Bearing in Mind Forbearance's Purpose

There has been a lot of discussion the past several months about the FCC’s exercise of its forbearance authority. This is the authority granted to the FCC in the Telecom Act of 1996 that requires the agency, consistent with making certain consumer protection and public interest findings, to “forbear” from applying to telecommunications carriers an agency regulation or statutory provision that otherwise applies. Note that the forbearance provision in the ’96 Act says the FCC “shall forbear,” not may forbear, if the requisite determinations are made.

Given what Congress described as the ’96 Act’s “deregulatory” purpose, it has seemed to me for quite some time that the Commission has been much too sparing in its use of its forbearance authority. After all, grant of such authority is a rarity, seldom found in other regulatory statutes. It is unlikely that Congress intended the provision, titled “Regulatory Flexibility,” to be mere window-dressing.

Be that as it may, there are always some close cases, ones at the margin, which reasonably can be argued either way. Fair enough. I do not suggest that the Commission should assume a posture of granting all forbearance petitions willy-nilly.

By the same token, there are some cases that ought not to be close, that are not at the margin. With respect to these, the Commission should bear in mind forbearance’s purpose, and act accordingly.

The FCC has pending before it such a case. In January 2007, AT&T filed a petition asking the Commission to forbear from applying the agency’s decades-old cost assignment rules. The FCC must act on the petition by the last week in April.

Simply put, today’s competitive marketplace environment, coupled with a changed regulatory regime, means that the FCC’s cost allocation rules no longer serve a useful purpose. The rules were devised back in the days when AT&T and other telephone carriers, considered dominant in the marketplace, were subject to rate-of-return regulation which tied a carrier’s rates to its costs. The cost allocation rules assigned costs to different service categories (for example, MTS, WATS, private line) in an attempt to ensure that no service earned more than the authorized rate-of-return and to prevent cross-subsidization among the various service categories.

(Even during rate-of-return regulation’s heyday, devising and then applying the cost assignment rules was always highly problematical. For anyone interested in a research project with historical insights into the nitty-gritty difficulties of traditional public utility regulation, I refer you to the FCC’s decades-long efforts in Docket 18128 and the follow-on Interim Cost Allocation Manual proceedings. The purpose of these proceedings was to establish workable and proper cost allocation rules. Over many years, for example, Docket 18128 explored at least seven different “fully distributed cost (FDC) ” allocation methodologies proposed for AT&T before being ditched around 1980 in favor of the “interim” cost allocation manual. The differences between FDC-1 through FDC-7 methodologies were quite subtle, to put it nicely.)

In any event, when the FCC abandoned rate-of-return regulation in favor of price cap regulation in the early 1990s, the rationale for maintaining in place the elaborate set of cost allocation rules applicable to AT&T evaporated. This is because, unlike under rate-of-return regulation, price cap regulation rates are not tied to the costs of providing service. Rather, consumers are protected because prices are capped. And carriers have an incentive to operate more efficiently because they are allowed to profit from cost savings achieved.

Thus, with rate-of-return regulation abandoned by the FCC and the states covered by AT&T’s petition, applying the cost allocation rules no longer serves a useful regulatory purpose. With price cap protections in place, continued application of the cost allocation rules is certainly not necessary to protect consumers. Even aside from the operation of the price cap regime, increasingly vigorous and ubiquitous marketplace competition protects consumers from unreasonable prices. Moreover, the direct and indirect costs incurred in applying the FCC's allocation rules certainly outweigh any benefits.

In sum, in my view, the Commission has been much too sparing in availing itself of the forbearance tool that Congress gave it in the ’96 Act to reduce regulation in light of changed marketplace conditions. Whether or not one agrees with that general assessment, granting AT&T’s petition should be an easy call for the Commission. The FCC should forbear because it should be for burying the regulatory relic of cost allocation rules.

FCC Reform: Changing the Institution

Since it was created in 1927 as the Federal Radio Commission, and reincarnated in 1934 as the Federal Communications Commission, the FCC has undergone remarkably little fundamental institutional change. To be sure, there have been some changes that impact the way the FCC does business. For example, in 1982, the number of commissioners was reduced from seven to five. The enactment of the Sunshine Act in 1976 affected the way the Commission operates, and the way the commissioners interact – or don’t – with each other. Compared with its preferred mode of regulating during its first few decades, for almost the last half-century the agency has regulated primarily through conducting ex ante rulemaking proceedings rather than post hoc adjudications.

For the most part, it is fair to say that, in fundamental respects, the agency functions much the same today as it has for decades. Certainly, this is true in the decade since the passage of the Telecommunications Act of 1996, which was billed by Congress as “pro-competitive” and “deregulatory” and by President Bill Clinton as “truly revolutionary legislation.” And it is true despite the fact there have been unprecedented marketplace changes resulting in increased competition in all market segments subject to the FCC’s jurisdiction and a definite blurring of traditional service categories due to the transition from analog narrowband to digital broadband communications.

In August 1999, then-FCC Chairman William Kennard released a strategic plan called “A New FCC for the 21st Century.” The first two sentences presciently read: “In five years, we expect U.S. communications markets to be characterized predominately by vigorous competition that will greatly reduce the need for direct regulation. The advent of Internet-based and other new technology-driven communications services will continue to erode the traditional regulatory distinctions between different sectors of the communications industry.” As a result, the plan continued, “[t]he FCC as we know it today will be very different in structure and mission.”

Since then, while there has been some rearranging and renaming of the boxes on the agency’s office organizational chart, it would be a stretch to say today’s FCC is “very different in structure and mission.” Nevertheless, the agency’s annual budget has continued to grow each year, from around $200 million in 2000 to $338 requested for FY 2009.

‘Nuff said, for now. All of the foregoing is my way of calling your attention to a lunch program I am moderating on April 3. The program, sponsored by the American Bar Association’s Section of Administrative Law and Regulatory Practice, is entitled, “FCC Reform: Changing the Institution.” There is a stellar line-up of very knowledgeable speakers: John Duffy, Professor, George Washington University School of Law; Sam Feder, Partner, Jenner & Block and immediate past FCC General Counsel; Andrew Schwartzman, President, Media Access Project; and Joe Waz, Senior Vice President of External Affairs and Public Policy Counsel, Comcast Corporation. The panel will address both potential major structural institutional reforms, which likely will be achieved, if at all, on a longer-term basis, as well as process-oriented reforms that possibly could be implemented over the near-term.

Achieving institutional change is never easy. Even with “change” this year’s dominant campaign mantra, I can’t promise this is the year there will be fundamental institutional changes at the FCC. But as the moderator of this program, I can promise the discussion will be lively and informative.

To sign up, click here.

Computer Services Tax Repeal

Maryland Governor Martin O’Malley has now come out in favor of repeal of the state’s ill-conceived 6% sales tax on computer services performed in Maryland. This tax, scheduled to take effect this July, would be a blow to the state’s hopes to a leader in attracting high-tech industries, especially small business entrepreneurs.

Free State Foundation experts have been early and frequent critics of this tax, which was enacted hastily without public deliberation. For example, Free State Foundation Senior Fellow Cecilia Januszkiewicz, in a commentary entitled “Random Acts of Taxation” published in the Baltimore Examiner on January 21, 2008, explained in detail why the tax “a mistake, and it must be corrected.” Her commentary stated:

“In a random act of taxation, the General Assembly grievously wounded Maryland’s efforts to rival Silicon Valley as a technology magnet. From a lengthy menu of services that are not currently subject to the Maryland sales tax, the Senate Budget and Taxation Committee during the 2007 special session recommended that computer services be subjected to Maryland’s 6 percent sales tax. Now, how will state officials convince technology leaders that Maryland, one of the few states to tax computer services, is a welcoming environment for their businesses when they have increased the cost of those services? The impact of the computer services tax will not be limited to technology companies. It will extend to companies that rely significantly on technology in operating their businesses, precisely the kind of businesses states recruit for their high-wage jobs. Maryland businesses with offices in several states will opt to locate their most sophisticated operations and jobs outside Maryland to avoid the tax. Selecting a non-Maryland location will now yield a 6 percent price advantage.”

And I submitted testimony to the pertinent Maryland House and Senate committees urging repeal. In my testimony, I stated that “[t]he repeal of the tax would correct an error that, if uncorrected, will cost the State significantly more revenue than it hopes to receive from the tax.” This is because:

“Unlike many other business sectors, technology services, including the computer services that are subject to the tax, are highly portable. Already many technology businesses have reported that nearby States are luring their businesses. It is likely that many of these businesses will relocate to avoid the arbitrary 6% surcharge on their services. When these businesses leave the State, they will take with them thousands of jobs. And they will take with them Maryland’s understandable desire to develop a reputation as a technology magnet.”

And there have been other FSF commentaries and blogs to the same effect.

Governor O’Malley’s recognition that the computer services tax --that “random act of taxation”—should be repealed is a positive step. Unfortunately, he wants to make up the supposed loss of revenue by increasing taxes elsewhere. After taking one positive step, the governor should take another: He should recognize that even after last autumn’s special session of the Maryland General Assembly called to address the so-called structural deficit, Maryland lawmakers are still proposing healthy increases in the state expenditures. The Governor (and the General Assembly) should look to reduce state expenditures before looking for more taxes to increase.

Public Access to Public Information

Recently, Maryland Comptroller Peter Franchot released the names of Maryland State employees earning more than $100,000. This caused quite a stir in Annapolis because public information had actually reached the public.

The Maryland Public Information Act provides that the salary of a State employee is public information. Releasing the information to anyone who asks or posting it on the Comptroller’s website is perfectly legal. Why then is a Maryland State Senator launching an investigation into the release? Why does the Senator want to waste State resources investigating the release of information that by law must be made available to the public? Is the Senator afraid that Maryland taxpayers might question some of the salaries? Could it be that our public officials are concerned that taxpayers may learn too much about how our money is being spent and we might wonder whether it is the best use of our money?

The Senator should instead investigate why, despite all the high-priced talent at the Comptroller’s Office, the Comptroller’s web site is so lacking in current information on the State’s finances but full of information about the Comptroller’s public appearances.

I applaud the Comptroller’s devotion to assuring that the public has public information but it would have been far more taxpayer-friendly to post the information on his website than to release it only to the press. Taxpayers should hope that release of the salaries is the Comptroller’s first step in keeping them informed about how their money is spent. Taxpayers should also hope that, in the future, the Comptroller will provide the information directly to them through his website rather than piecemeal through the press.

The Comptroller’s website is very helpful in instructing taxpayers about paying taxes but relatively devoid of information about where all the money that is collected goes. The Comptroller is responsible for paying almost all of the State’s bills and maintains records of the payments. He has the latest technology and talented employees. Using these resources that State taxpayers provide to him, the Comptroller could provide taxpayers with timely comprehensive information about how their money is spent.

Instead of waiting for requests for public information, the Comptroller could make the database of State payments accessible and searchable by ordinary citizens through his website. This would be a giant leap forward for public access to public information. It would also save many State employees time and effort in responding to multiple individual Public Information Act requests for the same information and would assure that the information would be available to the taxpayers without additional charge.

It should take little or no effort for the Comptroller to make information that is by law public information more easily accessible to Maryland citizens.

Pole Attachments and Broadband Deployment

With all the focus on the continued expansion of broadband deployment, including the position of the United States relative to other developed countries, little attention has been paid to a proceeding pending before the FCC that could have a material impact on broadband deployment. The FCC is conducting a rulemaking (WC Docket No. 07-245) that will determine the rates that cable and telecommunications companies pay to attach their equipment to utility poles. Not surprisingly, the facilities that cable and telco companies wish to attach in this day and age are used not merely to provide “cable” services or “telephone” services, but rather to provide broadband Internet access services.

There is a long history to the FCC’s regulation of pole attachment rates, one involving much litigation and some legislative activity. The history comes replete with mind-boggling formulations that have been developed to determine the rates that utilities may charge for access to their poles. Unless you write to request a personal tutorial, I will spare you the pain of all the history, and you should thank me for it. Just take my word that there are now separate rates for attachments used to provide “cable services” and attachments used to provide “telecommunications services,” and the cable rate is lower than the telcom rate.

In the current rulemaking the Commission is asking a couple questions that ought, as a matter of policy, to have pretty simple answers. The agency is asking whether there should be a single pole attachment rate for both cable systems and telecommunications carriers in order to remove regulatory bias from investment decisions regarding deployment of broadband and other services. In its rulemaking notice, the Commission tentatively concludes that, due to the importance of promoting broadband deployment and technological neutrality, “all categories of providers should pay the same pole attachment rate for all attachments used for broadband Internet access service….” In a marketplace environment characterized by technological convergence and competition among providers, this conclusion makes sense.

But, of course, the attachment rate matters too. After explicitly referencing “the critical need to create even-handed treatment and incentives for broadband deployment,” the Commission tentatively concludes the uniform rate should be higher than the current cable rate, yet no higher than the current telecommunications rate.

Perhaps in some way this is supposed to be an appealing split-the-baby Solomonic compromise. But compromise for what purpose? To me, it appears problematic in the sense of running counter to the national policy, to which the Commission pays lip service in the notice, to provide incentives for broadband deployment. I definitely am not suggesting that the cable and telecom providers should not be charged a reasonable rate for attaching their facilities to the utilities’ poles. But the rate that is charged cable operators already has been found to be fully compensatory by the FCC and the courts. (Recall the litigation to which I referred above.) Standing alone, the fact that broadband Internet services are now being provided over the cable attachments does not impact the costs incurred by utilities in allowing pole access.

Unless there is a very convincing economic case to be made otherwise, which is not apparent to me, the FCC should adopt the lower compensatory cable rate as the uniform rate to be paid by all broadband providers, regardless of regulatory classification. Competitive neutrality will be promoted. But more importantly, adoption of the lower pole attachment rate will promote continued expansion of broadband deployment in furtherance of national policy. This is especially so in more rural areas in which broadband penetration may lag behind. I think even Solomon would agree there is no reason to split the baby in this instance.

In my view, the single-most important thing the FCC can do right now to promote broadband deployment is to firmly reject any further attempts to impose investment-stifling net neutrality-like mandates on broadband providers. But, at the same time, it should not neglect other actions that may affect broadband deployment -- such as not increasing the cost to broadband providers of pole attachments.