Adjusting Regulation to Competition: Toward a New Model for U.S. Telecommunications Policy

id=894346. 169 Id. 170 Id.; Philippe Aghion et al., Competition and Innovation: An Inverted U Relationship (Nat'l Bureau of Econ. Research, Working Paper No. 9269, 2002). 171 See Howard A. Shelanski, Competition and Deployment of New Technology in U.S. Telecommunications, 2000 U. CHI. LEGAL F. 85, 116 (2000). Yale Journal on Regulation C. Precedent and History Support a Deregulatory Shift History supports shifting sooner rather than later to a less rule-based telecommunications policy. First, there is precedent for deregulating markets whose structure is similar to that currently found in "local" telecommunications. Second, there is evidence that past delays in deregulation in a variety of industries have been costly to American consumers. This Section will discuss the relevant precedent and historical evidence. The FCC and Congress have on several occasions made decisions about whether to impose or maintain regulation in concentrated markets. On three important occasions the Commission or Congress decided to forebear from regulating in circumstances generally less competitive than the local telecommunications market is today. These three occasions involved the provision for removal of cable price regulation in 1992, the deregulation of wireless communications in the mid 1990s, and the removal of dominant-firm regulation from AT&T in 1995. In the case of cable television, Congress passed the Cable Television Consumer Protection and Competition Act of 1992 (1992 Cable Act) in response to public outcry about the rise in cable rates over the preceding years. The 1992 Cable Act granted local franchising bodies, in conjunction with the FCC, authority to regulate cable rates as long as the cable system at issue was not subject to "effective competition." 172 Of interest for current purposes is that the Act went on to define competition as "effective" if: (i) fewer than 30% of households in the franchise area subscribe to a cable system's cable service; or (ii) the franchise area is served by at least two unaffiliated subscription video providers each of which offers service to at least 50% of households in the area, and the smaller of the two providers has at least a 15% market share. 173 If applied to today's telecommunications market those standards would result in deregulation of most local service areas. Indeed, if one counts wireless telephony alone as being in the relevant market with conventional wireline local exchange service, all of local telecommunications would easily qualify facing "effective competition" under Congress' 1992 standard for cable. In fact, however, the telecommunications market is quickly becoming far more competitive than subscription video after factoring in the multiple wireless, landline, and cable-based solutions. 172 47 U.S.C. § 543 (2000). 173 Implementation of Section of the Cable Television Consumer Protection and Competition Act of 1992 Rate Regulation, 8 F.C.C.R. 5631, 8 (1993). Since passage of the 1992 Cable Act, cable systems have met significant competition from the two, major direct broadcast satellite (DBS) providers operating in the United States. In June of 1993 cable operators held over 95% of the subscription video market in the United States. By June 2004 that market share had fallen to 72%, with the second and fourth largest providers being satellite companies. FCC, ANNUAL ASSESSMENT OF THE STATUS OF COMPETITION IN THE MARKET FOR THE DELIVERY OF VIDEO PROGRAMMING: ELEVENTH ANNUAL REPORT 4-6 (2005), available at http://hraunfoss.fcc.gov/edocs.public/attachmatch/FCC-0513A1.pdf. Vol. 24:1, 2007 Telecommunications Policy Wireless communications provide the second relevant precedent for a deregulatory move in conventional, wireline telecommunications. In 1984, the FCC defined geographic markets for cellular telephony and licensed two carriers in each market. Although the FCC did not impose regulation on these cellular duopolies, some state regulators did regulate cellular prices. In 1993, when Congress authorized the auction of radio spectrum that would enable "Personal Communications Service" (PCS) operators to enter the market in competition with incumbent cellular carriers, it simultaneously greatly reduced the ability of states to regulate the rates or operations of wireless carriers. 174 At the time Congress preempted such wireless regulation, the market was still a duopoly of the original cellular licensees. It is moreover important that the newly entering PCS carriers not only had to incur the fixed costs of building their own networks to compete with the already-established cellular carriers and overcome a sizable marketing and brand-recognition deficit, but also had to pay sizable sums for spectrum that the cellular licensees had received for free. Congress nonetheless opted for deregulation in the wireless marketplace. In the wake of that decision the new entrants not only built their own networks, but deployed state-of-the-art technology with which the incumbents eventually had to catch up. As already mentioned, the real consumer price of wireless subscription dropped 34% from 1997 to 2002.175 If one considers only wireline providers, the local telecommunications market is less consistent in its structure than the wireless market. But even at its most concentrated the local market is fast approaching and surpassing the duopoly structure in place when Congress deregulated wireless. 176 The final example of precedent for deregulation in the face of emerging competition is long-distance telephone service. Even after divestiture, AT&T faced regulation that did not apply to its emerging competitors. The FCC classified AT&T's competitors as "non-dominant" carriers that had to file tariffs but whose rates were presumptively valid and could take effect within a day of filing. AT&T, on the other hand, was classified as dominant and had to file tariffs as much as 90 days in advance of the rate's effective date. The FCC in 1995 finally reclassified AT&T as non-dominant, at which time AT&T still had over 50% market share of the long distance market. 177 The market was at that point essentially deregulated, despite having only three major players, one of whom was substantially larger than the others. Not only is there precedent from within U.S. telecommunications for deregulating local telecommunications as competition evolves, but there is foreign precedent as well. Telecommunications in the European Union (EU) is 174 47 U.S.C. § 332 (2000). 175 Tenth CMRS Report, supra note 1, at 157. 176 See Sections II.B and JIC, supra. 177 Motion of AT&T to be Reclassified as a Non Dominant Carrier, 11 F.C.C.R. 3271 (1995). Yale Journal on Regulation both a national and EU-wide matter. Individual member states set their own policies, but they do so pursuant to a "Framework Directive" of the European Parliament. 178 The Framework Directive expressly recognizes that ex ante rules to safeguard against monopoly need to adapt to changing market conditions. 179 Indeed, the Framework Directive allows such ex ante regulation of telecommunications carriers only where there is a firm with "significant market power" and where general competition law would be ineffective. 180 France recently put the Framework Directive into practice in deregulating the retail rates of France Telecom, the country's incumbent telecommunications carrier. The French telecommunications authority, ARCEP, stated that changing market conditions as well as the access rules put in place pursuant to the Framework Directive had led to the development of significant broadband competition.1 ARCEP found the pressure from broadband competition and resale sufficient to warrant phased deregulation of France Telecom's retail business. 183 Significantly, ARCEP ordered such deregulation on the strength of evidence of competitive growth, not on the existence of already-mature and substantial competition. ARCEP relied partly on the rapid growth of voiceover-Internet competition in the year preceding the decision, even while noting that such competition only encompassed 7% of telephone traffic in the relevant market. 184 The French regulatory authority similarly recognized drawbacks and limits to wholesale competition, but nonetheless found it sufficiently strong to support retail deregulation in the evolving French telecommunications market. 1 85 In addition to the above examples from the telecommunications sector, there is empirical evidence from a number of other industries in the United States showing benefits from deregulation and, moreover, suggesting that delays in deregulating are costly to competition and consumers. In a survey of the results of deregulation in the transportation, communications, financial services, and energy sectors, Clifford Winston found that deregulation produced substantial consumer benefits. 86 Winston's objective was to examine 178 Council Directive 2002/21, 2002 O.J. (L 108) 33 (EC), available at http://europa.eu.int/eur-lex/pri/en/oj/dat/2002/l_108/_10820020424en00330050.pdf.