It’s become a Washington ritual. With each new wave of corporate scandals, CEOs of the relevant companies are summoned to Capitol Hill, herded before the media, and subjected to a peculiarly American form of hazing known as the congressional hearing. So it was this Tuesday, when the Senate Commerce Committee held hearings on the telecom mess: calling in the CEOs of WorldCom, Global Crossing and Qwest for a roasting.
Not that there’s anything wrong with that. Some of these guys deserve a lot more – and a tongue-lashing by Senators Hollings and McCain and company may be among the easier things they will face. Still, it’s somewhat less than reassuring knowing that Senate Commerce is on the case.
At this hearing, however, an interesting thing happened. FCC chair Michael Powell, also appearing before the committee, apparently didn’t get the message that the event was just for the cameras. He showed up with testimony providing a multi-part strategy for dealing with telecom’s crisis. With one exception, his Rx for telecom was on the mark. That’s good news. The bad news is that the one exception gained the most attention from the media, and the committee.
High on Powell’s list is the obvious but essential: rooting out corporate fraud. He went on from there to some even more fundamental and needed changes. He stressed the need for industry restructuring, pointing out that mergers may benefit consumers as well as firms. He stressed the need for new sources of revenue, citing the promise of broadband. Most important, he outlined regulatory reforms, including rate flexibility and rebalancing, and reform of network access policies, providing stronger incentives for investment in local networks.
This isn’t a new agenda – it’s largely already underway in various FCC reform proceedings. But Powell should get credit for laying out the case for reform clearly and strongly, before this less-than-supportive audience.
Nevertheless, the testimony hit one flat note. In an effort to reassure consumers that service won’t be cut off, Powell stressed the Commission’s authority to prevent telecom firms, even bankrupt ones, from discontinuing service. He also asked Congress to extend that authority to Internet backbone services such as UUNet. It was that request (not the far more important regulatory proposal) that lead the headlines. Senator Hollings promised legislation to close the “loophole.”
Of course, service interruptions are one of the greatest fears of policymakers. After all, voters might not notice immediately if regulation stymies investment, or freezes innovation. But they sure get upset if their phone is cut off.
But, does that mean government should ban them? Lots of markets get along quite nicely without regulators requiring providers to provide. And, the Commission’s current authority to stop telephone disconnections was created in a different world: one in which providers were granted legal monopolies, leaving consumers with no choice should service be cut off. That’s far from today’s reality in long-distance or Internet backbones.
So, what’s the harm? First, any economist could tell you that raising barriers to exit from a market will discourage entry – you’re much less likely to invest if you see the industry as a flytrap. Second, the extension of the FCC’s power over backbone providers would be a major step toward federal regulation of the Internet. A small step, but regulators rarely stop at small steps.
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