Letter to Congressional Leaders

February 26, 2001

The following congressional leaders received the letter printed below: Senators John McCain and Fritz Hollings, Representatives Billy Tauzin and John Dingell.

Five years ago, Congress passed the Telecommunications Act of 1996, an Act designed “to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.” While there has been a great deal of debate about specific aspects of the Act’s implementation, the goals of competition and deregulation have — until recently — never been seriously questioned.

In recent weeks, however, some telecommunications companies have advanced ideas that call into question the Act’s central premises and challenge its most basic goals. Specifically, the idea of requiring “structural separation” of local telephone companies into separate wholesale and retail companies has been advanced recently by AT&T Chairman & CEO Michael Armstrong as well as by others.

As analysts who have spent much time studying telecommunications policy issues, each of us has written and commented upon various aspects of the Telecommunications Act, and there are important disagreements among us on many specific issues. This said, however, we agree strongly and unanimously that the wholesale/retail break-up proposal would constitute a setback to the clear vision of the Telecommunications Act of 1996 to achieve competition in all telecommunications markets, including the local service marketplace.

Since 1996, competition in local telephone markets has increased significantly. Indeed, the FCC has concluded that competition has developed sufficiently in four states to allow entry by the former Bell Operating Companies in those states into the long-distance marketplace. The market for services to businesses is competitive in most if not all metropolitan areas. The FCC bases its current strategic plan on the conclusion that “vigorous competition” will exist in telecommunications markets within five years.

Implementation of the Act has not been without problems, and the difficulties now being experienced by certain Competitive Local Exchange Carriers (CLECs) are an unfortunate example. But the fact that some firms are performing poorly in the marketplace — despite numerous regulatory advantages — is hardly cause for returning to the failed model of regulated monopoly.

Make no mistake, the “structural separation” proposals now being floated are, virtually by definition, proposals to concede that the local loop indefinitely will remain a monopoly. Indeed, they are premised specifically on the idea that the local loop is an “essential facility” that cannot be duplicated and therefore must be made available to all at a government-regulated price. To accomplish this, the break-up proposals would turn the local infrastructure over to a so-called “loopco,” which, as a practical matter, would remain a regulated monopoly.

Mandatory wholesale/resale separation clearly is inconsistent with the vision of the Telecommunications Act. The Act envisioned that, after a transitional period and with non-structural “equal access” regulatory safeguards in place, facilities-based competition would develop in the local services marketplace, making traditional public utility-type regulation unnecessary. By contrast, the break-up proposal assumes that the services of the “wholesale” entity will continue to be subject to rate regulation and non-discrimination obligations for the indefinite future. The “wholesale-only” company would have little or no incentive to make the investments in local infrastructure that are necessary to maintain this country’s leadership in the Information Age, including the large investments necessary to provide innovative broadband services. Similarly, competitive carriers would have little incentive to invest in their own facilities as long as they are assured of “open access” to incumbents’ facilities at below-market rates.

Reasonable people can disagree over specific elements of the Telecommunications Act, and certainly there are grounds for criticizing the way the Act has been implemented by the FCC. But there is no basis whatsoever for rejecting the Act’s most fundamental premises or turning away from its central vision. Rather than taking a step that assumes re-monopolization of the telecommunications marketplace, we need to build on the progress that has already been made and stay the course of deregulation and competition Congress set just five years ago.

Thank you for your consideration of these comments.


Randolph J. May

Senior Fellow & Director of Communications Policy Studies

The Progress & Freedom Foundation

James Gattuso

Vice President for Policy and Management

Competitive Enterprise Institute

Adam D. Thierer

Director of Telecommunications Studies

The Cato Institute

Sean Duffy


The Commonwealth Foundation

Kent Lassman

Director of Technology and

Communications Policy

CSE Foundation

Jerry Ellig

Senior Research Fellow

Mercatus Center at George Mason University

David J. Theroux


The Independent Institute

*Affiliations are for identification purposes only