Wednesday, February 23, 2011

High Taxes and Surging Surcharges Weigh Down Wireless Subscribers

Wireless voice services are taxed too much, too often. Federal, state, and local taxes, fees, and charges make consumers' wireless bills longer with extra, expensive line items. And the bottom line is that consumers' wireless bills run higher as a result. Unfortunately, recent years have seen a trend in tax hikes and fee increases for wireless consumers – with federal universal service fund (USF) surcharges leading the way.

According to a State Tax Notes report this month by Scott Mackey, "[w]ireless users now face a combined federal, state, and local tax and fee burden of 16.3 percent, a rate two times higher than the average retail sales tax rate and the highest wireless rate since 2005." Moreover, the recent increase in rates is mostly attributable to the rapid growth in the rate of the federal Universal Service Fund (USF) surcharge."

The federal USF system for subsidizing rural telephone companies, schools, libraries, and other institutions has been snowballing for years. As the FCC's recent notice for modernizing and streamlining the USF and intercarrier compensation systems states: "The component of the Fund that supports telecommunications in high-cost areas has grown from $2.6 billion in 2001 to $4.3 billion in 2010." USF is funded by a "contribution factor" that wireless and other telecommunications service providers pay into the system. Those companies recover their contribution costs through consumer surcharges that appear as a line item on consumers' bills.

Coinciding with the ballooning USF high-cost fund is a ballooning USF contribution factor that results in ballooning USF consumer surcharges. In 2001 the USF contribution factor was only in the 5 - 6 percent range. But since that time the USF contribution surcharge has made an uneven but nonetheless persistent march upwards. Prior posts on the FSF blog, for instance, have pointed to the first quarter 2010 contribution rate of 14.1 percent, and the second quarter 2010 contribution rate of 15.3 percent. For first quarter 2011, the surcharge runs even higher at 15.5 percent.

The chart below shows the steady climb of USF contribution rates over the past decade, which has resulted in the steady climb of USF surcharges.

(click image to enlarge)

Wireless broadband adoption is and will remain crucial to any public policy stressing increased consumer adoption of broadband technologies. But as Scott Mackey points out in the State Tax Notes report, "[c]onsumer demand for wireless services is price sensitive." Although the USF line item contained in consumers' bills is designated a surcharge, from a consumer perspective the USF surcharge is the functional equivalent of a tax. Therefore, high USF surcharges that make wireless service more costly to consumers deters wireless adoption, including wireless broadband adoption.

So despite the FCC's initiatives to expand broadband adoption, its own policies generating such a high USF surcharge remain a major barrier to achieving the National Broadband Plan's adoption goals. Therefore, the FCC's recently renewed efforts to comprehensively reform the USF and the intercarrier compensation regimes are desperately needed to reverse this surging surcharge trend.

Not to be forgotten is the fact that "[t]wenty-one states have a USF or similar type of mechanism that is funded by an imposition on wireless users." In those states that have their own USF programs, wireless consumers pay surcharges for both federal and state USFs. Therefore, states also bear responsibility for addressing the extent to which their own USF surcharges create further disincentives for wireless broadband adoption.

Aside from federal and state USF surcharges, state and local governments shouldn't be let off the hook. Going back to the State Tax Notes report, Mackey points out that since 2007, "[w]ith a few notable exceptions, state and local taxes, fees, and government charges remained high but were relatively stable." In fact, "local governments in a few states have been aggressive in levying new taxes on wireless users as the recession has stressed revenue collections from property and other broad-based taxes." Some of those "notable exceptions" regarding state and local taxes are worth a closer look.

Maryland is one of those states that most aggressively taxes wireless, particularly at the local level. According to the State Tax Notes report, Maryland consumers bear the eleventh highest wireless tax burden in the nation. While the state applies its regular six percent sales tax to wireless services, Maryland also grants its local governments authority to impose high tax rates on wireless. The City of Baltimore and Montgomery County recently increased their per-line tax from $3.50 per month to $4.00 and from $2.00 per month to $3.50, respectively. (Maryland does not, however, have a state USF program.)

Monthly wireless bills for consumers in Maryland also include state and county 911 fees, which amount to 0.52 and 1.56 percent, respectively. While those numbers sound small, 911 and "E911" rates can add up to big money. According to the FCC's Second Annual Report to Congress On State Collection and Distribution of 911 and Enhanced 911 Fees and Charges, state and local 911 fees collected in Maryland for 2009 total $55,556,616.37. Most would agree that emergency services are a worthwhile expenditure that merits such charges. To its credit, Maryland reported to the FCC that it does not use its 911 fees for non-911 purposes. "Thirteen states, however, report that collected funds are or may be used, at least in part, to support programs other than 911 and E911." The FCC's report indicates that 911 funds totaling over $100 million were devoted to non-911 purposes in 2009.

So what do federal USF surcharges, state USF surcharges, state sales taxes, state telecom taxes, local telecom taxes, state 911 fees, local 911 fees, and in some cases wireless fees totally unrelated to wireless service add up to? A lot of money. Exact numbers will vary by state, by county, and by city. But the taxes, fees, and charges set at the federal, state, and local levels are too high.

In all or almost all contexts, the economically sound and most efficient tax policy is a broad-based tax set at a low rate. This approach makes for easy compliance by businesses that collect and remit taxes to the relevant taxing authorities. It ensures that all kinds of businesses are taxed fairly, encouraging efficient economic activity in the market and ensuring that the tax system does become a mechanism for distorting or changing consumer buying choices. In the context of wireless and other telecom services, this approach means taxing such services at the same rate as any other kind of service and limiting any actual fees to any actual costs that the relevant services actually impose on the public.

Comprehensively reforming our telecom tax systems to approximate a streamlined, broad-based, low-rate approach remains a long-term project. But at the very least, policymakers who profess to appreciate the importance of wireless broadband adoption as a means of empowering citizens and expanding economic opportunity need to recognize the costs of the tax burdens they are putting on wireless consumers.

(Hat tip: Washington Policy Center's Carl Gipson for an excellent blog post at TechLiberationFront.)

Monday, February 21, 2011

Level 3's Retro Regulatory Advocacy: From Loopcos to Loopier

Back in the 1990s, even as competition was developing for local exchange telecommunications services, Level 3 was the most persistent advocate of what it called "Loopcos". The idea was that the then-Bell Companies should be broken into two completely separate companies, one whose only function would be to own and make available local loops on a wholesale basis. (Hence, a "Loopco"). The other a firm, which would lease lines from the Loopco, would be allowed to sell local and all other services on a retail basis.

The theory was that the Loopco would have no incentive to discriminate in favor of itself vis-à-vis competitive carriers because its business would be strictly limited to selling wholesale loops. The problem with the theory is that the FCC had concluded a decade earlier in its Computer III proceeding that the costs imposed by such government-mandated separation outweighed the benefits to consumers. Especially with the development of competitive alternatives providing a check on the incumbent's actions, the FCC determined the economic efficiencies realized from integration of activities would be lost through forced separation. The result: higher prices and/or lower service quality for end user consumers.

Level 3 mounted a sustained campaign during the '90s to get policymakers in Washington and in the states to mandate "Loopcos" through forced structural separation or divestiture. Although some states dabbled with the notion in proceedings that ran on for years, at the end of the day, policymakers – and certainly almost all regulatory economists – rejected the idea as a backwards-looking retro vision.

It was downright loopy.

I bring up Level 3's Loopco advocacy now because the company's current campaign to get the FCC to regulate heretofore unregulated Internet peering arrangements under a reconceived version of net neutrality calls to mind its unreconstructed pro-regulatory corporate bent. Readers of this space are familiar with the Comcast-Level 3 controversy in which Level 3 is invoking the FCC's new net neutrality regulations to argue the agency should intervene to set a price for the exchange of Level 3's long-haul Internet traffic with Comcast. This, even though the FCC's net neutrality rules generally have been understood not to apply to interconnection arrangements involving the hand-off of Internet backbone transit traffic.

Suffice it to say by way of brief recap that the exchange of Internet backbone traffic through commercially negotiated peering arrangements is often done on a "free" basis when the traffic exchange is roughly in balance. But when Level 3 signed a so-called "Content Delivery Network" agreement with the hugely popular Netflix, which is estimated to generate about 20% of all on-peak Internet traffic, this meant Level 3 would now be delivering about five times more traffic to Comcast than Comcast would be sending to Level 3. In other words, with the traffic exchange no longer roughly in balance, in accordance with usual commercial practice, Comcast proposed to negotiate a price with Level 3 that would permit Comcast to be compensated for carrying Level 3's significantly increased amount of traffic.

In its latest missive to the FCC (there is a steady stream), Level 3 suggests its dispute with Comcast must be viewed within the construct of the FCC's net neutrality rules because what is at stake is the FCC's "prohibition on charging content providers for delivery of content requested by subscribers." It says that if Commission doesn't review the dispute, then the Commission's new net neutrality rules will be eviscerated because Level 3's service is arbitrarily labeled a "backbone service."

Putting aside for now my well-known legal and policy objections to the Commission's net neutrality rules, what Level 3 is now arguing, in terms of its backwardness, is as loopy, if not loopier, than its '90s Loopco advocacy.

In essence, Level 3 argues that, because a Comcast subscriber requests Netflix content that happens to be carried long-haul by Level 3 and handed off to Comcast for last-mile delivery, the Commission should regulate this traffic exchange. But if the Commission were to accept Level 3's theory, this would inevitably lead to the FCC's regulation of all Internet backbone traffic because all Internet traffic is ultimately destined for some requesting subscriber, whether a residential or business customer of the Internet access provider.

In other words, the necessary effect of what Level 3 is arguing is to obliterate the distinction between last-mile Internet access service understood to be within the contemplation of the FCC's new net neutrality rules and heretofore unregulated long-haul Internet backbone traffic understood not to be. Level 3 may suggest that the distinction between the two is now arbitrary, perhaps thinking with some justification that the current Commission majority, having evidenced its pro-regulatory mindset, will be receptive to extending its reach to the carriage of all Internet traffic, wherever such traffic may be found in the Internet's network of networks.

Hopefully, the Commission will not be inclined to adopt such an ill-advised extension of its new Internet regulations beyond what many already consider, on present terms, to be counterproductive regulation. Based on FCC Chairman Julius Genachowski's remarks at the February 16 House hearing, it appears he understands the agency's new rules ought to apply to Internet access service and not to peering arrangements for backbone traffic that have always been negotiated on a commercial basis without government intervention. He probably understands the market for transporting Internet traffic over the backbone is competitive, and that Level 3 is one of the very largest carriers of Internet backbone traffic.

As I have said many times before, assuming the FCC's net neutrality rules become effective, despite challenges in court and in Congress, there will be ongoing litigation at the agency which, over time, will determine whether the regulations are interpreted in a more or less regulatory way -- in other words, a more or less harmful fashion. Unless Chairman Genachowski continues to make clear that Level 3 should take its dispute with Comcast back to the bargaining table, he will ensure that the Commission will see an unending string of such frivolous "why not give it a try" complaints in the agency' inbox.

For its part, Level 3's retro-minded advocacy is going from loopy to loopier.


Friday, February 18, 2011

Silicon Valley Dem: Net neutrality repeal would spark 'revolution'


Silicon Valley Dem: Net neutrality repeal would spark 'revolution' - The Hill's Hillicon Valley

Anna Eshoo, the ranking Democratic member on the House Communications Subcommittee, said that if Congress were to reverse the FCC’s action adopting net neutrality rules “there would be a revolution in this country.”

Wow! What in the world are they putting in the California water now?

Eshoo’s statement is downright silly, and you can imagine the press outcry if a Republican had said something so outlandish.

Eshoo talks about a “revolution” if net neutrality is repealed at the same time every poll shows a majority of Americans favor repeal. In September 2010, Democratic pollster Peter Hart found that 75% of Americans like the Internet the way it is and 55% of the poll respondents said the government should have no hand in regulating the Internet. The FCC itself found that the vast majority of Americans are satisfied with the speed of their Internet service.

If repeal of the net neutrality rules is going to start a revolution, as Rep. Eshoo suggests, it likely will be carried out by a small band of revolutionaries with her leading the charge. 

Thursday, February 17, 2011

On the Road from Net Neutrality to Content Neutrality

For the National Association of Regulatory Utility Commissioners (NARUC) it is not enough to advocate for regulation of broadband Internet providers under the rubric of "net neutrality." Believe it or not, the organization representing state public utility commissioners is now on record advocating "content neutrality."

If this sounds a bit 1984-ish, it is only because it is. For those advocates and regulators who seek more regulation for every ill they can imagine – regardless of the real world marketplace environment – it is a short leap from regulating the "neutrality" of networks to regulating the "neutrality" of content.

I understand that, consistent with their original missions to regulate monopolistic public utilities, state public utility commissions have much less communications regulatory work they ought to be doing. But as competition rather than monopoly has become the norm in communications markets in the past few decades, and as telecom providers have mostly lost their traditional "public utility" characteristics, NARUC, on behalf of its utility commission constituency, seems intent on looking far afield to remain relevant.

Hence its advocacy of "content neutrality" through adoption of the "Resolution on Fair and Non-Discriminatory Access to Content" at the just concluded NARUC meeting in Washington.

NARUC wants the FCC to go beyond regulating broadband providers' Internet access services to regulating the provision of video programming by multichannel video distributors. The resolution states that the FCC dealt with program regulation on a selective basis in the context of approving the Comcast-NBCU transaction by acting to ensure "reasonable access" to programming. NARUC points out that in the merger approval order the FCC dictated that content be made available at "fair market value" and on "non-discriminatory prices and terms." NARUC's resolution implores the FCC to now attack the issue "more broadly."

As icing on the cake, and by way of justification I suppose, NARUC asserts that video content is the leading, if not the "killer" application, in the bundling of broadband services by competitors seeking to enter mid-size, small, and rural markets. In other words, despite the fact there are hundreds of completely independent cable programming networks, and countless other producers of quality programming who regularly score hit programming on YouTube and other popular Internet sites, we are supposed to think of the video programming marketplace as something akin to an "essential facility."

No matter how much the NARUC resolution is dressed up with talk of "killer" apps and "fair market value" and "non-discrimination," the regulatory interference it seeks to justify constitutes bad public policy. And the fact that Comcast and NBCU agreed to similar access and sharing conditions, whether "voluntarily" or not, in the context of their merger proceeding, certainly does not make such regulatory intervention sound policy.

Indeed, as I explained in a piece two weeks ago commenting on the FCC's recent net neutrality and Comcast-NBCU actions:

"Continually invoking language at the heart of the analog-era regulatory paradigm – "public interest," "reasonable," "unreasonable," "fairness," and "non-discrimination" – the Commission clings tenaciously to the exercise of regulatory power. Acting under the guise of "reasonableness" and the "public interest" and so forth, it exercises this regulatory power in the name of ensuring "fair competition" or "leveling the playing field," all the while picking marketplace winners and losers – and all the while disclaiming it is doing any such thing."

Not surprisingly, in supporting more program regulation, the NARUC resolution, right on cue, invokes the FCC's "commitment" to "level playing fields." With all the leveling going on with this FCC, it's a wonder the agency's Portals headquarters is not flat. And NARUC's headquarters too, for that matter.

At the end of the recent piece, I concluded that "the Commission, at least in the form of its present three-person majority, exhibits unbounded – but unwarranted -- confidence in its ability, notwithstanding the dynamic marketplace and technological changes, to make judgments as to what is 'reasonable' and 'fair' and 'nondiscriminatory' and in the 'public interest.'

By invoking its broad discretion to decide what is "reasonable," "fair," "non-discriminatory," and in the "public interest," the FCC's regulatory interference can have the effect of stifling investment and innovation, whether with regard to broadband networks or video programming. The reality is, whether deciding that non-discrimination and fairness dictate no prioritization or differential treatment of traffic or mandatory sharing of video programming with competitors, the effect may be to chill investment and innovation. When returns on invested capital are capped and limited by regulation, innovation and investment necessarily are chilled.

As for video programming, regulated mandatory sharing could well mean there will be less new innovative programming produced, and less new distinctly differentiated programming produced, because producing such programming is riskier, the returns less certain.

So, NARUC may wish to become a "player" in the video programming arena in the name of "leveling a playing field" through more government regulation. The state regulators may have supreme confidence that the folks over at the FCC know exactly what fairness and reasonableness require in the name of such leveling.

In my opinion, however, it is much more likely that the advocacy of "content neutrality" by NARUC, and others with a like-minded pro-regulation mindset, will result in just that – more content neutrality. By this I do not mean something positive. I mean program content that is less differentiated, less innovative, and less diverse.

Yes, more leveled in a way that does not ultimately serve America's viewers and consumers.


Monday, February 14, 2011

FCC's Elimination of CEI and ONA Rules Long Overdue

At its February 8th public meeting, the FCC issued a proposed rulemaking to remove sorely outdated and unnecessary reporting requirements that apply to Bell Operating Companies. Eliminating old, costly, and unnecessary regulations is always a good idea. So this is a welcome proposal by the FCC. But at the same time, it raises a serious question: What took the Commission so long?

Both the comparably efficient interconnection (CEI) rules and the open network architecture (ONA) rules were adopted as part of the FCC's Computer III proceedings, beginning back in 1986. CEI and ONA rules were offered as non-structural regulatory alternatives to the structural separationist regulatory apparatus provided under Computer II. I'll leave the history and details of the Computer Inquiry proceedings and the CEI/ONA regime to prior accounts such as the FCC's Wireline Broadband NPRM (2002) or to FSF Board of Academic Advisor Member and Professor Gerald Brock's book Telecommunication Policy for the Information Age. But two points about CEI and ONA are in order.

First, these Computer III reporting requirements are anachronistic rules based on assumptions that have been rendered obsolete by the development of broadband Internet services, wireless, and other technological developments in the advanced communications marketplace. As the FCC put it in its Wireline Broadband NPRM, CEI and ONA requirements were based on the "implicit, if not explicit, assumption that the incumbent LEC wireline platform would remain the only network platform available to enhanced service providers."

Second, the CEI and ONA reporting requirements are onerous, costly, and unnecessary. ONA requirements, for instance, include annual reports, semi-annual reports, quarterly nondiscrimination reports, and company officer-signed annual affidavits of compliance with those reports. Those reports must include detailed descriptions of various ONA services, federal and state tariffs, and projected deployment schedules for ONA services.

In complying with these ONA reporting requirements, Bell Operating Companies have spent years assembling boxcar loads of files and documents for routine delivery to the FCC. But it's doubtful that during the years of ONA reporting that many or any of these file-filled boxes were ever relied upon or even read. As the Commission pointed out in its recent proposal to eliminate CEA and ONA rules: "[T]he Commission does not rely on any of these submissions in the course of its decision making."

Moreover, the FCC's proposal for eliminating CEI and ONA reporting requirements states that "[n]o commenter or reply commenter in this docket argues for the retention of any of the BOC-specific CEI and ONA reporting requirements." Similarly, "no commenter voiced any opposition to their elimination or advocated in support of their continue application" in response to comments made in the Commission's 2006 and 2008 Biennial Review proceedings.

So what prompted the FCC to hang on to CEI and ONA reporting requirements that appear never to have offered any benefit and were based on market assumptions long since overtaken by market developments? The agency shouldn't have had to wait until the President's recent pledge to reduce or eliminate unnecessary and outdated regulation. Clearing out antiquated rules should be part of the modus operandi for all regulatory agencies and a constant goal rather than a counterintuitive task that requires an extraordinary public relations push.

Unfortunately, the Commission's prolonged retention of CEI and ONA reporting rules coincides with the FCC's foot-dragging over the past few years in granting petitions for forbearance relief from other Computer Inquiry III rules. The fact that the FCC is only now acting to eliminate CEI and ONA reporting requirements also points to the agency's institutional inclination to regulate today's market players under yesteryear's regulatory assumptions.


Thursday, February 10, 2011

A Tax Worthy of a Tea Party

When consumers are forced to pay a 15.5% tax on a service the government continually describes as vital in order to support a subsidy regime the government admits is "wasteful and inefficient," you would think there would be calls for a Tea Party – whether of the 1773 Boston variety or the 2010 nationwide variety.

I refer, of course, to the FCC's universal service and intercarrier compensation regulations which create both explicit and implicit subsidies that transfer money from various service providers to other service providers and from various telecom customers to other telecom customers. For example, lower income urban and suburban customers are charged above-cost prices for telephone service in order to subsidize the cost of telephone service for wealthy Aspen and Jackson Hole ranchers.

Most readers of this space are familiar with these byzantine, inefficient legacy subsidy systems, which I have addressed many times in detail. My purpose here is not to explain their intricacies again.

Rather, as the Commission embarks on yet another in a long series – way too long for recounting here -- of thus far fruitless reform embarkations, I want only to offer a few observations.

In the news release announcing the launch of this latest proceeding to fix what FCC Chairman Julius Genachowski describes as a "broken system" that is "locked in the last century," the Commission itself says the universal service regime is "wasteful and inefficient in some situations." This is understated.

The Commission's news release goes on to say, with respect to the intercarrier compensation system which is intertwined with the Universal Service Fund (USF): "The system is rooted in outdated distinctions between local and long-distance telephone service, and inefficient per-minute charges. ICC also suffers from loopholes that distort markets and derail investment in advanced Internet Protocol (IP) networks."

Lest you think the defects of the subsidy regimes are newly discovered on the agency's part, please disabuse yourself of that notion. Here are excerpts from FCC orders in 2001:

“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.”

These 2001 quotes were clipped from a piece I wrote in October 2008 entitled, "The Time for Bold Action Is Now," when the FCC appeared it might be – yet again -- on the verge of taking meaningful steps in the direction of reforming the USF and intercarrier compensation regimes. There are many more quotes from commissioners going back to the early years of the past decade to the very same effect.

With little originality, I ended the 2008 piece this way: "The time for kicking the can down the road has past. The can is broken." William Faulkner once said: "The past is never dead. It is not even past." With regard to universal service, for the Commission, it is as if the past is never dead and not even past. Just give the can another good kick.

But here is what finally may be sinking in: The agency's failure to have reformed the regulatory regimes, which it has recognized as broken for at least a decade, is an institutional failure of a high order. The almost universal explanation, usually put just this way or very similarly, is that "the politics are too tough." But this perennial excuse calls into question the very raison d' etre for the agency. With its bipartisan members serving fixed, staggered terms, and not removable at will by the President or by Congress, by design the FCC is supposed to be an independent regulatory agency largely (but not exclusively) insulated from politics. In accordance with the Progressive-era foundational theory that underpins its creation, the FCC's decisions are supposed to be guided mostly by the commissioners' expertise, not politics. (As you may know, I have real problems with the Progressive-era theories, including with respect to the nature of independent agencies, but the FCC is what it is.)

And, in any event, we are where we are – the can is where it is in the road. And, for the moment, the expectation – and certainly most of the industry participants already have fallen into line – is that everyone should cheer the fact that Chairman Genachowski and his fellow commissioners finally have started yet another proceeding to reform the USF and intercarrier compensation regimes.

Okay, I don't want to be churlish. Hip-hip-hooray!

I'll even gladly commend the Commission for nodding in the direction of recognizing the need to be guided by certain important principles, such as "ensuring fiscal responsibility," "demanding accountability," and "enacting market-driven and incentive-based policies." In and of themselves, these words have a nice ring to them.

But it is the way the Commission implements its first announced principle that is the key to whether the Commission's effort, assuming it ever moves forward, constitutes sound public policy. This first principle is "modernizing USF and ICC to support broadband networks." This notion of transforming an admittedly broken, wasteful, and inefficient subsidy regime into one supporting broadband is highly problematic, unless the regime is carefully limited, targeted, and constrained.

Here's the nub of the matter concerning what should be done. The size of the current USF subsidy fund – now over $8 billion spent annually – should be reduced very significantly. Voice telephone penetration, which the fund was created to support, is now as "universal" as it ever will be. Mission accomplished.

With broadband service available to approximately 95% of American households (not counting satellite or wireless broadband), there is simply no need for the universal service program to be converted wholesale from its original purpose into an expansive ongoing subsidy regime to support broadband. To the extent subsidies are used to support broadband, funds should be targeted only to unserved areas, not to areas already served by another provider. And it is appropriate for funds to be targeted to low income persons in a Lifeline-Linkup program in order to help get those persons connected to broadband.

The FCC's news release did not mention the current 15.5% tax collected on all interstate calls to support the various universal service subsidy funds, nor did Chairman Genachowski in his statement. (I know that it is denominated a "fee" and not a "tax," but the economic effect is the same as a tax.) This omission seems curious and unhelpful if the Chairman really wants to rally public support for meaningful reform which would incorporate the principles of fiscal responsibility, accountability, and market-driven incentives. Only Commissioners Robert McDowell and Meredith Baker took note of the size of the tax.

Regardless how one feels about so-called "sin taxes" on goods like cigarettes and alcohol, no one argues that it is a positive good to suppress the demand for telecommunications services. Yet suppression of demand for telecom services is exactly the result of the USF tax.

Absent indications that meaningful reform is on the way, and soon, you would think the 15 percent tax on telecom services would be a tax worthy of a Tea Party, if only one to dump dozens of phone bills into the Potomac River as it flows by not far from the FCC's headquarters.

Sunday, February 06, 2011

Regulatory Principles and Policy Priorities 2.0

I was honored that FCC Commissioner Meredith Baker gave her maiden speech as a commissioner at a Free State Foundation conference in September 2009 celebrating the publication of FSF's New Directions in Communications Policy book. And I was especially honored that Commissioner Baker agreed to deliver the opening keynote address last week at the Free State Foundation's Third Annual Winter Telecom Policy Conference at the National Press Club.

Her address, "Regulatory Principles and Policy Priorities 2.0," is here, and you may view it on C-SPAN, where it was broadcast live, here.

I hope you will read or view Commissioner Baker's speech in its entirety. Here I want only to highlight briefly some excerpts, because, to my mind, they are particularly pertinent to the way the FCC ought to go about its business.

Initially, Commissioner Baker set forth four guiding regulatory principles for the agency. A salient point from each one:

  • "More judicious self-selection of the issues and proceedings we tackle would help us become a more predictable agency that fosters greater legal certainty."
  • "[I]n those areas where the Commission has affirmative authority, we should act only where there is a factual record demonstrating conclusively that there is a market failure necessitating government action…Absent a genuine evidentiary record of a need to act, we must resist the urge to reward the loudest and most persistent advocates for action. We should also avoid regulating to respond to a handful of isolated incidents."
  • "Each new technological development or commercial dispute should not be viewed as an opportunity to investigate, regulate or bless. In the dynamic space in which we regulate, the risk of market-shaping action or picking winners and losers by regulation is too high."
  • “[R]obust, market-based competition provides the best results for consumers."

How much closer to the "model agency for the digital age" of which FCC Chairman William Kennard spoke in 1999 would the FCC be today if only the commissioners adhered to these principles?

Two other points of note.

Commissioner Baker pointed out that, before the Net Neutrality order has even been published in the Federal Register, "[p]arties are pushing to expand the scope of that decision into new markets and to erode the roadblocks built into the Chairman’s approach for wireless, prioritization, and managed services." Here think of Level 3 trying to turn what heretofore has been treated as an ordinary Internet peering dispute settled routinely through commercial negotiation into a complaint sounding in "net neutrality." And Free Press trying to do the same with respect to wireless provider MetroPCS's new offerings of various tiered services with certain pre-specified limitations dictated by existing legacy technological constraints. In fact, the MetroPCS offerings actually expand options for its customers.

Commissioner Baker admonished that "[w]e can’t let our debate within the FCC be hijacked by Net Neutrality for another year." Putting aside the question whether Congress or the courts will overturn the FCC's net neutrality rules, Commissioner Baker is surely right that, unless and until the rules are overturned, the Commission will be making a huge mistake if the agency doesn't make clear early on that they will not be interpreted in an expansive fashion that only has the effect of inviting a flood of frivolous complaints.

Finally, Commissioner Baker said: "For universal service and intercarrier compensation, the old ways will not do. We must resist the urge to shoehorn broadband into a broken system, and our IP future into our POTS past." In the coming weeks we will have much more to say about the substance of the Commission's handling of the universal service and intercarrier compensation issues. For now it is enough to observe that the Commission's unduly prolonged failure to reform these outdated, highly inefficient subsidy regimes over the last decade is nothing short of a demonstrable institutional failure.

On this last score, if the FCC is to meet its institutional responsibilities in the dynamic and competitive digital age marketplace environment, it would do well to heed Commissioner Baker's "regulatory principles and policy priorities."