Broadband as a Public Utility

by on February 23, 2010 · 2 comments

Debate over the regulatory status of broadband heated up this week as trade associations and major broadband companies sent a letter to the Federal Communications Commission arguing strenuously against reclassification of broadband as “telecommunications service” subject to regulation under Title II of the Communications Act. One implication of Title II regulation is that broadband could be regulated like a public utility. Comparisons of broadband to services like electricity or railroads, which I discussed last week, also raise the prospect of public utility regulation. 

Classic public utility regulation restricts entry and regulates prices to prevent firms from charging excessive prices.  It’s typically used in situations where competition is believed to be impossible (or, where pre-existing policy decisions have created monopolies that aren’t going to go away very soon).

Broadband is not a monopoly; it is an oligopoly. Contrary to popular perception, that is not synonymous with “evil.” Although both monopoly and oligopoly end in “-opoly,” that doesn’t mean broadband competitors will charge monopoly prices, or even somewhat excessive prices.  The only firm conclusion that emerges from economic literature on oligopoly is, “anything’s possible, depending on the specific facts and circumstances.”

But there are also firm conclusions that emerge from economic literature on public utility regulation.  Just about every time the federal government has tried to impose public utility regulation on an oligopoly, it has ended up enforcing a cartel.  This is what happened in the past with railroads, trucking, airlines, and brokerage firms. There are a few times federal price regulation did not enforce cartels in oligopolistic or competitive industries. In those cases, it usually created shortages  — most notably gasoline and natural gas in the 1970s.

Title II regulation is not necessarily synonymous with public utility regulation. Title II could be used to impose some “nondiscrimination” requirements, without necessarily directly regulating broadband providers’ prices or profits.

But anyone who actually wants the FCC to regulate broadband providers’ prices and profits needs to read the peer-reviewed economics literature on the actual effects of public utility regulation in practice on the federal level. (More literature is cited here.) Then they need to explain why the results in broadband would be different.  And the explanation needs to be better than “We know better now, we’re smart, and we promise.”

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