Thursday, June 26, 2008

Eleven Point Four. We Won't Pay!

“Eleven Point Four. We won’t pay!
Eleven Point Four. No way, no way!”

You could almost hear – or maybe it was my imagination – a background chant at Tuesday’s hearing on the “Future of Universal Service” convened by Rep. Ed Markey in his capacity as Chairman of the House Subcommittee on Telecommunications and the Internet.

All consumers now pay an 11.4% surcharge, in effect, a tax, on all interstate telephone calls. This tax funds the various universal service subsidy programs. In 2000, the tax was 5.5%. I got the sense at Tuesday’s hearing that at some point between 5.5% and 11.4%, a threshold, a Universal Service Rubicon of sorts, was crossed. Because it seemed clear from statements at the hearing that a bipartisan consensus is developing that the current regime is broken and needs meaningful reform. Many of the committee members who spoke, including significantly Chairman Markey, referred to the 11.4% surcharge on all calls as an impetus for getting on with the business of reform. Consumers finally have begun to pay attention to the size of the dollar amount of the item typically denominated as “Federal Universal Service Charge,” or some such, on their bills.

Chairman Markey is to be commended for holding a future-oriented hearing on universal service. As a hearing witness, I offered the committee some key guiding principles for reform and some specifics for applying them in today’s competitive and rapidly-changing technological environment. The principles are pretty simple but fundamental: Market forces, rather than subsidies, should be relied on to the greatest extent possible to achieve the universal service objectives. If there are to be subsidies, they should be targeted narrowly and financed broadly. The current regime is at odds with these principles, which is why, despite more competition and new, less-costly technologies, the surtax on telephone calls has climbed to over 11%. You can read my full testimony here.

With an apparent emerging consensus that the current regime largely has achieved the goal of making voice service ubiquitous – universal, if you will – the hearing, quite appropriately, focused mostly on broadband. The question is whether broadband service should now be brought into the existing universal service subsidy regime, or one similar. I addressed this question in my testimony. I pointed out that, without any significant government subsidies, market forces already have worked to make broadband service widely available to the American public. I urged policymakers to “retain this minimally regulated environment that has encouraged so much private sector broadband investment in a relatively short time.” And, if policymakers determine that some subsidies nevertheless are desirable to achieve more ubiquitous deployment at a faster rate, I urged they be distributed through some form of competitive bidding process that narrowly targets disbursements only to unserved high-cost areas or low income persons. Any such subsidies should be financed through general Treasury appropriations.

At bottom, I urged: “Any broadband subsidies deemed necessary should not be disbursed or financed through an unreformed universal service regime that resembles the existing one. To do so would perpetuate a system that is economically inefficient, wasteful, and competition-suppressing. It would saddle the broadband world – and the American public – with an outdated relic of the narrowband world.”

Finally, another indication of what I take to be the gathering reform momentum is the bill introduced by Reps. Joe Barton and Cliff Stearns on the day of the hearing. Rep. Barton is ranking member of the Energy and Commerce Committee and Rep. Stearns ranking member of the Telecom subcommittee. To my mind, their “Universal Service Reform, Accountability, and Efficiency Act of 2008” is the most reform-minded, consumer-friendly universal service bill ever introduced. It deserves very careful consideration. Most importantly, the Barton-Stearns bill would not bring broadband into the existing subsidy regime, with all of its competition-distorting rules and built-in inefficiencies. With respect to narrowband, recognizing that the goal of universal voice service largely has been achieved, the bill would cap the universal service funds at their current sizes. Among other things, it would substantially change the subsidy distribution method to incorporate competitive bidding mechanisms for high-cost areas without affordable service and curtail subsidies presently going to high-income areas. (Aspen is the proverbial example of a high-income area that currently receives substantial subsidies under the current regime.)

Chairman Markey deserves credit for holding a hearing on “The Future of Universal Service” at which a serious conversation about serious reform was begun. And Reps. Barton and Stearns deserve much credit for fashioning a bill that ought to contribute significantly to pointing the way forward.

“Eleven Point Four Percent. We won’t pay!
Eleven Point Four Percent. No way, no way!”

Maybe the background chant I was hearing during the hearing was all imagined. But my sense is that something has changed, that the consumer’s “pain at the phone” threshold has been crossed. And that, as a result, there is now an opportunity for meaningful universal service reform that leads to a less costly, more efficient system that is also much less competition and technology-distorting than the existing regime.

Thursday, June 12, 2008

Communications Policy in the Next Administration

As in other areas, the differences between the communications policy visions of Barack Obama and John McCain are stark, at least as presented by their surrogates at this week's Federalist Society debate at the National Press Club. And the surrogates are no newcomers to communications policy -- former FCC Chairman Reed Hundt representing Obama and former FCC Chairman Michael Powell representing McCain. You can find the audio and video for the debate here.

There were some sharp partisan jabs, mostly by Reed Hundt, which struck me as a bit at odds with his candidate's professed notion of trying to reach out to all sides and transcending "politics as usual."

But putting aside the entertainment value of the debate's sharpness, for those interested in the future of communications law and policy the debate was very instructive. There is no doubt that Mr. Hundt presented Obama's vision as one in which traditional analog-era regulation plays a much more prominent role than it does in McCain's. This difference in the willingness to maintain (or in some instances re-impose) regulations put in place long ago in the twentieth century's monopolistic communications environment ran throughout the debate.

Here I'll just highlight one instance in which I think the difference in regulatory philosophy is particularly stark, and important -- in the way in which the two surrogates approach the net neutrality controversy. Mr. Hundt enthusiastically embraces what he called the "broadband future-oriented modern version of common carrier," with an "absolute rule against discrimination." Mr. Powell vigorously disagreed, saying that adopting Mr. Hundt's common carrier regime would amount to "the first fateful step of inviting the federal government towards regulating the Internet." Responding to Mr. Hundt's embrace of the need for net neutrality legislation that strictly prohibits discrimination, Mr. Powell said at this point it is "far from clear what problem you are trying to solve," and that the "consequences of empowering legislation around difficult technical and architectural questions is dangerous." While not denying there could be instances of anticompetitive conduct that should be addressed, Mr. Powell said, "the better approach in a new and vibrant market is to put greater emphasis on an enforcement model, an antitrust model." For the core of the back-and forth regarding net neutrality, you can tune in beginning around the 26 minute mark of the replay.

Mr. Hundt is at least forthright in conceding net neutrality mandates are simply another name for a traditional common carrier regime. Some net neutrality advocates shy away from doing this for fear such directness harkens too much to the past. I have explained on many previous occasions why such a regime, with rate regulation and a no-discrimination prohibition at its core, is not an appropriate model to apply on a forward-looking basis to broadband Internet providers in today's competitive communications environment. Perhaps this model was appropriate for the railroads in the nineteenth century, and for AT&T throughout much of the twentieth century, although respected scholars such as Bruce Owen, a member of FSF Board of Academic Advisors, have serious doubts. (See Bruce's scholarly essay on this point here.) But relatively fewer scholars in the field of regulatory law and economics share Mr. Hundt's (and Obama's) view that the Internet should be subject to a public utility-style common carrier regime.

Anyway, as they say, the debate speaks for itself, and tuning in is a worthwhile way for all those interested in communications policy to spend an hour or so.

Monday, June 09, 2008

Maryland’s Budget System: An Imbalance of Power?

In 1916, the citizens of Maryland approved a budget system that gave primary budget authority to the Governor. Almost a century later, the debate continues about whether the legislature gave away too much of its power and should ask the citizens to restore it.

Those who argue that it is time to increase legislative authority maintain that more legislative power would allow more citizen participation and flexibility into the budget process. I believe that the General Assembly already has significant budgetary power and that allowing the General Assembly to rearrange the Governor’s budget would exacerbate Maryland’s spending problem (often referred to as the structural deficit). As noted in the September 18, 1916, issue of the Baltimore Sun by William Milnes Maloy, one of the members of the Goodnow Commission that recommended the current allocation of budgetary responsibility, “If the Maryland legislator served his State as well as he serves his county or district, a budget system would not be necessary in Maryland. …it must be said that most of the members of Parliament, of Congress and of every State Legislature in the Union are more mindful of the public interests of the localities they respectively represent than of the general welfare of the nation or the State.”

You can read my arguments and those on the other side by Prof. Roy Myers in a new report issued by The Maryland Budget and Tax Policy Institute, a project of the Association of Maryland Non-Profits.

Friday, June 06, 2008

Broadband Policy, Dollars and Sense

The United States has had a generally deregulatory broadband policy since 2002 when the FCC declared that broadband services “should exist in a minimal regulatory environment that promotes investment and innovation in a competitive environment.” Despite the fact that, since 2002, the broadband marketplace has continued to become more competitive and broadband services more ubiquitous and innovative, the FCC has not adhered in a consistent fashion to its declared deregulatory posture. When it has strayed, the results have not been good.

Take the recent 700 MHz auction of spectrum for wireless broadband services. FCC Chairman Kevin Martin insisted a portion of the spectrum to be auctioned be encumbered so that the auction winner would be required to use the spectrum consistent with net neutrality principles. The spectrum would be an “open access” zone in which all content, applications, and devices would be required to be treated on a “non-discriminatory” basis. With 80 years of common carrier non-discrimination regulation as historical context, potential bidders knew a regulatory quicksand pit when they saw one. The result: The auction bids fell way below the FCC’s reserve price, and the spectrum block, so-called prime real estate for advanced wireless services, will continue to lay fallow. And, in the meantime, the U.S. Treasury is deprived of the funds that would have been realized in an unencumbered auction.

Now Chairman Martin apparently is proposing another encumbered auction for another chunk of spectrum that can be used to provide broadband services. This time the auction winner would be required to offer a “free” broadband service of some bandwidth capacity to some percentage of the nation’s population over some future build-out schedule. And, for good measure, this free service would be required to filter out “indecent” programming.

The FCC should have learned its lesson from the 700 MHz auction. It is unsound public policy to encumber spectrum auctions in this way, rather than auctioning the spectrum on an unencumbered basis that allows market mechanisms to work properly. The spectrum is devalued, and U.S. taxpayers lose. And the FCC establishes a regime that will, assuming a bidder meets whatever “reserve price” the Commission in its wisdom sets, will invite, nay, ensure, regulatory scheming and litigation over the “free” block rules far into future. There will be attempts by all interested parties to use the regulatory process to game the regime, with ongoing battles over bandwidth requirements, the build-out schedules, and the interpretation and enforcement of the “indecency” regulations. What about a waiver of this rule? Why not a waiver of that rule? For how long? Pretty please! Any casual observer of the FCC’s regulatory history knows this to be true and understands the troubles such encumbrances promise.

Like virtually all goods and services, broadband capacity is “scarce.” Indeed, it takes huge capital investments to build-out broadband networks, and once built-out, unless periodically upgraded and modernized, they quickly can become less than the moving target that is called “state-of-the art.” It is important, therefore, that regulators allow the broadband market, like other competitive markets, to work in a way that uses price signals to respond to changing consumer demand. Of course, a zero-price of “free” is no price signal at all.

U.S. broadband penetration has been remarkable over the last several years, with over a 100 million lines now in service, and broadband service available in over 99% of the zip codes in America. To be sure, these figures do not demonstrate that broadband service is ubiquitous, or that everyone who would like broadband, has it, or even that those that have it, have as much bandwidth capacity as they would like today or tomorrow. There is still more progress to be made, and, truth be told, there most likely always will be with respect to ever-increasing demand for more bandwidth.

If policymakers determine that measures are needed to address broadband penetration or usage rates in certain high-cost geographic areas or among certain low-income persons, any such measures should be carefully and narrowly tailored to address those areas or persons in the most economical and efficient manner. But to continue the progress already made, policymakers should not abandon market mechanisms for regulatory encumbrances, whether they happen to be in the form of requirements for “free” service, “open access” zones, or “net neutrality” mandates.

In a not unrelated development, Time Warner announced earlier this week that will experiment in a few markets with plans that tie bandwidth usage to price. In other words, heavy users would be required to bear more of the burden for the capacity demands they place on Time Warner’s network than light users. In another context, this is just a variation of the point made above – that in a competitive marketplace, price signals must be allowed to allocate a scarce resource if overall consumer welfare is to be enhanced. Hopefully, the pro-net neutrality crowd won’t be allowed to derail such pricing experiments or plans if they prove to be a sound way to address network management issues and capacity constraints.