Is the United States in full retreat from internationally recognized regulatory best practice? Or is it instead headed toward some different destination—“dancing to the beat of a different drummer”? Where is this likely to lead? The following is an introduction to a paper, published by IDATE, from J. Scott Marcus, a Senior Consultant for WIK-Consult GmbH.

In a widely read white paper [PDF] that I wrote while at the FCC in 2002 (FCC, 2002a), I argued that the then-nascent European regulatory framework for electronic communications should generally reach regulatory conclusions similar to those of the United States. The U.S. and the EU had similar pro-competitive objectives. U.S. regulators over the prior forty years had been consistently reaching conclusions that would have been logical outcomes under the new European system.

In revisiting these themes a scant three years later, I find that subsequent experience no longer supports them. On the one hand, the European system is in full swing, and the system that seemed novel and radical three years ago is generally functioning as was expected and hoped (European Commission, 2004; 4th ZEW Conference, 2004). What has radically changed is telecoms regulatory practice in the United States. The U.S., in a long series of regulatory decisions, has largely abandoned its long-standing regulatory principles and moved in an entirely new direction.

The European sector-specific regulatory system for electronic communications rests primarily on formal mechanisms of market definition, determination of Significant Market Power (SMP), and imposition of proportionate (minimally adequate) remedies if, and only if, SMP is present. These core elements are implemented in a technologically neutral, allembracing framework that is harmonized with European competition law.

Telecommunications law and regulation in the United States lacks this elegant formal structure, it emphatically lacks technological neutrality, and it largely pre-empts the operation of competition law (antitrust). Nonetheless, U.S. law implicitly recognizes market power by identifying categories of telecommunications carriers who could reasonably be presumed to possess it. Moreover, U.S. law and regulation until roughly 2002 generally assigned an array of obligations (obligations similar to European SMP remedies) to carriers who were presumed to possess market power, including: interconnection, non-discrimination, transparency, unbundling of loops (and other elements), accounting separation and controls on pricing.

Consequently, it seemed to me that the U.S. and the EU should generally reach similar regulatory conclusions, despite major differences in their regulatory processes.

That conclusion turns out to have been incorrect. The U.S. subsequently reached one regulatory conclusion after another that would have been implausible or impossible under the European regulatory framework.

In a series of rulings over the past few years, the FCC has systematically deregulated wired facilities, especially those used in support of broadband Internet services. Deregulation is generally viewed globally, and in Europe specifically, as the appropriate response to the emergence of competition. As SMP fades, remedies are no longer necessary.

The concern that must be raised with this series of FCC rulings is that none of them contains any economic analysis worthy of the name. Indeed, in reading the rulings, it is difficult to escape the conclusion that they refrain from rigorous analysis because they know that it would not support the desired conclusions. Instead, they deregulate in response to non-binding statements of intent on the part of wired incumbents, and in the hope that new technologies might generate sufficient competition at some unspecified time in the distant future to warrant the deregulation granted in the present.

The regulatory system in the U.S. has thus been characterized in recent years by deregulation, despite the likely presence (at least in some relevant geographic markets) of SMP.

Several other factors are reinforcing an apparent abandonment of pro-competitive principles and a tilt toward the wired incumbents including:

• a series of large-scale mergers, permitted with only minimal conditions imposed on the parties,
• an apparent willingness to impose new regulations—in at least one case, harsh and lopsided regulations (MARCUS, forthcoming)—only when they disadvantage new entrants to a greater degree than wired incumbents,
• as regulatory changes cause financial losses at formerly competitive firms, forcing market exit or acquisition, funds for pro-competitive lobbying decrease correspondingly. In the context of the U.S. regulatory and political system, this creates a feedback loop, reinforcing the regulatory tilt.

So regulators are abdicating at the very moment that the industry is consolidating. Where is all of this likely to lead?

It is important to bear in mind that there are fundamental differences between the U.S. market and that of most European countries. Cable TV is far more prevalent in the U.S. than in most European countries. In the U.S., the suppression of competitive market entrants leads, not to monopoly, but rather (for the foreseeable future) to duopoly. More precisely, it leads to a series of non-overlapping geographically specific duopolies for wired broadband services at the retail level in most parts of the United States, and to continued decline in an already patently ineffective wholesale market for wired broadband access.

This is not to suggest that the FCC’s commissioners all woke up one morning, miraculously and simultaneously inspired with the notion that duopoly was the very thing that America needed. To the contrary, these effects are more likely to have been inadvertent than intentional. Intent aside, a long series of U.S. government actions (discussed in the following sections of this paper) have tended to strengthen wired incumbents at the expense of new market entrants. These decisions are mutually consistent and synergistic; moreover, they appear to have had considerable collective effect. This is not a cheerful result. In economic terms, duopoly is not a good thing. It is not something to be sought out (except perhaps by the duopolists). The best that one can say is that it is a lesser evil than monopoly.

For the moment, one must say in fairness that the economic results to date are mixed. In terms of consumer welfare, they may not be as negative as one might otherwise anticipate. The future implications depend heavily on the success or failure of local telephony incumbents with video services transmitted over Fiber to the Home (FTTH)—if FTTH is widely deployed and widely adopted, and to the extent that it leads to effective competition for triple-play services, the U.S. might conceivably wind up with an enviable electronic communications environment.

Nonetheless, this is a radically different long-term vision from that of Europe. Moreover, it is a duopolistic world in which neither market forces nor regulation can be presumed to adequately protect consumer welfare.

To download a full-length PDF copy of this paper click here.