The D.C. Circuit Upholds Removal of Legacy Investment Barriers

A decision by the D.C. Circuit on November 3 sets an important precedent for paring back 25-year-old forced-access regulation of communications networks. The court's ruling in Comptel v. FCC upheld the Commission's 2019 UNE Forbearance Order, which lifts certain legacy unbundling and resale requirements. Wireless and VoIP have long since eclipsed copper wire-based voice services, and the consumer benefits from intermodal competition made the old restrictions unnecessary. The D.C. Circuit's decision provides solid legal support for future agency actions to lift outdated regulations and encourage deployment of next-generation networks. 

The Telecommunications Act of 1996 requires incumbent local exchange carriers (ILECs) to make their facilities available to direct competitors at government-set rates. Back in the early 1990s, ILECs using copper wire-based Time Division Multiplexing (TDM) technologies were the dominant providers of local voice services. The 1996 Act's forced-sharing requirements, it was supposed, would enable competitors to lease capacity from ILEC facilities while building out their own facilities, thus leading to facilities-based competition among wireline voice providers. 

At issue in Comptel v. FCC was the Commission's decision in the 2019 UNE Forbearance Order to cease enforcing unbundling mandates regarding analog loops at government-set rates and to also cease enforcing its avoided-cost resale obligations. Under those obligations, ILECs must resell their retail service at wholesale, and at regulated rates, to their competitors.  

In reviewing the record, the D.C. Circuit observed the stunning difference in the voice service market today compared to more than two decades ago:

Rather than the near-complete monopoly that incumbents had as recently as 1996, now incumbents account for just 12% of all voice connections (both wired and mobile voice plans) and 37% of all wireline telephone connections (the subset of all voice connections that are physical rather than wireless—e.g., TDM copper, cable, and fiber). Lines sold through the unbundled copper loops account for less than 0.5% of all voice connections (less than 2% of wireline connections) and resold lines account for just over 1% of all voice connections (3% of wireline connections). Further, the Commission found that next-generation voice services like mobile phones and Voice Over Internet Protocol (VoIP) services are rapidly growing, whereas traditional copper wire voice services are declining in both market share and in absolute terms. 

Data released since the 2019 UNE Forbearance Order shows that consumers migration to wireless and VoIP services continues. According to an order released by the Commission on October 28 of this year: "Incumbent LECs' wireline voice subscriptions now account for… only 9% of all voice subscriptions across all technologies." Observing further migration in the residential and enterprise services markets away from TDM switched access lines, the order stated that "[t]he widespread deployment of 5G wireless networks will only accelerate this process."

 

Importantly, in Comptel v. FCC, the D.C. Circuit upheld the analytical basis for the Commission's deregulatory action in view of today's voice services market:

The Commission looked, reasonably in our opinion, at the whole national market for voice transmission, and the incumbents' share of that market is declining rapidly. Indeed, from the point of view of the incumbents, alarmingly. Far from the market behemoths the incumbents were in the late 90s, they look more like the sick men of the voice transmission market. Their copper wire advantage is of rapidly declining importance. It is myopic to look at the incumbents' possession of copper loops as giving them meaningful market power in the national voice market. And therefore what earthly economic reason would justify requiring them to provide their copper wire services to competitors at a subsidized price? 

Also important was the D.C. Circuit's unwillingness to limit the Commission's forbearance authority because that agency declined to grant deregulatory relief several years earlier. The D.C. Circuit rejected the notion that the Commission's 2010 Qwest Phoenix MSA Order precluded the grant of relief in the 2019 UNE Forbearance Order. As the court pointed out, the two orders and their contexts were decidedly different. Whereas the 2010 order denied forbearance relief from nationwide regulation in a specific geographic area using a different kind of market power analysis, the 2019 order granted nationwide relief based on an assessment of national market conditions that demonstrated vibrant intermodal competition. 

 

Citing the Supreme Court's decision in NCTA v. Brand X (2005), the D.C. Circuit acknowledged that "agencies are expected to reevaluate the wisdom of their policies in response to changing factual circumstances." According to the D.C. Circuit: "[h]ere, the FCC explained how the market had evolved and concluded—we think reasonably—that intermodal competition is now sufficient to discipline prices." And the court reiterated its precedents that the Section 10 forbearance authority imposes "no particular mode of market analysis or level of geographic rigor," as it leaves the Commission free to "tailor the forbearance inquiry to the situation at hand." 

 

As the D.C. Circuit stated, "our precedent and Commission precedent is clear: the Commission may forbear to encourage the deployment of next-generation facilities." Indeed, the decision in Comptel v. FCC should encourage future exercises of the Commission's unique forbearance authority to clear away legacy telecommunications regulation. The nation's gigabit and 5G future – and consumer welfare – depend on competing communications providers investing in their own facilities rather relying on forced access regulation and government price controls.