Computer Inquiry I, II, III, And On and On

At the book forum on Tuesday announcing the release of the new book, Net Neutrality or Net Neutering: Should Broadband Internet Be Regulated, which I co-edited with my former colleague Tom Lenard, I made the point that the current campaign to impose "net neutrality" regulation on broadband service providers, in effect, is nothing more than an effort to re-impose the same type of strict non-discrimination common carrier obligations on the broadband ISPs that were at the heart of each the three Computer Inquiry proceedings that played out at the FCC during the 60s, 70s, and 80s. I said that the current attempt to impose neutrality mandates on broadband providers could just as well be called Computer V, Computer IV being the failed campaign of a few years ago to impose "open access" requirements on cable operators.

For those fortunate enough to be too young too know these things, I pointed out Computer I was begun in 1966, when, yes, Virginia, AT&T did possess dominant market power. As computers began to be connected via communications, and new applications integrating data processing and communications emerged, the central idea of the Computer Inquiries was to prevent AT&T (and then post-divestiture, its Bell Company progeny) from using dominant market power to discriminate against newly emerging "enhanced" service providers. At that time, in the then-narrowband world still largely characterized by the market power of the Bell companies, the Computer Inquiry rules requiring strict separation of transmission and content and carrier non-discrimination made some sense.

But, as I pointed out at the book forum, as far back as its 1981 Computer II decision, even as the the FCC was imposing non-discrimination obligations, the agency predicted that "technological trends suggested that hard-wired access provided by the telephone company will not be the only alternative." It recognized even then that, as a result of technological developments, the communications marketplace was beginning to become more competitive.

Now flash forward a quarter of a century later. The FCC's prediction was correct, of course. With cable operators, satellite providers, and wireless companies all competing with the telephone companies, the broadband marketplace is radically different than the narrowband world that gave us the Computer I, II, and III proceedings. Over four years ago, based on an extensive record, the FCC determined that the broadband marketplace is competitive and that broadband ISPs such as Comcast, Verizon, and the like are not common carriers subject to the Communications Act's rate regulation and non-discrimination obligations. Of course, the broadband marketplace is even more competitive now then when the Commission made that finding, and is becoming more so every day.

So, it's discouraging that, in this changed marketplace environment, net neutrality advocates are trying to re-impose quarter-century old Computer Inquiry mandates that no longer make sense in today's world. You might as well call this new regulatory effort by what it is: Computer V. At least that way, you can easily trace its origins back to 1966, a far-away time with a marketplace terrain that now is almost a distant memory.

Power Politics

With air conditioners working overtime during the heat wave of the past few days, it is a good time to remember that it is unwise for politicians--whatever may be the short-term political gains--to make scapegoats of utilities. A story in today's Washington Post recounts the strains on the local power grid that have caused some scattered problems, along with deliberate cut-backs of power. And the Wall Street Journal has a story, "Heat Wave Spurs Calls for Stronger Power Grid," to the same effect from a national perspective. [Subscription required.] The Journal reports that, while the amount of backup power is now adequate, it "has been in decline as a result of a growing economy and disruptions in energy markets that caused many firms to cancel new power-plant projects." According to the Journal's report, "one major problem is making sure that there's enough power available to accommodate sudden spikes in usage caused by extremely hot weather."

No one likes rate increases, and certainly not every rate increase, or the full extent of such increase, sought by a power company is justified. But the fact of the matter is that the costs of producing electricity has spiked in the past few years, and, at the same time, demand for electricity has grown, putting pressure on the capacity of the existing transmission infrastructure. Ultimately the higher costs of producing electricity and the investment in new transmission facilities and power generating plants must be recovered if utilities are to remain financially healthy enough to meet the demand for electricity.

There is, of course, room for legitimate differences of opinion as to the proper pace and method of cost recovery. But make no mistake: It is the consumers who will suffer in anything but the short run if the utilities are not ultimately allowed to recover the costs incurred in generating and transmitting electricity. Absent the ability to earn a fair return, the utilities will simply not invest in the facility and plant upgrades necessary to ensure that consumers, over the long term, have available reliable, secure sources of power at reasonable rates.

That is why, in the face of this year's proposed BG&E rate increases following an extended six year rate freeze, the Maryland General Assembly's bill scapegoating the Maryland Public Service Commission is so disappointing. The wholesale firing by the legislature in mid-term of all the PSC commissioners appointed by the governor creates an unstable legal and regulatory environment that will harm the long-term interests of ratepayers. And it also harms the interest all citizens have in maintaining a system of governance that respects the separation of powers that is central to preventing abuse of government power. For more on this subject, see here and here.

Montgomery County Impedes Video Competition

At the end of June, Verizon filed a lawsuit in federal court against Montgomery County asking the court to declare that the county's cable franchise process violates the federal communications and antitrust laws, as well as its First Amendment free speech rights. Verizon is asking the court to issue a preliminary injunction invalidating the county's franchising law and directing the county to negotiate a franchise with Verizon within sixty days.

Verizon alleges that the county is acting unlawfully by seeking to assess franchise fees on its non-video services such as Internet access and Internet telephone services, in demanding that it set aside an exceessive number of channels for public access and government programming, and in demanding cash and free services as a condition of granting Verizon the franchise authority the county says it needs before Verizon can offer television services over its newly-installed (and very expensive) fiber optic lines. What's more, Verizon claims the county is even demanding, in violation of federal law, that it pay hundreds of thousands of dollars to cover the fees of the county's lawyers and consultants. (Would you believe there is a whole cottage industry of consultants advising counties around the country concerning how to extract the most "free" goodies from franchise applicants!)

I do not know whether all of Verizon's allegations against the county are true or not, although based on past practices around the country and Montogomery County's own excessively pro-regulatory history, the allegations have the ring of truth. In the past the county has tried to regulate Comcast's provision of high-speed Internet service, which it lacks the legal authority to do, and which it shouldn't do anyway as a matter of policy. In any event, whether or not all of the specific allegations are proven in court, in a larger and more fundamental sense they are beside the point. The truth is that the requirement that a local franchise be required before "cable" service be offered has outlived whatever usefulness it possibly may have had in the past. The requirement that cable television operators, such as Comcast in Montgomery County, obtain a local franchise has been used primarily as a means of economic regulation on the theory cable television service is a monopoly service. Of course, that is not true in today's technologically-dynamic environment. Although cable operators still may be the dominant multichannel video providers, consumers already have available the alternative of satellite television providers. And now Verizon wants to enter the video market in a big way in Montgomery County and, using its newly-installed high-capacity fiber network, offer consumers a TV package of several hundred digital video and music channels, with access to an on-demand video library.

Apart from the strict legalities of the County's position (more about that later in this space), it is clear that the county's foot-dragging harms the very consumers the county may try to claim it seeks to protect. Although you might think it would not take a brain surgeon to figure this out, several studies by respected scholars, and studies by the GAO and the FCC, have confirmed that when telephone companies enter a local market the prices for "cable television" service drop quickly. (I put "cable television" in quotes, because cable operators, telephone companies, and satellite operators all are scambling to offer various packages of services that include video, voice, and Internet access in competively priced bundles. And because in today's technologically dynamic environment, video, voice, and Internet services are all just bits offered over the same digital network facilities. And, of course, your kids--and maybe you too!--are already watching some of your favorite TV shows on your cellphone screens.)

Put simply, Verizon's lawsuit illustrates why, as I testified before the U.S. House of Representatives Commerce Committee in March, it is time to change the law to establish a national video franchise regime, one that treats telephone companies and incumbent cable television operators alike in all respects. In a competitive environment, there is no sound reason why either cable operators or other video providers such as Verizon should remain subject to local franchise reqirements. This regime would still protect the localities' interest in establishing reasonable regulations and cost recovery mechanisms to govern the providers' use of local rights-of-ways. But a national franchise regime would prevent localities from holding up new entry into the video marketplace while they try to extract maximum concessions from franchise applicants. A bill establishing such a national franchise regime passed the House of Representatives in June and awaits Senate action.

It is unclear whether federal legislation will pass this year removing the county's local franchising roadblock to the speedier introduction of competition. It really shouldn't have to matter. Montgomery County citizens should not have to wait any longer for additional video and communications competition. The county should quickly get on with the process of granting Verizon permission to enter the market. More competition means consumers benefit from lower prices and better quality of serivice. This simple proposition should not be that hard for the Montgomery County government to grasp.

PSC Firings On Hold

The Washington Post reports that yesterday Maryland's highest court issued an injunction halting, at least for now, the Maryland General Assembly's sacking of all of the Maryland Public Service Commission members. As I explained in testimony presented at Governor Robert Ehrlich's veto hearing and here as well, this unprecedented action encourages the notion that the regulatory and legal environment is highly unstable and unpredictable. It also violates fundamental separation of powers principles that protect all citizens against aggrandizement of legislative power at the expense of the chief executive's appointment and removal authority.

The court's injunction hopefully signals that it is prepared to take seriously these arguments that go to the heart of both sound regulation and, more broadly, sound governance. Rest assured that, in anything but the most short-term sense, consumers will not be better off in a regulatory regime in which utilities, or any business for that matter, are put at risk of not being allowed to recover their investment and the cost of providing service just because the legislature disagrees with a regulatory action. And rest assured as well that all of Maryland's citizens will not be well served when accepted principles of separation of powers among the government's branches are ignored.