Tuesday, July 31, 2007

The 700 MHz Decision: “Into the Morass of Regulation”

In the wake of the FCC’s 700 MHz decision mandating open access for the C block spectrum, I thought this comment from the analysts at Stifel Nicolaus was most telling: “We think it likely that much of the meaning of the open access rules will be determined by the 2009 election (which will determine the leadership of the FCC) and the courts.”

I assume the Stifel analysts mean the 2008 election. But in referring to 2009, they undoubtedly have in mind the time it takes for a new Administration to put in place its own FCC Chairman and its own team. For the same reason that much of the meaning of the FCC’s open access rules won’t be determined until 2009 or (more likely) thereafter, it follows that the revenues realized from the auction will be less than they would be in an unencumbered auction. This is because that veritable economic theorem that “people don’t want to buy a pig in a poke” holds true, even for the FCC.

Think about it: In how many auctions have you bid when the rules concerning what you can do with your winning bid won’t be known until several years later? As they say, it doesn’t take an Einstein to figure out that the looming uncertainty about the ultimate interpretation and enforcement of the new open access rules necessarily will drive down the bid price.

Regardless how it chooses to style its action, and regardless whether it calls it net neutrality, open access, or “no-lock, no-block,” the import is the same: The FCC is taking a step backwards to imposing common carrier regulation, a backwards step that imports public utility regulation into the broadband world. I still think former FCC Chairman William Kennard had it right in 1999 when he explained why he rejected arguments that the FCC should impose an “open access” requirement on cable:

But I also know that it is more than a notion to say that you are going to write regulations to open the cable pipe. It is easy to say that government should write a regulation, to say that as a broad statement of principle that a cable operator shall not discriminate against unaffiliated Internet service providers on the cable platform. It is quite another thing to write that rule, to make it real and then to enforce it. You have to define what discrimination means. You have to define the terms and conditions of access. You have issues of pricing that inevitably get drawn into these issues of nondiscrimination. You have to coalesce around a pricing model that makes sense so that you can ensure nondiscrimination. And then once you write all these rules, you have to have a means to enforce them in a meaningful way. I have been there. I have been there on the telephone side and it is more than a notion. So, if we have the hope of facilitating a market-based solution here, we should do it, because the alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America.

Curiously, the FCC, with the commendable exception of Commissioner Robert McDowell, seems to take pride in consigning broadband back to “the telephone world.” How else to explain the ritual incantation of Carterfone, a decision rendered in 1969 when the telephone world was indeed monopolistic? But this isn’t 1969, as Commissioner McDowell explained in his eloquent dissent. It is not even 1999, when Chairman Kennard rightly resisted picking up the “morass of regulation” and dumping it on the cable pipe.

No, this is 2007, when a Bush Administration FCC decided, despite the fact it recently concluded the wireless market is competitive, to reverse course and impose net neutrality/open access mandates on wireless broadband providers.

It is true that, as the Stifel Nicolaus analysts suggest, that the details of the “morass of regulation” won’t be entirely clear until 2009, if then. But what’s clear now, in 2007, is that the FCC has created a morass for no good reason.

Tuesday, July 24, 2007

Decoupling and Sound Energy Policy

In a little-noticed decision on July 20, 2007, the Maryland Public Service Commission took what appears to be an important step in improving our state’s energy policy. On the one hand, there is no doubt we need to remove unreasonable regulatory and legal disincentives to producing more energy. And we need to recognize that it is not only important to produce more energy, but also to be able to construct the facilities needed to transport the energy efficiently to those who need it.

But energy conservation plays a role in establishing overall policy as well. And this is why the PSC’s July 20 action is significant. The Commission approved a “decoupling” mechanism that allows electric utilities to increase the distribution rates that recover the utilities' fixed costs for maintaining lines and poles if consumers conserve more electricity and demand drops. In other words, utilities’ revenues are, at least to some extent, “decoupled” from customer usage so the utilities do not have disincentives to encourage conservation. Absent decoupling, if utilities encourage conservation, they risk not covering costs that remain fixed regardless of the amount of usage.

The Maryland PSC’s action regarding decoupling applies to electric utilities operating in the state. But this ratemaking concept seems to make sense with regard to the regulation of other utilities as well, for example, natural gas providers, and in other jurisdictions.

Wednesday, July 18, 2007

Budgets, Taxes, and People

With Maryland’s looming $1.5 billion so-called structural deficit, there is much talk in the air about tax increases of various kinds. For example, yesterday’s Washington Post reports that Governor O’Malley and leading lawmakers are considering substantially increasing income taxes on higher bracket earners as one means of closing the budget gap.

Governor O’Malley recently announced some modest spending reductions for Fiscal ’08, which began on July 1. The Governor is reducing general fund expenditures by $213 million, including $68 million in “reversions.”

In his press release, the Governor says that as part of the budget cuts 147 state government positions will be “eliminated,” of which only 17 are currently filled. The Governor and the press have referred to the reductions in allowed positions as job “cuts.” But here is where language becomes important, and, if Marylanders are going to follow the budget battle, they will have to demand that the politicians speak ordinary English.

What the Governor really is proposing is to reduce the growth in the number of state positions in Fiscal ’08 from the ’07 level. The ’08 budget, passed by the legislature and signed by the Governor only a few months ago --when the looming deficit was known to all--increased the number of non-Higher Education state government positions by 662 over ‘07. See Exhibit G of the state FY 2008 Fiscal Digest and FY 2007 Fiscal Digest. Even if 147 positions are now eliminated as the Governor plans, there will still be a net increase of 515 positions for this budget year. (The state higher education jobs increase by 925 from ’07 to ‘08, but that is another story.)

Thus, talk about “cuts” in the number of state personnel and “elimination” of jobs is misleading, even if inadvertently so. Governor O’Malley is only proposing a reduction in growth of state government positions.

It is never easy to cut jobs. And no one should minimize the difficulty, and even stress, experienced by those who lose a job in either the private or public sector. Before talking about increasing taxes, in a state government with close to 54,000 non-higher ed jobs, it seems the Governor can do better than reduce the growth in state positions from 662 to 515 positions for this budget year.

James F. Byrnes, an FDR confidant, knew a thing or two about the workings of government. After all, almost incredibly, he served as a member of the U.S. House of Representatives, the U.S. Senate, the U.S. Supreme Court, as well as the U.S. Secretary of State. Not to mention Governor of South Carolina. Byrnes once said: “The nearest approach to immortality on earth is a government bureau.”

True enough. But with Maryland facing such a tight fiscal situation, Governor O’Malley and our other political leaders should look to make real spending cuts, including in the number of state positions, before seeking to raise taxes. And Marylanders following the budget debate should insist the politicians respect ordinary English usage by differentiating between actual budget cuts and reductions in expenditure growth.

Tuesday, July 17, 2007

Message to Google: Just Bid

In today's Communications Daily [subscription required], FCC Commissioner Jonathan Adelstein is quoted to the effect that we need to get a third channel to the home quickly. In my view, competitive forces in the broadband marketplace currently are quite strong, with cable and telephone companies battling for market share, and with existing and potential competitors, such as satellite, wireless and BPL operators, providing further market constraints. Nevertheless, more competition is better than less--if it is economically sustainable competition, not that sustained by regulatory mangament--so I agree it would be good if their were a third channel to the home.

But then, according to Communication Daily, Adelstein said the crucial question is how to get large companies to bid. According to Adelstein: “We do need to take very seriously what they say they need.” Now this is a problem--this taking seriously what supplicants "say they need"--that plagues regulatory agencies, including the FCC. The supplication syndrome is especially problematical when the agency is preparing to conduct an auction that, by definition, is intended to indicate which entities place the highest value on the spectrum. The whole idea of auctions is to avoid the supplication syndrome that plagues so much other FCC regulatory activity. The idea of an unrestricted auction is to avoid the temptation of regulators to think they can do a better job of managing competition than the marketplace.

I understand that Google is telling the FCC that it will not bid for the 700 MHz spectrum unless the FCC takes, in Commissioner Adelstein's words, "very seriously what they say they need." On its public policy blog Google says, after consulting with various game theorists and auction experts: "While we remain interested in the possibility of participating in the auction, it’s clear that the incumbent carriers have built-in advantages that will prove difficult to overcome (particularly the economic and operational barriers to entry for a company like ours, and the relatively greater value and usefulness that spectrum brings to existing carriers)." So, Google wants to change the rules to benefit itself.

I remain confused. Google has a market cap today of $173 billion dollars. What exactly are the economic barriers that prevent a company with a $173 billion market cap from participating in a clean auction? Obviously, an existing provider has certain advantages over a new entrant: a customer base, rights-of-way, a marketing team, a back office operation, and so forth. But for a company that tells the FCC in comments that its daunting "self-defined mission" is to "organize all of the world’s information," is it really too much to expect that Google can figure out how to address what it calls operational barriers? If necessary, some of those presently assigned to organizing the world's information can be temporarily detailed to getting a new service provider, Googlecom, with a great brand name and a loyal customer following, up and running.

I am not surprised that Commissioner Adelstein is sympathetic to jerry-rigging the auction rules by imposing net neutrality/open access/unbundling rules to give Google, Frontline, and others say they need to participate and win the auction. Frankly, I don't expect the Bush Administration-appointed FCC Chairman, Kevin Martin, or the two Republican commissioners, who ought to be free market-oriented, to succumb to the managed competition temptation.

It is striking that, also in today's Communications Daily, it is reported that John Kneuer, head of the Bush Administration's National Telecom and Information Administration, told state regulators at NARUC that the nation's relaxed broadband regulatory policy has started up "a broadband flywheel whose spinning is sustained by market forces." According to the report, Kneuer said broadband deregulation has led to investment that expanded access that fueled demand that encouraged still more investment in a cycle that shows no signs of stopping.
And this: "The United States has the world's most fertile environment for broadband innovation and competitiveness...Our role as regulators will pale before the power of the market
forces we've unleashed."

It took a overly long time before the Bush Administration developed any sort of communications policy, including a broadband policy. When it belatedly did so, at least the policy was free market-oriented with respect to broadband. John Kneuer's remarks quoted above seem to embody that market-oriented policy. There is a huge disconnect between what the Bush Administration now articulates as policy and what the FCC is proposing for the 700 MHz auction. For if net neutrality/open access/unbundling mandates are imposed in the wireless space, a market segment the FCC consistently has found to be competitive, on what principled basis is it to be argued they should not be imposed on wireline providers?

The FCC should not succumb to the supplicant's syndrome that leads to the managed competition temptation. It should send a clear message to Google: "Just bid!"

Tuesday, July 10, 2007

Googling the "FUC"

There are press reports that FCC Chairman Kevin Martin is going to propose that a sizeable chunk of the 700 MHz spectrum be set aside as a mandatory open access, net neutralized zone. According to a USA Today story, an FCC official is quoted as stating: “The Chairman has proposed that the winning bidder for that one large piece of spectrum must build a network that allows customers to attach any device or run any application they choose as long as it doesn’t interfere with network management.” In other words, if the press reports are true, it appears the Republican Chairman of the FCC is accepting the net neutrality arguments that Google and its allies have been making for several years now that the broadband marketplace is not sufficiently competitive to protect consumers. Instead, he wants to opt for long-term regulatory micro-management.

It is important to reiterate--as I have many times in the past--that net neutrality and open access proposals always involve an unbundling mandate. Open access and net neutrality necessarily imply unbundling because the regulators simply cannot enforce their openess and neutrality rules unless the broadband service provider separates [read: unbundles] transmission from content applications and equipment attachments. In Computer II parlance, the broadband provider must offer only pure or basic transmission service on an unbundled basis. Otherwise, how to prevent "discrimination" that is the opposite of neutrality?

The Chairman's open access proposal, if it materializes, would be very disappointing in any event. But it would not be totally surprising if it came from Commissioners Copps and Adelstein. It is surprising coming from a Republican Chairman in an Administration that ought to be free market-oriented.

A few weeks ago I wrote a piece to the effect that the FCC risks becoming the Federal Unbundling Commission. That essay focused most heavily on the FCC's wrong-headed proposal to consider mandating more unbundling of cable's OpenCable platform and to involve itself in the ongoing regulatory supervision that unbundling mandates necessarily entail. But it noted that the 700 MHz auction was also a target of regulatory opportunity for the open access/net neutrality/unbundling advocates.

Again, it is puzzling and disheartening that this Republican-led FCC is the one taking the FCC down the path towards becoming the FUC. There was a time during the 1960s Carterfone and 1980s Computer II eras when unbundling mandates may have been justified. For the reasons explained in the Federal Unbundling Commission piece that time has long passed.

The costs of imposing unbundling mandates in today's technologically dynamic, much more competitive environment far outweigh the benefits. Quite simply, investment and innovation are discouraged by regulations that, by design, prevent realization of the market-based returns that result from the efficient integration of operations.

It will be a sad day if as a result of Google's succcess on the regulatory playing field a google search of the FCC turns up the FUC.

Tuesday, July 03, 2007

Independence Day 2007

As we celebrate Independence Day 2007, I am reminded of Abraham Lincoln’s remarks eulogizing Henry Clay: “He loved his country partly because it was his own country, but mostly because it was a free country.” To my mind, no one before or since has matched Lincoln’s simple eloquence in articulating freedom as the core idea—and ideal-- of America.

At the outset of the Civil War, it is true that preserving the Union, not freeing the slaves, was Lincoln’s principal war aim. But by December 1862, it was clear to Lincoln that the Union could not be preserved without emancipation. In his Second Message to Congress Lincoln declared: “We —even we here— hold the power and bear the responsibility. In giving freedom to the slave, we assure freedom to the free —honorable alike in what we give, and what we preserve. We shall nobly save, or meanly lose, the last best hope on earth.”

Lincoln’s Gettysburg Address was not delivered on Independence Day, of course, but in November 1863, when the fate of the Union was still in doubt. It is difficult to imagine a more beautiful expression of the American idea:

But, in a larger sense, we can not dedicate—we can not consecrate—we can not hallow—this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us — that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion — that we here highly resolve that these dead shall not have died in vain — that this nation, under God, shall have a new birth of freedom — and that government of the people, by the people, for the people, shall not perish from the earth.

The world did take note of the words Lincoln uttered at Gettysburg. And they have been long remembered, and should be, especially in troubled times, when American soldiers are fighting and dying abroad.

Within the Free State Foundation’s masthead are the words “Because Ideas Matter.” They do. In my view, the core American idea is not tied to the ethnicity, race, religion, national origin, or language of its people, but rather to a common commitment to the idea of individual liberty and the rule of law.

There is the story, perhaps apocryphal, of a certain Mrs. Powell stopping Benjamin Franklin as he departed the Constitutional Convention in September 1787 to ask: “Well, doctor, what have we got, a republic or a monarchy?” Franklin’s reply: “A republic, if you can keep it.”

To echo Lincoln’s eulogy of Clay: We love America partly because it is our own country, but mostly because she is a free country. As long as we have a constitutional culture that has as its central idea—and ideal, even if not always perfectly realized-- respect for individual liberty and the rule of law, we will preserve our Republic. And Dr. Franklin can rest in peace.

Happy Independence Day!