Federalism and the Telephone: The Case for Preemptive Federal Deregulation in the New World of Intermodal Competition

Abstract:     
The Constitution's Commerce Clause was written to rescue commerce from the embarrassing and destructive consequences of parochial regulation by multiple States. The authors - whose litigation practice and government experience involves the principles of federalism - believe that the 18th century insights of the Constitution's Framers have much to offer contemporary telecom policymakers. Interstate commerce must be federally regulated, and the most natural subjects for exclusive federal regulation are network industries - trucking, railroads, airlines - whose operations and markets span multiple state borders. Congress has recognized this by preempting inefficient state-by-state regulation when an industry's network became interstate in nature, and then deregulating the industry entirely when its network had matured to the point where the forces of competition could be relied upon to operate freely. This same regulatory (and ultimately deregulatory) model has been applied with stunning success to major segments of telecommunications, including cellular phones, long-distance service, and broadband Internet access. Traditional wireline telephone service, however, remains hobbled by the vestiges of state-by-state regulation. There is little, if anything, about today's wireline telephone networks that is truly local and that could therefore justify the inertial perpetuation of state-by-state regulation. The computer servers, databases and switches that make up wireline telephone networks are located thousands of miles from the millions of callers they serve. More importantly, the major telecommunications media - wireline, wireless and cable - now compete against each other in a rapidly converging, unitary market for voice, data and video entertainment services. When the Telecommunications Act of 1996 opened up local wireline telephony to competition but perpetuated state-by-state regulatory supervision, neither cellular telephones nor cable telephony nor the Internet constituted genuine competition for traditional local telephone service. That is no longer the case. Preemptive federal deregulation has allowed wireless and broadband to attract the investment and innovation that have fueled explosive growth, and this profound shift in the competitive structure of the telecommunications industry warrants similar federal deregulation of local wireline phone companies. Dramatic changes in network technology and intermodal competition have made state-by-state regulation an inefficiency that our national economy can no longer afford to indulge.

Keywords: telecom, telecommunications, federalism, telephone, telephony, Commerce Clause

Working Paper Series