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Yet again, technology is challenging regulation. In the telecommunications industry, whenever a disruptive innovation comes along, the Federal Communications Commission is hard-pressed to keep its regulations up to date. The process is playing out now with the introduction of various new telephone technologies that operate over the Internet — commonly known as Voice-over-Internet Protocol, or VoIP. Regulators must decide how to adapt policies, written for traditional telephone, to accommodate VoIP services. But this time, the FCC should depart from its usual method of rewriting the regulations. In the past, the FCC has typically responded to technological and marketplace changes by instituting cumbersome rule makings. Despite some benefits, rule making is poorly suited to keep up with the pace of technology, now progressing faster than ever. When considering regulations for rapidly evolving technology like VoIP, the FCC should instead rely heavily on the more flexible method of adjudication. TALKING ON THE INTERNET Without getting bogged down in too much detail, the key point to understand, technologically, about VoIP is that the Internet allows the transmission of voice, data and video information in one integrated, digital stream. In contrast to traditional analog networks, digital networks do not establish an exclusive path between the beginning and end points of the communication. This is why services such as VoIP, which rely on Internet protocols either wholly or in part to carry transmissions, are more efficient and less costly. There have been many headlines in recent months similar to this Oct. 9 one from The Wall Street Journal: “Battered Telecoms Face a New Challenge: Internet Calling/Once a Minor Player, Service Captures a Growing Share of Home, Business, Market.” Or witness Walter Mossberg’s testimonial in the Feb. 26 Journal, where he gushed in his personal technology column: “Internet calling can save you money, and allow you to add features and flexibility unheard of in the traditional phone industry. … Now, Internet phone calling has come into the mainstream.” But here’s the rub. In the analog world, since the early 1980s, the FCC has distinguished between “information services” that employ computer processing to act on the “form, content or protocol” of the subscriber’s transmitted information, and “telecommunications” services that offer transmission capacity without a “net change in form or content.” This somewhat metaphysical distinction was serviceable enough early on. Until fairly recently, “telecommunications service” basically equated to “voice,” and “information service” essentially meant online “data.” But in digital networks, voice and data travel together indistinguishably. That means the existing regulatory distinctions are problematic. Under current regulations, much depends on how the FCC classifies a service. Telecom providers are subject to certain public utility-type requirements, such as rate regulation and nondiscrimination obligations. They also are subject to certain mandates requiring 911 service, disability access, and wiretap accessibility. And they must contribute to support various “universal service” programs. Information providers are subject to none of these mandates. So, how to treat VoIP? Already, new digital services are severely straining the existing regulatory regime built for the analog world. Until Congress puts in place a new framework, the FCC should use its discretion to rely more on adjudicative procedures and less on sweeping rule makings. The difference is critical. In 1947, only a year after Congress passed the landmark Administrative Procedure Act, the Supreme Court held in Securities and Exchange Commission v. Chenery Corp. that agencies are free to formulate new rules through either rule making or case-by-case adjudication. But after the 1960s, rule making supplanted adjudication as the preferred agency policy-making tool. Under the APA’s requirements, proposed rules and notice of opportunity for public comment must be published in the Federal Register, which facilitates participation by any interested party. Moreover, it is argued that rule making more effectively promotes predictability and stability. Once a rule has been promulgated, affected interests can presumably go forward knowing the governing standards. These public participation, predictability, and stability values make rule making, in many contexts, a good choice. The late Kenneth Culp Davis, America’s most influential administrative law scholar, called rule making “one of the greatest inventions of modern government.” True enough. But even good things can be overused. CASE BY CASE BY CASE For VoIP and other evolving services, the FCC should consider the benefits of the more modest case-by-case approach that adjudication offers. Adjudications are individualized proceedings usually triggered by outside parties. Typically, those parties are also the ones most directly affected by the agency’s regulations. As a result, adjudication may involve more limited public participation than rule making. But it’s precisely the more modest scale that is also a primary strength. Like court decisions, adjudications take one step at a time. Thus, they have a dynamic akin to the common law, where, step by step, the regulatory framework adapts and readapts. Agencies such as the FCC charged with making policy in fast-changing, uncertain environments would do well to resort more often to case-by-case adjudication. More frequent resort to incremental proceedings that result in specific rulings based on a particular set of facts is likely to result in the development of sounder policies, with less prolonged periods of regulatory uncertainty. The FCC may sense this. On Feb. 19, the agency, commendably, issued a declaratory order — a form of APA adjudication — holding that one type of VoIP is not regulated telecommunications. But on March 10, it released a very broad rule-making notice. In effect, it proposes to re-examine, for the various VoIP configurations, most of the regulations regarding classification, universal service, 911, disability requirements and more. The notice acknowledges that “development and deployment of these [VoIP] services is in its early stages, that these services are fast-changing and likely to evolve in ways that we cannot anticipate, and that imposition of regulatory mandates, particularly those that impose technical mandates, should be undertaken with caution.” Of course, this is precisely when rule making is not the best idea. AVOIDING BLOATED REGS To make matters worse, rather than proposing new rules with any real specificity, the FCC’s March 10 notice invites comment on more than 100 separate open-ended questions. Rule makings that solicit comment on a whole raft of unfocused issues tend to produce internally inconsistent outcomes. With a potpourri of issues up for grabs, the commission’s five members are more likely to adopt unprincipled compromises that ratchet up regulation. There is a natural tendency for the commissioners to succumb to the special pleadings of various industry interests seeking to impose unnecessary regulations on their competitors. And even though rule makings may be completed as quickly as adjudications, the FCC’s norm is for rule makings to drag on much longer. With so many questions in dispute simultaneously, and with circumstances changing, parties have incentives to continually offer up new facts and arguments to keep the agency from reaching decisions that the parties fear may harm them. But when the agency responds to more narrowly framed requests for declaratory orders or when it rules on individual complaints — another form of adjudication — it retains the flexibility to adapt its policies to the evolving environment. Employing this approach with regard to VoIP, for example, the FCC could determine the new regulatory issues as they are presented based on a concrete set of facts. There is still room for formal rules, of course. With much more competition resulting from new technologies like VoIP, Congress should enact a new telecom framework. And in many instances, the FCC should still use generic rule makings to formulate industrywide policies. But, in today’s technologically dynamic environment, the FCC should rely more frequently on adjudicative techniques. When it does initiate rule makings, it should narrow their range by offering specific proposals, rather than throwing out open-ended questions. A bit more procedural modesty on the FCC’s part would lead to sounder communications policies for the digital age. Randolph J. May is a senior fellow and director of communications policy studies at the Progress & Freedom Foundation in Washington, D.C. The views expressed are his own and do not necessarily reflect the views of the foundation. He may be reached at [email protected]. His column, “Fourth Branch,” appears regularly in Legal Times.

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