Herman on Regulatory Capture

OK, last post on the Herman paper. I’m especially pleased that he took the time to respond to my “regulatory capture” argument, because to my knowledge, he’s the first person to respond to the substance of my argument (Most of the criticism focused on my appearance and my nefarious plot to impersonate the inventor of the web):

Timothy B. Lee insists that BSPs will have more sway than any other group in hearings before the FCC and will therefore “turn the regulatory process to their advantage.” He draws from a vivid historical example of the Interstate Commerce Commission (“ICC”), founded in 1887. “After President Grover Cleveland appointed Thomas M. Cooley, a railroad ally, as its first chairman, the commission quickly fell under the control of the railroads, gradually transforming the American transportation industry into a cartel.” Yet this historic analogy, and its applicability to the network neutrality problem, is highly problematic. Even the ICC, the most cliché example of regulatory capture, was not necessarily a bad policy decision when compared with the alternative of allowing market abuses to continue unabated. One study concludes “that the legislation did not provide railroads with a cartel manager but was instead a compromise among many contending interests.” In contrast with Lee’s very simplistic story of capture by a single interest group, “a multiple-interest-group perspective is frequently necessary to understand the inception of regulation.”

Herman doesn’t go into any details, so it’s hard to know which “market abuses” he’s referring to specifically, but this doesn’t square with my reading on the issue. I looked at four books on the subject that ranged across the political spectrum, and what I found striking was that even the ICC’s defenders were remarkably lukewarm about it. The most pro-regulatory historians contended that the railroad industry needed to be regulated, but that the ICC was essentially toothless for the first 15 years of its existence. At the other extreme is Gabriel Kolko, whose 1965 book Railroads and Regulation, 1877-1916 argues that the pre-ICC railroad industry was fiercely competitive, and that the ICC operated from the beginning as a way to prop up the cartelistic “pools” that had repeatedly collapsed before the ICC’s enactment. Probably the most balanced analyst, Theodore E Keeler, wrote in a Brookings Institute monograph that that in its early years, the ICC “had about it the quality of a government cartel.”

So it seems to me that the most optimistic spin you can put on the ICC is that the 1887 Act was a well-intentioned but ineffectual effort to rein in the railroads, and that only after a decade of further legislative changes did the ICC begin to exert some limited oversight. I think that a more accurate interpretation is that the ICC was harmful from the get-go (because it gave the railroads a legal mechanism to punish those who tried to undercut pools) and that the ICC’s efforts became progressively more harmful as Congress increased its power in the first years of the 20th century. But notice that neither of these interpretations gives us much reason to support neutrality regulations. If the first round of regulations is likely to be toothless anyway, it’s hard to see that there’s a great urgency to passing them right away, as Congress is going to have to repeatedly revisit them in future years in any event. Moreover, the railroad industry’s critics at least had a significant number of examples of abusive behavior by the railroads. By my count the NN crowd has exactly one example (the Madison River case) of discrimination by an American ISP. So the case for regulating the internet is significantly less compelling than the case for regulating the railroads was.

Herman continues:

Lee insists that the FCC currently has “no authority” that would allow it to prevent new entrants to the broadband market. This is a half-truth at best. The FCC was formed and continues to serve as a means of regulating the airwaves, and wireless transmission is the single best hope for establishing a third commonly adopted vehicle for broadband delivery. The FCC is therefore already in a position to limit the ability of new BSPs to spring up. Instead, the Commission has made several policy changes to facilitate wireless Internet transmissions. Power lines are another potential vehicle for broadband delivery. Several groups, including broadcasters–long reputed as having captured the FCC–asked the FCC to rule that broadband-over-power-lines (“BPL”) creates interference with their transmissions and to limit or disallow the service. Instead, the FCC “affirmed that BPL providers have the right to provide data access using power transmission lines, provided they don’t interfere with existing radio services.” Despite concerns about the FCC’s rulemaking in other areas, the Commission is not a fully captured agency but rather supportsLee insists that the FCC currently has “no authority” that would allow it to prevent new entrants to the broadband market. This is a half-truth at best. The FCC was formed and continues to serve as a means of regulating the airwaves, and wireless transmission is the single best hope for establishing a third commonly adopted vehicle for broadband delivery. The FCC is therefore already in a position to limit the ability of new BSPs to spring up. Instead, the Commission has made several policy changes to facilitate wireless Internet transmissions. Power lines are another potential vehicle for broadband delivery. Several groups, including broadcasters–long reputed as having captured the FCC–asked the FCC to rule that broadband-over-power-lines (“BPL”) creates interference with their transmissions and to limit or disallow the service. Instead, the FCC “affirmed that BPL providers have the right to provide data access using power transmission lines, provided they don’t interfere with existing radio services.” Despite concerns about the FCC’s rulemaking in other areas, the Commission is not a fully captured agency but rather supports competition in the broadband industry.

This is a fair point as far as it goes. It’s certainly true that the FCC has some regulatory powers, such as its control over the spectrum, that it could use to impede entry into the broadband market. But the point is that it currently has no authority over TCP/IP networks by virtue of their being TCP/IP networks. It has no specific authority over non-telco backbone providers. Nor does it have any special authority over your local Starbucks, beyond requiring them to only use FCC-approved equipment when doing wireless transmissions. In particular, such questions as the configurations of routers or firewalls are not under the FCC’s authority.

That means that the FCC has no way of erecting regulatory barriers to new BSPs in general regardless of the technology they employ. Sure, they can still use the powers they do have as a weapon against new entrants, but any such effort will be both less effective and more obvious than if the FCC had the power to impose new requirements on broadband providers in general.

Secondly, it’s true that is not a fully captured agency. I don’t think any agency ever is. “Captured” is not a binary property but exists on a continuum from the perfectly independent to the perfectly craven. But it’s indisputable, I think, that AT&T and Verizon have more influence over the FCC than Public Knowledge, the “Save the Internet” coalition, or Bill Herman. (Or, I suspect, Google or Microsoft) So to the extent that regulatory capture is a real phenomenon, and I don’t think Herman denies that it is, we need to be mindful of the fact that the “bad guys” (from his perspective) will have more influence over the way the law is interpreted than will the “good guys.” That, I think, should give us second thoughts about whether we really want to enhance the FCC’s power over an industry that’s still very young and evolving rapidly.

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