Maryland's Attorney General Says No To Net Neutrality

Yesterday I attended a hearing before the Economic Matters Committee of the Maryland House of Delegates to testify against a proposed Maryland state net neutrality law. The bill has two parts: First, it provides, a la the AT&T/BellSouth merger condition that AT&T and BellSouth were forced to agree to in order to get the FCC's Democrats to act on their merger, that broadband providers "should" not degrade or prioritize "any packet source over that company's broadband Internet access service based on its source, ownership, or destination." Second, the bill requires broadband providers to provide the Maryland PSC with quarterly reports detailing certain information concerning the number of subscribers served, the locations served, and the speed and price of various service offerings. (Note that the FCC already collects much of this information, such as the information that 92% of Maryland's zip codes have present three or more broadband providers.)

My testimony opposing the bill is here. But the most significant news concerning the bill probably came out of Baltimore, where the Maryland Attorney General's office is located, rather than in the Annapolis hearing room where I passed the afternoon. For the Maryland AG issued an opinion that the part of the net neutrality law purporting to prevent discrimination, if enacted, likely would be preempted by federal law. As the AG's opinion summarized, "the general conflict with the stated policies of Congress and of the FCC would also likely to lead to a decision by the FCC to preempt any attempt on the part of a State to impose the type of requirements discussed in the first portion of the bill." (The opinion stated that the AG's office lacks the knowledge of the industry to say if the information reporting requirements would be preempted as well.)

Make no mistake. The AG's opinion is very significant because its analysis applies with the same force to any proposed state net neutrality law purporting to regulate broadband Internet access. State AGs are not known to hastily conclude that state laws are likely to be preempted by federal law and policy. In fact, precisely the opposite. Before seeing the AG's opinion, I testified to the same effect. It was particularly gratifying to see that the AG's opinion followed closely along the lines set forth in Jim Speta's paper, Net Neutrality is a Federal Issue, that was released by FSF last week. Anyone --especially any state legislators considering introducing net neut bills--who hasn't read Professor Speta's excellent legal analysis concluding that state neutrality laws almost certainly would be preempted because they conflict with federal law and policy should do so, along with the excellent Maryland AG's opinion to the same effect.

The Qwest for Forbearance

On February 20, the FCC granted in part a petition filed by Qwest asking the FCC to "forbear" from applying certain statutory and regulatory requirements relating to the company's provision of "long distance" services. For this modest step in granting regulatory relief, the agency is to be commended. By not applying certain outdated "separate subsidiary" regulations, the Commission's action will allow to Qwest to achieve efficiencies and cost savings from integrating operations that should benefit its customers.

Two observations:

First, doesn't the notion of having a plethora of regulatory requirements based on a distinction between "long distance" and "local" services seem outdated in an era when people increasingly buy buckets of minutes priced irrespective of distance? Not only do the cellular, cable, and VoIP providers sell plans with buckets of "anywhere" minutes, so do the telephone companies. Most people under thirty don't even know what you mean if you say, "I'm going to make a long distance call."

Second, and more fundamentally, the FCC's use of its forbearance authority in this and other instances is welcome. Going forward, it should avail itself of this authority more often. Recall that at the time the 1996 Telecom Act was passed, new Section 10 granting forbearance authority was hailed as one of the most important provisions of the new act. It was thought to be a new important tool for the agency to have as it adapted its decades-old encrusted public utility regulatory regime to the increasingly competitive environment the 1996 Act envisioned. Also recall that the act says the Commission "shall" forbear from applying statutory or regulatory requirements when the statutory requisites relating to consumer welfare and the public interest are met. The duty to forbear is not discretionary.

In other words, in today's rapidly changing and much more competitive marketplace, the Commission should not forbear from doing much more forbearing. I'm confident that is what the Congress that passed the 1996 Act intended, and probably what President Clinton had in mind as well when, signing the bill, he said: "With a stroke of the pen our laws will catch up with the future. We will help create an open marketplace where competition and innovation can move as quick as light."

Wireless Information Services

In its just-released semi-annual report, the FCC reports that the number of broadband lines in service continues to increase at a healthy pace. You can view the entire report here. This robust growth is good news for our country, and especially its economy and its productivity.

Particularly noteworthy is the uptick in mobile wireless broadband subscribership--from 380,000 high-speed lines in June 2005 to 11 million in June 2006. Obviously, change is afoot. (There is a reporting lag of approximately six months; with all the new wireless offerings, including new feature-rich interactive content, I suspect the growth curve was even steeper in the second half of 2006.)

Communications Daily [subscription required] reports in yesterday's edition that FCC Chairman Kevin Martin is proposing on his own initiative to classify wireless broadband as "information services." The regulatory classifications in the current Communications Act--"telecommunications," "information services," "broadcasting," and "cable"--make no sense in today's marketplace and technological environment characterized by competition and convergence. I've written a lot about this. For an early essay on why the Communications Act's service classifications turn on what are essentially meaningless metaphysical techno-functional constructs, see my "The Metaphysics of VoIP." And for a more extended law review treatment in the Federal Communications Law Journal, see "Why Stovepipe Regulation No Longer Works: An Essay on the Need for a New Market-Oriented Communications Policy."

A major overhaul of the Communications Act that gets rid of these outmoded service distinctions for most regulatory purposes is all but inevitable. But for now we must work with the Communications Act we have. Chairman Martin's initiative to formally classify wireless broadband services as information services makes good sense. As wireless services become more important as an alternative broadband platform, they should be subject to the same deregulatory regime that applies to the others, whether telco, cable, broadband-over-powerline ("BPL"), or other. While none but the most rabid pro-regulatory advocates suggest that wireless broadband should be subject to common carrier-like rate and nondiscrimination obligations, reclassification now would be helpful to make clear that wireless broadband providers will not be regulated more stringently than other broadband providers. Like broadband services provided over other platforms, wireless broadband typically includes Internet access and other interactive features involving changes in form or content that are the hallmarks of information services.

After the Supreme Court's Brand X decision the Commission moved quickly to reclassify the telco's broadband service and it has also already classified BPL as an information service. Since the rates for wireless services were deregulated at the federal and state levels over a decade ago, the growth in subscribership has been remarkable. There are now over 220 million wireless subscribers, roughly 50 million more than the number of landlines in service. It is wireless' turn to be designated an information service.

Back to 1968? No Way!

Kevin Maney, USA Today’s technology columnist, has a piece this week headlined “FCC Ruling Changed Phone Industry in 1968” suggesting that the FCC needs “another Carterfone,” referring to the famous 1968 decision in which the Commission ruled that Tom Carter’s acoustic coupler could be attached to the Bell System’s public switched network. This allowed mobile phones of the day to communicate with the landline network. The decision was an important step in the development of the FCC’s policies that led to the unbundling of customer premises equipment (for example, telephone handsets) from network transmission services. Part 68 of the Commision’s rules, which established interconnection rights and standards for telephone equipment, followed soon thereafter.

1968 was certainly a year of turmoil and change. Amidst it all, Carterfone may have been one of the more positive things to happen that memorable year. Indeed, many are still nostalgic about all things ’68.

Nostalgia is not altogether bad. But being nostalgic about Carterfone, and thinking that it is a “neat historical analogy” that should guide communications policy today are two very different things. Kevin Maney is wrong to suggest the FCC ought to follow Carterfone and “bust open the cellphone industry.” By busting open the cellphone industry, he means mandating cellphones and service must be unbundled so all cellphones will be compatible with the networks of all the various network operators, Cingular, Verizon Wireless, Sprint, T-Mobile, and the like. Maney also urges the FCC not to postpone its rule that will require, in July of this year, the unbundling of security and navigation functions in set-top TV boxes.

To be blunt, the communications environment has changed so much since the 1960s and 1970s when the Bell System exercised monopolistic power in both the communications transmission and equipment markets that the Carterfone analogy just doesn’t make sense. Carterfone was an important decision on the road to introducing competition in the communications marketplace; it is not a religious dictate. I wrote about this very subject a couple of weeks ago in a piece called “Integration Bans Then and Now” and in another in this week’s edition of Broadcasting & Cable magazine entitled “FCC Should Let Bygones Be Bygones.”

Without repeating all that here, I want to make a few explicit general points:

In his column, Maney completely ignores the difference that the existence of competition makes in determining whether the costs of mandating unbundling outweigh the consumer benefits. In a competitive market, network operators have an incentive to satisfy consumer demand, or consumers will simply switch providers. The wireless market is very competitive, and what we sometimes still call the “cable” market is competitive as well, with satellite operators garnering over a 25% market share, and with the "telephone" companies now beginning to compete vigorously too. In reality, for most purposes of competition analysis, we’re close to having just a “POBS” market (“plain ‘ol broadband service”), in which providers compete to offer voice, video, data, and Internet services over different POBS technology platforms. (No, by “plain” I don’t in any sense mean that the new razzle-dazzle applications, with all their incredible bells and whistles, that broadband makes possible are really plain. Anything but. I am just suggesting that POBS, with bandwidth available that enables high-speed, feature-rich applications, is rapidly replacing POTS (“plain ‘ol telephone service”) as the prevalent service).

Maney completely ignores the economic efficiencies that often result from integration (or “bundling”). He does not acknowledge that innovation and new investment depend on allowing innovators and those who risk capital to capture efficiencies that may give a service provider a competitive edge in the marketplace. Maney says that "bundling arrangements are an unnatural levee set up to hold back market forces.” He’s got it just backwards: Once a market is competitive, like the wireless and video markets are, market forces drive service providers to determine whether consumers prefer service and equipment to be offered on a bundled or unbundled basis, and under what varying circumstances. Service providers will be responsive to consumer demands.

To be more specific, consider these differences between the communications environment during the Carterfone era and now:

· The Bell System was a monopoly then. The operators providing mobile and video services definitely are not.

· The Bell System included an affiliated equipment manufacturer, Western Electric, with all the incentives to extend market power that accompany such corporate affiliation. Video and mobile services providers do not have corporate-affiliated equipment manufacturers.

· The Bell System’s ubiquitous telephone network was mostly standardized across the country and, in 1968, had been essentially stable for decades. In today’s dynamic technological environment, the networks of mobile and video service operators change rapidly, and the technologies employed in the various networks differ from one operator to the next.

· In the analog era dominated by the Bell System, each phone line generally was dedicated to one customer (except for the 50s-ish party lines I fondly recalled in the Integration Bans piece). The facilities and frequencies used by video and mobile providers generally are shared by multiple users. They employ complex protocols and digital technologies that make operating these shared networks much more challenging than operating a network that features subscribers using dedicated channels.

· Phone lines typically carried one service—recall “POTS”, or “plain ‘ol telephone service.” The facilities of cable and mobile operators typically carry voice, video, and Internet service applications on an integrated basis.

· In the common carrier era, phone lines carried only the subscribers’ own content, and there was little reason to worry about theft-of-service. Video service providers carry proprietary content—often developed at great expense—that must be protected against theft-of-service. And now mobile services are carrying high value proprietary content as well.

I can be as nostalgic about Carterfone as the next guy. But a decision that made sense in 1968 should not be misused in a way that fosters poor communications policy 40 years later. That does a disservice to Carterfone's legacy. In today’s radically changed marketplace environment, with all its technological dynamism, it is important to distinguish between nostalgia and common sense.

Sparrows Point and Sensible Energy Policy

In a piece two days ago in this space entitled “Maryland PSC Chief Resigns-The Way Forward on Energy Policy,” I used the occasion of Maryland Public Service Commission Chairman Kenneth Schisler’s resignation to set forth some general principles that should guide Maryland’s role in establishing sensible energy policy. While the federal government has—and should have--the leading role in establishing and promoting an energy policy that will move the nation towards the goal of achieving energy security, I explained that states and local governments have a significant role to play as well.

Indeed, in this regard I stated: “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.”

Lo and behold, shortly after finishing that piece, I learned, as the lawyers say, of a case on point. A federal court in Baltimore held that the Natural Gas Act preempted a local Baltimore zoning ordinance that had the effect of denying an application by AES Sparrows Point LNG to construct a liquefied natural gas terminal at Sparrows Point. The link to the full decision is here. The court examined the text, legislative history, and context of the 2005 amendments to the Natural Gas Act (“NGA”) and concluded that all “clearly reflect the intent of the United States Congress to preempt local governments with respect to the siting of liquefied natural gas facilities.” While the NGA reserves to the states rights and obligations under certain environmental statutes, as the court explained, the act “now governs virtually every step of an LNG facility’s siting, construction, and operation.” In light of the need to increase energy supply consistent with national policy, Congress obviously wanted to give the Federal Energy Regulatory Commission (“FERC”) principal authority to make determinations concerning LNG terminal facilities.

The Baltimore Sun editorialized in “A Clear Message” that “it is hard to argue with the [court’s] legal reasoning.” Nevertheless, it urged local Baltimore officials to continue to try to stop the proposed LNG terminal from being built at Sparrows Point by invoking an environmental statue that is excepted from FERC’s exclusive decisionmaking authority. I don’t know enough about the specific situation at Sparrows Point to know whether such a course by local officials has any merit at all. What I do know is that the court’s decision sends a clear message regarding federal primacy regarding siting LNG terminals that should not be disregarded lightly. There is a more than a bit of a NIMBY tone to the editorial’s conclusion that the proposed LNG terminal “needs a more sensible location.”

There is another proposal involving a new LNG facility presently being held up by local officials apparently succumbing to a NIMBY mindset. Washington Gas wants to increase its natural gas storage capacity at a site it owns in Chillum, Maryland, by constructing a new LNG storage tank. Even though the new gas storage tank would be considerably smaller than two separate gas storage tanks previously located at the very same location until they were decommissioned several years ago, the proposal has run into opposition from close-by citizens expressing concerns about the safety of the facility. Local authorities thus far have stymied the project.

Washington Gas says the new storage tank is needed so that the utility will be less dependent on transporting gas through long-distance third party pipelines, and that by locating the facility close to WG’s pipes that already are in the ground, it will be able to avoid expensive pipeline construction projects that are disruptive to public roadways. And the company maintains that construction of the new storage facility will allow it to buy natural gas when demand and prices are lower and pass the cost savings, as well as the savings in transportation costs, on to consumers. Finally, and importantly, in the highly unlikely event a spill were to occur at the proposed Chillum facility, the project design incorporates numerous safety features that protect the safety of the community as well as the environment.

Because Washington Gas is proposing to construct an LNG storage tank rather than an LNG terminal, the provisions of the Natural Gas Act that were the basis of the court’s finding of federal preemption may not apply to the Chillum proposal in the same way they do with respect to AES’s Sparrows Point proposal. But putting aside the legalities, there is an underlying commonality of principle that is crucial, and that goes back to what I said two days ago: State and local officials have an important role to play in facilitating —not obstructing—projects that will increase the ability of utilities to meet consumers’ needs for energy in a safe, reliable, and environmentally-sound manner. Certainly, as a nation, we will never meet our goal of achieving greater energy independence if state and local officials simply respond to proposals for needed new facilities with a NIMBY mindset.