The agency still doesn't grasp that new competition has eliminated the need for much of its regulatory staff

By Randolph J. May
Legal Times, November 15, 1999

Chairman William Kennard recently delivered to Congress his proposal to reform the Federal Communications Commission, created more than 65 years ago to regulate communications in the then largely monopolistic environment.

The plan, "A New FCC for the 21st Century," proclaims that "the FCC is meeting the challenge of reinventing itself to keep pace with the rapidly changing communications industry landscape." Not so. And a shame too, for if ever there were an agency ripe for meaningful reinvention, it is today's FCC.

The FCC proposes some tinkering, for example, by reorganizing its bureaus and offices along so-called functional lines, consolidating some (but not all) enforcement activities into a new office, and creating new inter-bureau task forces. There is nothing inherently wrong with shifting some bureaucratic boxes, but the plan is fundamentally flawed. It fails to recognize that competition has supplanted the need for many of the agency's regulatory activities, and, consequently, the need for much of its regulatory staff.

When the FCC was created in 1934, its two principal responsibilities were to oversee AT&T and Western Union (then the almost-exclusive providers of long-distance telephone and telegraph services) and the emerging broadcasting industry, which consisted of a handful of newly licensed radio stations. To accomplish this mission, Congress gave the commission the authority under Title II of the new Communications Act to regulate AT&T and Western Union under traditional public utility principles designed to ensure that the carriers' rates are "just and reasonable." The FCC also received authority under Title III to license broadcasters to use the radio spectrum only if the commission determines that such use is in "the public interest."

Of course, this was before the development of over-the-air television, broadband cable systems, satellites, high-capacity fiber optic cables, local multi-point distribution services, cellular phones, and personal communications services. Not to mention microchips and the Internet.

Although constrained to a significant degree by the 1934 legislation-and at times by its own timidity and solicitousness for protecting its existing regulatees-the agency, to its credit, has taken a number of steps to foster competition.

For example, in the 1960s and 1970s the FCC adopted an "open skies" policy to encourage multiple entry into the satellite market. After some initial prodding by the U.S. Court of Appeals for the D.C. Circuit, the FCC in the 1980s actively sought to promote competition in the long-distance telephone markets by streamlining the regulation of new "nondominant" competitors like MCI and Sprint. And, during the same period, the commission decided not to regulate as common carriers new computer-based online services like America Online. This key decision left these Internet precursors free to develop on an unregulated basis as "enhanced service providers."

By the 1990s, however, the emergence of many new competitors in the telecommunications and video services markets, along with the increasing blurring of traditional service distinctions, had created a need for a new (de)regulatory paradigm. In other words, it was becoming clear that competition shortly could replace regulation in most telecom markets.

Congress started in this direction by passing the Telecommunications Act of 1996. In the legislation's conference report, lawmakers expressed their intent to "provide for a pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies to all Americans."

Unfortunately, Congress, under tremendous pressure from the various industry interests, did not go far enough in mandating real deregulation. Instead, it left the job largely to the FCC, giving it some new tools, such as the discretion to "forbear" from applying the statute or its own regulations if the agency finds that competition is sufficient to protect consumers and the "public interest."

In its reinvention plan, the FCC acknowledges that within five years there will be "vigorous competition that will greatly reduce the need for direct regulation." But rather that lay out concrete proposals to downsize the agency-only negligible staffing reductions are contemplated-as regulatory functions are supplanted by competition, the FCC focuses on bureaucratic survival. The commission labors mightily to reinvent new core functions to justify its current staff and budget levels. (Approximately 85 percent of the FCC's budget currently is funded by fees from its "regulatees." Obviously, this funding methodology may create disincentives to deregulate and thereby depopulate the fee-paying base.)

First and foremost, the FCC says it must transform itself from an industry regulator into a "market facilitator." While that term is left undefined, it implies an undiminished concern with preserving the proverbial "level playing field," rather than simply letting the players compete. The true goal of telecommunications reform shouldn't be a level playing field, but rather a "littered" one-that is, one littered with competitors who didn't make it in the marketplace.

Competitive markets don't need government agencies to serve as market facilitators. We don't have a Federal Toy Commission or Federal Automobile Commission to "facilitate" the markets for toys and cars. What we do have are antitrust laws and a Department of Justice, with a well-staffed Antitrust Division, in place as a backstop to protect consumers against anti-competitive practices.

Speaking of consumers, the FCC sees "fostering a consumer friendly marketplace" as another primary mission for the reinvented agency. Indeed, the plan refers more than two dozen times to the agency's consumer protection mission, in contexts as varied as "ensur[ing] that consumer bills are truthful, clear and easy to understand" to "increas[ing] outreach to consumers" to "establish[ing] a Consumer Advisory Board to advise the Commission on consumer issues."

LESS IS MORE

In its efforts to develop a long list of things to do, the FCC never seems to realize that in the increasingly competitive marketplace there should be less, rather than more, need for the government to play an activist role as consumer protector. In competitive markets, it is generally much more efficient to rely on contract and tort remedies to protect consumers rather than overly intrusive regulatory intervention. In any event, there is no indication that the FCC considered whether its new emphasis on consumer advocacy duplicates the role of existing consumer protection agencies, such as the Federal Trade Commission and its state counterparts, with their own broad authority to remedy deceptive or other abusive trade practices.

With regard to the radio spectrum, the FCC's plan fails to articulate explicit recommendations for a more market-driven system grounded in defined property rights-as opposed to the current regime in which the agency employs its licensing authority to promote all sorts of "public interest" goals. Rather than relying on the market to satisfy consumer preferences, the commission still sees its job as divining whether the spectrum "is put to the highest value use."

And there is no indication that the FCC plans to stop using its licensing authority to conduct extensive reviews of proposed mergers under the nebulous public interest standard. The FCC conducts such lengthy reviews even though its competitive analysis largely duplicates the DOJ's antitrust review, and often includes other issues, such as the merger's potential impact on employment opportunities, that are far afield from the commission's core mission.

Alas, the FCC asserts at the end of its reinvention plan that the proposed changes are "not trivial." That is debatable. But in any event, the commission is missing an opportunity to acknowledge that the competitive changes sweeping the communications marketplace demand real deregulation and real reform-including downsizing the FCC.

If that job is to be done, Congress probably will have to do it, a task lawmakers began, but failed to complete in 1996. This time, they should employ explicit "sunset" directives or "competitive rebuttable presumptions" to ensure that outdated regulatory requirements are eliminated in a timely fashion. And the statute's indeterminate public interest standard should be replaced with specific legislative guidance that reflects the competitive Information Age environment. In other words, Congress will need to bite the deregulatory bullet.

© 1999 Legal Times. All rights reserved. This article is reprinted with permission from Legal Times.