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October 6, 2000


Mr. Chairman and Members of the Subcommittee, it is an honor to appear before you to discuss management practices of the Federal Communications Commission.

Before continuing, I should note that while I serve as President of The Progress & Freedom Foundation, the views I express are my own, and do not necessarily represent those of the Foundation, its board or other staff. The Progress & Freedom Foundation is dedicated to studying the digital revolution and its implications for public policy. Since its founding in 1993, issues of telecommunications deregulation and FCC reform have been an important part of the Foundation's program of research. Today, under the leadership of Director of Communications Studies Randolph J. May, we are preparing a comprehensive report on reform of our communications laws and of the FCC’s role in implementing these laws, which we will release in December.1

The FCC oversees what is arguably the most important and vibrant sector of the American economy. The communications business is in the midst of revolutionary change, transformed by technology from a marketplace of scarcity and monopoly to one of abundance and competition. In passing the Telecommunications Act of 1996, Congress created a policy framework for managing this transition, and charged the Commission with implementing that framework.

The vision of the Telecommunications Act is clear: It aims to replace monopoly with competition, and to impose the discipline of the marketplace in lieu of government regulation. In some areas, like cable television and wireless, Congress was quite explicit in mandating deregulation. In other cases, such as the market for local telephone service, it provided guiding principles and specific tools. And at the broadest level, Congress granted the FCC authority to forebear from regulating whenever it concluded competition was a viable alternative. Congress did not decide every issue, but its direction could not have been more clear: Facilitate the transition to competition and, when it is complete, deregulate.

But deregulation is a task for which the Commission – at least, this Commission -- has turned out to be poorly suited, and the results have left much to be desired. Indeed, the Federal Communications Commission in 2000 is larger than it was when the Act was passed, and in many ways it plays a more intrusive regulatory role than it did five years ago.

In fact, the Commission has shown both the will and the ability to expand the scope and effect of its regulations. For example:

  • Its review of mergers under the vague "public interest" standard has become an exercise in designer regulation, with separate and unequal regulatory regimes imposed on similarly situated firms through supposedly "voluntary" conditions.
  • While paying lip service to the "unregulation" of the Internet, the Commission has refused to forebear from regulating broadband Internet access services (such as DSL) provided by local phone companies, and it has now opened a proceeding that threatens to impose common carrier-type regulation on broadband Internet offerings by cable companies.

  • In its current proceeding on the public interest obligations of digital broadcasters, the Commission contemplates imposing a new regime of First Amendment-threatening content regulation on the new converging electronic media.

In recent years, the Commission has expanded its mission beyond the traditional boundaries of communications regulation to take on some of the functions of a social policy agency. Already, it manages what former Chairman Reed Hundt called "the largest national effort for K-12 education in the country's history"2 -- the so-called "E-Rate." Through the "universal service" program (which remains largely unreformed despite Congress' mandate to make such subsidies "explicit" and "transparent"), the Commission operates a massive income transfer program that, among other things, subsidizes the rural rich at the expense of those living in urban areas. The Commission appears now to be poised to further expand this social policy mission by broadening the definition of "universal service."

This continuing "mission creep" would be less troubling if the Commission had a better track record of implementation. But the fact is that the Commission's practices and procedures leave much to be desired. Consider the following examples:

  • In its review of mergers under the "public interest" standard, the Commission routinely imposes regulatory conditions which go beyond what it likely could require through rulemaking. By using this "regulation by condition" technique, the Commission avoids the procedural requirements of the Administrative Procedures Act (which are applicable to industry-wide rulemakings). As noted above, the result is not only to increase the intrusiveness of regulation, but to leave similarly situated companies facing very different sets of rules.

  • The Commission often fails to meet deadlines, even when they are self-imposed. One result is that issues such as "reciprocal compensation," which should be resolved by the Commission, end up being tossed back into the lap of Congress not on substantive grounds but simply because of the Commission's failure to act in a timely fashion.

  • When the Commission isn't missing deadlines, it is often found engaging in creative interpretations of its statutory authority -- again placing Congress in the position of having to do the Commission's job for it. Proposals now before Congress that would address such issues as attribution rules for cable ownership and "truth-in-billing" requirements for phone bills are necessary largely because the Commission's decisions in these areas seem contrary not only to sound policy but to simple common sense.

  • When Congress isn't having to correct the Commission, the courts often are. Despite the Chevron doctrine, which gives substantial deference to the decisions of agencies like the FCC, key elements of its rules have been overturned in court -- including, most importantly, the two centerpieces of its local competition policy, the TELRIC pricing standard and standard for defining unbundled network elements.

  • If one is to take former Chairman Hundt's book at face value, it would appear that the Commission has been far more involved in and sensitive to political concerns than is appropriate for an independent regulatory agency. At a minimum, the appearance of politicization diminishes the public's (and Congress') ability to have faith in the results of the agency's decisionmaking process.

Despite these problems, the Commission's five-year "draft strategic plan" asks Congress to sign off on a broad new mission. While the agency continues to predict that the U.S. communications market will be characterized by "vigorous competition" within five years, the plan offers no proposals for curtailing the agency's size or authority. Indeed, it demands still further increases in the agency's staffing and budget, and proposes yet another new role for the Commission, this time as a "market facilitator" that would "promote competition, protect consumers and support access for existing and advanced communications services."3

The plan does not describe the specifics of what it would mean for the Commission to be a "market facilitator," nor does it explain why a competitive market for telecommunications services would be more in need of such facilitation than other competitive markets -- which seem to function quite adequately even without their own industry-specific regulators. The plan also leaves unstated the standard the Commission would apply in exercising its new functions, but it is fair to assume that it would intervene in the marketplace whenever three commissioners decided it was "in the public interest" to do so. This is potentially a big job, and we might well expect still more staff and resources will be required to do it well!

I respectfully submit that the Commission could and should take a different tack. In my opinion, the advent of competition in the communications marketplace should result not in a larger and more powerful regulatory agency, but in a scaling back of both the cost of the agency and its intrusion into decisions better made in the private sector. The report we will release in December will present comprehensive recommendations for how to accomplish this objective.

In the meantime, I would offer the following suggestions for your consideration.

First, the Commission should be required to make explicit the criteria it uses to judge "the public interest," starting with its application of the public interest standard to the license transfers involved in mergers. If the Commission is reviewing license transfers as such, it should limit its deliberations to the direct implications of those transfers. If it is going to engage in a broader, antitrust-like merger review, it ought to do so using its authority under the Clayton Act.

Second, the Commission should get out of the social policy arena as expeditiously as possible. Federal education programs should not be run by the FCC, but by the Department of Education, and universal service programs should be further targeted, not further expanded.

Third, Congress should undertake a comprehensive examination of the Commission's structure. Certainly there should be a streamlining and consolidation of the separate bureaus and offices so that the internal agency structure better reflects the realities of a converging marketplace. In addition, Congress should consider additional approaches to streamlining the agency, including examining whether some of the agency's functions would be better placed elsewhere in the Federal government.

Fourth, and keeping in mind that the Strategic Plan presented by Chairman Kennard remains a "draft," Congress should insist on a "Draft 2.0." Rather than focusing on creating new missions and expanded responsibilities, Draft 2.0 ought to point the way to the smaller, less expensive and less powerful FCC that should be the natural consequence of telecommunications competition and deregulation.

Mr. Chairman and Members of the Subcommittee, I appreciate the opportunity to offer these thoughts and look forward to any questions you may have.



1.  The Progress & Freedom Foundation is a 501(c)(3) non-partisan research and educational organization which accepts no government funds. I am grateful to Randolph J. May for helpful comments, and have attached three of his recent articles in Legal Times which bear upon the issues discussed here.

2.  Reed E. Hundt, You Say You Want a Revolution: A Story of Information Age Politics (New Haven: Yale University Press, 2000), p. 184.

3.  See Statement of William E. Kennard before the Subcommittee on Commerce, Justice, State and the Judiciary, Committee on Appropriations, United States Senate, on the Federal Communications Commission's FY 2001 Budget Estimates, p. 2.



The Progress & Freedom Foundation