IP Convergence: Beyond VoIP, Beyond Cost Savings

The release of the proposals by the European Commission for reform of the European regulatory framework for telecom firms is surely just the beginning of what is to be a major political battle within Europe. The proposals garnering the greatest attention at the moment are the ones aimed at the forming a European-wide regulatory authority and allowing national regulators to “functionally separate” the incumbent carriers if other measures fail to introduce competition.

On the subject of the European-wide regulatory authority, I must say I think it is a bad idea and I think the U.S. experience should serve as a vivid example of the problems with such an approach. There was a time, back in the late 1980s and early 1990s when individual states in the United States began experimenting with liberalization of the telecommunications market. New York and Illinois were the early pioneers in this effort. Other states, including Maryland, Massachusetts, Florida, Michigan, California, Washington, and Connecticut, recognized that market liberalization was good for investment and local business and moved quickly to initiate rulemakings or modify their telecommunications laws to open the local telephony market to competition. By the time the Telecommunications Act of 1996 was passed by Congress, more than a dozen states had ended the local telephone monopoly and implemented measures to promote local exchange competition. At least a dozen more states (including Tennessee, Georgia, Pennsylvania, North Carolina, Texas, and Colorado) were in the process of initiating changes to their laws and regulations as well so that basically half of the states were in the process of liberalization.

But once the Telecommunications Act of 1996 passed and the experiment in local competition was nationalized, what started as an orderly progression towards effective market liberalization quickly disintegrated into an orgy of regulatory gamesmanship and litigation. That the Telecommunications Act of 1996 was a mistake was made clear when the FCC issued its first “local competition order” – a nearly 800 page order that attempted establish comprehensive local competition rules, most of which were eventually overturned after years of litigation.

How the FCC could get it so wrong when nearly half the states were getting it right is a lesson on the dangers of centralization that the Europeans would do well to heed. But putting aside the substantive policy problems that a central authority would have, the situation in Europe is a bad idea for the simple reason that it is going to have the effect of freezing progress, not accelerating progress towards liberalization, as parties litigate the contours of the authority of this new pan-European regulator. National regulatory authorities hostile to the idea of a pan-European regulator will simply shut down, forcing interested parties to pursue their cause at the pan-European regulatory authority, ultimately triggering litigation by the losing party. This process could take years to sort out during which time critical issues will remain unresolved. Moreover, this process involves substantial legal and political cost and resources for the parties involved, which lends a decisive advantage to incumbent operators. Most nascent competitors lack the legal and political resources necessary to effectively pursue a legal claim over the course of several years from the national regulator, up to the pan-European authority, and eventually back to the national regulator where the matter will be resolved on some form of remand. So not only will progress be frozen pending the outcome of litigation, but the outcome is more likely to be favorable to incumbent interests since they are the only parties with the resources to see the process through to its conclusion.

My feelings about the proposal to allow national regulatory authorities to impose functional separation on incumbent operators are much more favorable from a substantive perspective, but I still have questions about the procedure. The proposal says national regulatory authorities can impose functional separation as a measure of “last resort” and only after receiving approval from the European Commission. I am not sure European Commission approval is a necessary component to this and it would probably be better if the European Commission simply clarifies the authority of national regulators in this regard.

For the moment, these are just proposals for reform. It remains to be seen whether the European Commission will adopt them, but it demonstrates once again that the Europeans are setting the example for the world on how to effectively liberalize telecommunications markets. Here in the U.S., policy makers seem unable to tackle the primary obstacles to more effective competition and are devoid of any creative ideas as to how to overcome them.