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FCC “Third Way” Plan = Beginning of Big Government Broadband Era

by on June 17, 2010 · 4 comments

Today, the Federal Communications Commission (FCC) voted along party lines to adopt a Notice of Inquiry opening a new proceeding to regulate the Internet by reclassifying it under Title II of the Communications Act. FCC Chairman Julius Genachowski calls this his “Third Way” plan. In a PFF press release, I issued the following response:

In its ongoing ‘by-any-means-necessary’ quest to regulate the Internet via Net Neutrality mandates, Chairman Genachowski’s FCC continues to flaunt the rule of law and magically invent its own authority as it goes along. If this Chairman wants to bring the Net under his thumb and regulate broadband networks like plain-vanilla public utilities, he should ask Congress for the authority to pursue such imperial ambitions. As the law stands today, the FCC has no such authority. Indeed, the unambiguously deregulatory thrust of the Telecom Act of 1996 stands in stark contrast to Chairman Genachowski’s outdated vision for Big Government Broadband. The FCC stands on the cusp of killing one of the great deregulatory success stories of modern economic history by reviving the discredited regulatory industrial policies of the 19th Century. The revisionism about that epoch is dead wrong: Price controls and protected markets limited choice and stifled innovation. With the agency rolling back the regulatory clock in this fashion, today marks the beginning of the Internet’s “Lost Decade” of stymied investment, innovation, and job creation as all sides wage battle over the legality of reclassification and its implementation.

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Dunstan on Genachowki’s Third Way & the Looming Broadband Tax

by on May 12, 2010 · 7 comments

My dear friend, fellow space/IT/priavcy/communications lawyer and now PFF Adjunct Fellow Jim Dunstan just published this PFF paper, which I thought I’d share with you (PDF)

The FCC’s Title II “Lite” (as a Lead Balloon!) & the Looming Broadband Tax

by James E. Dunstan, PFF Adjunct Fellow, Progress Snapshot 6.9

FCC Chairman Genachowski has set forth his vision—a “Third Way”[1]—for overcoming the D.C. Circuit’s recent decision in the Comcast case concluding that the FCC lacked jurisdiction for sanctioning Comcast for allegedly blocking subscribers using peer-to-peer software or otherwise throttling bandwidth to heavy users.[2] The Court concluded that the FCC’s “ancillary jurisdiction” under Title I of the Communications Act was insufficient authority to step in and regulate Comcast’s broadband services.  Since then, all of the Washington telecommunications intelligentsia has speculated at the FCC’s next move.  Now we have it.

Chairman Genachowski’s “Third Way” is a form of Title II “lite,” where the FCC will reverse its prior decisions dating back decades that declare the Internet and broadband connections “information services,” and instead bifurcate the Internet into two segments: the “Internet” itself, and the “connections to” the Internet.  Under the “Third Way,” the FCC would continue to treat the “Internet” itself (whatever that actually means) as an “information service” (Title I) but declare all connections to the Internet to be “telecommunications services” (Title II).[3] Armed with a ten-page memo from his General Counsel,[4] the Chairman argues that this policy reversal is on sound legal ground and will instantly reverse the “problem” caused by the Comcast decision.

Setting aside the fundamental question of who caused this “problem” (a Federal Court of Appeals concluded that it was the FCC who violated the Communications Act, not Comcast), the Chairman’s “Third Way” may turn out to be a third rail, with the real potential for destroying the Internet as we know it. Continue reading →

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Broadband Baselines

by on April 1, 2010 · 0 comments

The national broadband plan drafted by Federal Communications Commission staff has a lot of goals in it. Goals for broadband infrastructure deployment include:

  1. Make broadband with 4 Mbps download speeds available to every American
  2. Over the long term, have broadband with 100 Mbps download and 50 Mbps upload speeds available to 100 million American homes, with 50 Mbps downloads available to 100 million homes by 2015
  3. Have the fastest and most extensive wireless broadband networks in the world
  4. Ensure that no state lags significantly behind in 3G wireless coverage
  5. Ensure that every community has access to 1 Gbps broadband service in institutions like schools, libraries, and hospitals

The plan also outlines a number of policy steps that the FCC and other federal agencies could take to help accomplish these goals.

So far, so good. But to truly hold federal agencies accountable for achieving these objectives, we need more than goals, measures, and a list of policy proposals. We also need a realistic baseline that tells us how the market is likely to progress toward these goals in the absence of new federal action, and some way to determine how much the specific policy initiatives affect the amount of the goal achieved.

Here’s what will happen in the absence of a well-defined baseline and analysis that shows how much improvement in the goals is actually caused by federal policies: The broadband plan announces goals. The government will take some actions. Measurement will show that broadband deployment improved, moving the nation closer to achieving the goals. The FCC and other decisionmakers will then claim that their chosen policies have succeeded, because broadband deployment improved.

But in the absence of proof that the policies cause a measurable change in outcomes, this is like the rooster claiming that his crowing makes the sun rise. Scientists call this the ” post hoc, ergo propter hoc” fallacy: “B happened after A, therefore A must have caused B.” (Brush up on your Latin a little more, and you’ll even find out what Mercatus means. But I digress.)

Enough abstractions. Let me give a few examples.

The first goal listed above is to ensure that all Americans have access to broadband with 4 Mbps download speeds. In his second comment on my March 17 “Broadband Funding Gap” post, James Riso notes that the plan acknowledges that 5 out of the 7 million households that currently lack access to 4 Mbps broadband will soon be covered by 4th generation wireless. That means coverage for 83 percent of the households that lack 4 Mbps broadband is already “baked into the cake.” 

Accurate accountability must avoid giving future policy changes credit for this increase in deployment, because it was going to happen anyway.  (Of course, policymakers need to avoid taking steps that would discourage this deployment, such as levying the 15 percent universal service fee on 4th generation wireless.) The relevant question for evaluating future policy changes is, “How do they affect deployment to the remaining 2 million households?”

Similarly, the goal of 50 Mbps to 100 million households by 2015 seems to have been chosen because cable and fiber broadband providers indicate that they plan to cover more than that many homes by 2013 with broadband capable of delivering those speeds (pp. 21-22). Future policy initiatives should get zero credit for contributing toward this goal unless analysis demonstrates that the initiatives increased deployment of very high speed broadband over and above what the companies were already planning.

If you think this point is so basic that it’s not worth mentioning, you haven’t read enough government reports. Post hoc, ergo propter hoc is endemic, and not just on technology-related topics. For example, both sides regularly display this fallacy whenever the unemployment figures get released: “Unemployment increased after Obama’s election, therefore his administration caused the unemployment.” “The recession started when Bush was president, therefore his administration caused the unemployment.” These are at best hypotheses whose truth, untruth, and quantititive significance needs to be established by analysis that controls for other factors affecting the results.

Just take this as an advance warning on reporting results of the national broadband plan: Tone down the triumphalism.  

Note: For those of you who just can’t get enough discussion of the national broadband plan, Jerry Brito and I will have a dialog on other aspects of the plan in a future podcast that will be available here on Surprisingilyfree.com.

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Elmo Rallies Toddler Support for FCC’s National Broadband Plan—But Should He?

by on March 30, 2010 · 3 comments

Just in case you missed Adam Thierer’s unhinged rant, My Swan Song Moment: I Will Take Elmo Hostage in the Name of First Amendment Freedoms!, you’ll want to go back and read it after watching this:

http://www.youtube.com/v/NUYaHBvVS5o&hl=en_US&fs=1& Not exactly a highpoint in the history of deliberative democracy or rhetoric (in the best sense), but I suppose it beats wading through the 376 page National Broadband Plan… Anyway, given all this talk about increasing funding for the Corporation for Public Broadcasting as a way of “saving media,” I do have to wonder: Just how far will we go in allowing taxpayer-funded muppets to rally public support for this (or future) administration’s policy agenda? I mean, if the White Houe had put Oscar the Grouch on national TV to lobby for health care socialization “reform” by explaining whatever trash-related chronic medial conditions are responsible for making him so darn cranky, I think some folks would rightly have been upset. Yes, I’m trying to be funny here but, seriously, where’s the line between harmless fun and… inappropriate use of taxpayer-funded resources for political purposes? I’m not sure. The administration probably crossed that line last September when President Obama gave a speech to kids and the Department of Education sent a proposed lesson plan to schools nationwide (later withdrawn) suggesting that pre-K-6 teachers have their students “write letters to themselves about what they can do to help the president.” But is Elmo’s meeting with Chairman Genachowski ok as a way of rallying kids—and, more importantly, their parents and everyone else who finds it cute—around a policy agenda? Any thoughts on where this line should be drawn?

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FCC Releases Executive Summary of Broadband Plan

by on March 15, 2010 · 0 comments

The FCC today released an executive summary of its National Broadband Plan, which is supposed to be delivered to Congress tomorrow.  Of course, executive summaries by their nature are brief and usually don’t explain the underlying logic and evidence supporting the conclusions. Here are a few highlights, some possible interpretations, and things to look for when the full plan gets released tomorrow:

Recommendation: “Undertake a comprehensive review of wholesale competition rules to help ensure competition in fixed and mobile broadband.” This could signal that the FCC plans to re-impose “unbundling” or “line sharing” regulations, which would require broadband companies to let competitors use their lines and other facilities at regulated rates. Such initiatives would likely undermine broadband deployment and investment.  Economic research by my GMU colleague Tom Hazlett and others finds that broadband investment, competition, deployment in the US took off only after the FCC eliminated line-sharing requirements. Christina Forsberg and I summarized a lot of this research here.

Recommendation: “Make 500 Mhz of spectrum available for broadband within ten years … Enable incentives and mechanisms to repurpose spectrum.” This is a fantastic recommendation. A Mercatus Center review of the costs of federal telecommunications regulations found that federal spectrum allocation, which prevents spectrum from being reallocated to uses that consumers value highly (like broadband), is by far the costliest federal regulation affecting telecom and the Internet. This recommendation indicates the FCC leadership would like to auction a lot more spectrum and share the proceeds with existing users (like broadcasters) in order to overcome resistance to reallocation. It’s not quite a market in spectrum, but it might be the closest the FCC can come.

Recommendation: “Broaden the USF contribution base to ensure USF remains sustainable over time.” Uh-oh. I’m not sure what this means, but if means that broadband subscribers will have to start payng into the FCC’s universal service fund (USF), watch out! Most economic studies find that consumer demand for broadband is very price-sensitive. That means if the FCC slaps broadband with universal service fees (which currently exceed 10 percent), we’ll see a big drop in broadband subscribership — maybe by 4-7 million subscribers. This is , of course, precisely the opposite of what the FCC wants to accomplish!

Recommendation: “Reform intercarrier compensation, which provides implicit subsidies to telephone companies by eliminating per minute charges over the next ten years…” Another excellent idea.  “Intercarrier compensation” refers to payments phone companies make when they hand traffic off to each other. Small, rural phone companies usually receive the highest per minute payments — as much as 15-30 cents per minute! This is a huge markup on long-distance phone service — another price-sensitive service!

Recommendation: Provide subsidies so that rural areas can have broadband with download speeds of 4 MB.  It will be interesting to read in the full plan where this 4 MB figure came from. Does it reflect the speed of service that a lot of Americans currently have, so these subsidies are just supposed to help equalize opportunities for rural residents? Or does it reflect some balancing of the costs and benefits of subsidizing broadband in rural areas?  Or is this a magic number experts believe subscribers need, regardless of the choices consumers actually make in the marketplace and regardless of what it costs?

The executive summary also lists a set of goals, such as ensuring that every American has the ability to subscribe to “robust” broadband service, having 100 million households with access to 100 MB broadband, and ensuring that the US has the fastest and most extensive wireless networks of any nation.  When the full plan comes out, look carefully at whether or how the FCC plans to measure accomplishment of these goals.  More importantly, look to see whether the FCC explains how it will quantify how much its own policies actually contribute to these goals over time. The FCC is famous for NOT doing these kinds of things, so let’s see if the broadband plan signals a new era in accountability.

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Railroading Broadband?

by on February 18, 2010 · 0 comments

FCC Chairman Julius Genachowski’s comparison of broadband with electricity in a speech this week has generated mixed reviews in the blogosphere. Manny Ju says that this shows Genachowski “gets it” — that he understands the transformational power of broadband and how it will come to be regarded as a ubiquitous necessity in the years ahead. Scott Cleland is more alarmed: “The open question here is electricity transmission is regulated as a public utility. Is the FCC Chairman’s new metaphor intended to extend to how broadband should be regulated?”

It may surprise some technophiles, but this kind of discussion even predates electricity. The advent of the railroads in the 19th century brought similar arguments.  Railroads were usually a heck of a lot cheaper way of hauling goods and people across land than the next best alternative at the time: wagons. Railroads were “The Next Big Thing” that no town could do without — especially if the town lacked access to navigable waters. Lawmakers handed out subsidies (often in the form of land grants), then regulated railroads to control perceived abuses, such as discriminatory pricing for different kinds of traffic or traffic between different locations. Henry Carter Adams, the godfather of economic regulation in the U.S., said all shippers deserved “equality before the railroads.” Even today, commentators lament the rural towns that people abandoned because they lacked rail access. Deja vu all over again! 

As long as we’re deja-vuing, let’s remember a few little problems America encountered down the railroad regulatory track:

  1. Subsidies created “excess capacity” — that is, more capacity than customers were willing to pay for. In some cases, subsidies attracted shady operators into the railroad business whose main goal was to get land grants or sell diluted stock offerings to the public, not build and operate railroads. 

  2. Regulation ended up caretlizing railroads and propping up rail rates, which faced downward pressure because of the excess capacity.

  3. When another low-cost, convenient alternative (trucking) came along in the 1930s, truckers got pulled into the cartel when they too were placed under Interstate Commerce Commission regulation to keep them from undercutting rail rates.

  4. Despite cartelization, by the late 1970s, 21 percent of the nation’s railroad track was operated by bankrupt railroads, even though the railroads had shed unprofitable passenger service to Amtrak earlier in the decade. Part of the reason was excessive costs: Because access to freight rail service was still considered a right, regulation prevented railroads from abandoning money-losing lines. Part of the reason was restraints on competition: The regulatory passion for “fair” pricing kept railroads from competing aggressively with each other or with truckers. When the Southern Railway introduced its 100-ton “Big John” grain hopper cars in the 1960s, for example, it couldn’t offer shippers lower rates in exchange for high volume until it appealed an Interstate Commerce Commission all the way to the Supreme Court.

By the late 1970s, a Democratic president, a bipartisan majority in Congress, and economists across the political spectrum agreed that railroad regulation needed a radical overhaul. Regulatory reforms made it easier for railroads to abandon unprofitable service, in many cases turning track over to new, lower-cost short lines and regional railroads. Prices for more than 90 percent of rail traffic were effectively deregulated. At the same time, Congress deregulated rates and entry on interstate trucking routes. This encouraged rail-truck competition and also allowed each mode to specialize in serving those markets it could serve at lowest cost.

Rail rates fell, and railroads came out of bankruptcy. The current system is hardly perfect, but most economic research suggests that most consumers, shippers, and railroads are much better off now than they were under the old regulatory system.  (For reviews of scholarly research on this, check out Clifford Winston’s paper here  or my article here.)

Will we repeat the cycle with broadband? I don’t know, but to this railfan, the current broadband debate is looking soooo retro — as in 19th century!

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FCC’s Genachowski Promises He’s Not Out to Regulate Net, New Media

by on February 10, 2010 · 12 comments

By Berin Szoka & Adam Thierer

We learned from The Wall Street Journal yesterday that “Federal Communications Commission Chairman Julius Genachowski gets a little peeved when people suggests that he wants to regulate the Internet.” He told a group of Journal reporters and editors today that: “I don’t see any circumstances where we’d take steps to regulate the Internet itself,” and “I’ve been clear repeatedly that we’re not going to regulate the Internet.”

We’re thankful to hear Chairman Julius Genachowski to make that promise. We’ll certainly hold him to it. But you will pardon us if we remain skeptical (and, in advance, if you hear a constant stream of “I told you so” from us in the months and years to come). If the Chairman is “peeved” at the suggestion that the FCC might be angling to extend its reach to include the Internet and new media platforms and content, perhaps he should start taking a closer look at what his own agency is doing—and think about the precedents he’s setting for future Chairmen who might not share his professed commitment not to regulate the ‘net. Allow us to cite just a few examples:

Net Neutrality Notice of Proposed Rulemaking

We’re certainly aware of the argument that the FCC’s proposed net neutrality regime is not tantamount to Internet regulation—but we just don’t buy it. Not for one minute.

First, Chairman Genachowski seems to believe that “the Internet” is entirely distinct from the physical infrastructure that brings “cyberspace” to our homes, offices and mobile devices. The WSJ notes, “when pressed, [Genachowski] admitted he was referring to regulating Internet content rather than regulating Internet lines.” OK, so let’s just make sure we have this straight: The FCC is going to enshrine in law the principle that “gatekeepers” that control the “bottleneck” of broadband service can only be checked by having the government enforce “neutrality” principles in the same basic model of “common carrier” regulation that once applied to canals, railroads, the telegraph and telephone. But when it comes to accusations of “gatekeeper” power at the content/services/applications “layers” of the Internet, the FCC is just going to step back and let markets sort things out? Sorry, we’re just not buying it. Continue reading →

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Some good ideas in the FCC's National Broadband Plan

by on December 17, 2009 · 2 comments

Good ideas, supported by evidence, eventually matter.

That’s the conclusion I reached after reviewing the outline the FCC’s broadband task force presented to the commission yesterday. Here are some ideas perceptive scholars have been discussing for a long time that are apparently going to be part of the National Broadband Plan:

  • “Private sector investment is essential; new funding is limited.” So I guess the Interstate Highway System won’t be the funding model for universal broadband. Whew!
  • “Policy changes require the consideration of unintended consequences.”
  • “Competition drives innovation and better choices for consumers.”
  • Wireless broadband needs a big new chunk of spectrum, and policymakers need to consider reallocating broadcast TV spectrum and spectrum reserved for use by the federal government.
  • “Market forces should be applied to all [spectrum] bands, though other policy objectives should play a role in allocation decisions.”
  • Fundamental reform of the Universal Service Fund, which subsidizes phone service very inefficiently, should actually be done, not just talked about.
  • Universal service reform should include reform of “intercarrier compensation,” the charges phone companies pay each other when they hand off traffic.
  • “USF policies should be designed to achieve measurable outcomes with transparency, oversight, and accountability.”

Most of these ideas were considered wacky, ideological, politically unrealistic, or just not relevant a few decades (or even a few years) ago.  Now they are the mainstream.

That doesn’t mean everything is wonderful with the National Broadband Plan. The FCC is supposed to plan how broadband will be used to promote consumer welfare, civic participation, public safety, education, health care, energy independence, community development, worker training, and a host of other legislative goals. In many cases there may be a fundamental tension between consumer welfare — a term of art in economics that means resources are allocated so that consumers get the selection of goods and services they are most willing to pay for, with the quality attributes they most prefer, at the best possible prices — and the other goals, which often involve planners deciding what consumers should want. Similarly, FCC Chairman Genachowski’s comments illustrate some decisionmakers’ disturbing tendency to conflate access (the service is available to those who want it) with adoption (everybody actually chooses to use it). Technophiles sometimes have an annoying habit of assuming that those of us who fail to adopt the latest info tech gadget or service must be ignorant rubes who don’t understand the glories of being hooked up to a fat information pipe 24/7 — rather than careful shoppers who have better things to do with our time than read Yahoo OMG! while driving. For this reason I fully expect to be annoyed by the National Broadband Plan, as well as gratified to see that some good ideas have finally made it from the Ivory Tower to real-world policy application.

But there’s enough good stuff in there to stick with “gratified” for at least one day.

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Is the FCC jumping the gun on broadband and the universal service fund?

by on December 2, 2009 · 0 comments

In a speech yesterday, FCC Chairman Julius Genachowski pledged to revisit the Federal Communications Commission’s universal service programs for telecommunications as part of the National Broadband Plan: 

 The key points for today are these: USF is a multi-billion dollar annual fund that continues to support yesterday’s communications infrastructure. The goal of universality is as important as ever — and to meet our country’s innovation goals, we need to reorient the fund to support broadband communications. This is a thorny issue, with no shortage of practical and statutory challenges. We need to wring savings out of the system, protect consumers, avoid flashcuts, while ultimately moving USF in the direction it needs to go to support our 21st century platform for innovation. 

The USF program spends approximately $7 billion annually. Most of the money goes to subsidize phone service in “high cost” areas. Eeuww – phone service.  So twentieth century! All of us who have not yet shifted 100% of our personal communications to Facebook and Twitter pay for the universal service fund via surcharges of about 12 percent on our wireless and  wireline phone bills, including VOIP. (Dirty little secret: you also pay for universal telephone service if you use a wireless broadband card, because each card is assigned a phone number.) 

Genachowski’s comment follows some rather interestingly-timed announcements from the FCC’s broadband task force. On November 13, the task force asked for public comment on the role the universal service fund and “intercarrier compensation” (another, more opaque set of transfers from consumers in general to rural phone companies) should play in the national broadband plan. Comments are due December 7. Five days after soliciting comments, on November 18, the FCC announced that the structure of the universal service fund is one of the “critical gaps” in the path to universal broadband.

I doubt the FCC has telepathically determined what the parties will say in the comments they file on December 7, but there’s no need to. The FCC has ground through so many rounds of comments on universal service reform that the problems and potential solutions are well-known. At a conference on universal service about five years ago, I recall one speaker commented, “Everything that can be said about universal service has already been said, but not everyone’s had a chance to say it, so that’s why we still have conferences on it.” About a year ago, the FCC almost used a court-imposed deadline as an opportunity to actually reform universal service and intercarrier compensation, but the commissioners failed to reach consensus.

Here are some major problems with the universal service fund, in no particular order:

  • It subsidizes voice phone service with built-in incentives for inefficiency on the part of providers.
  • It subsidizes wireless voice service without limiting the subsidy to one essential connection per household, so it has effectively created an entitlement to both wired and mobile phone service in rural areas.
  • The FCC does not measure or track the outcomes produced by the subsidies to see what they actually accomplish for the public. (Section 201 of the draft Boucher-Terry USF reform bill would require the FCC to adopt outcome-oriented performance measures.)
  • The contribution mechanism acts like a percentage tax that discourages use of price-sensitive services like long-distance, wireless voice, and wireless broadband.
  • The “death of distance” has slashed long-distance phone charges, which means wireless bears a growing percentage of the burden and the funding mechanism may well be unsustainable.

(For more detail on these issues, read the assortment comments on USF reform by various Mercatus Center colleagues and me here, here, here, here, here, here, here, here, here, and here. BTW, did I mention this issue has been beaten to death?)

So is the FCC jumping the gun, rushing to judgment on universal service before the comments are in?  Heck no. It’s about time.

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Did the White House review net neutrality regulations?

by on November 4, 2009 · 2 comments

As someone who follows the federal regulatory process, I was amazed to see this in a recent American Spectator post about White House technology advisor Susan Crawford’s return to the University of Michigan Law School:

But White House sources say that she ran afoul of senior White House economics adviser Larry Summers, who claimed he and other senior Obama officials were unaware of how radical the draft Net Neutrality regulations were when they were initially internally circulated to Obama administration officials several weeks ago … In the end, the proposed regulations were slightly moderated from the original language FCC chairman Julius Genachowski, a Crawford ally, circulated.

Unlike regulatory agencies that are considered part of the executive branch, the Federal Communications Commission is an “independent” regulatory agency — which means the president cannot fire its five commissioners. Before executive branch agencies can propose a regulation, it must be reviewed by the Office of Management and Budget’s Office of Information and Regulatory Affairs (OIRA). No administration has yet tried to bring independent agencies like the FCC under OIRA review.

Typically, congressional and private watchdogs scream bloody murder when they see the White House trying to influence independent agencies. But I haven’t heard any barking about this one.

Personally, I think independent agencies’ regulations should be subject to OIRA review. I don’t mind letting the president and his advisors have their say on regulations proposed by people he appointed. But I’d like to see it happen through the formal OIRA review process, where the public knows it’s happening and knows what the rules are.

For example: If you want to know which proposed regulations OIRA has reviewed, go here.  If you want to know the standards OIRA uses to review regulations, go here. If you want to know what outside parties have met with OIRA to discuss regulations, go here.

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