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When Congress passed the Telecommunications Act of 1996, it envisioned a future where competition ruled every communications market and regulation passed into the history books. That vision has been realized in part, as competitors using a multitude of different technology platforms vie to provide innovative packages of voice, high-speed data, and video services to consumers. Yet intrusive regulation remains a clear and present fact of life for incumbent phone companies such as BellSouth, SBC, Qwest, and Verizon based on the mistaken belief that local phone competition requires continued access to their facilities at steeply discounted rates. Now, there are hopeful signs that the market-driven future sought by Congress finally will be permitted to develop. The Federal Communications Commission has eliminated some of the onerous burdens that restrained investment in next-generation broadband networks. And the U.S. Court of Appeals for the D.C. Circuit has overturned the FCC’s “unbundling” rules, which had compelled incumbent carriers to share their traditional narrowband networks with competitors at rates that don’t recover their costs. A NARROWBAND VIEW Two Aug. 30 opinion pieces on these pages by Lawrence J. Spiwak [" Interim Rules Buck Telecom Act," Page 35] and Bruce Fein [" D.C. Circuit Upended Telecom Precedents," Page 35] contend that these developments sound a death knell for local phone competition. Their gloom-and-doom scenario, however, founders on both the facts and the law. Spiwak and Fein take a narrowband view of the nation’s broadband future. In doing so, they overstate the impact of recent regulatory and judicial actions. More important, they understate the extent to which local competition derives from sources other than the microcosm of competitive carriers that staked their existence upon the false economic incentives of perpetual, cheap access to the network facilities of the incumbent carriers. In reality, new services that are independent of the traditional telephone network are taking millions of customers and billions of minutes away from the Bells and other incumbent phone companies. One such suite of services, voice over Internet protocol (VoIP), is not just a more efficient means of carrying phone traffic but is platform-independent. Spiwak belittles the impact of VoIP because it is not necessarily facilities-based, but that is precisely why it poses such a competitive threat. As a recent editorial in The Wall Street Journalobserved, “Anyone with access to cable modem service, some 90 percent of the country, can get VoIP from any number of providers. Which is to say that the real competition faced by the Bells today is coming from broadband providers that don’t depend on the Bell networks to reach homes.” In fact, VoIP can be provided over any broadband platform, including cable modem, DSL, fixed wireless, and power lines — and there is nothing that the platform owners can do to stop it. The biggest players in the VoIP market are the large cable companies such as Cox, Comcast, and Time Warner, which also control two-thirds of the market for high-speed Internet access. Each of these companies already offers phone service to millions of customers and plans to roll out VoIP to its entire subscriber base within the next three to 12 months. Ninety percent of the country is expected to have access to cable-provided VoIP service by the end of 2005. And, where cable telephony (including VoIP) is already available, it has been hugely successful, often picking up more than a third of the market in very little time. In fact, Cox already is the 12th largest telephone company in the country, and analysts expect cable companies to control more than 15 percent of the phone lines in the country within three years. Of course, you don’t have to be a cable company to offer VoIP. As the chief executive of one leading VoIP provider recently observed, “Anyone who wants to go into the phone business can do it.” A host of startups (Vonage, Skype, 8×8, and many others) are competing effectively with little capital at risk and no need to interconnect to underlying distribution facilities. Vonage already has more than 250,000 customers and is adding 25,000 a month. And AT&T itself has moved aggressively into VoIP, with plans to introduce its CallVantage local and long-distance calling service in 100 markets by the end of 2004 and to capture one million customers by the end of 2005. Notably, AT&T is teaming with several of the major cable operators to market this service. Mobile wireless services are another potent competitive alternative to landline phone service. By the end of 2003, at least 10 million local telephone lines had migrated from wireline to wireless networks. Six percent of customers in the top 35 markets have dropped their wireline service entirely. Estimates are that up to 30 percent of all telephone subscribers could go completely wireless in the next few years. Even more significant, wireless networks now handle untold billions of minutes that otherwise would have been carried on traditional phone networks. Roughly one-third of calls that would have been made on landline phones now are made using cell phones. Contrary to Spiwak’s concerns, wireless competition is not diminished by the fact that regional Bell operating companies own some of the major cellular providers. Even after the Cingular/AT&T Wireless merger is consummated, three of the remaining five national wireless competitors will not be affiliated with a regional Bell. In addition, there are a host of non-phone company regional wireless providers, and the evidence confirms that all wireless carriers compete vigorously in all geographic areas, regardless of whether they are affiliated with an incumbent phone company. Moreover, wireline services are not nearly so grave a competitive alternative to wireless services — that is, customers switch from wireline to wireless, but not in the reverse direction — for the simple reason that wireline service is not mobile. Competition from cable, VoIP, wireless, and other rivals not using traditional phone networks has caused the regional Bells to lose 28 million access lines since the end of 2000 — 18 percent of their total lines. Not surprisingly, this competition has triggered sharp rate reductions by both incumbent phone companies and competitive local exchange carriers. LIMITING SUBDELEGATION Turning to the law, these marketplace facts confirm that the D.C. Circuit was correct in vacating the FCC’s old unbundling regime. Under the Communications Act, unbundling may be mandated only where competition would be “impaired” without access to specific network elements. In United States Telecom Association v. FCC(2002) ( USTA I), the D.C. Circuit explained that in applying the impairment standard, the FCC must recognize that unbundling is not an unqualified good. Congress sought above all to promote facilities-based competition, but unbundling “spread[s] a disincentive to engage in innovation and create[s] complex issues of managing shared facilities.” Accordingly, the court instructed the FCC to mandate unbundling only where a network element exhibits natural monopoly characteristics. It reiterated this requirement in USTA v. FCC(2004) ( USTA II), noting that where there is “robust intermodal competition,” unbundling cannot be justified. The USTA IIcourt also held that the FCC erred in delegating the impairment determination to the states, pointing out that “the case law strongly suggests that subdelegations to outside parties are assumed to be improper absent an affirmative showing of congressional authorization.” As the court warned, “when an agency delegates power to outside parties, lines of accountability may blur, undermining an important democratic check on government decision-making.” Fein asserts that USTA IIwould promote “Balkanization” by undermining federal regulatory authority and that the D.C. Circuit’s statements about the evils of unbundling cannot be reconciled with Supreme Court precedent. His first claim has things exactly backward. The D.C. Circuit prevented the very Balkanization that Fein foretells, striking down the FCC’s standardless delegation of impairment determinations to 51 separate regulatory bodies. That regime would have yielded a patchwork of clashing requirements and created a hopeless morass for anyone planning to invest in the telecom sector. For good reason, Fein does not challenge the D.C. Circuit’s holding regarding subdelegation on legal grounds. That holding is consistent with precedent, which permits subdelegation of authority within an agency, but generally prohibits subdelegation to third parties. Instead, Fein asserts that the D.C. Circuit instructed the FCC (in USTA I) to perform a more “granular” impairment determination yet prohibited the agency (in USTA II) from enlisting the states to help in that analysis. The FCC, however, need not examine the state of competition in each and every village and town to conclude that competitive local exchange carriers generally are not impaired without access to facilities of the incumbent local exchange carriers. Record evidence establishes that competitive local exchange carriers are competing successfully using their own networks, third-party facilities, and services leased from incumbent carriers to serve every type of customer in almost every corner of the country. NO BASIS FOR CERT Fein’s second claim fares no better: The USTA decisions are not just consistent with, but are effectively compelled by, the Supreme Court’s precedent in AT&T v. Iowa Utilities Board(1999) and Verizon Communications Inc. v. FCC(2002). Iowa Utilities Boarddirected the FCC to “apply some limiting standard, rationally related to the goals of the Act” — i.e., the promotion of facilities-based competition — in determining which elements should be unbundled. The Court also cautioned that the “Commission cannot, consistent with the statute, blind itself to the availability of elements outside the incumbent’s network.” Likewise, Verizonemphasized that the unbundling obligation should apply only to “bottleneck facilities” that are “very expensive to duplicate.” Consequently, there is no basis for granting cert to review USTA II. Congress never intended the unbundling obligation to be permanent, and its time has come and gone. On its own, the FCC has taken steps to eliminate some network sharing requirements in the broadband area. Those initial measures have been rewarded with a significant expansion of investment in next-generation networks, and additional commitments of capital will be sure to follow once the FCC removes the remaining regulatory overhang affecting broadband services and facilities. With prodding from the D.C. Circuit, the agency also has begun, albeit hesitantly, to limit obligations to unbundle the traditional, copper-based phone network. Consumers and facilities-based competitors should hope that the Court declines to hear USTA IIand that the FCC promptly eliminates any residual compulsion for the incumbent carriers to share their narrowband networks at uneconomic, investment-deterring rates. Should that happen, Congress’ vision of a competitive and deregulated telecom market will at long last be realized. R. Michael Senkowski and Jeffrey S. Linder are partners at Wiley Rein & Fielding. The firm’s clients in the telecommunications industry include incumbent local telephone companies and equipment manufacturers.

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