Court to Regulators: Drop Dead

Yesterday, the D.C. Circuit reversed an FCC decision that had favored new local phone service competitors. The Baby Bells are popping champagne. But it's a huge loss for Commission--a thrashing that hints that government oversight may be increasingly ineffective in regulating rapidly changing, high-tech industries.

The ruling in U.S. Telecom Ass'n v. FCC is lengthy and convoluted. The issues are fiendishly complex. Diane Katz posted a partial summary of the ruling on National Review Online. In brief, the court sided with incumbent local phone providers rather than new competitors. This may be a victory for consumers. (Reason: bigger local phone companies may be more efficient than new entrants, implying that a regulated monopoly will be cheaper than uneconomic competition--i.e., local phone service remains a "natural monopoly.") I'm working on a summary of my own that will address the substance and ramifications of the decision for the telecom industry.

But the case is noteworthy even for those uninterested in telecom policy. That's because the D.C. Circuit's decision is astonishingly angry at the FCC. In almost 25 years in telecom, I have never seen a court so contemptuous of an agency's competence or neutrality. The decision--written by Senior Judge Williams (appointed by Reagan in 1986)--accepted nearly every Baby Bell assertion while rejecting virtually every FCC response. Moreover, the opinion is packed with pithy, unforgettable phrases--including disallowing one government defense in two words: "Not exactly" (Slip Op. at 23). Indeed, the court crafted a memorable metaphor deriding the agency's zeal to force incumbent phone companies, called ILECs, to subsidize their competitors:

In competitive markets, an ILEC cannot be used as a pinata.

And that's not all. The opinion saves its cruelest blow for the final paragraph--the court ordered the FCC to fix its rules within 60 days. Typically, FCC action on "remand" from courts can take 12 to 18 months. Not this time:

This deadline is appropriate in light of the Commission's failure, after eight years, to develop lawful unbundling rules, and its apparent unwillingness to adhere to prior judicial rulings.

Normally, when reviewing decisions of the FCC or other agencies, Judges aren't required to agree with the outcome. Rather, the Federal Courts must defer to the expertise of a regulatory commission--and affirm all but the irrational or unexplained. Those principles clearly cannot account for yesterday's decision.

The D.C. Circuit Court clearly doesn't like the FCC. They accuse the agency of being "captured" by of one sort of company--new entrants--and unfairly prejudiced against another type--existing providers. I happen to agree. But whether accurate or not, the court plainly distrusts regulators. So do I--competition, where feasible, is better than bureaucracy.

But this case concerned monopoly telecom services and companies--or, as a minimum, areas not yet competitive. And the court concluded expert regulators were either biased or incompetent. I often agree. But regulation by Judges is worse--as Judge Greene proved during his 12 year rein as "Czar" of the AT&T breakup. So where competition is infeasible and neither agencies nor courts will suffice, what's the alternative?

I have no idea.

Update:

The March 4th WSJ contains two articles on the case, each available to subscribers only. The WSJ editorial translates the 60-days-to-fix provision: "That's legalese for, 'What part of 'back off' don't you understand, pal?'" For fans of Washington "inside baseball," the Journal also declares the decision a victory for current FCC Chairman Michael Powell and a loss for Republican Commissioner Kevin Martin--and for the Bush Administration, for whom Martin normally speaks.

Futurist George Guilder also praises the opinion:

This severe attack on the Bush administration by a liberal court might seem par for the course. But by throwing out the FCC's rump majority votes a year ago to continue micro-mismanagement of Internet connections and to delegate telecom control to 50 different state public-utilities commissions, the Court has performed a vital service.

The Bush administration now has a chance to release U.S. technology companies and communications markets from a multi-state schlerosis that is driving Internet leadership, wealth and jobs massively to Asia. New broadband networks cannot spring up across America's local loops overnight. But a bold White House policy to free the Internet from last century's rules -- designed for long-gone monopolies -- would spur the entire telecom and technology sectors to gear up for a new era of optical and wireless networks.

Connecting the dots to the recently-launched VoIP rulemaking (tpfp post 2/12 7:10pm), Guilder is optimistic: "The key to a new regime is a ruling that broadband-real multimegabit links to homes and offices -- not the dribbleware widely available in the U.S. -- is not a telecommunications service to be regulated but a new domain of innovation to be liberated." If Guilder's right, everyone's a winner--except the Bush Administration.