Stop the Presses: FCC Unbundling Rules Upheld!

This afternoon, announcing that the “fourth try is a charm,” the D.C. Circuit upheld the Federal Communication Commission’s unbundling rules. If that statement doesn’t strike you as wondrous, it means that you are not a telecommunications person—lucky you—but also means that you are not sufficiently curious. (“You mean the FCC issued three sets of complicated rules over a decade, the courts rejected all of those, and now finally, on the fourth try, the D.C. Circuit blessed the rules?”)

Yes, exactly. A quick review. In February, 1996, Congress enacted a new telecommunications law, known to all as the Telecommunications Act of 1996. That statute required the FCC to issue the required rules in six months. Now, June, 2006—only ten years late—we finally have rules that have made it through the courts, assuming of course that the Supreme Court doesn’t jump in (which it did twice before).

How did we get into this mess?

The 1996 act is complicated but one core piece was a new law designed to jump-start competition in local telephone service. That too had a number of features but the especially tricky part was the requirement that the FCC issue rules to “unbundle” the local telcom network.

The FCC was to define pieces of the network and set prices for those pieces. New entrants into the local phone business—CLECs or competitive local exchange carriers as they are known—were to be able to mix and match. Rent pieces of the network from the incumbent provider—typically one of the local Bell regional operating companies—match those with a few of your own, and voila, instant competition.

There is a lot that one can say about this vision—Doug Lichtman and I published a paper in the Supreme Court Review on this a few years ago (online version here)—but for now, we should limit ourselves to the question of the limits of what law can do.

Independent of your views on the merits of trying to create local competition into telecommunications—an issue that seems increasingly dated with consumers dropping landlines for wireless and with the entry of cable into phone service—we should regard a process that took a decade to establish the basic rules of engagement as a huge failure. Most of the blame falls to Congress for passing a vague statute—the key terms are “necessary” and “impair”—and giving the FCC very little time to implement it, though to spread the blame, in the intervening decade, the FCC has had quite a bit of time to think this through.

The are powerful limits on the extent to which we can do legal engineering of the sort attempted in the 1996 Act. If we can’t create administrable rules in a reasonable time frame, we shouldn’t try at all. Sometimes the bite is just too big to swallow. The cost of bad engineering is that real decisions regarding large investments turn on these rules.

[Disclosure: The Law School has received grants from Verizon in the past, and, I believe, continues to do so.]

Comments

[Fabio Polverino]

I think this case adds an important piece of evidence to the never ending debate on whether the telecoms market (like any other infrastructure based market) should be regulated through sector-specific regulation or, rather, general competition law.

Regulation is a tool capable of being finely tuned on the policy needs, but is slow-paced (incapable of timely tackling technological issues), while competition rules are fast and flexible, but sometimes too generic (plus, they are only applicable ex post, once an infringement is alleged).

This case seems to show that competition law would have got to the same place as the Telecommunication Act (and the court), just in a shorter time.

It is possible to imagine, in fact, that under something like the essential facility doctrine (rejected by the Trinko court) or a refusal to deal theory, a CLEC would have gained access to the incumbent's network in a time shorter than 10 years and with a minor burden on the judicial system.

Plus, since a suit for access to an essential facility or refusal to deal would only succeed when no viable alternatives are available to the new entrant, the presence of a wi-fy/cable network would have also played a decisive role (which did not happen in this case).

My reasoning might seem flawed, since the EU also adopted an unbundling regulation (rather than resorting to competition law), but I want to point out that such regulation, a very reduced body of rules, was enacted only in 2000, two years (ages for the IT/telecom market) after the liberalization in the telecom sector (1998) and still poses burdensome problems for its full application.

[BobRasmussen]

Randy,

This seems to me the type of law that your colleague Adrian Vermule would say the courts should take a pretty deferential approach with and just leave it to the agency. Others, most notably Bill Eskridge, have argued that Adrian is too enamored with agencies and that the current state of affairs is about as good as we can do. The problem with debates of this nature are that they often abstract from actual legal disputes. I trust your judgment on this (it is certainly better than mine!), so does the travails of this law add support to either side. In other words, if courts had quickly blessed the first set of regulations, would that have been a better outcome (and I'll even let you define what constitutes "better").

[Randy Picker]

Bob,

Yes, some Chicago configuration started to write a paper saying exactly that (I think that I have a partial draft somewhere by Lichtman, Picker and Sunstein). This was an experiment, and the uncertainty over the rules was mucking up the experiment. Far better to run it and see what we might learn. Fighting over the rules meant that we couldn't learn anything cleanly. So yes, pick a rule and quickly and let us see what happens.

Instead, we fought about the rules for a decade and in the meantime the tech landscape moved on (wireless and cable, so-called intermodal competition).