Is it Time to End Asymmetric Regulation?

December 19th, 2012 | Posted by Larry Spiwak in Federal Communications Commission | IP Transition | Law and Economics | Regulation | Regulatory Reform

This week, USTelecom filed a petition with the Federal Communications Commission requesting the agency to issue a declaratory ruling that incumbent local exchange carriers (ILECs) are no longer subject to dominant carrier regulation when providing interstate mass market and enterprise switched access services.  As the Commission begins to evaluate USTelecom’s petition, we need to keep in mind that the policy question at the heart of this proceeding is not necessarily one of de-regulation per se (although deregulation is the end objective of USTelecom’s petition), but one of regulatory symmetry.  That is, does it make sense to maintain asymmetric regulation for one select segment of the industry (the ILECs) under current market conditions?

To put the matter into context, perhaps a quick history lesson of FCC’s Competitive Carrier paradigm is in order.  Making a very long and complicated story short, prior to the Modified Final Judgment, when the Commission was coming to the realization that it could “carve out” those areas of AT&T’s vertically-integrated monopoly network capable of possibly sustaining competition (i.e., the long distance industry), they needed a legal construct which would keep the then-monopoly AT&T regulated, yet reduce the regulatory burden on then-nascent startups MCI and Sprint.  As the tool of regulatory forbearance was not yet part of the Communications Act (we had to wait for Section 10 of the 1996 Act for that), in the Competitive Carrier proceeding the agency came up with the ingenious legal construct of “dominance”:  that is, AT&T, with its 99% market share would continue to be subject to the full panoply of regulation (price caps, 45 days notice and comments before new rates could go into effect, reporting requirements, etc.) as the “dominant” carrier, while Sprint and MCI—as “non-dominant carriers”—would be subject to no such onerous regulatory burdens.

Thanks to this “light touch” regulatory policy, in just a few years, MCI and Sprint became viable competitors to AT&T in the long-distance market.  Correctly recognizing that the dominant-carrier rules designed for one set of market conditions may be inappropriate for another set of conditions, the FCC started to issue a series of orders declaring AT&T to be a “non-dominant” carrier in a variety of product “buckets.”  Finally, in the mid-1990s, the Commission took the bold step of declaring AT&T to be a non-dominant carrier for all domestic long-distance services because the Commission found, inter alia, that asymmetrical regulation—while appropriate under near-monopoly conditions—did more harm than good under workably competitive market conditions.

By way of classic example, by the time AT&T petitioned to be a non-dominant carrier, long distance competition was in full swing.  However, if AT&T wanted to respond immediately to Sprint and MCI in the market, it was prohibited by regulation from doing so.  Instead, as noted above, as a “dominant carrier”, AT&T had to subject any rate decrease to a 45-day notice and comment period before the rate decrease could go into effect.  And guess what happened?  On the 44th day, Sprint and/or MCI would often announce a price lower than the rate proposed by AT&T, and so AT&T had to start the process all over again.  As a result of these regulatory shenanigans, AT&T became reluctant to compete on price aggressively.  However, once the burden of regulatory asymmetry was removed, price competition intensified.

As we have not formally modeled the potential effects of granting USTelecom’s petition, I am in no position in this blog to make any prognostications.  That said, the similarities of current regulatory asymmetries to the long-distance case are hard to ignore.  For example, according to USTelecom’s petition,

Previous Commission orders have identified the specific obligations that flow directly from dominant carrier regulation as encompassing the following: (i) dominant carriers are subject to price cap or rate-of-return regulation, and must file tariffs with applicable cost support for services on a minimum notice of seven days or more, while non-dominant carriers are not subject to rate regulation and may file tariffs on one days’ notice and without cost support; (ii) dominant carriers are subject to a 60-day waiting period for applications to discontinue, reduce, or impair services to be granted, as compared to a 30-day period for non-dominant carriers; and (iii) dominant carriers are eligible for presumptive streamlined treatment for fewer types of transfers of control under section 214 than non-dominant carriers.

The obligations associated with dominant carrier status are clearly artifacts from another era.  Accordingly, as we begin the complex conversation about developing a regulatory paradigm to facilitate the IP transition, common sense would dictate that under today’s market conditions, perhaps a good place to begin is to remove antiquated regulatory asymmetries so that everybody—ILEC, CLEC, Cable, Wireless, etc.—starts off on the same policy footing.

 

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