Monday, June 08, 2015

Dealing Effectively With Effective Competition

Over the past couple of years, I have had far fewer opportunities to commend the Tom Wheeler-led FCC than I had hoped for – and this has been a disappointment. So, I don’t want to miss an opportunity to give credit where credit is due. I am happy to applaud Chairman Wheeler, along with Commissioners Pai and O’Rielly, for adopting an order on June 2 that presumes cable operators are subject to “effective competition.” As a result of establishing this rebuttable presumption, each local franchising authority (LFA) will be prohibited from regulating basic cable rates unless the franchising authority demonstrates the cable system is not subject to effective competition.

Truth be told, this action should not be controversial. But Commissioners Clyburn and Rosenworcel dissented, in part, because the regulatory relief, such as it was, extended to all cable operators, rather than to small operators only.

In dissenting, Commissioners Clyburn and Rosenworcel exhibited the difficulty many regulators have, even in the face of a competitive marketplace, in just “Letting Go” – as the late, world-renown regulatory economist Alfred Kahn put it in the title of one of his books. Fred Kahn, a proud Democrat, was President Jimmy Carter’s Civil Aeronautics Board Chairman, until he succeeded, working principally with Senator Edward Kennedy, in getting Congress to disband the New Deal-era agency that set airline rates and controlled route entry and exit. I am proud Fred was a member of the Free State Foundation’s Board of Academic Advisors. By the way, the subtitle of Fred’s Letting Go book, which is critical of regulators’ disposition to cling to legacy regulations in the face of marketplace competition, is instructive: “Temptation of the kleptocrats and the political economy of regulatory disingenuousness.”

I certainly don’t wish to accuse anyone of being a kleptocrat, or of being disingenuous. And I’m sure Fred conjured up the subtitle with that usual playful twinkle in his eye. But I do think Commissioners Clyburn and Rosenworcel were wrong to dissent.

The indisputable reality is that the video marketplace has changed dramatically since the 1992 Cable Act established a regulatory regime allowing local franchise authorities to regulate basic cable service rates. But under the 1992 Act, LFAs may regulate rates only if the Commission finds the cable operator is not subject to effective competition. As the Commission explains in its June 2 order:

In 1993, when the Commission implemented the statute’s Effective Competition provisions, the existence of Effective Competition was the exception rather than the rule.  Incumbent cable operators had captured approximately 95 percent of MVPD subscribers. In the vast majority of franchise areas only a single cable operator provided service and those operators had “substantial market power at the local distribution level.” DBS service had not yet entered the market, and local exchange carriers (“LECs”), such as Verizon and AT&T, had not yet entered the MVPD business in any significant way. Against this backdrop, the Commission adopted a presumption that cable systems are not subject to Effective Competition…. 

In contrast to 1992, as the Commission points out, today satellite video service is ubiquitous and satellite providers “have captured almost 34 percent of multichannel video programming distributor (MVPD) subscribers.” As my colleague Seth Cooper and I stated in Free State Foundation reply comments urging the Commission to adopt the pro-consumer deregulatory presumption it now has adopted:

The Commission’s rules for imposing cable rate regulations are premised on early 1990s suppositions about cable operators’ so-called “bottlenecks.” Those premises do not correspond to today’s reality. Consumers now enjoy the benefits of vibrant video competition, with choices including two nationwide DBS providers, so-called “telco” entrants in the video market, and myriad online and wireless video delivery options. 

In light of these marketplace changes, which are further detailed in the Commission’s order, the majority concludes that, in adopting the rebuttable presumption, the agency was updating its rules “for the first time in over 20 years, to reflect the current MVPD marketplace, reduce the regulatory burdens on all cable operators, especially cable operators, especially small operators, and more efficiently allocate the Commission’s resources.”

Considering the competition that has existed in the video marketplace for many years, the Commission could have – and should have – taken this deregulatory step long ago. In responding to Commissioner Clyburn’s and Commissioner Rosenworcel’s argument that the STELAR legislation only directs the FCC to streamline the regulatory process for small cable operators, the Commission majority responds, correctly, that STELAR nevertheless does not restrict the Commission’s authority to extend relief to all cable operators. More importantly, the Commission majority explains that the agency possesses – and always has possessed – authority under the Cable Act to adopt the deregulatory presumption.

At least since April 2011, when I published “A Modest Proposal for FCC Regulatory Reform,” I have been urging the Commission to employ deregulatory presumptions to provide swifter and surer relief from burdensome regulations that no longer make sense. The Commission has a sound basis for adopting such evidentiary presumptions regarding marketplace competitiveness on a broader scale. Despite the usual protests from competitors (such as the National Association of Broadcasters in the “effective competition” proceeding) and those organizations that generally oppose all regulatory relief measures, employing deregulatory presumptions is both pro-competition and pro-consumer.

Well, that’s an argument I can – and will – carry on another day. For now, I’ll just content myself with commending Chairman Wheeler and Commissioners Pai and O’Rielly for a job well done.