The Federal Internet Rate Regulation Commission

Rep. Eric Massa (D-NY) has introduced his so-called "Broadband Internet Fairness Act," or H.R. 2902. It is surely one of the more misguided pieces of legislation I've seen from this Congress. In the interest of truth-in-disclosure, it more appropriately should be named the "Broadband Internet Rate Regulation Act."

In essence, what the bill does, pure and simple, is require that the Federal Trade Commission conduct a full-blown rate case before broadband Internet providers are allowed to offer any "volume usage service plans." Peruse Sections 3 and 4 of the bill and you'll see that before a provider may offer any such capacity-based billing plan, it must submit cost data akin to that required in the days when Ma Bell's rates were established in months-long rate proceedings. When all the cost data is submitted, the FTC determines whether the rates proposed in the volume usage plan are "unjust, unreasonable, or discriminatory" -- the traditional public utility regulatory standard. The FTC would be empowered to enjoin the plan and issue civil penalties to enforce the prohibition against "unreasonable" plans.

All of this in reaction to Time Warner's very modest proposal in April to trial volume usage billing plans in four cities. As I explained in these two pieces at the time -- the "Free Lunch Free Press" and the "Common Carrier Free Press" -- in light of foreseeable Internet capacity constraints imposed by rapidly increasing peer-to-peer file-sharing applications, these pricing experiments should have been welcomed, not used as a basis for grandstanding. When network traffic reaches certain capacity levels, the only alternative is to build more capacity or reduce the level of traffic or service quality. If more capacity is built and operated, someone has to pay the costs, although Free Press refuses to acknowledge this. Hence the "Free Lunch" Free Press moniker.

The fact is that with 5% of Internet users generating almost half of all Internet traffic, tiered pricing plans based on the amount of usage might be the fairest pricing regime in that the larger number of low volume users would not be required to subsidize the infrastructure expansion costs caused by the smaller number of high volume users. This is not to say that consumers necessarily will accept such plans, or that they are the only way of addressing capacity constraints. But assessing consumer reactions in the real-world marketplace is what Time Warner's trials presumably were intended to do.

But here is the key. Free Press and Rep. Massa simply don't recognize, or won't acknowledge, that we no longer live in a marketplace environment that in any way resembles the monopolistic environment that prevailed when Ma Bell was subject to the very same type of cost-of-service rate case that Rep. Massa wants to impose on today's Internet providers. The broadband marketplace may not be the classical wheat market, but it is effectively competitive. And it is becoming more so every day. This marketplace competitiveness will protect consumers from any abuses far better than turning the FTC into the Federal Internet Rate Regulation Commission.

Indeed, it is more than a little ironic that Rep. Massa wants to put the FTC into the Internet rate regulation business. For it was the FTC staff that issued a comprehensive 160 page report on broadband policy in June 2007, with a particular focus on whether there was any justification for "net neutrality" regulation akin to that advocated by Rep. Massa and Free Press. That report, issued after public hearings and voluminous testimony, concluded it would be a mistake for the government to promulgate and enforce net neutrality-type regulations.

One wonders whether Rep. Massa has read the FTC report. If not, I commend the entire report to him. Below are a few of its conclusions. (Keep in mind the report was issued in June 2007. The broadband market certainly is even more competitive now than it was then, especially in light of the emergence of wireless as an increasingly robust broadband competitor and the rapid deployment of fiber and hybrid fiber networks.)

• Page 100: "This market has quickly evolved from one in which consumers could get broadband only if they had access to cable systems offering it, to one in which many, if not most, consumers can get broadband from either a cable or telephone provider. In 2000, over 80 percent of broadband service was provided by cable modem. By the middle of 2006, broadband service by cable had fallen to 55.2 percent, while DSL's residential share had increased to 40.3 percent."
  

• Page 101: "Broadband deployment and penetration have both increased dramatically since 2000. From June 2000 to June 2006, the number of high-speed Internet lines increased from 4.1 million to 64.6 million, with 52 percent growth from June 2005 to June 2006 alone. Penetration kept pace with deployment, as by 2006, broadband Internet access accounted for over 70 percent of all U.S. Internet access.
  

• Page 155-156: "Specifically, there is evidence at least on a national scale that: (1) consumer demand for broadband is growing quickly; (2) access speeds are increasing; (3) prices (particularly speed-adjusted or quality-adjusted prices) are falling; and (4) new entrants, deploying Wi-Fi, Wi MAX, and other broadband technologies, are poised to challenge the incumbent cable and telephone companies…Such evidence challenges the claims by many proponents of network neutrality regulation that the broadband Internet access market is a cable-telephone duopoly that will exist for the foreseeable future and that the two primary broadband platforms do not compete meaningfully."
  

• Page 157: "Policy makers should be wary of calls for network neutrality regulation simply because we do not know what the net effects of potential conduct by broadband providers will be on consumers, including, among other things, the prices that consumers may pay for Internet access, the quality of Internet access and other services that will be offered, and the choices of content and applications that may be available to consumers in the marketplace."
  

• Page 157: "To date, the primary policy proposals in the area of broadband Internet access include imposing some form of network neutrality regulation. In evaluating such proposals, we recommend proceeding very cautiously."
  

• Page 159: "Further reason for policy makers to proceed with caution in the area of broadband Internet access is the existence of several open questions that likely will be answered by either the operation of the current marketplace or the evolution of complicated technologies."
  

• Page 160: "Two aspects of the broadband Internet access industry heighten the concerns raised by regulation generally. First, the broadband industry is a relatively young and evolving one. As discussed above, there are indications that it is moving in the direction of more – not less – competition. In particular, there is evidence that new entrants employing wireless and other technologies are beginning to challenge the incumbent wireline providers (i.e., the cable and telephone companies). Second, to date we are unaware of any significant market failure or demonstrated consumer harm from conduct by broadband providers. Policy makers should be wary of enacting regulation solely to prevent prospective harm to consumer welfare, particularly given the indeterminate effects on such welfare of potential conduct by broadband providers and the law enforcement structures that already exist."

Markets could actually begin reducing electric rates, if only consumers would give them a try

There is actually some relief for consumers from the huge electric bills that have caused a political furor in Maryland for three years now. The relief – some of it available today -- comes not from the kind re-regulation or economic coercion that have been offered up by the governor and legislators, but from the very markets that were supposed to offer lower prices years ago.

That's the surprising conclusion from a hearing of the House Economic Matters Committee in Annapolis Tuesday. There a panel of industry experts, both distributors and competitive suppliers of electricity, testified that consumers can do better.

Customer choice can save 10% on bills, Mark Case, senior vice president BGE told the committee. There are currently 11 different suppliers to residential customers in Maryland. One of the largest of those suppliers, Washington Gas Energy Services, said consumers could conceivably pay 13-14% less on their bills, according to its president, Harry Warren.

The problem, as Delegate Sonny Minnick put it, is that "most people are unaware that they have a choice in electricity." The Dundalk Democrat said he's launched a personal campaign to inform his constituents about their options.

Committee Chairman Dereck Davis, a Prince George's County Democrat, said even many of the presumably well-informed legislators and lobbyists he's talked to "haven't switched either" even though they'd "definitely be paying less than they're paying now." Davis favors some method of either encouraging or forcing consumers to make a choice of suppliers.

The savings from choosing a competitive supplier have not always been there. To rehearse the decade-long history, in 1999, Maryland restructured its electric industry, allegedly deregulating it, as it really did for power plants and commercial users of electricity, but leaving rate caps for residential consumers in place. Electric rates rose elsewhere, but they were artificially frozen in Maryland till 2006, when there was a massive increase to match the going rates. With the rate freeze in effect, competitive suppliers of energy couldn't compete with residential rates, only on the unregulated commercial rates.

Now businesses large and small pay lower rates, but most consumers are still buying "the standard offer service." Based on power auctions, everyone concedes that these are not the best prices in town. But to get consumers to switch "would require some pretty serious consumer education," said Public Service Commission Chairman David Nazarian.

Rather than focus so much on a return to regulation, that's exactly what state officials should do. While suppliers want the new business, attracting individual residential customers is much more expensive to do than marketing to larger commercial and industrial users.

These reduced rates for consumers would result in overall bills that are only moderately reduced since the distribution charges by BGE, Pepco or the other local utilities would remain.

But it's still worth the effort, given the failure of regulatory efforts to achieve much improvement. Interestingly, Nazarian complained that Maryland rates, though likely to slightly decline next winter, were higher than they should be in central Maryland because of decisions of the Federal Energy Regulatory Commission.

But the faith in regulation remains high. In other deregulated states such as Ohio and Connecticut, Maryland People's Counsel Paula Carmody said, "We don't see any trend for residential participation in the supply market." Only 3% of Marylanders have chosen an independent supplier, and the state should focus on protecting them and reducing rates, Carmody said, even though her office does supply some comparison rates.

There are still serious problems with capacity-challenged transmission lines and generating plants that threaten the long-term reliability of Maryland's energy supply. But those issues haven't and won't be solved by paying higher rates, even the PSC admits. While dealing with those issues, suppliers such as Washington Gas emphasized the importance of "regulatory and legislative stability" -- keeping the current regime of imperfect deregulation in place, rather than adding uncertainty to the mix.

One thing is clear. Consumers who want to lower there electricity bills can do so this minute by taking the time to switch. They might not save a huge amount of money relying on the market, but they'll save more than regulators have been able to provide.

For information about competitive suppliers, the PSC has a list of suppliers with contact information.

The 13% Phone Tax

On Friday, June 12 (a Friday the 13th would have been more appropriate!), the FCC announced that the tax on all interstate and international phone calls has been increased to 12.9%. While the possibility of implementing new regulations to enforce payment of income taxes for personal calls made from business-provided cell phones has been much in the news in the past few days, not much attention has been paid to the large increase in the "phone tax" levied to support universal service subsidy programs. Attention should be paid.

Just since the beginning of the year, the tax has jumped from under 10% to 13%. (I understand the FCC requires the phone companies to call the tax a "fee" and not a "tax." Tell that one to an economist with a straight face. My habit is to call a skunk a skunk when I encounter one.)

To put the matter bluntly, the time has long since past when the FCC (or Congress) should have radically overhauled the universal service regime. It has been irresponsible not to do so. With respect to the universal service regime, the preferred course seems to be to follow the Detroit model a la GM and Chrysler or what may soon be the California model -- just wait for a financial implosion of monumental proportions before finally cleaning up the mess.

It didn't - maybe still doesn't - have to be this way. Most telcom experts agree that the original mission of the universal service regime -- to make voice telephone service universally available -- was accomplished years ago. The subscriber rate has remained stable at around 95% of American households for over a decade, despite billions of additional subsidy dollars poured into the coffers of mostly rural telephone companies and new wireless competitors. Targeted subsidies are available to low-income persons that need help to get telephone service.

Telephone service is as universally available as it is going to get without the expenditure of further billions in untargeted, unnecessary, and wasteful subsidies that have the effect of inhibiting the development of more efficient and cost-effective technologies, services, and competitors. Last year the FCC Inspector General's report found that 23% of the subsidy payments made directly to phone companies from the "high cost fund" were "erroneous." This amounted to $971 million in estimated erroneous payments.

I have explained what needs to be done to reform the subsidy regime many times before. Here's a piece entitled "The 10% Telephone Tax" from December 2006, and here's one from February 2008, optimistically titled "Universal Service Reform in '08." They have the background information needed to understand why the FCC has been derelict in not acting much earlier to reform the regime.
Note that I point out in these pieces that in the first quarter of 2002 the phone tax was "just" 6.8%. Now it is almost double that.

After watching the FCC delay taking action for years, it may be naive to hope that the agency, even under new leadership, can summon the will to radically reform the system in a way that comports with the realities to today's technologically dynamic, competitive telcom marketplace. This would mean substantially reducing the current subsidies.

Rather than reforming the regime, what appears as likely, given the predilections of the current acting Chairman of the Commission and potentially of the new Chairman, is that the newly-reconstituted Commission will propose to glom a new broadband subsidy regime onto the already-broken existing USF regime. This would be a big mistake. If it happens, the current 13% phone tax might look like a bargain.

To the extent that any federal support for broadband is needed, for reasons I explained in my recent FCC comments on the national broadband plan, it should be directed to presently unserved areas. The funds should be distributed through competitive bidding mechanisms, and they should come from the general Treasury, not a tax on communications services.

Thirteen is generally considered an unlucky number. But if the new 13% tax serves as a wake-up call to our policymakers that they can no longer avoid universal service reform, then perhaps the number 13 will come to be seen -- at least among those interested in sound communications policy -- in a more favorable light.

Broadband Nation: Where Do We Go From Here

So, the FCC has now taken initial comments in its inquiry looking to develop a national broadband plan to deliver to Congress next February. There were a boatload (battleship size!) of comments filed with the agency, and this is only the beginning of what is likely to be a year-long paper barrage. Congress probably should have required the FCC to deliver a reforestation plan next February along with the broadband plan.

Here are my comments. The main two fundamental points are these:

• The plan must contain within its parameters sufficient flexibility to allow policymakers and broadband providers to respond to the rapid pace of technological and marketplace changes. Built-in flexibility that preserves considerable private sector discretion for adaptation and experimentation is essential in a dynamic environment.
  
• The plan also should be grounded in certain fundamental free market-oriented principles. These principles should dictate that federal support for broadband should be targeted predominantly to providing access to presently unserved areas and to increasing, if this can be accomplished efficiently and effectively, broadband adoption; that any federal support should favor private sector companies over government providers; that competitive bidding procedures should be used to the extent possible to distribute any federal support; and that the government should not adopt any further net neutrality or open access mandates because these regulations have the effect of deterring investment and chilling innovation.
  

There will be much talk in the FCC's inquiry about the need for new public-private partnerships, new "third ways," new government collaborations, and the like. Much of this talk is superficially appealing, and as my comments make clear, there is role for government to play in achieving certain well-defined objectives. But there is a real risk, especially in the context of the government writing a mandated "plan," of tilting too far in the direction of government control. The government has enough on its hands managing the existing "government collaborations" and "public-private partnerships" with the financial institutions and automakers to become overly involved in managing the broadband marketplace. Note that after investing well over $200 billion in private capital to build-out and upgrade broadband networks, the facilities-based operators are not seeking bail-outs.

The reality is that the nation has made very substantial progress over the past decade in making broadband deployment almost ubiquitous. Over 90% of America's households have broadband available, and close to 60% subscribe. As my FCC comments explain, the focus of the government's efforts should be on providing narrowly targeted support to bring broadband to unserved areas and to encourage, albeit only in efficient and effective ways, greater adoption. (For example, with respect to adoption, it may make sense for the government to narrowly target subsidies for broadband subscriptions a la the LifeLine and Linkup programs, and for the purchase of computers by low income persons.)

Here's another reality. For a long time now, there has been a vocal "talking broadband down" crowd that rather relentlessly has belittled and minimized the progress the U.S. has made regarding broadband deployment and subscription. As I explained in an April 2007 blog, "The Talking Broadband Down Crowd," the crowd has a distinct purpose in mind: "Quite simply, those here in the U.S. who continue to talk down this country's broadband achievements clearly have a policy agenda in mind. The agenda is to impose net neutrality (read: common carrier regulation) on broadband providers on the perverse theory that somehow consumers will take more broadband if all the providers are required to offer exactly the same service--just as in the good ol' days of Ma Bell." Certainly, Free Press, with its proposal, now clear for all to see, to impose common carrier regulation on all broadband providers, is a leader of the talking broadband down pack.

Unfortunately, Acting FCC Chairman Michael Copps too often has fallen in with this company. He has frequently bemoaned the U.S.'s (allegedly) poor broadband showing by uncritically citing the OECD rankings as if they are another one of the gospels – all the while ignoring other indicators of substantial progress. Anyone who wants to understand - and is willing to spend a bit of time to be educated – as to why the OECD rankings are not useful or appropriate benchmarks from which to argue for a pro-regulatory and government interventionist broadband agenda, should watch the video from the Free State Foundation's "Broadband Nation" event on Friday. The event featured Ambassador David Gross, the State Department's most recent U.S. Coordinator for International Communications and Information Policy. He patiently explained in considerable detail the nuances, and the flaws, in the OECD rankings that make them generally inapt to the U.S. situation, and the other panelists – Rob Atkinson (Information Technology and Innovation Foundation), Link Hoewing (Verizon), and Christopher Guttman-McCabe (CTIA) – all agreed on this point.

To be sure, there is more progress to be made. And the government can play a supportive, appropriately limited, role. But it would be a serious mistake to jettison the generally light-handed regulatory regime under which so much progress already has been achieved.