The FCC’s plan to share phone lines relies on a bogus argument for states’ rights.

by Randolph J. May
Legal Times, March 2003

Shortly before the Federal Communications Commission’s Feb. 20 vote on whether to relax the rules for incumbent local telephone companies such as Verizon and SBC, the American Conservative Union and several other self-proclaimed “conservative” policy organizations ran newspaper ads imploring the FCC to “defend states rights in the telecommunications industry.” In their misguided effort, these groups beseeched the FCC to “re-affirm the founding principle of federalism” by preserving the existing system intact.

The key issue in the FCC’s Triennial Review proceeding, released late last month, was the extent to which the incumbent companies must continue sharing with competitors the complete ensemble of the incumbents’ local network facilities (known as UNE-P for “unbundled network element-platform”). So what does the preservation of the outdated, overly expansive, and counterproductive sharing rules in the form of a network facilities entitlement have to do with ringing affirmations of “federalism” and “states’ rights”? AT&T and MCI WorldCom (the locals’ most vocal competitors), the majority of state public utility commissioners, and the conservative policy groups all urged the FCC to turn over to the state utility commissions ultimate decisionmaking authority regarding any cutback of the federal sharing mandates. They did this knowing the state commissions usually favor more regulation and network facilities sharing than the FCC.

States’ Rights Charade

Unfortunately for the development of sound communications policy, the commission majority bought the trumped-up states’ rights argument. Republican Kevin Martin joined with his two Democrat colleagues on the five-member agency to administer a stinging defeat to Chairman Michael Powell. Powell feared (rightly, I think) that the state commissions will now only slowly, if ever, roll back the sharing mandates that are inhibiting facilities investment in voice networks by the incumbents and new entrants alike. (For more discussion on network facilities sharing, see my Nov. 11, 2002, column, “They Just Want to Be Free,” Page 46.)

Looking down from their heavenly haunts, John Marshall and Thomas Jefferson must have rolled their eyes. Those two founding-generation giants epitomized the serious constitutional debate in the nation’s early years concerning the proper role of the states vis-à-vis the central government. Marshall, the Federalist, favored a strong national government, one that would protect the free flow of commerce among the states. Jefferson’s Democrats, on the other hand, urged a much more restrictive role for the central government, including little regulation of interstate commerce.

Because the constitutional boundaries are not bright-line, serious contests concerning the proper division of federal and state authority continue to this day. But the FCC’s network sharing decision really doesn’t implicate “states’ rights” and “federalism” in a serious way. Instead, interjecting federalism into the debate trivializes legitimate concerns about maintaining a proper state role in other contexts.

Here’s why. The Telecommunications Act of 1996, the first comprehensive revision of our communications laws since 1934, provides that access to the incumbents’ networks by new entrants is one means for facilitating local telephone competition. But Congress specifically directed the FCC, in prescribing competition rules, to consider whether the absence of such shared access would “impair” new entrants’ ability to provide service.

The first case under the 1996 act to reach the Supreme Court, AT&T Corp. v. Iowa Utilities Board (1999), involved a challenge to the FCC’s initial attempt to draft sharing regulations. Some incumbents and state public utility commissions challenged the rules on the basis that they derogated from the states’ traditional authority to regulate local telephone service under interpretations of the 1934 act.

Justice Antonin Scalia, no knee-jerk states’ rights foe, made short shrift of the “states’ rights” plea: “[T]he question . . . is not whether the Federal Government has taken the regulation of local competition away from the states. With regard to the matters addressed by the 1996 Act, it unquestionably has. The question is whether the state commissions’ participation in the administration of the new federal regime is to be guided by federal agency regulations. If there is any presumption applicable to this question, it should arise from the fact that a federal program administered by 50 independent state agencies is surpassing strange.”

Reaching Out

In other words, the 1996 act effected a paradigm shift by curtailing the states’ previous authority to regulate “local” facilities. And this makes good sense. With today’s integrated and largely distance-insensitive telecommunications networks, it is just as likely that even a call across town will be routed across the nation as that it will stay on local circuits.

It was in recognition of this largely “interstate” character of modern communications networks that the conference report accompanying the 1996 Act stated the legislation was intended to create a new “national policy framework.” And surely it was in recognition of the interstate character of the telecommunications business that no one argued in Iowa Utilities Board that Congress exceeded its authority under the commerce clause in giving the FCC the final say in fashioning network sharing rules.

Aside from settling federal supremacy, the Supreme Court in Iowa Utilities Board held that the initial sharing rules, by affording competitors “blanket access” to incumbents’ networks, were inconsistent with the statute’s “impairment” standard. It directed the FCC to devise more limited requirements. Last May, in United States Telecom Association v. FCC (2002), the D.C. Circuit sent a rewrite of the sharing rules back to the agency because they violated the statute by still requiring essentially unlimited sharing, thus deterring new investment.

The commission’s decision in its Triennial Review was in response to the latest judicial reprimand. But rather than taking responsibility itself for formulating narrower rules, the three member majority punted the issue to the individual states, subject only to vague guidance. While the D.C. Circuit had suggested the FCC should consider a more “granular” regulatory approach since competitors in some geographic areas suffered much less impairment than others, it did not suggest the agency relinquish its decisionmaking authority to the state commissions.

No Legal Harmony

So, as Chairman Powell wrote in dissent, “The nation will now embark on 51 major state proceedings to evaluate what [network] elements must be made available to [competitors]. These decisions will be litigated through 51 different federal district courts. These 51 cases will be decided in multiple ways—some upholding the state, some overturning the state and little chance of regulatory and legal harmony among them at the end of the day.”

This mish-mash is not what Congress had in mind in creating what it thought was a “national policy framework.” And the resulting uncertainty can’t be good for an already beaten-down industry.

Constitutional federalism serves a variety of purposes, the most fundamental of which is protecting liberty by diffusing governmental power. And, in certain circumstances in which Congress has not so clearly exercised its interstate commerce power to establish a federal regime in the interest of uniformity, the states usefully may serve, in Justice Louis Brandeis’ memorable term, as “laboratories” for experimentation.

But that’s not what’s happening here. I’m afraid the American Conservative Union and other conservative organizations let themselves get hijacked by AT&T and WorldCom, and the state utility commissioners, for distinctly pro-regulatory purposes. The real purposes that “federalism” and “states’ rights” serve were not at stake in the FCC proceeding. Indeed, the FCC implicitly acknowledged the point in another decision that was part of its Triennial Review. For broadband Internet connections, the commission eliminated the sort of network sharing requirements that, in the realm of telephone connections, it bequeathed to the states.

In the end, such a misuse of federalism, properly understood, leads to unsound communications policy making. And the bet here is that it will lead to yet another defeat in the courts for the FCC’s network sharing rules.

Randolph J. May is a senior fellow and director of communications policy studies at the Progress & Freedom Foundation in Washington, D.C. The views expressed are his own and do not necessarily reflect the views of the foundation. He may be reached at rmay@pff.org. His column, “Fourth Branch,” appears regularly in Legal Times.

© 2003 ALM Properties Inc. All rights reserved. This article is reprinted with permission from Legal Times (1-800-933-4317 • subscriptions@legaltimes.com • www.legaltimes.biz).