Monday, October 27, 2008

The FCC’s Actions Should Benefit “Joe the Caller”

With the FCC facing its own important November 4 vote on proposals to reform the archaic intercarrier compensation and universal service regimes, here are some thoughts, some of which relate to the discussion at last Friday’s Free State Foundation seminar on the subject.

First, back to 1926. At the time of the creation of the Federal Radio Commission, the FCC’s predecessor agency, Senator Clarence Dill, the chief Senate sponsor of the Radio Act, declared the agency’s commissioners would be “men of big abilities and big visions.” The notion that the new agency could attract such men (and, of course, women too) to serve was tied directly by Senator Clarence Dill to the central idea that the FCC was to be an “independent body” and an “expert authority.”

Much of the work of the FCC affects the American people and the American economy in important ways on a day-in, day-out basis, so the commissioners shouldn’t get too many free passes on anything they do. But some matters, obviously, are more important than others. This is so with regard to the universal service and intercarrier compensation proceedings.

With competition now firmly embedded in the telecommunications marketplace, enabled in large part by new digital technologies, intercarrier compensation and universal service reform is necessary to increase the efficient use of our telecommunications networks, while creating an environment in which competition can flourish without wasteful uneconomic subsidies. The mechanics of how to achieve these efficiency and pro-competitive objectives are no mystery to economists and other public policy scholars who have studied the issues for years, if not decades: Move quickly to a unified intercarrier compensation regime in order to eliminate existing arbitrage opportunities that have everything to do with outdated regulatory constructs and nothing to do with the economic cost of originating or terminating traffic. And move quickly to a universal service regime that targets distribution of subsidies narrowly to those who truly need them, and that collects funds to support the subsidies from a broad base.

The difficulty lies not with the design of a meaningful reform plan, although surely there are differences regarding specific points to be worked out at the margins. Rather what is at issue now is whether the commissioners have the will to adopt such a plan. Surely, none of the commissioners sought or accepted the job with the idea of avoiding making tough, consequential decisions in the interest of all American consumers.

Now go back to 1980, even before the AT&T divestiture. At Friday’s FSF seminar, Professor Gerald Brock, Professor of Public Policy and Public Administration at The George Washington University and a member of FSF’s Board of Academic Advisors, began his slide presentation with one entitled “Unified Intercarrier Compensation – An Old Problem.” He points to a 1980 tentative decision that “found the wide variety of existing access compensation methods unreasonably discriminatory and sought to replace them with a unified method.” This early attempt to address the intercarrier compensation problem, according to Professor Brock, was “blocked by opposition from those who would pay higher rates.” The intercarrier compensation problem, and the opposition to reform, is not new. 1980 is almost three decades ago.

Now go back to 2001. In a blog posted last Tuesday entitled, “The Time for Bold Action Is Now,” I predicted there would be cries that the FCC should not “rush to judgment,” that it should seek still more comment before doing anything. In the course of explaining why in this instance those cries are not well-taken, I quoted from Commission pronouncements in 2001 when it opened the intercarrier compensation proceeding. Here’s just one: “The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules.” The Commission stated in the 2001 notice: “We are particularly interested in identifying a unified approach to intercarrier compensation – one that would apply to interconnection arrangements between all types of carriers interconnecting with the local telephone network, and all types of traffic passing over the local telephone network.” Since the FCC sought comment on the 2001 notice, there have been at least five further rounds of comments filed, not to mention the thousands of pages of ex parte comments submitted. Arguments about the FCC “rushing to judgment” seem wildly misplaced in this instance.

Now back to the present – and the future. Two questions from the audience at Friday’s seminar particularly struck me because they highlighted why it has been so difficult up to now to reform intercarrier compensation and universal service. One questioner asked whether the agency, in effect, shouldn’t be especially concerned about acting in a way that might disadvantage some competitors vis-a-vis others. And another asked about the political economy of achieving reform. Won’t more intense, narrow interests likely prevail over the more diffuse public interest in reform? Isn’t this the “public choice” dilemma that has stalled reform efforts long past when it has become clear that substantial change is needed?

Two fair questions. As to the first, I thought John Mayo, Professor of Economics, Business and Public Policy at Georgetown’s McDonough School of Business, and a member of FSF’s Board of Academic Advisors, gave a good answer. It is not the business of the FCC to protect competitors from disadvantage, but rather to adopt policies conducive to creating competition. The focus on creating an environment in which competition thrives without distortive arbitrage opportunities and subsidies, not the protection of a particular class of competitors, will best serve the long-run interests of the American consumer.

As to the second question, the political economy one, the questioner is correct that public choice theory predicts the difficulty of accomplishing meaningful reform that advances te broader public interest in the face of intense, narrowly-focused opposition to change. As a general subscriber to public choice theory, I understand that achieving reform in these circumstances is not easy. But I think the political economy dynamics are changing in a significant way. To fund universal service programs, every “Joe the Caller” in America now pays more than an 11% surtax on every interstate call – and more and more Joes and Josephines (with thanks to Commissioner Deborah Tate at Friday’s FSF seminar for this inclusiveness) are beginning to notice the tax’s size. Why wouldn’t they? An 11% tax is not peanuts, and the fee has grown significantly in the last several years. And it has the detrimental effect of suppressing telecommunications usage, and of discouraging investment that would be directed towards build-out of new, more economically efficient networks.

Again, the way to do something positive for Joe and Josephine, the average American telecommunications consumers, is no mystery to any of the sitting commissioners. No doubt they understand the public policy imperative for bold action to implement, without delay, a unified, cost-based compensation regime and a more narrowly-targeted, efficient universal service regime.

In their consideration of the intercarrier compensation and universal service proposals, the commissioners ought to have in mind Senator Dill’s hope and expectation that the commissioners would be men and women of big abilities and big vision.

Tuesday, October 21, 2008

The Time for Bold Action Is Now

With the FCC poised in early November to consider proposals to reform the outdated intercarrier compensation and universal service fund regimes, you will hear much talk in the coming days about how the FCC should not rush to judgment to decide issues of such complexity, especially with so many various “interests” affected. You’ll hear about wireless and wireless carriers; ILECs and CLECs in small, mid, and large sizes, and rural and urban varieties; VoIP providers; and so forth and so on. Much of this talk about protecting this or that particular interest, or actions favoring one type of service provider at the expense of another, will have a distinctly familiar “inside the beltway” ring. Pundits will be giving (hedged) odds as they try to figure out who the winning and losing companies will be.

It would be a mistake to buy the “don’t-rush-to-judgment” line. And it would be a mistake for the Commission to forget that the “interest” that really ought to matter in all this is the average American consumer, let’s say “Joe the Caller,” who now pays an 11% tax on every interstate call in order to fund the various unreformed universal service programs.

As for claims that the Commission may be rushing to judgment, in this instance the charge is well-nigh laughable. If the Commission takes any longer to take meaningful actions to reform the IC and USF regimes, it ought to plead guilty to negligence and beg for the court’s mercy.

Here are just a few excerpts from two different Commission decisions in 2001 expressing a sense of urgency regarding the agency’s need to comprehensively reform the intercarrier compensation regime:

“We believe it essential to re-evaluate these existing intercarrier compensation regimes in light of increasing competition and new technologies, such as the Internet and Internet-based services, and commercial mobile radio services (CMRS). We are particularly interested in identifying a unified approach to intercarrier compensation – one that would apply to interconnection arrangements between all types of carriers interconnecting with the local telephone network, and all types of traffic passing over the local telephone network.”

“The existing intercarrier compensation rules raise several pressing issues. First, and probably most important, are the opportunities for regulatory arbitrage created by the existing patchwork of intercarrier compensation rules.”

“We believe that there are significant advantages to a global evaluation of the intercarrier compensation mechanisms applicable to different types of traffic to ensure a more systematic, symmetrical treatment of these issues.”

And similar long-ago and oft-repeated statements exist concerning the need to reform the universal service regime.

Almost a year ago, I wrote a not so prosaically titled piece, “Put Universal Service Reform Near Top of FCC’s Agenda.” It urged the Commission to cap the high-cost fund, eliminate the identical support rule which provides subsidies to wireless carriers based on wireline carrier costs, and implement reverse auctions as a means of distributing subsidies. Commissioner Deborah Tate deserves credit for leading the Federal-State Joint Board to a point last year where the Board put on the table useful reform recommendations. And Chairman Kevin Martin deserves credit for working hard over the past several months to tee up a set of comprehensive proposals for the Commission to consider. (Of course, the Commission’s staff deserves much credit as well for its hard work.)

No doubt at all that the Commission is confronted with difficult decisions that, if they are to serve the larger public interest, which is to say, the long-run consumer welfare interest, won’t please everyone. Sure, there likely will be compromises and deals cut, and this is often a necessary part of the process of moving forward. But meaningful reform won’t be achieved and sound policy won’t be served by a pedestrian “split-the-difference” or “hold harmless” mentality.

In my view, the Commission should act boldly to adopt a unified and cost-based intercarrier compensation regime that eliminates the arbitrage opportunities that exist under the present rules. The existence of these arbitrage opportunities deters and misdirects investment and innovation to the detriment of all consumers and the general economy. And the Commission should act to implement a universal service system which targets subsidies in a much more narrow fashion than occurs under the current regime. The truth is that the universal service mission is essentially mostly accomplished with respect to provision of voice service. If broadband service is going to be subsidized, any such subsidies should be explicit, narrowly targeted to areas that lack service, and funded broadly, preferably from general revenues. Competitive bidding mechanisms, such as reverse auctions, should be employed to ensure that service is provided as economically and efficiently as possible. And the reforms must be implemented without undue delay and without long transitional periods that render them ineffectual or "obsolete-before-implemented."

The time for kicking the can down the road has past. The can is broken.

Again, I appreciate that the issues are complex and that their resolution involves making difficult choices. Nevertheless, the principles that should guide the Commission are relatively simple and fundamental.

We’ll discuss all of this at the FSF lunch seminar, “Archaic Intercarrier Compensation and Universal Service Regimes: Proposals for Reform,” this Friday at noon. For information and to register, click here.