CHAIRMAN REED HUNDT
FEDERAL COMMUNICATIONS COMMISSION

AMERICAN ENTERPRISE INSTITUTE
WASHINGTON, D.C.

August 14, 1997

(As Prepared for Delivery)

THE LIGHT AT THE END OF THE TUNNEL VS. THE FOG:
DEREGULATION VS. THE LEGAL CULTURE

A year-and-a-half after the President signed a law that replaced a hundred years of monopoly in communications with a commitment to competition, we should ask: is it working? Will Congress and the President see their intentions come true? Will we get competition and deregulation in local telephone markets -- perhaps the largest remaining monopolized markets in our economy?

The answer is we have scarcely any competition in the local markets. The pace of investment and new entry is too slow; the success of our country's national deregulatory effort is jeopardized by the delays, missteps, and complexities of our legal culture.

Today I hope to describe some of the problems that our legal culture poses for rapid deregulation and some of the solutions that are possible.

As Jerry Mashaw of Yale Law School wrote in his brilliant book analyzing the failures of the 1966 Motor Vehicle Safety Act, "[L]egal culture...[is] expressed through the operation of judicial review, the separation of powers, 'federalism,' and associated 'checks and balances'."

And this legal culture, he wrote, determines the "ultimate success or failure" of any law that depends, as the Telcom Act must, on agency implementation.

As Mashaw explained, the Congressional intent behind the unanimously voted Motor Vehicle Safety Act was hornswoggled by the legal culture. While the courts debated every nuance of every phrase of the law and every jot and tittle of the expert agency's implementation, for each of the first 15 years after the law was passed about as many Americans were killed on the highways as died in the entire Vietnam War.

When it comes to legislation, between the thought and the deed falls the shadow.

The shadow is cast by the million lawyers of America. I praise, respect, and try to convince other countries to adopt the American system by rule of law.

But respecting the rule of law is different from admiring the delays of the legal process.

The Telcom Act described a paradise of open markets, free competition, deregulation and growth in the information sector that is already one-sixth of our economy.

In my mind's eye, I see Congress and the FCC together in that paradise like Adam and Eve -- we being the agency created by Congress like Eve from Adam's rib.

But now we two, like the First Family of Milton's Paradise Lost, are being exiled "hand in hand, with wand'ring steps and slow," from the Eden of promised deregulation into the harsh desert of the legal culture -- with its thousand devices of tortuous delay and tortured questioning of every phrase, word, and punctuation mark of the Telcom Act.

Professor Mashaw wrote that an agency must "understand how hostile the legal culture can be toward certain forms of regulation . . . ."

And I might add, how hostile the legal culture can be even toward deregulation.

I admit that Congress asked us to undo the state-regulated local monopolies by forceful rulemaking action, not by passivity or mere jawboning.

Hostility is a fair way to characterize the reaction -- from the telephone industry, from some states and even from the alleged new entrants, the long distance companies. An example: we dared order the long distance companies no longer to file tariffs with us. If they weren't regulated they'd actually be exposed to consumer lawsuits. So they got a court to enjoin us from deregulating!

I understand that for incumbent monopolists and other companies protected by regulation from market forces hostility may be a rational response to deregulation.

The problem is that the legal culture -- just as Mashaw taught -- validates that hostility, primarily by encouraging unceasing argument and ineffective delay-ridden decisionmaking.

Debates of interminable Jesuitical casuistry rage over the Congressional intent behind the word "cost" or -- my personal favorite -- the word "and", as in the phrase "business and residential."

I admire the lawyerly zeal that sees complexity behind these simple terms. Of course, that's because I am one of them -- I myself am a lawyer. Worse, I'm a son of a lawyer. So I appreciate lawyerly cunning that can fog the plainest Congressional intent.

But how can we find our way to free markets through all this lawyerly fog?

Even now the telcos and the long distance companies and many other parties, including often the states, appeal virtually every paragraph of every one of our decisions to various courts of appeals. Moreover, the appellate courts don't consolidate the appeals; they scatter them across the country.

And as if there weren't enough litigation, Southwestern Bell has hired a brilliant lawyer named Tribe to argue in federal court in Wichita Falls that the Telcom Act the company itself lobbied about for years is unconstitutional.

I have two questions. First, SBC has just discovered the Telcom Act is unconstitutional? They lobbied this law for a decade. A year-and-a-half after it was signed, they just found out it violates the Constitution?

Second, the Bells asked Congress for a date certain by which they could get into long distance. They wanted three years after the law was signed: that would be February 1999. This lobbying effort they actually lost. And now they are irate to the point of starting Tribal warfare because only half-way through their own proposed waiting period they haven't yet made a record of opening local markets that passes the tests of the law. Is this reasonable?

The fog, the fog!

Meanwhile, after getting the Eighth Circuit to enjoin our clear national rule defining "cost" so that fair and final interconnection agreements could be quickly reached, GTE's taste for litigation is unslaked. So far, by our count, GTE has filed 23 federal court actions challenging the pricing decisions of 23 state commissions.

Of course, eventually the Supreme Court will resolve all disputes and the path to competition will be clear.

But the excruciating delays of the legal process recall the lawsuit known as Jarndyce v. Jarndyce, described in Dickens' Bleak House. Let me read a bit from that great book, and ask you to think of the interconnection lawsuit Dickens could so easily have been describing:

This scarecrow of a suit has, in course of time, become so complicated that no man alive knows what it means. The parties to it understand it least; but it has been observed that no two ... lawyers can talk about it for five minutes without coming to a total disagreement as to all the premises....The little plaintiff or defendant, who was promised a new rocking-horse when [the case] should be settled, has grown up, possessed himself of a real horse, and trotted away into the other world.

I myself perhaps can find that horse and ride away, the Senate so permitting when it returns in September.

And so will many, while the interconnection litigation drones on.

But there has to be a better fate for our country's competition policy than Jarndyce v. Jarndyce.

Dickens also wrote: "Facts alone are wanted in life. Plant nothing else, and root out everything else."

So let me plant a handful of facts.

Fact number one: after years of effort by many states, such as Ohio, Wisconsin, Illinois, Oregon and others -- there is still scarcely any choice for telephone service in local markets. A year-and-a-half after the new telcom law, the new entrants to the local exchange markets of the U.S. have between one and two percent of total market share.

So far, scarcely any local competition has been delivered to residential or business consumers.

Fact number two: if our local telephone companies thought markets were truly open, at least one of them somewhere would be going into its neighbors' markets. For all intents and purposes, none of them is doing so.

And if local markets were truly open to competition, then all Bell companies in those markets would long ago have filed 271 applications for entry into long distance. Instead, only one Bell in one state, Ameritech in Michigan, has even tried to make a serious showing that one state is truly and fully open to competition -- and there, neither Michigan nor the Department of Justice yet agreed!

By the absence of serious 271's and by the absence of telco-to-telco competition, the local telephone industry in effect admits that not one state market is truly open to competition at this time.

Fact number three: the congressional intent to open local markets on a national level has never, not for a day, been completely put into action. And that has mattered a great deal.

Since the day the law was signed, the incumbents have been arguing for prices so high that the new entrants would be, in effect, paying off the incumbents' past investments. If new entrants are forced to do that, they won't have enough money to pay for their own investments. Result: poof! no competition.

There has never been a day when any new entrant could be assured that interconnection pricing and network sharing pricing could be counted on to be, and to remain, fair in any state or region of the country. That means prices that are forward-looking or, in other words, set by the formula called TELRIC (total element long run incremental cost).

Yet, at last count, only 11 states have issued permanent interconnection and element pricing rules.

Meanwhile, does it matter that the Eighth Circuit last Fall enjoined the FCC's fair prices from going into effect?

GTE told the Eighth Circuit last fall that if the FCC's pricing rules went into effect, GTE would suffer "substantial and rapid losses of market share."

In other words, they said the FCC pricing rule would cause competition right away. They got an injunction from the Eighth Circuit: poof! the prospect for rapid competition went away.

The result: the telcos have lost hardly any market share since the law was passed.

So the judicial intervention in the interconnection case hurt competition badly.

Fact number four: the existing competitive efforts in local markets are tiny fish that will not survive in the presence of the incumbent, formerly government-protected monopolist, whale-sized telcos -- unless state and national governments write and enforce pro-competitive rules.

All evidence suggests that as of now there is not effective enforcement of binding competition rules. And without that, competition will be undercut.

These are four key facts that tell us that we have a major challenge to introduce competition in the local telephone markets. And that challenge is not yet being met. Plainly investment in local competition is a necessity.

We need to promote investment by promoting rapid and wise decisions about how to open local telephone markets.

Justice delayed is investment denied.

Now I get to my most comforting fact, number five: legislation is not like the Ten Commandments.

The Commandments were brought down direct from the Supreme Being. They were not subject to judicial review. The tribes of Israel did not have divided jurisdiction over enforcing them.

Legislation is not so fine a thing. But legislation --- this is its saving grace -- is the work of mere humans and so mere humans can keep writing and rewriting it until courts finally submit to its direction.

So let us talk about how Congress could blow away the paralyzing fog the legal culture is spreading over the legislative and executive mandate to open the local markets.

Let us talk about how Congress, at least for this one fine law, might make sure its intent is truly realized.

I have four proposals for legislative action.

A. We need an immediate national definition of "cost" set forth by the FCC, so this key term won't vary confusingly and uncertainly from state to state.

Until the Eighth Circuit interconnection decision, no court in 60 years has issued a decision constraining this agency from defining terms in a congressional statute.

There is no doubt, however, that in a national law using the term 'cost' Congress intends a single national meaning for the term. The result of the Eighth Circuit decision is that up to 93 district courts will define the meaning of "cost" as they review hundreds of interconnection agreements. A dozen courts of appeal will then review these decisions. And if there is conflict among circuits ultimately -- years from now -- the United States Supreme Court will decide what "cost" means.

What fog this process will spew forth!

When Senators Lott, Hollings, Stevens and Inouye, and Congressmen Bliley and Markey told the Eighth Circuit that the FCC had the authority to define "cost," their words should have been treated by the courts as law. They were not. Now the law should be written to instruct the Court to follow the Senate Majority Leader by permitting the FCC to define the term now and have its definition respected by the courts, states, and parties.

B. The FCC should be given deference, as Supreme Court authority requires, for any reasonable interpretation of congressional intent and its application of policy.

In the 1984 case of Chevron v. Natural Resources Defense Council, the Supreme Court said that where "Congress has not directly addressed the precise question at issue, the [appellate] court does not simply impose its own construction on the statute." Instead, the Court said, an appellate court must affirm if "the agency's answer is based on a permissible construction of the statute."

But in the Eighth Circuit case, the court of appeals substituted its judgment for ours in striking down what it called the "pick and choose" rule, which we call the "nondiscrimination" rule.

The court of appeals "acknowledge[d] ... that the FCC's approach [could reasonably be said to be] intended by Congress." [fn. 22]

If that's so, then under Chevron we should have been affirmed.

Instead, the Eighth Circuit inserted its opinion for ours regarding how interconnection negotiations were likely to proceed, and reversed the FCC.

This decision is a recipe for delay, doubt, and uncertainty.

If the FCC reasonably interprets the Telcom Act, the courts should rapidly affirm, not deliberately secondguess.

Congress should specifically instruct the 8th Circuit that our interpretation of the statute on this subject was correct, and that Chevron should be followed strictly by all courts reviewing our decisions.

If Congress does not like our interpretations, it can change them. But courts should give us Chevron deference.

C. Judicial review of FCC decisions interpreting and applying the telcom act should not be piecemeal or delayed.

I am confident that we ultimately will prevail in the Supreme Court on the Eighth Circuit's decision concerning our interconnection provisions. But, similar litigation over the 1992 Cable Act just ended last month, after five years, and it might have gone on for another year if the cable operators hadn't decided to give up.

We need a faster, cheaper, way to get the legal issues of competition policy resolved.

I will propose that Congress consider passing laws that would consolidate all appeals of section 252 agreements and all review of FCC decisions in a single court, bar stays of our orders for more than 30 days, and require for all such review expedited briefing and decisionmaking.

D. No state or federal competition rule will be of value unless it's enforceable.

I applaud the new Illinois statute that requires resolution of interconnection-related complaints within 60 days.

I will propose to Congress that it impose a similar rule on the FCC and on all states. Those states that won't follow such a rule, would have to relinquish enforcement to the FCC. In addition, I will ask Congress to increase the sanctions available to the FCC. We should have treble damage relief, in addition to equitable remedies, for all violations of our rules.

Congress, its agency the FCC, the Administration, and the country want a private, investment-built information economy in which the states and the federal government have no further need to regulate investment, wholesale prices or retail prices.

Lawyers -- including both judges and recovering litigators, like me -- need to learn from business people the real world consequences of delay and uncertainty.

While courts spar with Congress and its expert agency, while NARUC sues the FCC and never ever files a brief in support of us, the fog of uncertainty spreads like the famous fog of London described by Dickens as a metaphor for Jarndyce v. Jarndyce.

And in that fog an entrepreneur misses a window for launching a new satellite venture.

A would-be new entrant watches an incumbent obtain first mover advantage in offering a new product line. A banker agrees to finance an established business, while turning down the entrepreneur on the ground that the competition rules aren't clear yet.

The result -- jobs are lost; money is wasted; choice does not come to the market; consumers are disappointed; productivity gains are not realized; other economies surge forward and we lose our edge.

These costs are real. They must always to be in our minds as we lawyers try to create a fair but efficient rule of law.

The competition policy of Congress should be realized by businesspersons solving economic and technological policies. It should not be tangled up by lawyers solving -- or creating -- word games about legislative intent.

Samuel Johnson said people disagree chiefly on means not ends. I'm sure we all agree on the ends of deregulation and competition. Let's work together in mutual respect to find more effective means.

- FCC -