Friday, June 30, 2006

A La Carte Mandates Defeated

With all of the attention focused on the momentous battle over net neutrality at this week's Senate Commerce Committee markup on the communications bill, not enough attention has been paid to the welcome defeat of amendments offered by Sen. McCain that, in effect, would have required cable operators to offer channels on an a la carte basis. The amendments were defeated handily.

In today's increasingly competitive multichannel video environment, it is not necessary or wise for the government to dictate the manner in which broadband operators are required to offer their services. Competitive pressures will ensure that the providers offer services in a way that meets consumer demands.

Apart from constituting unwise policy, government mandates such as a la carte requirements, multicasting "must carry" obligations, and net neutrality non-discrimination obligations all raise serious First Amendment free speech and Fifth Amendment property rights issues.

Monday, June 26, 2006

More Double-Speak: Net Neutrality's First Amendment Perversion

Sometimes really bad ideas have adverse consequences that extend even beyond the most immediate detrimental impact of the bad idea. As I have explained many times, "net Neutrality" is a bad idea that, if adopted, is likely to stifle future innovation and investment on the Internet. That's bad enough. But the double-speak that is being employed to sell NN is distorting the accepted understanding of the First Amendment and undermining the free speech values protected by the First Amendment. This derogation of constitutional rights has been too little noted, and it is too important to be ignored.

As everybody schoolboy knows (or should), the First Amendment protects us against government censorship or restriction of private speech ("Congress shall make no law...."). But so eager are the net neutrality advocates to turn the broadband providers into traditional common carriers that they willingingly turn the First Amendment on its head. Thus, we have the example of the last Stevens bill draft, with Section 904 entitled "Application of the First Amendment." It reads in part: "Consistent with the First Internet service provider...may limit, restrict, ban, prohibit, or otherwise regulate the content on the Internet because of the religious views, political views, or any other views expressed in such content..."

Of course, this provision is demonstrably inconsistent--not consistent--with the first great protection in the Bill of Rights. The First Amendment's free speech clause protects private parties from having their speech restricted by the government. It does not restrict a private party from restricting the speech of another private party. A law purporting to prevent a private operator of a communications facility from regulating the content of speech carried on its own communications facility is incompatible with First Amendment jurisprudence. (I know that in the Red Lion case in the 1960s the Supreme Court upheld the government's Fairness Doctrine that required broadcasters to carry content they might not otherwise have wished to carry. I also know, putting aside whether the Court would reach the same result today even as to broadcasters, that the decision rested on the so-called scarcity of the public's airwaves. And I know that the Court would not extend the Red Lion rationale to non-spectrum-based cable, telephone, or other broadband providers today.)

This distortion of First Amendment principles does more than just harm the cable, telephone, wireless, and satellite operators that, in effect, involuntarilywould be turned into common carriers, required to carry all content indiscriminately. Sure, the derogation of their free speech rights injures them. But when the net neutrality double-speak turns the First Amendment on its head, all American citizens lose something very important.

Maryland Among States of Plenty

The Wall Street Journal has a editorial this morning entitled "States of Plenty" [subscription required]. It is all about how, due to the robust economy of the last several years, most state coffers are overflowing with tax revenues. There are recaps of the situations in several states.

Here's what the WSJ has to say about Maryland:

In Maryland, the Democratic legislature seems to believe that proximity to the recession-proof federal government will insulate its economy from even the most hare-brained policies. Over the past three years GOP Governor Robert Ehrlich has had to veto $7.5 billion in tax increases. The one piece of good news is that Mr. Ehrlich and Democratic Comptroller William Donald Schaefer -- both of whom face tough re-election fights this year -- joined to cut property taxes by 15%.

Thursday, June 22, 2006

A Principled Veto

Earlier today Governor Ehrlich vetoed SB 1, the bill passed by the Maryland General Assembly's bill to deal with the BG&E electricity rate hike. He gave five reasons, and one of them was the focus of my testimony before the governor at his Tuesday veto hearing: the bill's summary dismissal of all of the Public Service Commission members to be replaced, in effect, by choices of the leaders of the legislature. Read his veto message here.

As I urged in my hearing testimony, in and of itself this provision constitutes sufficient grounds for a veto. I stated that: "This precedent will create an environment in which utilities will conclude that regulatory decisions will be made not based on sound ratemaking principles, but rather with an eye to the political passions of the moment. In this environment, incentives to innovate and invest for the longer term will be diminished....This course will encourage the view that the legal regime and regulatory environment are unstable and unpredictable...."

Along these very same lines, in his veto message Governor Ehrlich stated: "[I]t is unsettling to the State's regulatory climate for the General Assembly to eliminate the members of a quasi-judicial agency with nearly a century of independence when the General Assembly disagrees with an opinion of the agency. Such action will only lead to major regulatory uncertainty, less competition, and higher costs for consumers."

The governor also rightly pointed to the potential unconstitutionality of the dismissal provision on the grounds that it violates separation of powers principles that are key to Maryland's tripartite constitutional regime. Whether or not a court would ultimately hold the provision unconstitutional we do not now know. But we do know that the PSC dismissal provision is an assault on fundamental separation of powers principles that are essential to maintaining liberty and effective and responsible government. As I said at the close of my testimony:

"Reform of the PSC warrants serious consideration. But it is far more consistent with accepted notions of a government of separated and diffused powers—one in which no branch aggrandizes its own power at the expense of the power of a co-equal branch—for the PSC to be reformed in a way that increases the governor’s appointment and removal authority over the agency’s commissioners, and, therefore, the governor’s accountability for the agency’s policymaking actions. Because SB 1’s approach is in the opposite direction, it should be rejected."

The governor was right --and courageous--to veto SB 1. There are various ways to address the details of the rate relief mitigation plan to which Governor Ehrlich objected that ought to be acceptable. But, as I said in my testimony, in addition to the substance of regulation, consumer welfare is affected "more broadly, by whether government structures put in place for bodies such as the Public Service Commission are consistent with fundamental principles of sound governance."

With his principled veto, Governor Ehrlich has given the General Assembly another opportunity to get it right!

Wednesday, June 21, 2006

Net Neutrality Double-Speak

At bottom, the net neutrality proponents' arguments are as much about sowing confusion as anything else. And there is a certain line of argumentation that, in the end, is most confusing of all, and, if we're honest about it, just amounts to doublespeak. Yesterday, on CNBC, I heard Senator Ron Wyden, one of the most ardent net neutrality mandate proponents, say something very close to (if not verbatim) this statement which appears on his website:

"Network operators must not be allowed to create a priority lane where content providers can buy quicker access to customers, while those who do not pay the fee are left in the slow lane."

Just like he says on his website, Sen. Wyden said yesterday he was absolutely opposed to "creating a two tiered system" which might chill mom and pop businesses from competing with the Wal-Marts of the world.

Then, in response to a question from the CNBC anchor, he said he had absolutely no problem with allowing pricing on the Internet akin to that used by the US Post Office in which you can pay more for speedier delivery (Express Mail) or pay less for slower delivery (regular mail). That's perfectly fine, he said. If customers want to pay more for priority mail, fine.

I don't get it. Someone please explain to me how Sen. Wyden (and his like-minded colleagues) say that the Post Office's priority pricing scheme for a variety of levels of mail service is fine, but the world would come to an end if the same basic economic principle were introduced on the Internet.

Like net neutrality mandaters, I don't want the world to come to an end. But I do want the Internet to continue to develop robustly. Continuing to develop robustly means allowing the broadband operators the freedom to enter into business arrangements and to develop pricing plans that are efficient and that make sense in a market environment. For the Internet, continuing to develop robustly means at the very least as much freedom as the Post Office has to establish prices that reflect different levels of service if such tiered pricing arrangements make marketplace sense. It means freedom from net neutrality mandates.

Even Sen. Wyden and his allies don't seem to be arguing--at least when pushed on the point--that they want to go back to the days when Post Office customers didn't have the option of priority mail (I know, there was even higher "airmail" rate before today's multitudinous options. I used to collect stamps in the 50s with airplanes on them).

Why do the NN mandaters want to enact laws that make the Internet less able to respond to market needs than even the Post Ofifce?

Please explain.

Monday, June 19, 2006

Constitutional Reprieve for Multicasting

According to an item in this morning's Washington Post, FCC Chairman Kevin Martin has pulled from this Wedsnesday's FCC meeting agenda a proposal to impose a multicasting mandate on local broadcasters. This is good news, not least for the notion of creating a culture at the FCC that is mindful of constitutional rights.

As I explained last week in a post below entitled, "Taking the Constitutional Oath Seriously at the FCC," a government mandate requiring cable operators to carry multiple signals of local broadcasters likely would violate the First Amendment's free speech and the Fifth Amendment's property rights protections.

The Post speculates that the proposal may have been pulled from consideration, at least for now, because of concerns by new FCC commissioner Robert McDowell. I don't know whether that is true, but, if so, it would be a welcome sign that McDowell is taking seriously the constitutional oath he so recently swore.

Thursday, June 15, 2006

Taking the Constitutional Oath Seriously at the FCC

Like the President and members of Congress, when FCC commissioners are sworn into office, they pledge that they "will support and defend the Constitution of the United States." Indeed, this pledge is not, of course, a nice platitude. The Constitution itself provides in Article VI that all federal officers "shall be bound by Oath or Affirmation, to support this Constitution."

We'll have a chance to see how seriously the FCC commisoners take their constitutional oath to support and defend the Constitution next week. Because that's when the FCC is scheduled to consider--yet again!--whether cable operators should be required to carry not one, but multiple streams of local broadcast station programming. Simply put, such a requirement almost certainly would violate the First Amendment free speech rights and the Fifth Amendment property rights of the cable operators.

In 1994 in the Turner case, a sharply divided Supreme Court (5-4) barely upheld against a First Amendment challenge must-carry provisions that required cable operators to carry one signal of local broadcast stations. There is no evidence that, nor could there be in today's sunstantially changed communications environment, that the failure to carry multiple signals of local broadcasters will diminish the availability of local programming. And under Turner that is the test that must be met, with substantial and convincing evidence, to pass constitutional muster.

And a must-carry multiple signals mandate in today's competitive video environment doesn't pass muster under the Fifth Amendment either. Cable operators have a right under the Fifth Amendment not to have their property commandeered for the benefit of broadcasters. There is only so much capacity available, and, sure, if I had my druthers, I might like for the government to require the cable operators to commandeer two or three channels for The Free State Foundation to carry programming I want transmitted. I can understand the broadcasters wanting to "free ride" whenever they can. But that's why we have a Constitution that protects private property from commandeering absent the government making a very convincing showing it is necessary to seize the property for public use, and then being willing to pay just compensation for the seizure. Not the case here.

The "must carry" vote next week will be a real test in which we'll have an opportunity to see whether the FCC commisioners take their constitutional oaths seriously. Every government official should, whether running the Weather Service, the Export-Import Bank, or whatever. But with the immense power that FCC commissioners continue to exercise over the communications media, there aren't many public officials for whom the pledge to protect and defend the Constitution is more crucial to good job performance.

And, importantly, rejecting multicast must-carry not only protects the Constitution, but represents sound communications policy.

If You Really Want To Understand Net Neutrality

With sophistic slogans such as "Save the Internet," not to mention the seemingly appealing "Net Neutrality" label itself, it is not suprising that many ordinary Internet users are wondering what are the hullaboo is about. They may be wondering to we really need to apply the old public utility regulations applicable in the monopolistic narrowband world to broadband Internet services in a competitive environment.

Well, no. To dispel any notions that Congress should jump in and regulate the Internet, see this just released an easy-to-digest Net Neutrality primer co-authored by four of my former PFF colleagues (and friends!) and myself.

The approach in the curent draft of the Stevens bill is a wise one: Don't enact innovation-stifling regulatory mandates before there is a problem requiring a regulatory solution.

Tuesday, June 13, 2006

Net Neutrality: Internet Retrogression

In a column in CNET published on June 1 entitled, "Watch Out We Don't Neuter The Net," I stated: "Strict Net neutrality mandates also mean ordinary Internet users must pay equally for the increased investment required to support some very resource-intensive activities, such as downloading movies or gaming. In effect, this is akin to imposing a retrogressive tax on those less resource-intensive consumers to subsidize sites, such as Google and Yahoo, which are responsible for generating the increased investment necessary to support high-traffic, high-capacity applications."

It was gratifying to see yestersday's Washington Post editorial, "The Internet's Future," make many of the same points that I made in my CNET commentary, especially the point that what the Googles, Yahoos, and Microsofts seem to be looking for are subsidies from lower-volume, less bandwidth-hungry Internet users. Thus, the Post concludes:

"Allowing builders of Internet infrastructure to recoup their investment by charging the Googles and Amazons for use of their network would balance the incentives for innovation more closely. Ironically, a non-neutral net would accelerate the spread of zippy broadband that can deliver movies, allowing hobbyists with camcorders to take on Hollywood studios. The neutrality advocates who criticize corporatized cable TV should welcome that. The weakest aspect of the neutrality case is that the dangers it alleges are speculative. It seems unlikely that broadband providers will degrade Web services that people want and far more likely that they will use non-neutrality to charge for upgrading services that depend on fast and reliable delivery, such as streaming high-definition video or relaying data from heart monitors."

Exactly right. The broadband marketplace is not perfectly competitive in all locales, but it is workably competitive in almost all. In this environment, unless and until there is some (unlikely) demonstrable market failure, far better to let the marketplace sort out the business arrangements which best enhance the welfare of all Internet consumers.

Sunday, June 11, 2006

Electroshock Legislating

The Maryland legislature is set to convene tommorrow to consider what to do about the impending BG&E rate hikes. According to the Washington Post, "the Democratic leaders are considering sweeping changes that include dismissing the state's utility regulars and restocking the Public Service Commission with members considered more consumer friendly."

There are sensible actions in the nature of transitional rate plans on which the legislature and governor ought to be able to agree to mitigate the rate shock that will result from implementation on a flash-cut basis of a 72% rate hike. But having the legilature establish the precedent that it will replace all of the PSC commissioners willy-nilly on its whim is not one of them. As I explained in a commentary published in the Baltimore Sun on April 25, there is a better way to make the PSC more politically accountable than to have the legislature hiring and firing PSC commissioners. That is a course unlikely to lead to economically sound ratemaking decisions at the PSC.

And keep in mind it was the legislature in 1999 that ordered electricity rate deregulation. And further keep in mind that nobody then predicted the surge in raw energy prices we have experienced in the last several years, due in part to geo-political factors beyond anyone's control, much less the control of the PSC commissioners. And, finally, keep in mind that it requires substantial capital investment and ongoing costs to generate, transmit, and deliver electricity. Even though we can't see it or smell it, electricity is not a free good. So, any solution proposed by the legislature that doesn't recognize this basic economic fact--in other words, a solution that is merely political theatre and nothing more--will not really be "consumer friendly". Because, ultimately, to have available on demand reliable and dependable sources of electricity, the costs of generating and delivering it must be recovered by the utilities from the consumers who benefit from such availability and use.

Friday, June 09, 2006

Welcome to the Free State Foundation Blog

Welcome to the Free State Foundation blog. In addition to the longer scholarly studies, essays, commentaries and the like published on a more leisurely schedule by FSF, it is important as well--at least at times--to react to daily events with immediacy. Sometimes the comment is on a pending bill or agency action, sometimes a reaction to an action already taken, sometimes a response to another's comments, and, not infrequently--hopefully, at least--the offering of an original thought or idea.

On FSF's home page, right after the tag line, "A Free Market Think Tank for Maryland," is embedded the injunction: "Because Ideas Matter". Indeed. So, this blog is just another means of ventillating and vetting ideas, along with all the other more traditional means that preceded it. But please keep in mind, with the immediacy, it is probably only natural for a bit of emotionalism to surface from time to time, and a few typos as well. But we'll strive for ventillation, not hyperventillation.

Winston Churchill once said: "Nothing is so exhilarating as to be shot at without success." Fortunately, I have no first hand experience in that regard. But it is exhilirating to engage in the battle of ideas to, as our website proclaims, promote the "understanding of free market, limited government, and rule of law principles in Maryland and throughout the United States."

I welcome anyone's help who shares that purpose.