The Failure of Good Intentions: The WorldCom Fraud and the Collapse of American Telecommunications After Deregulation

Abstract

Seven years of attempted deregulation of telecommunications in the United States yield several lessons. First, the transactions costs of the regulatory process have grown since enactment of the Telecommunications Act of 1996. Second, if the Federal Communications Commission ("FCC') had used a consumer-welfare standard rather than a competitor-welfare standard when interpreting the Act, the agency's regulations on mandatory unbundling of local telecommunications networks would have been simpler and more socially beneficial. Third, despite its micromanagement of competition in local telecommunications, the FCC missed WorldCom 's fraud and bankruptcy. WorldCom's false Internet traffic reports and accounting fraud encouraged over-investment in long-distance capacity and Internet backbone capacity. Because Internet traffic data are proprietary and WorldCom dominated Internet backbone services, and because WorldCom was subject to regulatory oversight, it was reasonable for rival carriers to believe WorldCom's misrepresentation of Internet traffic growth. WorldCom 's accounting fraud may have destroyed billions of dollars of shareholder value in other telecommunications firms. In addition, WorldCom's misconduct may have been intended to harm competition by inducing exit (or forfeiture of market share) by the efficient rivals. Chapter 11 reorganization of WorldCom would further distort competition in the long-distance and Internet backbone markets. The FCC has a unique obligation to investigate the harm that WorldCom caused the telecommunications industry. If WorldCom is unqualified to hold its FCC licenses and authorizations, that legal conclusion would promptly, and properly, propel WorldCom toward liquidation.