A Tough Act to Follow? A Tough Act to Follow? The Telecommunications Act of 1996 and the Separation of Powers Harold W. Furchtgott-Roth The AEI Press Publisher for the American Enterprise Institute WASHINGTON, D.C. Distributed to the Trade by National Book Network, 15200 NBN Way, Blue Ridge Summit, PA 17214. To order call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries please contact the AEI Press, 1150 Seventeenth Street, NW, Washington, DC 20036 or call 1-800-862-5801. Library of Congress Cataloging-in-Publication Data Furchtgott-Roth, Harold W. A tough act to follow : the Telecommunications Act of 1996 and the separa- tion of powers / Harold Furchtgott-Roth. p. cm. Includes bibliographical references. ISBN 0-8447-4235-X (alk. paper) 1. Telecommunication policy—United States. 2. United States. Telecommuni- cations Act of 1996. 3. United States. Federal Communications Commission. 4. Separation of powers—United States. 5. Telecommunication—Law and legislation—United States. I. Title. HE7781.F87 2006 384.0973—dc22 2005030557 10 09 08 07 06 1 2 3 4 5 © 2006 by the American Enterprise Institute for Public Policy Research, Wash- ington, D.C. All rights reserved. No part of this publication may be used or repro- duced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not neces- sarily reflect the views of the staff, advisory panels, officers, or trustees of AEI. Printed in the United States of America To Diana Contents ACKNOWLEDGMENTS xi INTRODUCTION 1 The Natural Experiment of the Telecommunications Act of 1996 2 Structure of the Book 3 1. SEPARATION OF POWERS AND DASHED EXPECTATIONS 5 History of the Separation of Powers 6 The Other Benefits of Separation of Powers 8 The Rule of Law 9 Reinforcement of Democratic Institutions 10 The Efficiency of Governmental Services 10 Isolated Agencies without Separation of Powers 11 A Charmed Life 12 Separation of Powers Matters, Even in Isolated Agencies 13 2. THE ANCESTRY OF THE FCC 15 Expansive Power under the Communications Act of 1934 15 Concentration of Powers and the FCC 17 The FCC Evolves over Time 19 Congress Considers Revising the Communications Act of 1934 20 The Consent Decree Problem 21 The Unending Bureaucracy Problem 23 The Technology Retardation Problem 24 The Antitrust Problem 25 The False Scarcity Problem 26 The Cost-Accounting Problem 27 vii viii A TOUGH ACT TO FOLLOW? The Cable Problem 27 The “Public Interest” Problem 29 Subtle Problems 30 3. THE TELECOMMUNICATIONS ACT OF 1996 31 Solutions 31 February 8, 1996 33 A Triumph of Individuals over Government 34 August 8, 1996 35 No Branch of Government to Discipline the FCC 36 The Bubble Bursts 37 Causes of Boom and Bust 39 Benign Explanations 39 Bad Behavior 40 Bad Implementation of a Law 41 The Core of the Problem 42 4. THE COURTS AND THE ADMINISTRATION WILL NOT DISCIPLINE THE FCC 45 The Supreme Court Holds That Congress, Not Courts, Must Discipline the FCC 46 Iowa Utilities Board Sanctions FCC Discretion as Residual from the Communications Act of 1934 47 Chevron Deference Reinforces Combined Powers of Government 49 Despite the Courts, the FCC Limits Speech 53 The Administration Will Not Interfere with the FCC 54 The FCC Is Left Alone to Divine Congressional Intent 55 5. CONGRESS WILL NOT DISCIPLINE THE FCC 59 Congress Is Ill Equipped to Discipline the FCC 59 Congress Has Limited Means to Ensure That Its Intent Is Carried Out 60 The FCC Provides Plausible Deniability to Congress 66 The FCC Cannot Discipline Itself 67 6. INDIVIDUALS DO NOT OR CANNOT DISCIPLINE THE FCC 69 Problems Associated with Insulation from the Public 70 Unresponsiveness to Citizen Concerns 71 CONTENTS ix A Hidden Tax 72 Merger Reviews 73 The Exception That Proves the Rule 74 Combined Powers Make Individuals Reluctant to Take Disputes to the FCC 76 7. SLOPPY RULEMAKING 78 Rules That Kept Power at the FCC for Enforcement and Adjudication 79 A History of Written and Unwritten Rules Facilitates Sloppiness 80 The “Public Interest” as Authority 81 Hidden Taxes 82 A Poor Track Record in Court Has Done Little to Improve Rulemaking 84 Consequential Costs for Both Businesses and Consumers 89 Combination of Powers and Sloppy Rules 91 8. UNPREDICTABLE FCC RULES AND COMMUNICATIONS LAW 92 Uncertainty and Delays from Sloppy Rules 93 Uncertainty of Enforcement 98 Uncertainty of Adjudication 99 Loss of Valuable Time 100 The Costs of Negotiations and Settlements as a Result of Uncertainty 102 9. AN APPEARANCE OF DISCRIMINATORY TREATMENT BY THE FCC 104 Discriminatory Enforcement 105 Methods of Detection 105 Standards of Enforcement 108 Discriminatory Adjudicatory Proceedings 109 Merger Review Activities at the FCC 109 BOC Section 271 Reviews 116 Waivers 118 The CALLS Proceeding 119 x A TOUGH ACT TO FOLLOW? 10. THE MIRACLE OF COMPOUND INTERESTS 125 Auctions 126 Peculiar Financing 127 The C Block 128 A New FCC—Where There’s a Will There Must Be a Way 130 The Market Turns 132 Eureka! 133 Regulatory vs. Fiduciary 135 Collateral Damage 136 Re-auction 138 The D.C. Circuit Court Opinion 141 Welcome to the Sausage Factory 142 The Market Collapses Again 143 CONCLUSION 145 Results of the Natural Experiment 146 A Cautionary Tale 147 Failure to Separate Powers 148 How to Improve the Situation 150 APPENDIX 152 NOTES 158 INDEX 181 ABOUT THE AUTHOR 193 Acknowledgments Many people have made this book possible, particularly my colleagues and friends at the American Enterprise Institute. I wrote the manuscript while I was a visiting fellow at AEI from June 2001 through March 2003. They have patiently waited for this book, and supported my efforts. Chris DeMuth, the president of AEI, has been more patient and provided better guidance than I had any reason to expect. Some colleagues have suggested that I should update the book to reflect the many decisions and court defeats at the Federal Communications Com- mission since I completed research in late 2002. I can only plead laziness for not having done so. One of the tests of the value of an idea, however, is whether it holds over time. My conclusion, that separation of powers is a critical issue at the FCC, is no less true today than it was in late 2002. More recent evidence would corroborate, but not change, that conclusion. Heather Dresser of AEI assisted me with the book in many different ways ranging from careful research assistance to coordinating the efforts of others who helped with parts of it, including Eliot Joel Rushovich of Har- vard University. In addition, Simone Berkowitz of the Brookings Institute provided valuable research assistance. I have learned much from my years of federal government service, both as a staff member and as an appointed official. To my colleagues at the Commission, I owe a debt of thanks. Bill Kennard, Susan Ness, Michael Powell, and Gloria Tristani both taught and tolerated me. The FCC staff taught me even more. Government employees are a hardworking, dedi- cated group. The problems of government, such as they are, are not the fault of staff. The FCC attracts many of the finest public servants. Neither the honesty nor the work ethic of the FCC commissioners and staff is at issue. Any group of people placed at the FCC will suffer from the structure xi xii A TOUGH ACT TO FOLLOW? of the agency; government simply cannot perform well without separation of powers, regardless of who is in it. These individuals are placed in an untenable position; they and the FCC can perform much better with a different agency structure. I have also learned from members and staff of the House Commerce Committee, including Chairman Tom Bliley, James “J. D.” Derderian, Michael Regan, Catherine Nolan, Justin Lilley, Ed Hearst, David Cavicke, and others. I owe a particular debt to my staff at the FCC. Paul Misener, Helgi Walker, Bryan Tramont, Rebecca Beynon, William Bailey, Robert Cailiff, Katie King, Ben Golant, and others taught me communications pol- icy and communications law. Kevin Martin not only taught me well but he later became chairman of the Federal Communications Commission. Any good ideas in this book can likely be traced to these and other individuals who have advised me over the years. I have doubtlessly inserted errors where I have not fully learned from what they taught. Those who know me well know that my memory is weak. Many indi- viduals helped refresh my memory on various matters, reviewed parts of the book, and gave valuable advice. The reviewers include several col- leagues at AEI: J. Gregory Sidak, Karlyn Bowman, Robert Hahn, and Chris DeMuth. Helpful comments also come from Robert Crandall, Thomas Hazlett, Bruce Owen, Bryan Tramont, William Trumbour, Jerry Udwin, and John Wohlstetter. To them I owe an enormous debt of gratitude. They made many suggestions to improve the manuscript. They also found many mis- takes in the book that I have attempted to correct; the remaining mistakes are of my own creation. Samuel Thernstrom managed both the publication of the book and the editing of the manuscript, which was done by Drew Helene and Lisa Ferraro Parmelee. Jenny Rowley of the Hudson Institute diligently found many of the footnotes. Introduction Congress rarely passes major new laws overhauling an agency. One recent example, however, was the Telecommunications Act of 1996 (the Act). That law substantially added to the responsibilities of the Federal Communications Commission (FCC), an independent agency that com- bines all of the powers of government.