Monday, March 31, 2008

Bearing in Mind Forbearance's Purpose

There has been a lot of discussion the past several months about the FCC’s exercise of its forbearance authority. This is the authority granted to the FCC in the Telecom Act of 1996 that requires the agency, consistent with making certain consumer protection and public interest findings, to “forbear” from applying to telecommunications carriers an agency regulation or statutory provision that otherwise applies. Note that the forbearance provision in the ’96 Act says the FCC “shall forbear,” not may forbear, if the requisite determinations are made.

Given what Congress described as the ’96 Act’s “deregulatory” purpose, it has seemed to me for quite some time that the Commission has been much too sparing in its use of its forbearance authority. After all, grant of such authority is a rarity, seldom found in other regulatory statutes. It is unlikely that Congress intended the provision, titled “Regulatory Flexibility,” to be mere window-dressing.

Be that as it may, there are always some close cases, ones at the margin, which reasonably can be argued either way. Fair enough. I do not suggest that the Commission should assume a posture of granting all forbearance petitions willy-nilly.

By the same token, there are some cases that ought not to be close, that are not at the margin. With respect to these, the Commission should bear in mind forbearance’s purpose, and act accordingly.

The FCC has pending before it such a case. In January 2007, AT&T filed a petition asking the Commission to forbear from applying the agency’s decades-old cost assignment rules. The FCC must act on the petition by the last week in April.

Simply put, today’s competitive marketplace environment, coupled with a changed regulatory regime, means that the FCC’s cost allocation rules no longer serve a useful purpose. The rules were devised back in the days when AT&T and other telephone carriers, considered dominant in the marketplace, were subject to rate-of-return regulation which tied a carrier’s rates to its costs. The cost allocation rules assigned costs to different service categories (for example, MTS, WATS, private line) in an attempt to ensure that no service earned more than the authorized rate-of-return and to prevent cross-subsidization among the various service categories.

(Even during rate-of-return regulation’s heyday, devising and then applying the cost assignment rules was always highly problematical. For anyone interested in a research project with historical insights into the nitty-gritty difficulties of traditional public utility regulation, I refer you to the FCC’s decades-long efforts in Docket 18128 and the follow-on Interim Cost Allocation Manual proceedings. The purpose of these proceedings was to establish workable and proper cost allocation rules. Over many years, for example, Docket 18128 explored at least seven different “fully distributed cost (FDC) ” allocation methodologies proposed for AT&T before being ditched around 1980 in favor of the “interim” cost allocation manual. The differences between FDC-1 through FDC-7 methodologies were quite subtle, to put it nicely.)

In any event, when the FCC abandoned rate-of-return regulation in favor of price cap regulation in the early 1990s, the rationale for maintaining in place the elaborate set of cost allocation rules applicable to AT&T evaporated. This is because, unlike under rate-of-return regulation, price cap regulation rates are not tied to the costs of providing service. Rather, consumers are protected because prices are capped. And carriers have an incentive to operate more efficiently because they are allowed to profit from cost savings achieved.

Thus, with rate-of-return regulation abandoned by the FCC and the states covered by AT&T’s petition, applying the cost allocation rules no longer serves a useful regulatory purpose. With price cap protections in place, continued application of the cost allocation rules is certainly not necessary to protect consumers. Even aside from the operation of the price cap regime, increasingly vigorous and ubiquitous marketplace competition protects consumers from unreasonable prices. Moreover, the direct and indirect costs incurred in applying the FCC's allocation rules certainly outweigh any benefits.

In sum, in my view, the Commission has been much too sparing in availing itself of the forbearance tool that Congress gave it in the ’96 Act to reduce regulation in light of changed marketplace conditions. Whether or not one agrees with that general assessment, granting AT&T’s petition should be an easy call for the Commission. The FCC should forbear because it should be for burying the regulatory relic of cost allocation rules.