On February 20, 2003, the Federal Communications Commission ("FCC") rewrote some of its rules for local telephone competition. For a number of reasons the ultimate impact of the FCC's decision on competition is unclear. What seems clear, however, is that the decision signals a dramatic political shift at the FCC at the expense of Chairman Michael Powell.
The FCC's revised rules relate to one of three methods of local telephone competition established by the Telecommunications Act of 1996: the use of the incumbent's unbundled network elements. New entrants can also compete by building their own networks (facilities-based competition) or by reselling the incumbent's service (resale). The availability of unbundled network elements, or UNEs, allows competitors to use parts of the incumbent's network, in conjunction with their own facilities, to provide local telecommunications services. The FCC established its original list of UNEs in 1996 and has since modified the list since that time. In addition, the FCC allows competitors to order combinations of UNEs from the incumbent, or so-called UNE Platforms ("UNE-P").
The FCC's revised rules reflect a series of compromises that apparently satisfy only one of the five commissioners - Republican Kevin Martin. Over the objections of Chairman Powell, Martin and the two Democrats on the Commission (Michael Copps and Jonathan Adelstein) decided to retain switching as a UNE, provided that state regulators in individual states deem this necessary to allow competition. Also over the Chairman's objection, the majority eliminated "line sharing" which enables competitors to provide high speed Internet access while the incumbent continues to provide voice service on the same line. Apparently Commissioners Copps and Adelstein reluctantly acquiesced in this decision in order to obtain Martin's support on other elements of the plan. On the other hand, the three Republicans on the Commission – Powell, Martin and Kathleen Abernathy – decided to eliminate local loops from the list of UNEs when the incumbent deploys fiber optic cable in its loop plant. The Republicans argue that this will encourage incumbents – and presumably new entrants – to deploy more advanced facilities for the provision of broadband services while the Democrats worry that it will eliminate choice and increase prices.
Neither the incumbents nor the new entrants were entirely happy with the FCC's decision. On balance, the FCC's revised rules appear to be a loss for new entrants, although some of the compromises the commissioners reached, such as on switching, make the decision less damaging to competitors than many observers had predicted. The FCC's hope that its revised rules will spur broadband deployment seems dubious in the current economic climate. Indeed, in the wake of the Commission's decision, the Bell Operating Companies were reported to be backing off their earlier commitments to deploy broadband facilities if the FCC relaxed its unbundling rules. It is entirely possible that the Commission's rules will reduce options for new entrants and not spur the incumbents to deploy new facilities. Indeed, one might wonder why the incumbents would increase their investment in the face of waning competition.
The ultimate effect of the Commission's rules remains murky, however. First, the text of the FCC's decision has not yet been released and likely will not be for several weeks. In fact, much of the decision apparently had not been written at the time the Commissioners voted. More important, however, the order, when released, is certain to be appealed. The Supreme Court and the U.S. Court of Appeals for the D.C. Circuit have remanded the FCC's two previous sets of unbundling rules and the odds for a third remand could be high. Over the last seven years, the courts have frequently shown a willingness to second-guess the FCC's interpretations of this complicated and highly ambiguous statute. In this case, the FCC's highly contentious internal debates have produced a compromise decision that appears to satisfy only one of the commissioners and no one in the industry. Under these circumstances, the FCC's task in writing a decision that is internally consistent and logically coherent will be extremely difficult.
It seems clear, however, that Chairman Powell's political standing has been seriously damaged by this decision. Although the Chairman has only one vote and is technically the equal of all the other commissioners, the Chairman has traditionally set the Commission's agenda and largely controlled the main policy conclusions. It is extremely unusual for the Chairman to dissent and almost unheard of in the last twenty years for the Chairman to dissent on an item of this importance. Despite considerable pressure from some in the industry and many Republican members of Congress, Kevin Martin has emerged as something of a maverick power broker on the Commission. The new alignment of Commissioner Martin with his two Democratic colleagues could produce defeats for Chairman Powell on a number of other important items in the telecommunications and media areas in the months ahead. For example, the FCC is also considering how it should regulate the Bell Companies' provision of Digital Subscriber Line ("DSL") and cable companies' provision of cable modem service. At the same time, the Commission is considering its media ownership rules. Commissioner Copps has been an outspoken critic of the Republican majority's proposals in all of these areas. With the recent addition of Jonathan Adelstein to the FCC, Commissioner Martin may find room to compromise with his Democratic colleagues on one or more important items. One should not exaggerate the likelihood of this result. Commissioner Martin retains substantial philosophical disagreements with his Democratic colleagues. Nevertheless, a willingness to compromise with the minority on the Commission may give Martin an extraordinary degree of power and could have important consequences for competition in the telecom and media industries in the months ahead.
For more information, please contact Bob Doyle at rdoyle@pgfm.com, Kelly Cameron at kcameron@pgfm.com or Robert Galbreath at rgalbreath@pgfm.com.