Did The High Court Reach An Economic Low In Verizon v. FCC?

Abstract

The Supreme Court's decision in Verizon v. FCC rests on two errant interpretations of the 1996 Telecommunications Act: First, the Act represents a new form of regulation rather than a deregulatory statute; Second, Congress intended that the playing field be tilted in favor of new entrants. Under the Chevron Doctrine, deference is given to the controlling federal agency if there is a "rational connection" between the regulations and statutory intent. The Court ruled that the FCC's implementation of the Act survives that scrutiny. This discussion contests that finding and argues that the FCC's regulations undermine the goals of the Act. IntroductionOn May 13, 2002, the U.S. Supreme Court issued its long-awaited decision in Verizon et al v. FCC et al ("Verizon v. FCC"). The Court focused on three primary issues: (1) The FCC's pricing rules for unbundled network elements; (2) Whether the exclusion of historical costs in the pricing rules constitutes a governmental taking; and (3) Various rules for combining network elements. This discussion is focused primarily on the economic implications of the FCC's costing standards -which the Court upheld -and secondarily on the takings claim -which the Court ruled was not yet "ripe". The Court's decision in Verizon v. FCC has been widely regarded as a stunning victory for the competitive local exchange carriers (CLECs) and a stinging defeat for the incumbent local exchange carriers (ILECs). The real loss with this decision, however, is likely to be the one borne by consumers. Indeed, the Court's decision in Verizon v. FCC set a troubling precedent -one that is destined to frustrate the goals of the 1996 Telecommunications Act ("the Act") and injure the competitive process in ways that we have yet to fully comprehend. * Mailing address: Department of Economics, Waters Hall, Kansas State University, Manhattan KS, 66506-4001 U.S.A. E-mail: weisman@ksu.edu. The author is grateful to Dale Lehman and Timothy Tardiff for thought-provoking discussions and helpful comments. A special debt of gratitude is due Fred Kahn for illuminating discussions and constructive commentary on an earlier draft of this manuscript. The usual caveat applies. The author presented expert testimony in state arbitration cases on behalf of one of the Bell Companies concerning some of the issues discussed herein.

Pricing Network Interconnection: Advantages Held by Integrated Telecom Carriers

“…96-98 (August 8, 1996). 6 There is considerable disagreement as to whether the Act and/or sound economic reasoning does/should require Telric to be computed on actual or best practice (efficient firm) costs (see Sidak and Spulber, 1997;Weisman, 2002;Tardiff, 2002). The interconnection issues addressed in this paper apply regardless of the cost basis.…”

Incentive Regulation of Prices When Costs are Sunk

“…It allows the regulated firm to collect revenue based upon the costs faced by a hypothetical "efficient" replacement firm, thereby exposing regulated firms to the additional risk that capital prices and demand, and therefore allowed revenue, will fall in the future. For example, the FCC's starting point in its TELRIC calculation is the cost structure of an efficient cost-minimizing firm with an optimally configured network built with the current technology (Weisman, 2002). We present a model featuring uncertain future demand and capital prices, irreversible investment, economies of scale in investment, and a regulator who sets the firm's output price at discrete intervals.…”

Incentive Regulation of Prices when Costs are Sunk

“…Modern incentive regulation allows regulated firms to collect just enough revenue to cover the costs faced by a hypothetical 'efficient' replacement firm, thereby exposing regulated firms to the additional risk that capital prices, and therefore their own allowed revenue, will fall in the future. For example, the FCC's starting point in its TELRIC calculation is the cost structure of an efficient cost-minimizing firm with an optimally-configured network built with the current technology (Weisman, 2002).…”