Federal Communications Commission (FCC) Chairman Ajit Pai today announced plans to expand the role of economic analysis at the FCC in a speech at the Hudson Institute. This is an eminently sensible idea that other regulatory agencies (both independent and executive branch) could learn from.

Pai first made the case that when the FCC listened to its economists in the past, it unlocked billions of dollars of value for consumers. The most prominent example was the switch from hearings to auctions in order to allocate spectrum licenses. He perceptively noted that the biggest effect of auctions was the massive improvement in consumer welfare, not just the more than $100 billion raised for the Treasury. Other examples of the FCC using the best ideas of its economists include:

• Use of reverse auctions to allocate universal service funds to reduce costs.
• Incentive auctions that reward broadcasters for transferring licenses to other uses – an idea initially proposed in a 2002 working paper by Evan Kwerel and John Williams at the FCC.
• The move from rate of return to price cap regulation for long distance carriers.

More recently, Pai argued, the FCC has failed to use economics effectively. He identified four key problems:

1. Economics is not systematically employed in policy decisions and often employed late in the process. The FCC has no guiding principles for conduct and use of economic analysis.
2. Economists work in silos. They are divided up among bureaus. Economists should be able to work together on a wide variety of issues, as they do in the Federal Trade Commission’s Bureau of Economics, the Department of Justice Antitrust Division’s economic analysis unit, and the Securities and Exchange Commission’s Division of Economic and Risk Analysis.
3. Benefit-cost analysis is not conducted well or often, and the FCC does not take Regulatory Flexibility Act analysis (which assesses effects of regulations on small entities) seriously. The FCC should use Office of Management and Budget guidance as its guide to doing good analysis, but OMB’s 2016 draft report on the benefits and costs of federal regulations shows that the FCC has estimated neither benefits nor costs of any of its major regulations issued in the past 10 years. Yet executive orders from multiple administrations demonstrate that “Serious cost-benefit analysis is a bipartisan tradition.”
4. Poor use of data. The FCC probably collects a lot of data that’s unnecessary, at a paperwork cost of $800 million per year, not including opportunity costs of the private sector. But even useful data are not utilized well. For example, a few years ago the FCC stopped trying to determine whether the wireless market is effectively competitive even though it collects lots of data on the wireless market.

To remedy these problems, Pai announced an initiative to establish an Office of Economics and Data that would house the FCC’s economists and data analysts. An internal working group will be established to collect input within the FCC and from the public. He hopes to have the new office up and running by the end of the year. The purpose of this change is to give economists early input into the rulemaking process, better manage the FCC’s data resources, and conduct strategic research to help find solutions to “the next set of difficult issues.”

Can this initiative significantly improve the quality and use of economic analysis at the FCC?

There’s evidence that independent regulatory agencies are capable of making some decent improvements in their economic analysis when they are sufficiently motivated to do so. For example, the Securities and Exchange Commission’s authorizing statue contains language that requires benefit-cost analysis of regulations when the commission seeks to determine whether they are in the public interest. Between 2005 and 2011, the SEC lost several major court cases due to inadequate economic analysis.

In 2012, the commission’s general counsel and chief economist issued new economic analysis guidance that pledged to assess regulations according to the principal criteria identified in executive orders, guidance from the Office of Management and Budget, and independent research. In a recent study, I found that the economic analysis accompanying a sample of major SEC regulations issued after this guidance was measurably better than the analysis accompanying regulations issued prior to the new guidance. The SEC improved on all five aspects of economic analysis it identified as critical: assessment of the need for the regulation, assessment of the baseline outcomes that will likely occur in the absence of new regulation, identification of alternatives, and assessment of the benefits and costs of alternatives.

Unlike the SEC, the FCC faces no statutory benefit-cost analysis requirement for its regulations. Unlike the executive branch agencies, the FCC is under no executive order requiring economic analysis of regulations. Unlike the Federal Trade Commission in the early 1980s, the FCC faces little congressional pressure for abolition.

But Congress is considering legislation that would require all regulatory agencies to conduct economic analysis of major regulations and subject that analysis to limited judicial review. Proponents of executive branch regulatory review have always contended that the president has legal authority to extend the executive orders on regulatory impact analysis to cover independent agencies, and perhaps President Trump is audacious enough to try this. Thus, it appears Chairman Pai is trying to get the FCC out ahead of the curve.

The National Transportation Safety Board recommended yesterday that states ban all non-emergency use of portable electronic devices while driving, except for devices that assist the driver in driving (such as GPS). The recommendation followed the NTSB’s investigation of a tragic accident in Missouri triggered by a driver who was texting.

Personally I don’t see how someone can pay attention to the road while texting. (I’m having a hard enough time paying attention to a conference presentation while I’m typing this!) But the National Transportation Safety Board’s recommendation is a classic example of regulatory overreach based on anecdote.  The NTSB wants to use one tired driver’s indefensible and extreme texting (which led to horrific results) as an excuse to ban all use of portable electronic devices while driving – including hands-free phone conversations.  Before states act on this recommendation, they should carefully examine systematic evidence – not just anecdotes — to determine whether different uses of handheld devices pose different risks. They should also consider whether bans on some uses would expose drivers to risks greater than the risk the ban would prevent.

The Senate might vote this week on Sen. Hutchison’s resolution of disapproval for the FCC’s net neutrality rules.  If ever there was a regulation that showed why independent regulatory agencies ought to be required to conduct solid regulatory analysis before writing a regulation, net neutrality is it.

For more than three decades, executive orders have required executive branch agencies to prepare a Regulatory Impact Analysis accompanying major regulations.  One of the first things the agency is supposed to do is identify the market failure, government failure, or other systemic problem the regulation is supposed to solve. The agency ought to demonstrate a problem actually exists to show that a regulation is actually necessary.

But the net neutrality rules have virtually no analysis of a systemic problem that actually exists, and no data demonstrating that the problem is real.  Instead, the FCC’s order outlines the incentives Internet providers might face to treat some traffic differently from other traffic, in a discussion heavily freighted with “could’s” and “may’s”.  Then it offers up just four familiar anecdotes that have been used repeatedly to support the claim that non-neutrality is a significant threat  (all four fit in paragraph 35 of the order).  The FCC asserts without support that Internet providers have incentives to do these things even if they lack market power, and indeed in a footnote it dispenses with the need to consider market power: “Because broadband providers have the ability to act as gatekeepers even in the absence of market power with respect to end users, we need not conduct a market power analysis.” (footnote 87)

Thus far, no administration of either party has sought to apply Regulatory Impact Analysis requirements to independent agencies. If administrations won’t, Congress should.

Federal Communications Chairman Genachowski previewed the universal service reform plan the commissioners are discussing in a speech today.

The speech offers a masterful summary of the myriad inefficiencies created by the current universal service subsidies and intercarrier compensation payments. Most of the examples highlight plain old-fashioned waste. The universal service program collects billions of dollars from telephone subscribers, then simply wastes a goodly portion of it by subsidizing telephone competition in places where unsubsidized service from cable or satellite already exists, subsidizing multiple mobile wireless competitors, and subsidizing local phone companies that have little incentive for cost containment because they are still subject to rate-of-return regulation. The intercarrier compensation system uses per-minute charges to collect billions of dollars from telephone subscribers and hands it to phone companies that sometimes charge as little as $8 a month for phone service. There’s also a race to game this system as the companies that benefit seek new ways to inflate the regulated charges they collect, and the companies that pay seek clever ways to avoid paying.

It’s a powerful brief for reform. Never thought I’d live to see the day whan an FCC chairman would say so many things that are substantiated by economic research.

Nevertheless, a few parts of the speech give me cause for concern about the solutions the FCC commissioners may be discussing.

First, the chairman claims that 18 million Americans live in areas without access to broadband — up from the 14 million estimated in the National Broadband Plan.  The size of this figure suggests to me that the FCC is still over-estimating the number of people without access by defining “broadband” as a speed fast enough to exclude 3G wireless, many small rural Wireless Internet Service Providers, and satellite. Absent an adjustment in the definition of broadband, the subsidy program will be larger than it needs to be, and so telephone consumers will pay excessive universal service charges.

Second, the FCC still seems bent on subsidizing at least two broadband competitors in rural areas through the Connect America Fund and a separate Mobility Fund. This essentially presumes that fixed wireless service  and 4G mobile are, and always will be, separate services, and every rural customer is entitled to both. If the goal is basic broadband connectivity in places that allegedly have no broadband at all, why not make all technologies compete for a single subsidy in these places before proceeding to subsidize two?

Third, there’s a certain amount of technological favoritism.  Wireless subsidies will be awarded based on competitive bidding from the outset.  Subsidies for (fixed) service to homes and businesses will transition from current payments to competitive bidding — faster for phone companies subject to price caps, slower for phone companies under rate-of-return regulation. Satellite is mentioned just once — in a sentence discussing how service will be extended to the most remote areas. This continues the pattern set in the National Broadband Plan, which viewed satellite as a special-purpose technology suitable only for remote areas. For reasons unexplained, the plan assumed that wired and wireless broadband could expand capacity in response to subsidies, but satellite could not.

In summary: The speech gave a great diagnosis of the problem and sketched out solutions that will surely improve things compared to the way they are now.  But given that opportunities to actually achieve universal service reform (as opposed to just talking about it) come around rarely, there’s still room for improvement.

I can’t help but think that there might be  a big advantage of having the AT&T-T-Mobile merger go to court.  For once, the high-profile action everyone pays attention to will occur in an antitrust forum where the decision criterion is the effects of the merger on consumer welfare, period.   Regardless of what one thinks about the merger, it’s nice to see that we’ll finally have a knock-down, drag-out fight based on whether a big telecommunications merger harms consumers and competition.  That’s the antitrust standard the Department of Justice has to satisfy in order to prevent the merger. 

This will be a refreshing change from the Federal Communications Commission’s “public interest” standard, which allows the commission to object on grounds other than consumer welfare and demand all manner of concessions that have nothing to do with remedying anticompetitive effects of a deal. Case in point: Comcast must now offer broadband service for $9.95 per month to low-income households as a condition for getting approval to buy 51 percent of NBCUniversal. Now, I’m all for seeing low-income households get access to broadband, but subsidizing one subset of customers has little to do with mitigating any possible anticompetitive effects of allowing a cable company to own NBCUniversal. As FCC Commissioners McDowell and Baker said in their statement on that transaction, “Any proposed remedies should be narrow and transaction specific, tailored to address particular anti-competitive harms. License transfer approvals should not serve as vehicles to extract from petitioners far-reaching and non-merger specific policy concessions that are best left to broader rulemaking or legislative processes.” 

In short, if AT&T wins in court, the FCC should approve the merger promptly without additional conditions.

A couple days before Congress announced a debt deal, half a dozen telecommunications companies filed a plan on July 29 with the Federal Communications Commission that attempts to resolve a much longer-running set of negotiations over big bucks.  The “America’s Broadband Connectivity” Plan seeks to replace Universal Service Fund subsidies for telephone service in rural areas with subsidies for broadband in rural areas.

Like the federal budget negotiations, the never-ending negotiations over USF get bogged down in arguments over distribution: who gets what.  Indeed, it’s almost exclusively an argument over which companies get what. But federal telecommunications policy is supposed to advance the overall public interest, not just haggle over what corporate interest gets what piece of my pie. Here is a quick take on the biggest strengths and weaknesses of the plan in terms of advancing overall consumer welfare. By “consumer welfare,” I mean not just the welfare of the folks receiving subsidized services, but also the welfare of the majority who are paying a 15 percent charge on interstate phone services to fund the USF.

BIGGEST STRENGTHS

Fixed-term commitment: Rural phone subsidies have become a perpetual entitlement with no definition of when the subsidies can end because the problem is considered solved.  The ABC plan proposes a 10-year commitment to rural broadband subsidies.  By 2022 the FCC should assess whether any further high-cost universal service program is needed. This idea remedies a significant deficiency in the current high-cost subsidy program, which doesn’t even have outcome goals or measures. (That’s why I like to sing the final verse from “And the Money Kept Rolling In” from Evita when I talk about universal service.  Free State Foundation President Randy May asked me for an encore of this at the end of the foundation’s July 13 program on universal service, available here.)

Intercarrier compensation: “Intercarrier compensation” refers to the per-minute charges communications companies pay when they hand off phone traffic to each other. The plan proposes to ramp down all intercarrier charges to a uniform rate of $0.0007/minute.  Economists who study telecommunications have pointed out for decades that high per-minute charges reduce consumer welfare by discouraging consumers from communicating as much as they otherwise would.  MIT economist Jerry Hausman, in a paper prepared for the filing, estimates that low, uniform intercarrier charges would increase consumer welfare by about  $9 billion annually.

Legacy obligations: Public utility regulation traditionally forced regulated companies to offer certain services or serve certain markets at a loss, then charge profitable customers higher prices to cover the losses. Judge Richard Posner referred to this opaque practice as “Taxation by Regulation“: the customers paying inflated prices get “taxed” to accomplish a public purpose, but they don’t know it.  Some of these obligations continue today as federal requirements applied to “Eligible Telecommunications Carriers” or state “Carrier of Last Resort” obligations.  The plan would remove these obligations for companies that are not receiving USF subsidies.

BIGGEST WEAKNESSES

Definition of broadband: The plan would continue to inflate the cost of rural broadband subsidies by defining “broadband” as 4 megabytes per second download and 768 kilobytes per second upload.  This means 3G wireless, satellite, and some wireless Internet service providers do not count as “broadband.” This decision more than doubles the number of households considered “unserved” and rules out some lower-cost technologies.  Jerry Brito and I have written extensively about both the economics and the legality of this.  Interestingly, the ABC coalition’s legal white paper arguing that the commission has legal authority to adopt the plan makes no effort to show that the commission has authority to subsidize 4 mbps broadband; it only shows the commission has authority to subsidize some form of broadband.

Alternative cost technology threshold: The plan includes an “alternative cost technology” threshold that allows substitution of satellite broadband for customers who would cost more than $256/month to serve.  Inclusion of a threshold is actually a strength. But the $256/month figure is way too high.  Satellite broadband with speeds of 1-2 mbps is now available for $60 – $110 per month.  Consumers who pay a 15 percent surcharge on their local phone bills to fund USF should not be expected to provide a subsidy of more than $200 per month.

Mobility: The plan appears to advocate subsidies for mobile broadband service in places where it is not currently available.  So now the rural entitlement expands to include not just basic broadband service in the home to stay connected, but also a mobile service that a lot of Americans don’t even buy unless their employers pay for it! I question whether mobile broadband satisfies the 1996 Telecommunications Act’s criteria for universal service subsidies, such as “essential” (not just nice) for education or public safety, or subscribed to by a “substantial majority” of households. These questions should be thoroughly examined before anyone receives subsidies for mobile broadband. At a minimum, households should be eligible for only one broadband subsidy — wireline or mobile — but not both.

While most folks have been obsessing over their income taxes the past few weeks, Jerry Brito and I have been obsessing about a non-tax: the universal service assessments on our phone bills.

More specifically, the Federal Communications Commission has asked for comments on its plan to gradually turn the current phone subsidy program in high-cost rural areas into a broadband subsidy program in high-cost rural areas. This opens up a big tangled can of worms.  Comments are due Monday.  We deal with two issues in our comment:

Definition of broadband: Thankfully, the FCC is asking for comments on its proposal to define broadband as 4 Mbps download/1 Mbps upload. This is an important decision with a big effect on the size of the program. The 4 Mbps definition more than doubles the number of households considered “unserved,” because it doesn’t count 3G wireless or slower DSL or slower satellite broadband as broadband. It also raises the cost of the subsidies by requiring more expensive forms of broadband.

The definition fails to fit the factors the 1996 Telecom Act says the FCC is supposed to consider when determining what communications services qualify for universal service subsidies.  A download speed of 4 Mbps is not “essential” for online education; most online education providers say any broadband speed or even dialup is satisfactory. Nor is that speed “essential” for public safety; the biggest barrier to public safety broadband deployment is creation of an interoperable public safety network, which has nothing to do with USF subsidies. And the proposed speed is not subscribed to by a “substantial majority” of US households.  The most recent FCC statistics indicate that the fastest broadband download speed subscribed to by a “substantial majority” of US households is probably 768 kbps.

Definition of performance measures: Fifteen years after passage of the legislation that authorized the high cost universal service subsidies, the FCC has proposed to measure the program’s outcomes.  Actually, the FCC wants to measure intermediate outcomes like deployment, subscribership, and urban-rural rate comparability — not ultimate outcomes like expanded economic and social opportunities for people in rural areas.  But it’s a start …  provided that the FCC actually figures out how the subsidies have affected these intermediate outcomes, rather than just measuring trends and claiming the universal service subsidies caused any positive trends observed.  We have some suggestions on how to do this.  

Our full comment is available here.

In previous posts, I’ve criticized the Federal Communications Commission for arbitrarily jacking up the speed in its definition of broadband (to 4 mbps download/1mbps upload) so that third generation wireless does not count as broadband. This makes broadband markets appear less competitive.  It also expands the “need” for universal service subsidies for broadband, since places that have 3G wireless but not wired broadband get counted as not having broadband.

The FCC’s definition is based on the speed necessary to support streaming video.  I rarely watch video on my computer. But tonight I had a chance to test the wisdom of the FCC’s definition.  I’m in rural southern Delaware with broadband access only via a 3G modem. I wanted to watch more State of the Union coverage than the broadcast channels out here carried. So, I fired up the old PC and watched things on CNN.com.  The video showed up fine and smooth, and it didn’t even burp when I opened another window to start working on this post.

So now I have not just analysis that questions the FCC’s definition of broadband, but that most precious of commodities in Washington regulatory debates: AN ANECDOTE!!!

The House and Senate have now both passed bills aimed at encouraging telework in the federal government. As anyone who has had to commute to work in the Washington DC area knows, the national capital area could probably use a good dose of telework to relieve traffic congestion.

According to Joe Davidson’s column in the Washington Post, “The inability or unwillingness of supervisors to manage staff members they can’t see has long been cited as a major reason” more federal employees don’t telework. This fits with what I’ve heard from some current or former federal managers.  “I have enough trouble getting work out of people when they’re in the office,” one remarked.

The legislation offers some simple solutions: Tell federal agencies they have to allow all employees to work remotely unless there’s some reason a position isn’t conductive to telework. And accompany that with training so that managers will be better equipped to manage employees who aren’t in the office.

I’m a big fan of telework. But one of the keys to making it work is holding employees accountable for results instead of inputs like time on task or time hanging around the office.  It’s possible to do this even when the desired results are hard to measure.  Universities, for example, evaluate professors based on the quality of their teaching and research, not the number of hours they spend preparing for class or writing. This system is hardly perfect, and some places do this better than others. But on balance, it works much better than telling professors they’ve fulfilled their obligation by showing up at the office 40 hours a week.

So the key question in making telework work in the federal government is, “How well do agencies hold individual employees accountable for results?”  Here, the federal government has a few handicaps to overcome. It’s hard to fire people for poor performance.  Pay is set by the federal pay scale, which does not necessarily create a direct link between pay and the value of the employee’s accomplishments to taxpayers. And agencies do not always create a clear understanding of how the individual employee’s contribution affects the results the agency is supposed to produce.

Granted, the federal government is probably better at dealing with some of these challenges now than it was 20 years ago, especially for the senior executive service. But most federal jobs are still a long way away from at-will employment with clear performance measures tied to the organization’s goals. This is a change that requires not just “more training” or “cultural transformation,” but also a redefinition of the terms of federal employment.

Given those circumstances, I think federal managers are justified in their concern that giving most employees the automatic right to telework could reduce productivity.  I can think of two ways to make telework work in the current federal employment environment:

1. Make people earn it. Employees who show they can get things done without a lot of supervision in the office are the most obvious candidates to be effective working remotely.

2. Mandate a trial period and evaluation. If you think it’s fair to guarantee the opportunity to telework to most employees, mandate only that it must be offered on a trial basis. Continuation depends on performance.

These are, of course, second-best solutions.  And there may be others.

In a 3-2 vote, the Federal Communications Commission recently decided to jack up its official definition of “broadband” from 200 kbps download to the 4 mbps dpwnload/1 mbps upload used as a benchmark in Our Big Fat National Broadband Plan. The three commissioners in the majority also declared that the definition of broadband will continue to evolve as consumers purchase faster connections to utilize new applications.

Several months earlier, the FCC launched a proceeding to figure out how to convert universal service subsidies for rural telephone service into universal service subsidies for rural broadband service.  Put these two decisions together, and it looks like the majority on the FCC is hell-bent on establishing rural broadband subsidies as a perpetual entitlement program that will never “solve” the rural availability problem because the goalposts will keep moving.

The current USF program taxes price-sensitive services (long distance and wireless) to subsidize a service that is not very price sensitive (local phone connections).  If the FCC takes a further step on the funding side and starts collecting universal service assessments from broadband, it will diminish broadband subscribership by taxing a service that is even more price sensitive: broadband connections. (I explained this a few months ago here.)

It’s time to get off this merry-go-round. The solution was suggested by MIT economist Jerry Hausman back when the FCC first started creating the current universal service programs in response to the Telecom Act of 1996: use revenues from spectrum auctions. 

Instead of having the FCC perpetually collect assessments from broadband or telephone services to subsidize broadband buildout in rural areas, Congress should earmark revenues from the next spectrum auction for one-time buildout grants in high-cost areas. The grants should be awarded via a competitive procurement auction that would force subsidy-seekers in different locations to compete with each other for the federal dollars. And Congress should explicitly wind down the universal service telephone subsidies in high cost areas and prohibit the FCC from using universal service assessments to fund broadband deployment in these places.

Using revenues from spectrum auctions would avoid the distortions and perverse consequences caused by ongoing universal service assessments on broadband or telephone services. One-shot deployment grants would ensure that the availability problem gets solved, so the federal government can declare victory and get out of the perpetual subsidy business.

Of course, some locations in the US are so expensive to serve that the potential revenues might not even cover the operating costs of broadband. But it does not follow that operators in these places need an ongoing stream of subsidies. When preparing their subsidy bids, they will have to calculate how large the one-shot payment needs to be to induce them to take on the capital costs and the ongoing operating costs. In other words, they can bank some of the one-shot subsidy and use it to cover the difference between revenues and operating costs.

This modest proposal does not address all aspects of the universal service fund. But it would achieve a clear objective — bringing broadband to rural areas — while allowing the FCC to extricate itself from the business of distributing $4.6 billion a year in subsidies. Let’s see a timetable for withdrawal!

You may have seen this recent article about Lila Kerr and Lauren Theis — two Rice University undergraduates who figured out how to turn a kitchen “salad spinner” into a centrifuge that can separate blood into plasma and red cells in about 20 minutes.  The inventors hope it will have a lot of applications in developing countries, because it will allow clinics to check blood samples for anemia on location and in real time, instead of transporting blood samples miles to the nearest facility with a centrifuge.

If the field tests go well, the inventors surely deserve to be lauded for the lives their invention will save. 

But I also think the students should be recognized for another aspect of their feat — namely, they figured out how to turn a really lame and pretty useless kitchen device into something useful! We have one of these (someplace). One attempted use was enough. I’m glad they found a way to unlock the true potential of this technology.

The Federal Communications Commission has an open proceeding in which it seeks advice on how to repurpose universal service subsidies for phone service in high cost areas to subsidize broadband instead. The FCC apparently wants to subsidize broadband with a minimum download speed of 4 megabytes per second (mbps) and upload speed of 1 mbps. These are the goals proposed in the commission’s National Broadband Plan.

I’m no lawyer, but I wonder if the FCC can do this legally. Section 254 of the Telecommunications Act of 1996 lays out criteria the FCC is supposed to consider when it decides whether to provide universal service subsidies for new services in addition to phone service. One of the criteria is that the new service must be subscribed to by a “substantial majority” of residential consumers.

Sixty-five percent of Americans have broadband at home. (National Broadband Plan, p. 167)  But a minority of residential customers subscribe to broadband that meets the FCC’s 4 mbps/1 mbps definition. According to the FCC’s Omnibus Broadband Initiative technical report on the “Availability Gap” (p. 43), 48 million subscribers have download speeds of 4 mbps or higher. More subscribers – 53 million – have broadband download speeds of 3 mbps or lower. And 35 percent of Americans have no broadband at all. These figures imply that a “substantial majority” of Americans have not subscribed to broadband that meets the National Broadband Plan’s proposed definition.

Based on figures in the technical report, I calculated that approximately 59 percent of Americans subscribe to broadband with a download speed of 768 kbps or higher. Perhaps this figure qualifies as a “substantial majority,” but surely the 4 mbps/1 mbps definition does not.

A reasonable person might also question whether even 59 percent counts as a “substantial majority” for the purpose of declaring broadband a service eligible for subsidy. Surely Section 254 requires a “substantial majority” in part to ensure that consumers who have chosen not to subscribe to a service do not bear the injustice of having to subsidize the provision of that service to others. It is clear from the FCC’s figures that most of the 35 percent of American households without broadband have it available but choose not to subscribe. Therefore, subsidizing even 768 kbps broadband would force many consumers to pay universal service assessments to provide others with a subsidized service that they themselves have decided is not worth the cost.

Wait and see how the FCC addresses this issue once it starts creating a universal service program for broadband.

National Economic Council Director Lawrence Summers made a major policy speech yesterday at the New America Foundation, announcing the adminstration’s plan to find an additional 500 megaherz of spectrum for wireless broadband service by the end of the decade. The spectrum will come from two places: federal agencies who currently under-utilize their spectrum, and commercial users who volunteer to participate in “incentive auctions.”

In an incentive auction, the current spectrum user receives part of the proceeds in exchange for making the spectrum available for reallocation. Within the current US system of spectrum allocation, it’s about as close as we can come to allowing spectrum holders to sell their spectrum licenses to someone else who can put the spectrum to a more valuable use. 

Summers even mentioned broadcasters specifically, noting that a local television station with a few hundred millions of dollars of revenue may currently control spectrum worth hundreds of millions of dollars. Federal agencies would get to use some of the proceeds to adopt “state-of-the-art communications.” Presumably this would include new equipment that doesn’t use so much spectrum.

In his speech, Summers gave appropriate credit to the Federal Communications Commission, which surfaced many of these ideas in its National Broadband Plan. Even more appropriately, the former Harvard University president and academic economist assigned proper credit for the original source of the idea: 

Most of the freed-up spectrum will be auctioned off for use by mobile broadband providers. As the great law and economics scholar Ronald Coase originally pointed out, auctions ensure that spectrum is devoted to its most productive uses because it is determined by investors’ willingness to pay for it.

There are, of course, a few unanswered questions. How much of the spectrum will actually get auctioned for mobile broadband, rather than reserved for unlicensed use? Will the buyers have to use the spectrum for mobile broadband, or will the license be sufficiently broad that they could use it for other forms of personal communication that perhaps haven’t even been invented yet? Do we really have to wait ten years for this? Will the Ronald Coase Institute get any royalties for the government’s use of its namesake’s intellectual property? (Academics will recognize the joke in the last question.)

For now I’ll just say, “Bravo, Dr. Summers!”

This is a post for all those broadband fans out there who want to talk about something today besides the Federal Communication’s Commission’s decision to take comments on which legal classification it should use to regulate broadband.

A recent FCC survey revealed that 80 percent of home broadband users do not know the speed of their broadband service. I can easily imagine how this statistic could be spun to “prove” that consumers are woefully uninformed and the broadband market must be plagued with “market failures” because consumers do not have even the basic information they need to make intelligent decisions.

Before we go down that road, let me explain, based on my own experience, why this is a non-issue.

I’m part of that 80 percent. I do not know the speed of my broadband service at home.  I know that when I signed up several years ago, I selected the slowest and cheapest broadband speed the provider offered.  I also know that this speed is still plenty fast for anything we need to do at home (and usually faster than the speed at my university office). I remain blissfully ignorant of the actual speed, even though it would be very easy for me to find out by looking at the materials I received when I signed up or checking the provider’s web site online.

In economic jargon, I am “rationally ignorant” of my home broadband speed. I don’t know (or remember) the speed, but to me this information is not worth the 45 seconds it would take me to find out. And that also means any FCC initiatives to “improve consumer information” or “educate” me about it will not, for me, be worth the time and money the FCC might spend on them.

If some of our Internet applications were not working in a satisfactory manner, we would probably do an online speed test, check to see what other speeds our provider offers, and check offers from competing providers. All of these steps would be easy and would require no FCC policy initiatives to facilitate (beyond making sure that the providers aren’t lying about what speeds they will provide).

I’m probably not alone.  The same survey reveals that 50 percent of Americans are satisfied with their broadband speeds, and another 41 percent are “somewhat satisfied.” So, 91 percent of consumers are more or less satisfied, even though 80 percent don’t know their speeds.

It would have been quite useful and instructive if the FCC survey had included an additional question: “Is your broadband speed adequate for the Internet applications you want to use?” And then cross-tabulate the responses with the responses on knowledge of broadband speed. Wanna bet that a substantial majority of people who do not know their speed would also have said that it is adequate?

Surely there are some broadband customers who use applications that require specific (fast) speeds, and these customers have a greater need to know what speed they’re receiving. That’s why providers tell prospective customers what speed tiers they offer. And that’s why one can find multiple web-based speed tests. This information is not hard to find if you want it.

But for some of us, it just ain’t worth it. And shame on anyone who tries to use my willful ignorance as an excuse for some new policy initiative. Rational ignorance is bliss, and I’m a bliss-ter.

We all pay “universal service” assessments on our phone bills.  It’s even broken out separately; go look. It’s probably just a matter of time before the Federal Communications Commission proposes to slap universal service assessments on broadband service to help pay for universal service subsidies for broadband service. The national broadband plan, after all, calls for “broadening” the universal service funding base.

If the commission reclassifies broadband as a “Title II” telecommunications service, this will be virtually automatic because the Telecommunications Act of 1996 says telecommunications providers must contribute toward the FCC’s universal service fund. If the commission doesn’t reclassify broadband, it could still require contributions — just like it imposed universal service assessments on VOIP without classifying VOIP as telecommunications.

After the FCC starts using universal service funds to subsidize broadband for poor people and rural households, the logic will be seductively compelling: “Broadband receives subsidies, so it’s only fair that broadband pays into the fund.”

Forget the ensuing howls about “taxing the Internet.”  I want to talk about another aspect of this.  Would imposing universal service assessments on broadband actually further the FCC’s goals in its national broadband plan?

Photo by nawtydawg.

The FCC wants to make broadband available to all Americans, regardless of where they live. Ideally, the FCC would like us all to subscribe, regardless of our income or where we live. The problem with imposing universal service assessments on broadband is that this would increase the price, leading subscribership to be lower than it would otherwise be.

This effect might be big or it might be little. But before making a decision about imposing universal service assessments on broadband, the FCC ought to know the size of the effect and how it compares to the increase in subscribership that would result from the subsidies.

To figure out how universal service assessments might affect broadband subscribership, we need to know how responsive broadband subscription is to changes in price. Economists call this the “price elasticity of demand.” The most recent study I’ve seen — and the only one cited in the FCC’s technical paper underlying the national broadband plan — estimates the elasticity of broadband demand was about -0.69 in 2008. That means a 1 percent increase in price would lead to a 0.69 percent decrease in subscribership. Other, earlier studies find much higher demand elasticities. But to be conservative, let’s use -0.69.

Current universal service assessments on interstate telecommunications are about 15 percent.  About 66.6 million households had broadband in 2008. A 15 percent increase in the price of broadband would reduce subscribership by about 6.9 million households (15% times -0.69 times 66.6 million.)

If the FCC imposed universal service assessments on broadband, it might be able to lower the rate since it would be collecting assessments from a broader base than just telephone service. Suppose the FCC could lower the assessment to 10 percent, more in line with the historical norm.  A 10 percent increase in the price of broadband would reduce subscribership by 4.6 million households (10% times -0.69 times 66.6 million).

So we’re going to reduce broadband subscribership by 4.6-6.9 million households in order to provide subsidies to increase broadband subscribership.  If the funds currently spent to subsidize phone service in rural areas were spent on broadband, that would be enough money to close the “funding gap” and make broadband available to the 7 million homes the FCC  says currently are unserved or under-served. 

Not all of them will susbcribe, so we can’t assume these subsidies will increase subscribership by 7 million.  About 65 percent of Americans currently have broadband at home.  If 65 percent of unserved or underserved households choose to subscribe once broadband becomes available, that would be  4.55 million new subscribers.

In short, it looks like subjecting all broadband to universal service assessments to pay for rural broadband subsidies would either be a wash or reduce subscribership on net. Paying for universal broadband service with assessments on broadband service will give the FCC a lot to do, but it won’t advance the subscribership goals of the national broadband plan. 

There are other ways to raise the money without this perverse effect. Historically, local telephone subscription has been very insensitive to price, so one option would be for the FCC to simply impose a universal service charge per phone number instead of the current percentage fee.  (Low-income households who have “Lifeline” service or use low-cost prepaid wireless plans could be charged a lower fee without sacrificing much revenue.)

Another option would be for Congress to earmark some revenues from upcoming spectrum auctions to fund universal broadband service, and reduce the universal service assessments on our phone bills accordingly.

Reasonable people can differ on whether, or by how much, the federal government should subsidize broadband where it is not currently available. But if we’re gonna do it, there’s no sense in funding it with a mechanism that reduces broadband subscription elsewhere.

Back on St. Paddy’s Day, I offered a few comments on the “funding gap” identified in the FCC’s just-released national broadband plan. Since then, the FCC has put out a notice of proposed rulemaking and notice of inquiry seeking public comment on reforms that would allow its universal service fund to subsidize broadband. The FCC has also released a 137-page technical paper that details how the staff calculated the broadband “availability gap” and funding gap.

So, now there’s more to chew on, and another round of online mastication would be timely given the open FCC proceeding.  Here are three big issues:

1. Definition of broadband

The plan announced a goal of making broadband with actual download speeds of 4 mbps available to all Americans.  In the plan, this goal appeared to be based on the actual average speed of broadband service (4 mbps), even though the median speed is just 3.1 mbps (p. 21). The technical paper, however, also projects that, based on past growth rates in broadband speed, “the median will likely be higher than 4 mbps by the end of 2010.” (p. 43)  Contrary to what I thought back in March, it appears the FCC is justifying the 4 mbps goal based on the median speed, not the average. 

The technical report also argues that 4 mbps is necessary to run high-speed video, which a “growing portion of subscribers” (not including me) apparently use. (p. 43) So, if the broadband plan achieves its goals, every Amercian will have the opportunity to subscribe to Internet access capable of delivering high-quality porn! Fortunately, the technical report uses a different and more productive example — streamed classroom lectures. 

Reasonable people could still question whether the median is the appropriate benchmark to guide government actions intended to equalize broadband access opportunities.  The technical report includes a helpful graphic that shows the most common broadband speed users actually buy is 2 mbps, and 38 percent of all subscribers have speeds of 2 mbps or less. (p. 43) The FCC staff’s model calculates that if the goal were set at 1.5 mbps, the number of “unserved” households would fall from 7 million to 6.3 million, and the required subsidy would fall from $18.6 billion to $15.3 billion. (p. 45) 

If almost half of broadband subscribers have decided that something less than 4 mbps is perfectly adequate, that suggests 4 mbps may go far beyond what is necessary to ensure that all Americans have access to basic broadband service. So, that 4 mbps goal is still questionable.

2. Omission of 3G wireless

The 4 mbps goal allowed the FCC to ignore third generation wireless when it estimated the “availability gap.” The technical paper shows that 95 percent of households have 4 mbps broadband available. About 3 percent of households have no broadband available, while 2 percent have broadband available at speeds ranging from 384 kbps – 3 mbps. (p. 17)  That 2 percent probably includes households with slow DSL and 3G wireless.

The technical paper also revealed that it did not include service from fixed Wireless Internet Service Providers due to data availability. (p. 25) These serve 2 million subscribers in rural areas (p. 66), so the omission potentially accounts for a large chunk of the households considered “unserved.” No telling how many, since apparently the data aren’t available.

Back in March, I guesstimated that the 7 million household “availability gap” might overstate the size of the problem by more than half, simply because 3G wireless is available to 98 percent of American households. Looks like my guesstimate is pretty much in line with the more detailed figures in the FCC technical paper.

 3. Role of satellite

The broadband plan did not count satellite broadband when assessing availability. The technical paper (pp. 89-94)provides a much more detailed explanation of the capacity constraints the FCC staff believes will prevent satellite broadband from serving more than a couple million subscribers.   (The current satellite subscriber base is approximately 900,000.)

The technical paper pointed out that satellites are expensive and take three years to build. (p. 92) To put the time frame in perspective, that’s about as long as the FCC and the Federal-State Joint Board on Universal Service have been discussing universal service subsidies for broadband. Lord knows we shouldn’t make consumers wait that long!

There is, however, something a little asymmetrical about the way the FCC staff treated satellite and other forms of broadband. The point of estimating the broadband availability gap was to determine how much of a subsidy would be required to induce the private sector to build the infrastructure to close the gap. But while the study assumed that the subsidies would call forth the requisite cable, DSL, and wireless infrastructure within some unnamed but acceptable time frame, it decided that three years is just too long to wait for satellite infrastructure to expand. So, satellite plays a minimal role in the FCC’s plan.

Yet even this minimal role has a big impact. To its credit, the technical paper calculated how satellite broadband could dramatically slash the cost of serving the most expensive 250,000 homes. It estimated (pp. 91-92) that the net present value of subsidies required to serve these homes with satellite would range between $800 million and $2 billion — compared to a $13.4 billion subsidy required to serve these homes with terrestrial broadband. (This implies an annual subsidy of $105-255 million, which is pretty close to my March 17 guesstimate of $100-200 million.)

So, satellite broadband could help prevent costs from skyrocketing, even assuming it plays only the limited role envisioned in the FCC staff’s analysis.

The UK’s Daily Mail reports that Phil Bissett, a 62 year old former gravedigger, transformed a steel casket into a street-legal single-seat automobile that does 100 mph, using the engine from his daughter’s 1972 VW. He acquired the casket — you guessed it — on ebay.

Now here’s where it gets interesting. The casket originally cost 1500 British pounds. He got it for just 98 pounds — about $146 at today’s exchange rate.  That’s 93 percent off!  The article doesn’t say how much he paid for the assorted spare parts from other vehicles needed to turn the casket into an automobile, nor does it explain what his daughter is doing for transportation now that the engine from her car powers his deathmobile.  Still, it’s a nice-looking little sports car, and I’ll bet it cost less and is more reliable than that fine piece of British automotive engineering I used to own, an MG Midget.

Bissett told the reporter, “I’ve learned never to go on the internet when you’ve had a drink. My friend said I’d never be able to turn it into a car but I knew I could.”

This must be what the wonks mean when they say the Internet is an “enabling technology.”

(Be sure to check out the Daily Mail link above to see the cool photos!)

A recent study by Cecil Bohanon and Michael Hicks at Ball State University’s Digital Policy Institute found that statewide cable franchising has increased broadband deployment.

Half of the US states have now enacted legislation that creates statewide cable franchising. These laws allow new entrants into the video business (principally the phone companies) to get permission to offer video from the state, instead of having to deal with local governments to get cable franchises. Previous research, much of it cited here, found that cable competition reduces cable rates and expands the number of channels available to subscribers. Local franchising often delayed or prevented new competitors from entering the market.

Since the same wires get used to transmit video, telephone, and broadband, Bohanon and Hicks reasoned that opening up entry into cable would also increase competition in broadband and hence increase broadband subscribership. And that’s precisely what their econometric study finds. After controlling for other factors, broadband subscribership is 2-5 percent higher in states that have statewide video franchising. Based on this finding, Bohanon and Hicks estimate that statewide video franchising increased broadband subscribership by about 5 million.

Their study covers the years 1999-2008. Maybe some of these 5 million would eventually have gotten broadband anyway. At worst, this study shows that 5 million subscribers got broadband sooner than they otherwise would have.

The study does not test whether the increase in broadband subscribership occurred because statewide video franchising sped up investment and deployment of infrastructure, or if it simply spurred competition in places where phone and cable companies already had the relevant infrastructure deployed.  I don’t know how one would get the confidential data on broadband investment in order to test this.  But given the large amount of new investment related to broadband, I’d be willing to bet that statewide franchising encouraged both new broadband deployment and more intense competition where infrastructure was already in place.

The Washington Post carried an article earlier this week by Cecilia Kang that noted the Federal Trade Commission could gain enforcement power over online businesses as a result of the financial services legislation under discussion in Congress. Ms. Kang contrasted the possibility of an empowered FTC issuing fast-track regulations against the recent experience of the Federal Communications Commission, which has become bogged down in its search for legal authority to issue net neutrality regulations. 

The comparison is insightful, but not for the reasons you might expect. Part of the debate over the FTC revolves around language in the House financial services bill that would repeal the “Magnuson-Moss” provisions that govern FTC promulgation of consumer protection regulations. (The name comes from the fact that these restrictions on FTC rulemaking were included in the Magnuson-Moss Warranty Act, which got the FTC into the business of regulating car warranties.)

If the FTC wants to regulate some type of general business practice under the FTC Act, it has to establish a factual record substantiating that there is actually a systemic problem that regulation can solve, hold a public hearing, allow cross-examination on factual matters, and conduct an economic analysis of the regulation’s effects.  In short, the commission has to do the homework necessary to demonstrate that its proposed regulation will actually solve a widespread problem that actually exists.

When Tim Muris directed the FTC’s Bureau of Consumer Protection in the early 1980s, he authored an article in Regulation magazine pointing out that when the FTC does careful analysis before issuing a rule, the rule is more likely to benefit consumers, more likely to be upheld in court, and more likely to be issued expeditiously. He contrasted the evidence-based eyeglass rule, which took three years to issue, with the anecdote-based funeral rule, which took ten. Muris noted wryly, “Some critics of my position charge that it is revolutionary to ask a body of lawyers and economists not to impose its own view of proper regulation on the world without first systematically evaluating the problem.” Muris went on to serve as chairman of the FTC between 2001-04, and last month he defended the Magnuson-Moss restrictions in testimony before Congress.  

What does this have to do with the FCC?  The FCC lost its case against Comcast on appeal, precisely because the FCC tried to take shortcuts. The FCC tried to promote net neutrality by enforcing a set of “principles” that originated in a former chairman’s speech and were never promulgated in a notice-and-comment rulemaking. The FCC commissioners endorsed these principles without investigating whether there was a systemic problem (ie, more than a few anecdotes of misbehavior). Indeed, Chairman Martin’s Notice of Inquiry on “Broadband Industry Practices” that was launched around the same time the FCC took its enforcement action against Comcast turned up no evidence of a systemic problem. If the FCC now tries to impose net neutrality by reclassifying broadband as a “Title II” common carrier, it will have to do the difficult but necessary work of demonstrating, with real factual evidence, that broadband is more like a common carrier than like the lightly-regulated “information service” the commission previously decided it was.

We don’t need Congress to free the FTC from Magnuson-Moss. Instead, Congress should impose the same requirements on the FCC. Sometimes, taking the time to do your homework leads to better decisions, sooner.

Wine (and beer) lovers who want to order hard-to-get vintages online have benefited greatly from federal court decisions that say state alcohol laws cannot discriminate against out-of-state sellers. Federal legislation introduced last week could threaten electronic commerce as it further entrenches middlemen who normally profit from every bottle of alcohol that passes from producers to consumers.

To understand what’s going on, you have to know something about Commerce Clause litigation. I’m not a lawyer, though I once played the teetotaling William Jennings Bryan character in a high school production of Inherit the Wind.  This proves my motives are pure. And since a lot of lawyers practice economics without a license, I figure I’ll return the favor.

The Commerce Clause of the US Constitution says that Congress, not the states, can regulate interstate commerce. A longstanding judicial interpretation, the “dormant” Commerce Clause, holds that if Congress has not chosen to regulate some aspect of interstate commerce, that means Congress doesn’t want the states to regulate it either.  So, normally a state can regulate interstate commerce only if Congress has given explicit permission.

If state law discriminates against out-of-state sellers who compete with in-state sellers, the state is regulating interstate commerce.  A state is not allowed to do this unless it can prove the discrimination is necessary to accomplish some clear state purpose that cannot be accomplished in some other way. States have to present evidence that proves these points, not just make arguments. 

The 21st Amendment, which repealed Prohibition, gave states the right to regulate alcohol.  Recent court cases involving direct wine shipment clarified that when states regulate alcohol, they must still obey the Commerce Clause. This makes good sense. Imagine if the 21st Amendment freed states from the rest of the Constitution when they regulate alcohol. The police could break into your house without warning if they imagined you might give your 20-year-old a beer, but they’d still need a search warrant if they thought you were cooking meth. 

In Granholm v. Heald (2005), the Surpeme Court said that states could either allow in-state and out-of-state sellers to ship wine directly to consumers, or prohibit it for both, but states couldn’t ban direct shipment for out-of-state sellers and allow it for in-state sellers. In response, most states have liberalized their direct shipment laws rather than making them more restrictive. In Family Wine Makers of California v. Jenkins (2008), federal courts said that an ostensibly neutral law that had a discriminatory effect on out-of-state sellers was also unconstitutional. Massachusetts had enacted a law that allowed only wineries producing 30,000 gallons or less to ship directly to consumers; the production cap was large enough to allow all in-state wineries to direct ship but small enough to exclude 637 larger out-of-state wineries that produce 98 percent of all wine in the United States.  The judge’s opinion essentially said, “By their fruits you shall know them,” and it reserved special grapes of wrath for the blatantly protectionist motives voiced by advocates of the law. Massachusetts appealed this decision to the First Circuit Court of Appeals, lost, and on April 12 decided not to appeal to the Supreme Court.

On April 15, Massachusetts Rep. Bill Delahunt introduced federal legislation that would turn alcoholic Commerce Clause litigation sideways. The legislation makes four big changes in the rules of the game:

1. It says that states may not “facially discriminate without justification.” This standard might reverse Granholm, because the state laws were clearly discriminatory but the states offered justifications. It would likely reverse Family Wine Makers, because the law was “facially” neutral but had discriminatory effects. (Of course, if this thing passes, I’d be delighted to see a consumer or winery plaintiff prove me wrong.)
2. It repeals the “dormant” Commerce Clause for alcohol by stating that congressional silence on interstate commerce in alcohol should not be interpreted as a prohibition on state regulation of interstate commerce in alcohol.
3. It shifts the burden of proof by requiring that anyone challenging a state alcohol law must prove “by clear and convincing evidence” that the law is invalid. Normally, states have the obligation to present evidence that a discriminatory law accomplishes a state purpose and is no more discriminatory than necessary.  
4. Any state law that burdens interstate commerce or contradicts any other federal law (!) would be upheld unless the person challenging it proves that the state law has no effect on temperance, orderly markets, tax collection, the structure of the distribution system, or underage drinking.  Since there’s plenty of economic evidence that state alcohol laws increase prices, a state could argue its laws reduce consumption and promote temperance, and the law would be upheld.  In other words, any state alcohol law that harms consumers by increasing prices would automatically be OK, even if it blatantly conflicted with other federal laws (such as antitrust laws, which are intended to protect consumers from the high prices associated with monopoly) or the Commerce Clause.

Word on the street is that the biggest pushers of this legislation are the beer wholesalers. Since most of this litigation has involved wine, what’s going on here?

The real goal of this legislation is not harrassing wineries that want to ship a few bottles to out-of-state customers. The real goal is to preserve anti-competitive state laws that force brewers, wine makers, and distillers to market most of their product through beer, wine, and spirits wholesalers, instead of marketing directly to retailers and restaurants. The proposed legislation would effectively insulate these state laws from challenge under the Commerce Clause, federal antitrust laws, or any other federal laws that might give alcohol producers and consumers some leverage to break the wholesalers’ lock on the market.

Call it states’ rights kool-aid with a chaser of economic protectionism.  A strange brew indeed.

Last week the D.C. Circuit Court of Appeals ruled that the Federal Communications Commission cannot impose net neutrality rules on broadband providers under its “ancillary jurisdiction” under the Communications Act.  If it wants to impose net neutrality, the FCC must first reverse previous decisions and reclassify broadband as a “Title II” common carrier.

Whoa!  The previous two sentences prove that this economist has been spending way too much time around telecom lawyers.

In almost-plain English, the court decision means the FCC cannot impose net neutrality regulations unless it publicly changes its five-headed mind and decides that broadband is much like an old-fashioned telephone monopoly and should be regulated much the same way. 

A lot of regulatory economists pretty much gag at this idea, or worse. Non-economists wonder what triggers this visceral reaction.

Let me explain.  As the recipient of 8 years of excellent Jesuit education, of course I have three reasons.

First, anyone who follows the scholarly literature on economic regulation generally knows that this form of regulation has a pretty checkered track record. In a wide variety of industries, economic regulation has increased prices, inflated costs, stunted innovation, and/or created shortages. In addition, because this regulation transfers enormous amounts of wealth — $75 billion annually in the case of federal telecommunications regulation — it creates enormous incentives for firms to lobby and litigate to bend the rules in their favor. While big corporations may feel they benefit from these expenditures, from a society-wide perspective the fight over wealth transfers is pure waste because it rarely produces anything of value for consumers. 

Utility regulation works best in relatively stangant industries where a company makes a big capital investment, pays a few employees to run it, and doesn’t need to innovate much.  In those kinds of situations, it’s easier for regulators and other outsiders to determine costs, set some rates that let the utility earn a reasonable rate of return, and keep the regulated company from gaming the system too much. If you think this describes broadband, well, good luck. A local water utility is probably the best example.

Second, anyone knowledgeable about the economic theory underlying utility regulation (which includes most economists who specialize in the area, and some lawyers) understands that regulation is supposed to be a last resort for “natural monopoly” industries where it’s cheaper to have one firm serve the entire market. A monopolist protected from competition could increase prices, degrade service, or do other things that increase its profits while harming consumers; economic regulation seeks to prevent those behaviors. But if competition is possible, competition is preferable. 

When phone, cable, wireless, and satellite companies bombard us continually with solicitations to switch to their broadband services, and I can see multiple wires running down the street outside my house when I go up on the roof to adjust the satellite dish, it’s pretty darn obvious that broadband is NOT a natural monopoly, even if competition isn’t “perfect.”  Therefore, broadband lacks a key prerequisite for public utility regulation to possibly increase consumer welfare.  Indeed, the most anti-consumer results of economic regulation have occurred when government created monopolies, cartels and/or shortages by imposing this regulation on industries where competition is possible, such as cable TV, trucking, railroads, airlines, oil, and natural gas.

Third, recent economic studies find that the FCC’s decision to classify cable, DSL, and fiber broadband as a less-heavily-regulated “information service” generated a tsunami of investment and spurred competition. See, for example, this study by my GMU colleagues Thomas Hazlett and Anil Caliskan. Some more cites are available on pp. 17-18 of this comment to the FCC. If you don’t believe economic studies, just keep in mind that the aggressive marketing of dirt-cheap entry-level DSL tracks pretty closely with the FCC’s decision that DSL is an information service not subject to Title II regulation.  Coincidence?

So, please excuse those of us regulatory economists who vomit when the subject of Title II comes up. If you check out the links above, perhaps the reaction will be more understandable.

I have not addressed the question of whether it’s realistic to think that reclassification of broadband under Title II could be a workable mechanism to impose just a limited, targeted, surgical, light-handed, smart, data-driven, evidence-based, transparent, transformative, sustainable, green, hybrid, itsy bitsy teenie weeny yellow polka-dot bikini smidgen of net neutrality regulation to prevent only certain forms of anti-consumer discrimination, without imposing the customary broad panpoly of public utility price and service regulation. Whether that’s possible in theory, or likely in real-world political practice, is a different issue for a different day. (Whether the other name for that kind of regulation is “antitrust” is also a different  issue for a different day.) For the moment, I just wanted to provide some context on the broader Title II issue.

And now I’ll go clean off my shoes.

Several years ago at a conference on universal telecommunications service, one panel moderator noted, “Everything that can be said about universal service has already been said, but not everybody has had a chance to say it, so that’s why we still have these conferences.” After hearings and a study by the Federal Trade Commission, a Federal Communications Commission Notice of Inquiry during the previous administration, the National Broadband Plan, the FCC’s still-open Open Internet proceeding, and Wednesday’s extension of the reply comment period in the Open Internet proceeding, net neutrality is starting to have the same vibe.

That’s why, instead of virtually killing some more virtual trees by writing more lengthy comments and replies, Jerry Brito and I signed onto a declaration by telecommunications researchers which explains that there is no empirical evidence of a systemic problem that would justify net neutrality rules, and these rules might actually ban practices that benefit consumers. Since the world probably doesn’t need another blog post rehashing arguments about this issue, I’ll simply point you to the comment here. It was masterfully written by economist Jeff Eisenach, a veteran of the Federal Trade Commission. (The teeming throngs of humanity who are curious to know whether Jerry and I have any original thoughts to contribute to the issue can read this CommLaw Conspectus article.)

Now that I’ve gotten the shameless self-promotion out of the way, let me MoveOn to a broader point. The debate over net neutrality illustrates how important it is to identify and demonstrate the nature of the problem before trying to solve it.  This applies whether the issue is net neutrality or health care or financial market regulation. Two points in particular bear repeating.

First, ensure that there is empirical evidence of a system-wide problem. The arguments for net neutrality are based on concerns about things the broadband companies might have the ability to do – not empirical proof of widespread abuses that have actually occurred. Less than a handful of famous anecdotes support the argument for net neutrality. Sweeping, systemwide policy changes should only occur when a sweeping, systemwide problem actually exists.

Second, understand the actual nature of the problem. Have a coherent theory of cause and effect that explains why the problem occurs with reasoning that is consistent with what we know about human behavior. Ignoring this point has led to some odd decisions on issues far afield from net neutrality. In 2009, for example, the Department of Energy proposed energy efficiency standards for clothes washers to be used in laundromats and apartment buildings. The justification for the regulation assumed that greedy business owners and landlords willfully ignored opportunities to earn higher profits by investing in energy-efficient appliances! One might argue about whether consumers always identify and act on opportunities to save energy, but assuming that businesses will ignore opportunities to save money is a much bigger stretch.

If you don’t get the problem right, you won’t get the solution right!

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.

The Federal Communications Commission released the full version of its National Broadband Plan yesterday — all 11+ megabytes of it. A quick read (!) of the 300+ page document reveals that the problem of broadband “availability” is not nearly as big as the numbers highlighted in the plan would lead one to believe. If you’re careful to read the caveats and the numbers in the plan that don’t get a lot of emphasis, the problem of people who lack access to broadband is quite manageable.

The plan states that 14 million Americans lack access to terrestrial broadband capable of delivering a download speed of 4 megabytes per second (mbps). Making broadband of this speed available to all Americans would cost $24 billion more than the likely revenues from sale of the service.

(To calculate the dollar figure, the report’s authors estimated the stream of future costs and revenues from extending 4 mbps broadband to places where it does not currently exist, then “discounted” them to present values to make the costs and revenues comparable.  The $24 billion “funding gap” is thus a present discounted value.)

Several key assumptions drive these estimates.

First, the plan explicitly declined to include satellite when it measured availability of broadband.

Second, even if the plan’s authors wanted to include satellite, the choice of the 4 mbps benchmark also excludes all but the most expensive residential satellite broadband plans.  Perhaps more importantly, the 4 mbps benchmark also allows the plan to ignore “third generation” wireless Internet as an option for households located in places that don’t have wired Internet. 

These are important omissions, because the plan reports that 98 percent of Americans live in places that have 3G wireless Internet. On the other hand, 95 percent of Americans have access to wired broadband capable of delivering 4 mbps downloads. If we include 3G wireless Internet, only 2 percent of Americans live in places where broadband is not available, rather than 5 percent. In other words, including wireless broadband in the calculation cuts the size of the problem by more than half!  If we include satellite, the number of Americans who don’t have broadband available must be truly miniscule.

Why is 4 mbps the goal, anyway? The plan does not explain this in great detail, but it looks like 4 mbps is the goal because that’s the average speed broadband subscribers currently receive in the US. As a result, the plan picked 4 mbps as the speed experienced by the “typical” broadband user in this country. Only problem is, other figures in the plan show that 4 mbps is not the speed experienced by the “typical” US broadband user. The same graph that shows the average broadband speed is 4.1 mbps (on page 21) also shows that the median speed is 3.1 mbps. Half of broadband users have speeds above the median, and half have speeds below the median; that’s the mathematical definition of a median. When the median is 25 percent below the average, it’s simply not accurate to say that the average shows the speed that a “typical” user receives. The typical user receives a speed slower than 4 mbps.

The 4 mbps figure is also way above the goals other nations have set for broadband; the plan shows that other countries typically seek to ensure that all citizens can connect to broadband at speeds between 0.5 and 2 mbps. A goal in that neighborhood would surely allow most 3G wireless services to count as broadband when estimating availability.

That $24 billion “funding gap” also deserves comment. That’s the amount of subsidy the plan estimates will be required to make 4 mbps broadband available to all Americans.  If you read the plan carefully, you will also find that a whopping $14 billion of that is required to bring broadband to the highest-cost two-tenths of one percent of American housing units — 250,000 homes  (page 138). That works out to $56,000 per housing unit!

One wonders whether most Americans would be willing to spend $56,000 per home to ensure that these last few folks can get broadband that’s as fast as the FCC’s broadband planners have decided they deserve. Here’s another option. A basic satellite broadband package costs about $70 per month. Giving these 250,000 expensive-to-reach households satellite broadband would only cost about $200 million a year. It would cost less than half of that if we actually expect these consumers to pay part of the cost — maybe the same $40 per month the rest of us pay in urban and suburban areas?

That cuts the broadband “funding gap” to $10 billion, plus maybe $100 million a year for the satellite subscriptions. If we abandon the arbitrary 4 mbps definition of “acceptable” broadband speed, so that 3G wireless counts as broadband, the gap would be maybe half that size (since more than half of the people who don’t have wired broadband available do have 3G wireless available).

 And guess what — the broadband plan identifies about $15.5 billion in current subsidies that the FCC could repurpose to support broadband. In other words, the FCC has the ability to solve the broadband funding gap all by itself, without a dime of new money from taxpayers, telephone subscribers, or broadband subscribers!

I’m surprised the plan didn’t point that out; coulda made the five commissioners look like real heroes.

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.

An Associated Press story this morning by Eileen AJ Connelly provides our latest example of Regulatory Whak-A-Mole, known to scholars as “term substitution.” 

Bank of America announced that it will discontinue charging overdraft fees on debit cards. This comes in response to new regulations that prohibit banks from charging overdraft fees unless the consumer has consented to the fee.  Since the bank has no way of getting your consent when you walk into Starbucks and perpetrate an overdraft while buying your latte macho grande and muffin, it simply won’t let the transaction go through.

Wa-Hoo, another victory for consumers. Well, not quite. Customers who place a high value on not being embarrassed in Starbucks are arguably worse off. (How do you return a latte macho grande if you find out you don’t have enough money to pay for it after your coffee concierge has mixed it?) More seriously, customers who might want to use an overdraft for a more substantial purchase will no longer have this option.

I wonder about the argument that regulators are saving hapless, uninformed consumers. The AP article reveals that 93 percent of overdraft fees are generated by 14 percent of customers — “serial overdrafters.” That means there are a lot of folks out there who repeatedly try to use their debit cards as a source of credit, albeit an expensive one. I don’t know about you, but it would only take one or two overdraft fees before I’d realize it’s cheaper to keep a $25 balance in my account than to pay more than that in multiple overdraft fees. If most overdrafters have done this more than once, they must know they will be charged a fee and have decided that’s the lesser of multiple evils. So why take this choice away from them?

Point-of-sale overdrafts may not be the only casualty of this regulation. The article quotes banking analyst Robert Meara’s prediction that banks might curtail free checking, which many apparently offer as a loss leader to generate fee income. A smaller stream of fee income makes “free checking” less attractive for banks.

Which consumers does this ultimately hurt? I can think of one group: people with low incomes who can’t afford checking account fees and  use debit cards responsibly.  

Somehow I doubt that was the regulators’ intention.

I was slow to adopt broadband. So maybe it’s also appropriate that I was slow to read John Horrigan’s highly informative survey on broadband adoption released by the Federal Communications Commission on February 23. Or maybe it’s fortuitous, because the delay let me take a look to see what messages the news media took away from this survey.

Two clear messages appear in the news coverage.  The first is a variant of the screaming headline the FCC put on its own press release: “93 Million Americans Disconnected from Broadband Opportunities.” You’ll find this as the headline or lead paragraph in coverage by the New York Times and AFP.

The second type of message highlights the main reasons one-third of the population does not subscribe to broadband. “FCC Survey Shows Need to Teach Broadband Basics,” notes the headline on an Associated Press story. According to the survey, the three main obstacles to broadband adoption are cost, lack of digital literacy, and non-adopters’ perception that broadband is not sufficiently relevant to their lives.  (I got a chuckle when I saw that non-adopters said they would be willing to pay $25, on average, for broadband; that’s the magic price that finally induced me to give in and sign up!)

But whoa, what’s missing here?  Our old friend Availability. Broadband was supposed to be some kind of noveau public works project that would take hundreds of billions of dollars to bring to fruition, because many Americans lack access to broadband. “Build it and they will come!” “Pour that concrete information superhighway!” “Stimulate the economy!”

The FCC survey tells an interesting story about availability:

Of the … non-adopters, 12 percent say they cannot get broadband where they live. This translates into a 4 percent share of Americans—on the basis of their reports on infrastructure availability in their neighborhood—who say they are unable to obtain broadband because it is not available. This means that 31 percent of all Americans can get service but do not. (p. 5)

The survey also notes that 10 percent of rural respondents say broadband is not available where they live.  I don’t mean to sound insensitive, but that’s all?  Heck, I’d have guessed a higher percentage than that.   

To put the numbers in perspective: 4 percent of Americans say they don’t have broadband because it isn’t available, while almost three times as many — 10 percent — lack broadband because they think the Internet is irrelevant to their lives.

Is availability a problem in some places?  Sure. But the FCC survey shows it isn’t nearly the size of problem we’d been led to believe. So let’s hope the National Broadband Plan’s discussion of availability is similary circumscribed and appropriately targeted.

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.”

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!

The Federal Communications Commission released its 102-page fiscal year 2011 budget request to Congress this week.  Here are some fascinating factoids about the agency that I’ll pass on without commentary, beyond saying that they caught my attention:

• The FCC has hired “close to 54 data experts, statisticians, econometricians, economists, and other expertise” to help with the National Broadband Plan mandated under the Recovery Act. These are “term employees,” meaning they’re not permanent, but the FCC says it needs more permanent hires to work on broadband after the plan is done. (p. 2)
• The commission asks for a “budget” of $352.5 million. (p. 1) But its total requested spending actually tops $440 million, because it also asks for authority to spend $85 million of spectrum auction proceeds to cover the cost of auctions. (p. 5)
• The administration proposes to give the FCC authority to charge user fees for unauctioned spectrum licenses, with projected revenues totaling $4.8 billion through 2020. (p. 6)
• The FCC commits to 24 “outcome-focused performance goals.”  (pp. 16-29) Most of these goals are phrased as activities, not accomplishments, with lots of verbs like “enact,” “encourage,” “facilitate,” “enforce,” “promote,” “work to,” “foster,” advocate,” and “maintain.” In some cases, one can identify the actual concrete outcome by looking at additional wording or performance targets. It’s clear, for example, that the FCC wants to make sure that all Americans have access to broadband. In other cases, the concrete outcome, or how we would know if it is accomplished, is not clear.  For example, the only targets listed under the goal “Promote access to telecommunications services to all Americans” are targets for enforcement actions rather than measures of whether the FCC has actually accomplished the desired outcome.
• The FCC has been supported almost entirely by regulatory fees assessed on regulated companies, with virtually no direct appropriations of tax dollars since fiscal year 2003 (p. 31).
• Spectrum auctions have generated more than  $51.9 billion for the US Ttreasury. (p. 33)