Tuesday, January 30, 2007

Maryland PSC Chief Resigns-The Way Forward on Energy Policy

Under intense pressure from new Maryland governor Martin O'Malley, Kenneth Schisler resigned yesterday as Chairman of the Maryland Public Service Commission. In its story headlined "PSC Chief Resigns at O'Malley's Demand," the Washington Post reports that the resignation will give the governor "the opportunity to make good on a campaign promise to create a more consumer-oriented agency." Rick Abbruzzese is quoted to this effect: "There is no time to waste getting professional regulators back on the job--to protect consumers and restore stability for business."

Last year the General Assembly passed a bill which gave the legislature the ability to replace--lock, stock, and barrel--all five members of the PSC, including Chairman Schisler. I criticized this ill-advised bill on the grounds that it was at odds with separation of powers principles that are key to sound governance. These principles prevent a concentration of power in the hands of one branch of government at the expense of a co-equal branch. Specifically, last year's bill represented legislative infringement on the governor's appointment and removal powers regarding agency officials.

The bill also constituted poor policy. It would have set a terrible precedent. The notion that the legislature may just fire all of the PSC commissioners because it disagrees with a rate decision or decisions would certainly not foster the stable regulatory environment that businesses need to make long-term decisions to invest in new infrastructure necessary to secure overall consumer welfare. You can read a few of my pieces from last year on the PSC situation here and here and here. Fortunately, a court agreed with the separation of powers arguments I was making and held the legislature's bill unconstitutional.

Under Maryland law, the PSC is an "independent unit in the Executive Branch of State government" and Chairman Schisler could be fired by the governor before the expiration of his fixed term only for "incompetence or misconduct." But a governor who wants to make life difficult for the head of any agency certainly can, so Chairman Schisler resigned, rather than prolong a nasty fight. His resignation statement on the PSC's website declares: "During my tenure at the Commission I have endeavored to implement the policies enacted by the General Assembly in a fair, impartial and effective manner. My resignation will facilitate the ability of the Public Service Commission to move forward in the important work it must accomplish."

To a large extent, Schisler was simply made a scapegoat for the heated reaction to last year's large proposed BG&E rate increases. The proposed rate increases came after more than a decade of rate stability. After the long-term rate freeze, they were consistent with the plan adopted by Maryland's General Assembly in 1999. That's what Schisler means when he refers to "the policies enacted by the General Assembly." But he is probably correct--hopefully correct--that his resignation will allow the PSC to move forward.

And make no mistake, with energy policy front and center on the national stage--as yet another declaration of the goal of "energy indepedence" is made by yet another president in yet another State of the Union message--it's way past time to approach energy policy with the seriousness it deserves. Obviously, the federal government has an important role to play in establishing sensible energy policy, but so do the state public utility commissions like the Maryland PSC. Over the next several months, the Free State Foundation will be addressing in a forward-looking way, and in more detail, the role the Maryalnd PSC and other units of Maryland government should play in establishing sound energy policy consistent with the national goal of securing our nation's energy indepedence.

But, for now, I just want to highlight the following points:

--Surely one of the important duties of the Maryland PSC is to protect consumers from unreasonable rate increases when marketplace competition does not exist to provide such protection. And, competition does not exist, for example, in all facets of the market for providing electricity to residential and business consumers. But, as a result of the law enacted in 1999 by the General Assembly, which the PSC implemented, the marketplace is working, albeit not as quickly as originally envisioned due to a spike in wholesle energy prices over the past few years, to bring consumers more choice regarding their energy supplier.

--Consumers are not benefited when regulators--or legislators--do not allow utilities to earn a reasonable return on their investment. No business will invest in new plant and spend money to develop innovative new ways to deliver services if it is denied the right to earn a reasonable return. In last year's brouhaha concerning BG&E's proposed 72% rate increase, it was often little-noted that there had been rate stability for over a decade. Sound regulatory policy depends on much more than focusing on one rate increase, however large, in one year. If consumers are educated, rather than used as political footballs, they will understand and appreciate that legislators and utility regulators must take a long-term view of consumer welfare. This is especially true with respect to market segments, such as utilities, that require heavy capital investment to build and maintain infrastructure.

--Consistent with the above principle concerning the need to think long-term, the PSC and other parts of the state government--and, for that matter, local governments--have an important role to play in facilitating and promoting an increase in energy supplies. While certainly environmental and other legitimate local concerns need to be addressed, too often worthy projects, whether they will increase electricity or natural gas generation or distribution are stymied by state and local officials who are simply responding to a "NIMBY" (Not-in-my-backyrard") attitude by a small group of citizens. Again, legitimate environmental and other concerns should be addressed. But state and local officials have an important role to play in not obstructing the plans of utilities that are willing to invest capital in new plants and other necessary infrastructure, such as natural gas storage facilities or new power lines, to bring on new supplies of energy. Absent the ability to bring on new supply, there will be increased pressure to increase rates for the more limited supply of energy that does exist.

Again, the purpose here was not to address specific rate proposals, plans for new facilities, or, more broadly, revisions to Maryland's own electricity and energy laws and PSC policies. There will be time enough for that. Rather, my purpose is simply to set forth certain fundamental principles that must be kept in mind as Maryland takes up the opportunity offered by Chairman Schisler's resignation to move forward to tackle the large energy challenges ahead. Maryland has an important role to play in promoting our nation's energy security, a goal that should be shared by all Maryland citizens.

Friday, January 19, 2007

Spending Education Dollars Wisely

It appears that new Maryland governor Martin O'Malley is proceeding cautiously in putting together his new $30 billion budget, and this includes education spending. According to a story in this morning's Washington Post, while still earmarking a record $400 million for school construction, O'Malley is proposing to defer spending $94.7 million in aid directed to large school districts such as Montgomery and Prince George's County under the state's Geographic Cost of Education Index formula.

The Post may not be correct that O'Malley's budget is "conservative" (as in the story's headline: "O'Malley 'Conservative' in '08 Budget Proposal"). Nevertheless, with a potential looming budget gap exceeding $1 billion only a year away, Governor O'Malley deserves credit for proceeding more cautiously than many expected, including many of his ardent supporters.

With respect to education, O'Malley and his advisors ought to give very serious consideration to proposing plans that require school districts to implement, or at least experiment with, plans that tie teacher pay to merit--in other words, that tie pay to results in the classroom. There is a piece in today's Wall Street Journal [subscription required] by Dan Henninger that reports on the marked improvement in test scores in some Little Rock, Arkansas schools that are experimenting with merit bonuses for teachers tied to classroom performance.

Governor O'Malley has first-hand knowledge concerning the low-achievement rates that plague Baltimore City and some of the state's other poorest school jurisdictions. The new governor is going to be forced to make tough choices as to how best to spend scarce education dollars. He should be bold and propose that Maryland move in the direction of tying teacher pay to performance rather than tenure. Unfortunately, the teachers union reflexively objects. But I suspect that there are many Maryland teachers--and would-be teachers-- who are confident enough in their own skills, who would be supportive of programs that provide incentives in the form of merit bonuses for them to boost classroom performance.

Monday, January 15, 2007

Massachusetts May Be Next to Embrace Video Franchise Reform

I recently published a piece on CNET commending the Michigan legislature for enacting a video franchise reform bill, and for doing so without attaching investment-stifling net neutrality mandates. I ended that commentary this way: "In 2007, more states should join Michigan and the other nine states that already have enacted video franchise reform laws. But it is important they do so without adopting net neutrality mandates that, in effect, regulate the Internet and stifle new broadband investment."

Two Massachusetts legislators have introduced video franchise reform legislation in that state. According to the Boston Globe report, the bill would allow new video entrants such as Verizon to bypass the current local franchising process and seek authority from the Massachusetts Department of Telecommunications and Energy (the state PUC) to start providing service. The state would have 15 days to review and act on such applications. The bills sponsors, state Senator Steven Panagiotakos and Representative James Vallee, stated that it can take 1-2 years for a new entrant such as Verizon to receive a franchise from a local community. According to the Globe, Senator Panagiotakos stated: "You're not going to get competition unless you streamline the process. Companies aren't going to spend money on infrastructure if they won't see a return for two or three years."

The two Massachusetts legislators should be commended for introducing the franchise reform bill. Passage will spur video competition, and more broadly, provide incentives for Verizon and other competitors in the broadband marketplace to invest in new digital network infrastructures. The Massachusetts legislature should pass this pro-competitive bill. And, it definitely should not allow the "net neutrality" issue to get in the way.

Friday, January 12, 2007

Integration Bans Then and Now

At this week’s Consumer Electronics Show, FCC Chairman Kevin Martin took a hard line against postponing implementation of the set-top box integration ban scheduled to take effect this July. The integration ban is the regulatory mandate that prevents cable operators and other multichannel video service providers such as Verizon from selling or leasing devices that integrate both security and non-security functions. I have argued there are many reasons why the costs of implementing the ban outweigh the consumer benefits. You can read my views here and here and weigh them for yourself.

But there is one oft-repeated canard, perhaps even superficially appealing at first blush, offered by integration ban supporters that needs to be put to rest. The canard goes like this: The FCC required telephone companies to separate their transmission service from customer premises equipment (CPE) and the result was a burgeoning, competitive CPE market. What was good for Ma Bell with regard to mandating separation of service and equipment will be good for today’s multichannel video providers and consumers.

Unfortunately, Kevin Martin picked up this refrain at the CES. He even quoted Consumers Union, which rarely has encountered any regulatory mandate that it doesn’t think should be made even more stringent, to the effect that in the days before the CPE unbundling mandate, “consumers had to pay a lot of money for any ugly black rotary phone that only did one thing.”

It’s easy to beat up on ugly black rotary phones. Having grown up with one, and a party line to boot, I’m tempted to do so myself sometimes. But having grown up with a black phone and a party line, I’m (unfortunately) old enough to know there is a world of difference between the telecom environment in the 1960s and 1970s when the CPE integration ban was promulgated and today’s environment. In short, it is the difference between a mostly monopolistic analog era and a digital era characterized by increasingly robust competition. It almost certainly made sense in Ma Bell’s heyday to require the separation of transmission service and CPE because Ma Bell possessed monopoly power in both markets. It had the incentive and ability to stifle the development of an independent CPE market.

That was then and this is now. The multichannel video market is fast becoming robustly competitive, especially with new entrants such as Verizon and AT&T challenging the incumbent cable and satellite operators. And truth be told, the multichannel video market is just one segment of the larger digital broadband market, a market in which consumers are being offered, and apparently demanding, a bundle of voice, video, and Internet services, and often equipment, as part of a package. Here is what the FCC said in early 2002 in its Wireline Broadband proceeding: “As we have noted in the past, broadband is evolving across multiple electronic platforms as traditional wireless, cable, satellite and wireline providers have expended substantial investments in broadband capable infrastructures.”

It cannot be seriously maintained, although Consumers Union might still try to do so, that in the five years since 2002 that the broadband market, of which video is just a part, has not become even more competitive with the continuing build-out of multiple digital platforms. In other words, today’s market resembles the market Ma Bell faced at the time of the CPE integration ban about as much as I resemble George Clooney, Patrick Dempsey, or Sean Penn. In other words, (unfortunately again) not at all.

What does this mean for telecom policy? It means that in the current competitive environment, all MVPD providers have incentives not only to allow, but to encourage, the use of whatever equipment will maximize the value of their service platform in the eyes of consumers. Having invested billions of dollars in upgrading their networks to provide an array of digital services, the broadband service providers cannot afford to do otherwise. They simply will not be able to foist on consumers equipment that consumers do not want.

So, don’t tell me about ugly black rotary phones from the original Beach Boys era. That was then and this is now.

On many broadband issues, and especially most recently in trying to resist new net neutrality mandates, FCC Chairman Kevin Martin deserves much credit for forcefully and effectively articulating a vision of allowing broadband to flourish in an environment unburdened by costly and unnecessary regulations. With that record in mind, and armed with the discretion Congress granted the Commission to waive or sunset the equipment regulations, I would urge rethinking the set-top box integration ban in the context of today’s competitive broadband environment.