time has come to clean house. The White House should make its pro-broadband, smaller-government views clear to commissioner Martin so that the FCC can move to create rules that favor a thriving telecommunications landscape.