Telecom Analysts Say FCC Reform Needed

WASHINGTON — A panel of telecommunications analysts agreed with key members of a House committee Wednesday that the Federal Communications Commission (FCC) should eliminate regulations that require the regional Bell companies to lease their lines and switching equipment to competitors.

Without a revision of the rules, they said, capital investment in the ailing telecom sector will remain scarce.

Ironically, the analysts disagreed with the fiery opening statement of House Energy and Commerce Chairman Billy Tauzin (R.-La.) and the less rhetorical but equally stern remarks of Rep. Fred Upton, (R.-Mich.), the chairman of the Telecommunications and Internet subcommittee, that current FCC rules led to the collapse of the telecom sector.

Meeting only a week before the FCC is expected to issue new rules regulating competition between the Bells and their competitors, Tauzin said, “Michael Powell’s FCC needs to rip the rules put in place by Al Gore and (former FCC chairman) Reed Hundt out by the roots and throw them away. At the very least, our Republican FCC commissioners should want a wholesale change in the overly-regulated approach (taken by Gore and Hundt).”

In a more even-measured approach, Upton said, “I believe the FCC’s rules implementing the Telecommunications Act of 1996 have been a major contributor to the massive decline in investment in the telecommunications sector.”

The economic experts called to testify before the panel, however, took a broader approach to the cause of the telecom slump but ultimately agreed with Tauzin’s and Upton’s prescription.

Robert Atkinson, director of policy research at the Institute for Tel-Information at Columbia University, said FCC regulations were a “contributing factor” to the telecom collapse but added it is “worthwhile to note that the meltdown was a simultaneous, worldwide event and that each country has different laws and different degrees of regulation.”

Atkinson said it might be possible that the slump was caused by the “peculiarities” of U.S. regulation, but is “more likely that regulation played a relatively minor role and that other common factors — such as the laws of physics and the laws of human nature, which are the same in all countries — are responsible.”

He added that the present downturn is showing signs of having bottomed out and that the survivors will begin to grow.

“So, the real challenge for the industry is what happens next?” Atkinson said. “If the sector is just working through the consequences of a one-time boom and bust, then there really isn’t much that anyone should do: we’ll be back to the ‘good ol’ days’ of steady growth and good health soon enough.”

More likely, though, Atkinson argued, the telecom industry has entered a pattern of chronic volatility where boom-bust cycles will become the norm.

“As we discovered over the past two-three years, telecom managers, investors and regulators have few tools and little or no experience to deal with the uncertainties of a volatile boom and bust. ‘Deer in the headlights’ is an apt description of how industry, government and investors reacted to the meltdown,” he said.

Robert W. Crandall, a senior fellow at The Brookings Institute, told the subcommittee that the telecom woes have a precedent in history.

“We should recall that we have been through similar problems in other sectors after they were first opened to entry and subjected to deregulation,” Crandall said. “At this point, it appears that very few of the new CLECs (competitive local exchange carriers) are likely to survive and prosper. As was the case in the airlines and trucking industries two decades ago, a large number of entrants have foundered on bad business plans and a disappointing market.”

Crandall said the key to reviving capital spending in the sector is to develop and deploy new services that expand telecom revenues. The current FCC regulations that require the Bells to “unbundle” their various network elements (UNE) for lease by competitors does nothing to expand telecom revenues, Crandall argued.

“The spread of the UNE platform will increase the appearance of competition, but not the reality of it. Simply allowing other carriers to deliver the same service over the same facilities to the same customers at a greater social cost will not promote competition,” he said. “The UNE platform is not stimulating the development of new local services. Nor are the companies offering local services over the UNE platform using this network strategy to gain a toe-hold before moving ahead to build their own networks.”

Eric Strumingher, an analyst for Cobalt Capital, had the bluntest assessment of the afternoon.

“The only legitimate reason explanation that I see for the current state of ambiguity in the rules is that the federal government is generally conflicted as to whether the local telephone companies should be run for the benefit of their shareholders or for the benefit of U.S. citizens generally,” Strumingher said.

He added, “I see only two ways for the government to skin the cat on this issue: either spell out the rules of the game clearly and allow private investors to evaluate the risks associated with an investment based on these rules, or nationalize the telephone system and lease it out as a platform to resellers at taxpayer subsidized rates that are deemed to achieve the redistribution of wealth or other policy goals that are deemed to be in the public interest.”

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