Subject areas: Regulatory Design for Economic Growth and Development Local Access Competition; Strategies of Incumbents and Entrants

Regulatory Opportunism in Telecommunications: The Unlevel Competitive Playing Field

Rob Frieden
Professor, Penn State University
105-C Carnegie Building
University Park, Pennsylvania 16802
(814) 863-7996; rmf5@psu.edu

ABSTRACT

The authors of the Telecommunications Act of 1996 had great expectations that they could engineer competition and enhance consumer welfare simply by rewriting a law to reflect changed circumstances. Congress assumed that it could craft legislation that created complementary incentives. For incumbent local exchange carriers ("ILECs"), the law attempts to require fair dealing with new competitors. The law also seeks to motivate competitive local exchange carriers ("CLECs") to construct facilities and to stimulate demand with lower prices and new options even in residential areas.

Congress underestimated the ability of stakeholders to thwart progress through litigation and to exploit ambiguous language in the '96 Act to maintain or create an unlevel competitive playing field. Stakeholders have spent more time vying in the courts than competing in the marketplace. Likewise, they have devised clever ways to exploit '96 Act provisions in ways not contemplated by Congress, e.g., routing Internet traffic through a CLEC, affiliated with an ISP, to trigger '96 Act mandated compensation, even though the CLEC has little or no offsetting traffic for ILEC routing.

This paper will examine the successes and failures of the '96 Act with particular attention to instances where asymmetric regulatory requirements have destabilized or reduced the potential for full and fair competition. The paper examines a number of semantically driven regulatory dichotomies, e.g., common carrier versus private carrier, basic versus enhanced services and ILEC versus CLEC, with an eye toward determining whether technological convergence and regulatory opportunism defeats the possibility of establishing a dual track regulatory regime. Additionally the paper scrutinizes several marketplace anomalies resulting when a regulatory dichotomy triggers a diversion or inflow of funds based on an operator's regulatory classification and its adeptness at exploiting arbitrage opportunities. The paper concludes with suggestions on how legislators and regulators might curb regulatory opportunism by abandoning the strategy of classifying carriers based on static technological or economic definitions.