Adam D. Thierer *

What role should federalism, devolution, and "states' rights" play in America's telecommunications marketplace as we approach the 21st Century? This is not really a new question, of course. In fact, this question has been debated tirelessly throughout this century with widely varying answers being offered by policy makers, jurists, and academics.

Historically, jurisdictional boundaries in the universe of telecommunications regulation have never been well defined. There was never any logical design to the system of jurisdictional regulation for this industry. Most historical accounts of the development of communications regulation in America make it clear that the rules of the regulatory road were essentially made up as we went along in an attempt to appease warring sets of federal, state, and local legislators and regulators.

In essence, these policy makers "split the baby" by devising crude rules of thumb and ad hoc power-sharing arrangements in a process that may best be labeled "spontaneous disorder," to borrow a phrase from the school of Austrian economics. The "separations" process, federal-state joint boards, and the post-AT&T divestiture LATA system, are just a few of the many examples of this regulatory ad hockery in practice. Essentially, every communications service under the sun has been forcefully pigeonholed into strict, but rarely logical categories: interstate vs. intrastate; federal vs. state; inter-LATA vs. intra-LATA; and so on.

As numerous industry experts have noted, however, this is not always the way the real world works. For example, economist Roger Noll argued in 1988, "The notion that there is a meaningful technical and economic distinction between federal and state services was always a fiction, but it has become increasingly so." In a similar vein, political scientist Paul Teske has noted that, "[T]he separation between [interstate and intrastate] does not neatly follow network boundaries or the emergence of newer services, leading to legal battles over jurisdictional authority."

And legal scholars Michael K. Kellogg, John Thorne, and Peter W. Huber, authors of Federal Telecommunications Law, maintain that attempting to partition regulatory responsibility along strict geographical lines is tantamount to "dividing the indivisible," since "[t]he fundamental problem with this verbally neat division of the regulatory turf is that nothing in telephony is purely intrastate, nor would many telephone users wish it to be. The same telephones and most of the same wires and switches are used for both intrastate and interstate activity." This leads the authors to conclude that, "There is, indeed, a fundamental paradox in the idea that a service whose entire purpose is to obliterate distance and transcend geographic boundaries can be regulated by dual authority divided along strictly geographic lines."

So if lawyers, economists, and political scientists agree generally that the system is flawed, what then do they suggest we do about it? Regrettably, few good solutions have been forthcoming. This is unfortunate since the need to find a satisfactory resolution to this issue is more pressing today than ever before.

In the past, regulators were only able to neatly compartmentalize telecom services into geographically-defined boxes because the monopolistic industry was willing to cut such deals in return for guaranteed profits and protected markets. But with the proliferation of new industry segments and companies, the advent of vigorous cut-throat competition for consumers, and the remarkable technological innovations of recent years, policy makers will no longer be able to convince this industry or its consumers that the old rules of the road will work as we head into the 21st Century.

Placing boundaries on the boundless makes little sense and makes no one happy. Telecom companies want to be free to offer consumers the broadest range of services, under a single brand name, at the lowest price possible. For these reasons, the somewhat illogical and oftentimes unworkable regulatory distinctions and systems of the past need to be rethought. Which leads to an obvious question: if the aim of the communications revolution is to transcend boundaries and make geographical location irrelevant (or at least less relevant), then what role will states and localities play in the future?

In a recent Heritage Foundation book entitled, The Delicate Balance: Federalism, Interstate Commerce, and Economic Freedom in the Technological Age, I outlined a framework to help resolve at least some of the problems created by the regulatory arrangements of the past. I do so in such a way that respects both the need for a vigorously competitive national marketplace and the right of states and localities to tailor policies to the desires of their communities.

Needless to say, for the reasons listed above, striking such a balance for the communications sector is not an easy task. In fact, it's downright messy. Nonetheless, by applying some time-tested legal tests, and asking some rather straightforward questions about what is the most sensible and efficient legal framework for this industry, a more intelligible, and less arbitrary paradigm emerges.

For example, here are a few of the questions policy makers should be asking to help determine what jurisdictional / regulatory arrangements will work best in the future:

• Does the service or activity in question clearly fall under the rubric of "interstate commerce" which might, therefore, make it the subject of at least some minimal form of federal oversight? Or is it confined entirely within the boundaries of a state? And is it really commerce at all?
  
  
• Are states or localities undertaking regulatory activities that have substantial interstate spillover effects on interstate companies or consumers? Similarly, are state or local actions imposing negative externalities on tightly integrated national or global communications networks?
  
  
• Do historical regulatory arrangements serve to promote competition or diminish it? Enhance innovation or limit it? Allow greater customer choice or restrict it?
  
  
• Could federal and state regulators swap certain oversight functions to encourage greater flexibility and experimentation?
  
  
• Could states enter into interstate compacts to achieve a more efficient legal regime for national carriers and simultaneously head off calls for federal intervention?
  
  
• What is the precedential (stare decisis) value of Court holdings in this field? Have Court decisions restrained commercial development or protected economic liberty?

Of course, even when legal tests such as these are employed, it is not always easy to answer questions of who should be regulating what in the telecom universe. But therein lies the rub. Too great a focus on improving the operational efficiency of the current regulatory system misses the more important point: there is simply too much regulation at all levels of government in America today.

America needs less of the federal government in telecommunications, less of state governments in telecommunications, less of city and county governments in telecommunications, less taxing authorities in telecommunications—basically, less government across-the-board. Constantly arguing over which level of regulatory oversight will guarantee optimal outcomes is like arguing over what constitutes a less painless way to kill ourselves. So long as this industry is constrained by volumes of law and regulation—whether federal, state or local in character—this market will never be truly competitive, efficient, or consumer-friendly.

Believers in federalism should stop their endless bickering about which level of government gets a bigger slice of the telecom pie and instead find ways to make sure that all these regulators can never get their fingers in the pie again. Instead, a unified call for across-the-board deregulation is in order. While unilateral disarmament would not be a good policy to safeguard our national security, it is exactly the type of medicine needed to correct the problems of the modern communications industry and help minimize the seemingly endless fight regarding jurisdictional responsibility. The goal should be to maximize the liberty of individual communications consumers so that they may purchase any type of communications product or service they desire from whomever they want, whenever they want, however they want.

Make no doubt, this will mean that federal officials will need to continue to exercise a small degree of oversight over the industry, but this oversight should be harmonizing in nature. The goal of federal telecommunications policy should be to provide clear and simple rules of the road for any company that wants to offer services to customers.

Optimally, federal legislators would borrow a page out of the pages of trade law and adopt the equivalent of a "Most Favored Nation" (MFN) clause for telecommunications. That is, Congress could pass a simple one-line statute that read: "Any communications carrier seeking to offer a new service or entering a new line of business, should be regulated no more stringently than its least regulated competitor."

Such an MFN for telecommunications would ensure that regulatory parity exists within the telecommunications market as the lines between existing technologies and industry sectors continue to blur. Placing everyone on the same deregulated level playing field should be at the heart of telecommunications policy to ensure non-discriminatory regulatory treatment of competing providers and technologies at all levels of government.

It is important to note, however, that such a policy will require a limited dose of preemption to protect the lanes of interstate commerce. For example, federal authorities will have to: (1) ensure that states and localities are not prohibiting new companies or emerging industry segments from offering alternative services; (2) ensure that wireless companies can deploy their technologies to consumers who demand them; (3) shield the Internet from unwarranted parochial regulation and taxation; and, (4) establish minimal rules for international trade in communications goods and services. Such preemption should be strictly limited and abide by the legal tests outlined above to ensure the federal authorities do not overstep their constitutional confines.

Importantly, however, this certainly does not mean that the states and localities will no longer have an ongoing role to play. In fact, there are many tasks that should remain exclusively within the purview of state or local governments. Zoning policy and rights of way oversight are a good example. Localities should retain the right to determine their own land use policies so long as those policies do not unjustly interfere with the ability of communications carriers to provide interstate services.

And any universal service safety net policies that remain should be completely devolved to local authorities. Lifeline telephone assistance can be better targeted at the community level. And, to the extent governments should be involved in attempts to wire the schools at all, such programs should be undertaken at the most local level of government possible since educational policy has traditionally been a local matter. The recent creation of The Schools and Libraries Corporation (the "e-rate" program) is a good example of a jurisdictional responsibility that has been unjustly usurped from state and local officials by the FCC. All federal universal service or school wiring programs should be devolved immediately.

Finally, and more hopefully, the states should begin investigating ways to eliminate any cumbersome intrastate regulations that remain, and even consider sunsetting their Public Service Commissions (PSC) or at least the portion of their PSC that regulates communications since it is becoming increasingly irrelevant and unnecessary.

In conclusion, two simple rules should guide future discussions regarding the interplay of federalism and telecommunications:

1. State or local officials may act whenever their actions will not substantially hinder, restrict, or unjustly interfere with the free flow of commerce across state boundaries; and,
   
   
2. Federal officials may only act pursuant to their constitutionally enumerated responsibility of protecting and making regular the flow of commerce in the interstate marketplace.

Of course, each individual case and controversy will be unique, and few debates involving jurisdictional boundaries in the telecommunications industry will ever be so neatly resolved in such black-and-white terms. The difficulty we face in trying to resolve such federalism disputes was perhaps most succinctly and appropriately summarized by Chief Justice William Rehnquist in United States v. Lopez (1995) when he concluded, "These are not precise formulations, and in the nature of things they cannot be."

* Adam D. Thierer is the Walker Fellow in Economic Policy at the Heritage Foundation in Washington.