An Open Letter To The Bush Administration On Its Plan To Unbundle Local Phone Networks

Dear Ms. Victory:

The FCC has announced its plans for unbundling local phone networks, and as Chairman Powell pointed out to Congress in his testimony to the Telecommunications and Internet Subcommittee on February 26, capital markets are unhappy. This letter expresses our support for the federal approach advocated by Chairman Powell and Commissioner Abernathy, and our grave concern with the discretion the majority ceded to the states.

Just how unhappy are capital markets? In the two days following the FCC’s releases, February 20th and 21st, SBC, BellSouth, Verizon and Qwest lost over 12 billion dollars. Wireless and equipment companies like Nortel and Lucent posted hundreds of millions in losses as well. Any gains by CLECs or long distance companies were slight. A headline in the Economist read, “The FCC Presses Auto-Destruct.”

Analysts concluded that the market had reacted to the uncertainty engendered by the FCC’s delegation of key issues to the states. This presents markets with the prospect of further delay and inconsistency, compounded by the risk that the FCC’s decision will be overturned by the courts yet again.

Chairman Powell and Commissioner Abernathy have repeatedly stressed the importance of certainty, along with deregulation, in helping telecom capital markets recover. Reconciling the need for certainty with calls for “granularity” and close attention to particular geographic markets is not easy. But the majority’s view in the Triennial review seems to neglect the need for certainty entirely. Certainty is a basic requirement of fairness and the rule of law. Without certainty, law cannot serve its most basic function of allowing people to avoid and resolve conflict. Investors cannot make plans. It is that simple. And the certainty that investors need now will not come from the slow machinations of fifty-one state commissions.

The view that delegating key unbundling issues to the states is a triumph of “states’ rights” is mistaken. No consistent or coherent approach to federalism could account for what the FCC has done. Why turn the issue of switching over to the states, but not line sharing? Why a federal rule for broadband, but not UNE-P? There is no rhyme or reason to it. Usually, devolution of power to the states is deregulatory, but in this case it compounds the worst features of regulation. It will impede national markets and national networks.

Several legal scholars have argued that the state commissions are the best place for unbundling decisions to be made, because of their proximity to local markets. Yes, telecommunications costs vary with population density and geography. But there is no correspondence between these features and state lines. And the Telecommunications Act gives the FCC, not the states, the authority to pick UNEs and set the basis for their pricing.

As Commissioner Abernathy has argued, states could serve a role in channeling information to the FCC. Or the states could arbitrate disputes. But telecommunications is an interstate business with national markets. The state commissions have rarely taken the lead in deregulating any telecommunications industry, wireless, the Internet, cable television, or telephony. Again and again, federal legislators and regulators have stepped in to protect national markets from state intervention.

Should the FCC’s final rules fail to provide the resolution markets need, we hope that the Administration, including the White House and NTIA, will urge the agency to reconsider.

Sincerely,

Fred Smith

President

Competitive Enterprise Institute

Solveig Singleton

Senior Analyst: Project on Technology and Innovation

Competitive Enterprise Institute

Joseph L. BastPresidentThe Heartland Institute

John Wohlsetter

Senior Fellow for Technology & Society

Discovery Institute

Greg Blankenship