Friday, September 28, 2012

Audit Report on Maryland Unemployment Overpayments Should Prompt Cost-Saving Reforms

A article spotlights a just-issued Maryland Office of Legislative Audits' report on state overpayment of unemployment claims. As the article points out, the Department of Labor, Licensing and Regulation's Division of Unemployment insurance's (DUI) overpayment receivables for last year totaled nearly $150 million. About $25 million in overpayments were recovered.
The Audit report made a handful of findings regarding the shortcomings of DUI's administrative processes for administering unemployment benefits. Among those findings that bear on the overpayment of benefits:

  • DUI didn’t use available quarterly wage information for existing and new employees for purposes of detecting unemployment claimants receiving payments that they were ineligible for.
  • "DUI did not perform certain targeted automated matches to identify claimant payments with a higher likelihood of being improper, such as claimants who were paid benefits after their date of death, while incarcerated in a State correctional facility, or while employed by a State agency."
  • DUI had no process in place to ensure current and accurate unemployment claimant address. In particular, DUI didn't have a process for making sure that changes processed by the bank's debit cardholder account records were communicated to DUI.
  • A system programming error for online tax credit applications resulted in employers being improperly certified to receive tax credits.

Fortunately, as indicated in the Audit report's appendix – and pointed out by – the Department of Labor, Licensing and Regulation appears willing to take these findings seriously. Hopefully, the acknowledged problems regarding improper, erroneous payments will be remedied quickly. This is important for an unemployment insurance program that has been growing rapidly in any event. Expenditures increased from approximately $460 million in 2007 to "approximately $1.61 billion, of which approximately $768 million was funded by the federal government" – that is, $842 million – in 2011. 

Wednesday, September 26, 2012

At the Time of the Merger

In an order released on September 12, 2012, the Federal Communications Commission terminated the remaining condition attached to the proposed AOL-Time Warner merger when the agency approved the combination in 2000. The condition prohibited Time Warner Cable, then a subsidiary of Time Warner, from discriminating against any unaffiliated Internet service providers permitted to use TWC's facilities to provide Internet service to subscribers.
I'm sure the order was little noticed, even though the Commission said it was part of "our broader efforts to remove unnecessary regulations." But it warrants some attention. The agency states "changed circumstances have eliminated the rationale underlying the condition."
You can bet your house on the truth of that Commission assertion.
The Commission's September 12 order dutifully observes that:
"At the time of the merger, AOL was the world’s largest Internet Service Provider (“ISP”). Time Warner was the second largest cable provider in the United States, possessed one of the world’s largest content libraries, and controlled the nation’s second largest broadband ISP, Road Runner….[C]orporate restructuring has severed the ties among AOL, Time Warner, and TWC. In addition, AOL no longer operates as a broadband ISP."
Changed circumstances?
Time Warner, Time Warner Cable, and AOL officially severed their corporate ties in 2009, although as close observers recall, the chief corporate components of the merged entity seemingly began falling apart not too terribly long after the AOL-Time Warner merger was consummated – after an intensive FCC review that lasted over a year.
The point of taking note of the FCC's order is not to poke fun at the agency. There is a serious, important point to be made: The FCC's experience in imposing conditions on the AOL-Time Warner merger based upon its competitive assessment should cause the agency to adopt a more modest, perhaps even humble, posture with respect to its ability to discern the future parameters of the communications marketplace. The technological and marketplace dynamism demand a high degree of regulatory modesty.
Of course, the Commission was under enormous pressure from so-called consumer groups to reject the AOL-Time Warner merger proposal in light of the claimed domination of the new "media giant."
A Consumers Union representative claimed that the consolidated company "would be in a position to thwart competition in many markets across the country." A Media Access Project representative stated "the sheer size of these two companies' assets and their inadequate commitment to open access fall short of what the public interest requires and the law permits." A Consumer Federation of America representative worried that by "[c]ontrolling both content and distribution, the company [could] design interfaces that capture and lock in customers, while they lock out competitors, except on terms and conditions that are set by the entity controlling the choke point." A Center for Media Education official noted that companies that "control both conduit and content… wield tremendous power in the marketplace of ideas" and possess "the ability to shape the future of the Internet and other digital media."
These groups filed a joint petition to deny the merger, which described the "dangerous new dimension" being added to "the emerging structure of the cable TV/broadband Internet industry… by extend[ing] the reach of two huge, vertically integrated firms across the cable TV, broadband Internet and narrowband Internets." Among the "findings" cited in their petition: "The merger would allow two enormous firms to dominate the markets for broadband and narrowband Internet services, cable television, and other entertainment services, which could leave consumers with higher prices, fewer choices, and the stifling of free expression on the Internet." The petition claimed that the new "media giant" would "be able to quickly capture the new product market for interactive TV."
Pretty alarming claims. But, of course, they were all wrong. The consumer groups always have a new set of claims, of course, concerning market dominance by "media giants." But on the occasion of the FCC's elimination of a merger condition that long since had made their market dominance prognostications look silly, is it too much to expect some measure of regulatory modesty from these groups?
Perhaps so.
But the FCC is another matter entirely. It shouldn't be too much to expect the agency to reflect on the extent to which its own concerns about marketplace dominance were misplaced. A good dose of regulatory humility would be in order.
Finally, while the Commission's order refers to elimination of the AOL-Time Warner merger condition as part the agency's efforts to remove unnecessary regulations – like the formal elimination of the Fairness Doctrine twenty-five years after the FCC had said it would no longer enforce it – this belated action doesn't warrant deregulatory plaudits. Like the formal Fairness Doctrine elimination, the Commission's AOL-Time Warner action is in the nature of a pro forma "cleaning up the books."
But the commissioners should take solace. There is plenty of real regulatory reform work to be done.

Thursday, September 20, 2012

A Snapshot of Smartphones and Surging Mobile Commerce

My September 18 short blog post pointed to the app market, which is now thriving thanks to the ubiquity of wireless broadband. Of course, sophisticated smartphones and other mobile devices are just as critical to these developments than the data networks and infrastructure facilities.
Data just released by comScore sheds some light on the centrality of smartphones to the expansion of mobile commerce—sometimes know simply as "M commerce." "From Brick-and-Mortar to Mobile Click-and-Order: Which Retailers are Carving Out Space in the M-Commerce Market?" ranks the highest-visited mobile retail sites and also looks at the percentages of of mobile retail shoppers among smartphone owners. According to comScore: "In July 2012, 85.9 million people age 18 and older visited a retail destination via a mobile browser or app on their smartphone, representing 4 in every 5 smartphone owners."
To put some perspective on just how rapid this rate of growth is, now consider what the FCC's 2011 Wireless Competition Report had to say about mobile commerce on smartphones: Data from comScore suggest that the increasing prevalence of smartphones may correspond to a growth in mobile shopping, as 10 percent of smartphones and 12 percent of iPhones have been used to access online retail sites, compared to only one percent of traditional handsets.
While smartphones and mobile retail websites are the beneficiaries of an unregulated, free-market environment, the same can't quite be said regarding some of the critical inputs for the wireless market. To repeat the policy priorities for furthering the mobile commerce boom: more flexible spectrum must be made available for commercial use and regulatory barriers must be reduced for building and upgrading wireless cell sites.  

Wednesday, September 19, 2012

Pro-Investment Spectrum Policy Requires Open Eligibility and Flexibility

This fall promises to be a critical season for spectrum. At its September 28 meeting, the FCC is set to consider proposed rules for the broadcast TV spectrum incentive auction and for the spectrum screen the agency uses in evaluating spectrum license transfers. The FCC is also considering AT&T's proposed acquisition of several spectrum licenses from Comcast, Horizon, and NextWave.

The name NextWave should ring a bell at the FCC. In particular, it should call to mind the debacle of the agency's mid-1990s spectrum auctions conducted according to a restrictive, protectionist approach instead of a truly free market approach. A decade of messy legal battles between botched auction winner NextWave and the FCC kept valuable spectrum from being put into use for wireless services.

The FCC will hopefully show it has learned the lessons of NextWave in implementing spectrum incentive auctions and in reviewing spectrum secondary market transactions. For the FCC, this means ensuring there is open eligibility for those entities offering the highest bids to obtain spectrum licenses. It also means auctioning spectrum licenses free from encumbrances that could depress their value. A pro-investment policy for spectrum, so vital to job growth and economic expansion, requires reliance on free market forces for ensuring spectrum licenses obtain their highest value.

Spectrum is a critical input for accommodating surging wireless data traffic and for facilitating deployment of next generation wireless services. According to data compiled by CTIA, wireless data traffic totaled more than 865 billion megabytes in 2011, a 123% increase in annual traffic from 2010. The FCC has repeatedly acknowledged the urgency of making more spectrum available to accommodate future wireless data traffic demands. AT&T's proposed acquisition of spectrum licenses from Comcast, Horizon, and NextWave – dubbed "AT&T/WCS Licensees" by the FCC – fits with plans to retire its legacy service operations. The carrier is positioning itself to migrate those customers to more advanced wireless networks, including its expanding 4G network. As one analyst report puts it, next-generation IP networks offer the benefits of "increased throughput, lower latency, and stronger security. One result is a reduced cost per megabit."

Due to this combination of increasing demand for wireless services and network capacity constraints, in recent years spectrum has become increasingly valuable. This is evidenced by the high prices being offered by wireless carriers for additional licenses. For instance, Verizon Wireless acquired 20MHz of Advanced Wireless Services (AWS) spectrum from a consortium of cable companies (SpectrumCo) for a reported $3.9 billion. It is reported that AT&T is paying NextWave $600 million for its spectrum licenses, with the carrier said to be spending some $2.6 billion to acquire spectrum through several other transactions.

Given the innovative and competitive state of today's wireless marketplace, a pro-investment policy that puts primacy on market forces will best ensure the rapid rollout of the next generation of wireless services. Market-based decision-making by the private sector offers the most efficient means for ensuring that spectrum licenses are put to their best use. Those entities that are willing to invest the most in spectrum will invariably have the strongest incentive to make good on their investments. And as research by economists Robert Shapiro and Kevin Hassett indicates, "every 10 percent increase in the adoption of 3G and 4G wireless technologies could add more than 231,000 new jobs to the U.S. economy in less than a year."

But the full benefits of future wireless innovation, investment, and jobs might not be realized if the FCC takes a restrictive, protectionist, and otherwise pro-regulatory approach to spectrum policy.

Earlier this year, FSF President Randolph May raised serious concerns that the FCC might invoke its vague and indeterminate "public interest standard" in order to impose restrictions on eligibility for the incentive auctions. Similar concerns were expressed that the FCC might impose restrictions on the use of licensed spectrum once it is auctioned. FSF scholars have criticized the FCC's process for reviewing mergers and acquisitions, including those involving the transfer of spectrum licenses. For example, FCC merger review orders regarding AT&T/T-Mobile and AT&T/Qualcomm have relied on seemingly arbitrary and ad hoc rationalizations for blocking deals or subjecting them to burdensome regulatory restrictions.

Given the vibrancy of the wireless market in an economy otherwise experiencing an intractably slow recovery, these concerns about FCC-imposed regulatory restrictions on spectrum auction eligibility and flexible license usage remain in full force. There are agency precedents in this regard that the FCC should not repeat. As mentioned earlier, the FCC's ill-conceived auction in the mid-1990s that restricted bidding eligibility and transferability put valuable spectrum licenses into the hands of NextWave and other entities that proved unable to pay for those licenses or put them to use. And in 2007, the FCC's 700 MHz C Block Order imposed "open access" or network neutrality restrictions on the use of the auctioned spectrum licenses. A 2010 paper by economists Gerald Faulhaber and David Farber concludes those encumbrances "decreased the value of the spectrum asset by 60%...reduc[ing] the affected telecommunication asset and thus reduc[ing] the incentive to invest in such assets." 

Going forward, the FCC must pursue a pro-investment spectrum policy that seeks to obtain the highest value that wireless carriers are willing to put up. Such investment is the lifeblood of the innovation, competition, and job growth that next-generation IP wireless services promise for consumers and for our economy. Open eligibility and flexible use, not protectionist or competitor welfare restrictions, should be the rule for the FCC's upcoming incentive auctions and for future reviews of spectrum license transfers. 

Tuesday, September 18, 2012

In the App Market It's All Ahead Full

As more consumers adopt smartphones, tablets, and other wirelessly-connected devices the market for applications continues to surge. The wireless app market appeared out of nowhere in 2007 and has been a bright spot to a largely dim economic recovery.  Earlier this year, TechNet released a study titled, "Where the Jobs Are: The App Economy." That study concluded that the app economy has created some 466,000 jobs in the U.S. since that time.

Now the Application Developers Alliance has released another important new study shedding light on this new source of economic vitality and innovation: "The Growing App Market: Adoption, Attitudes & Usage." (A handy 2-page graphic summary is also available.)

According to "The Growing App Market" study, "[n]early one half of the U.S. online population has downloaded an app. This is an astonishing figure. What's more, many of those users expressed intent to use apps more in the future than they do now. Likewise, a third of the number of persons identified as online non-users of apps actually plan to start using apps within the next half-year.

A key takeaway from these positive economic indicators, for public policy purposes, is the pressing need to further incentive investment and jobs in the app market. Our economy can surely benefit from further unleashing the growth potential of the app market. 

The use of apps relying on wireless connections, in particular, can be promoted by policies to increase the supply of infrastructure inputs that wireless broadband networks depend on. For starters, more spectrum needs to be made available for next-generation wireless networks. Likewise, regulatory barriers to cell site construction need to be reduced or eliminated, particularly at the state and local level

Monday, September 17, 2012

FCC Finally Forbears From CableCo/CLEC Restrictions

In another barely buzzer beating decision, the FCC granted forbearance relief to cable operators and competitive local exchange carriers from Section 652(b). I made the case for deregulation in my FSF Perspectives paper, "Section 652 Cross-Ownership Ban Shouldn't Apply to Cablecos and CLECs."

First and foremost, this is a welcome end result. It makes little sense to ban efficiency-enhancing mergers or otherwise burden them with onerous approval processes requiring the sign-off of potentially numerous local franchising areas (LFAs) that typically have no regulatory oversight over local voice services. The FCC's rejection of NCTA's petition for a declaratory ruling that Section 652 doesn't prohibit cableco/CLEC mergers makes sense in light of the plain terms of the statute. So the FCC did the next best thing in forbearing from Section 652(b). The FCC's deregulatory decision stands to improve marketplace competitiveness in advanced telecommunications services and thereby enhance overall consumer welfare.

But this forbearance petition wasn't a hard case. So it shouldn't have taken nearly so long. It certainly shouldn't have required the FCC to grant itself a 90-day extension after it ran out the standard one-year shot clock. Nor should the FCC have needed almost every last day of the extension. Here again, the FCC is continuing in its pattern of delay when it comes to considering regulatory forbearance petitions. Once more, the wisdom of Section 10's forbearance shot clock has been vindicated.

Going forward, regulatory forbearance should be part of any comprehensive or even modest federal communications policy reforms. FSF President Randolph May included reforms to ensure more frequent use of forbearance in his Perspectives paper "A Modest Regulatory Proposal."

Wednesday, September 12, 2012

First Amendment Overcomes San Francisco Health Scare Ordinance, Again

On September 10, the U.S. Court of Appeals for the 9th Circuit upheld an federal trial court's injunction against the City of San Francisco for its controversial ordinance regarding the health effects of cell phones. The ordinance would require retailers of wireless devices to issue city-written warnings to consumers about exposure to radio-frequency (RF) emissions. The required warnings include information telling consumers what to do if they want to reduce their exposure to RF emissions. 

As I wrote in a November 2011 blog post, the U.S. District Court ruled that the ordinance was almost entirely unconstitutional under the First Amendment. But the 9th Circuit's brief order appears to suggest that the ordinance's constitutional problems were more pervasive than even the District Court had acknowledged. 
Perhaps the City of San Francisco will finally take the First Amendment seriously and back down from forcing wireless merchants to issue misleading messages.  
(For additional background info, see my July 2011 blog post.)

Tuesday, September 11, 2012

FCC's Pro-Regulatory Broadband Policy Risks Investment and Jobs

In August, the Federal Communications Commission released its Section 706 Report measuring the availability of advanced telecommunications services. The 706 Report's data shows that approximately 95% of all Americans now have access to broadband services. And the 706 Report acknowledges the tens of billions of dollars in broadband infrastructure investment being made each year by the private sector.
Regrettably, the pro-market data points presented in the 706 Report were trumped by FCC's pro-regulatory gloss and its interventionist approach to the broadband market. Taking what has been called a "glass is 5% empty" approach, the FCC included in its 706 Report a finding that broadband is not being deployed in a "reasonably timely" manner to all Americans.
But if anything is not reasonably timely it's the FCC's negative broadband deployment finding. Controversially, the FCC regards Section 706 as a source of special regulatory power, triggered by its negative broadband deployment findings. By choosing to subject the economically vibrant broadband market to added burdens, such as net neutrality regulations, the FCC runs the risk of diminishing incentives for private investment, slowing deployment, and inhibiting job growth.
According to the 706 Report's numbers, some 19 million people – or 6% of the population – live in areas lacking broadband access. So 94% of the population has access to broadband by the 706 Report's measurement. That figure is impressive in its own right, considering that the FCC's prior 706 Report estimated that as many as 26 million Americans lacked access to broadband. Moreover, data cited by the FCC's Omnibus Broadband Initiative (OBI) indicates that broadband was deployed to only 15%-20% of Americans in 2003.*
But even the 94% estimate fails to take account of 3G wireless broadband. "[I]t is clear," the FCC recognizes, "that higher-speed mobile broadband services have been significantly deployed since our last report." Taking 3G wireless broadband into account shrinks the number of unserved down to 5.5 million people – just 1.7% of the population.
The 706 Report concedes that "[p]rivate industry is continuing to build out broadband and has invested significantly into broadband networks to date." According to figures cited in the 706 Report, between the years 1996 and 2010 wireline broadband providers invested $41 billion annually in expanding their networks. That's north of half-a-trillion dollars in broadband investment over a fifteen-year period. CTIA estimates for the years 1996-2010 show that cumulative capital investments for wireless providers totaled more than $277 billion, with wireless providers investing another $25 billion in 2011.
Given such positive deployment and investment data, the FCC's determination that broadband isn't being deployed in a reasonable and timely fashion is certainly hard to explain, let alone justify. But the FCC's finding can be more easily explained in light of the agency's pro-regulatory philosophy, including its interventionist approach to the broadband market.
The FCC continues to push the controversial view that a negative finding regarding broadband deployment under Section 706(b) gives the agency additional regulatory powers. And the FCC shows itself all too eager to use those assumed powers. The FCC's latest 706 Report finding simply renews the agency's additional regulatory power claims.
The 706 Report highlights the FCC's network neutrality regulations among its marketplace interventions, suggesting these regulations were undertaken ostensibly to accelerate broadband deployment and remove barriers to infrastructure investment. According to the 706 Report, net neutrality regulations were adopted "to ensure the continuation of the Internet’s virtuous cycle of innovation and investment, and the Commission must continue to prioritize those efforts consistent with the mandate of section 706."
Now if the FCC's net neutrality regulations really removed barriers to infrastructure investment, one would naturally expect to find corroborating data. But the 706 Report contains no data indicating actual increases in annual broadband investment following the adoption of those regulations. 
FSF President Randolph May and I pointed out in last September's Perspectives from FSF Scholars essay "New FCC Regulations Reduce Investment and Hinder Job Creation," that there is evidence suggesting that net neutrality regulations, in particular, actually raise barriers to broadband infrastructure investment. Our essay directed attention to Gerald R. Faulhaber’s and David J. Farber's 2010 paper "The Open Internet: A Customer-Centric Framework." Faulhaber and Farber compared higher winning bid prices for the 700 MHz band's unencumbered A and B blocks with lower bid prices for the C block, which was subject to  "open access" or net neutrality-like use restrictions. According to Faulhaber and Farber, "[n]etwork neutrality regulation thus decreased the value of the spectrum asset by 60%...reduc[ing] the affected telecommunication asset and thus reduc[ing] the incentive to invest in such assets."
In sum, the FCC's negative finding regarding broadband deployment flies in the face of two critical indicators: first, the rapid deployment of broadband over the last several years; and second, the heavy financial investment in infrastructure made by marketplace providers over that same timeframe. Taken together, those indicators suggest that the broadband market is a potent source of economic growth and job creation. In today's weakened economy, this success shouldn't be ignored, much less denigrated.
Where markets thrive, government should stay its hand to best promote economic growth and efficient results. But once more the FCC has positioned itself to second-guess the workings of the expanding, investment-heavy broadband market through regulatory restrictions. The agency risks injecting economic dislocations and investment disincentives into the market. In an economy clamoring for investment and new jobs, regulating a growing and competitive market is neither reasonable nor timely.

[* CORRECTION AND CLARIFICATION: This post previously attributed 2003 deployment data to the National Broadband Plan instead of OBI work prepared in support of the Plan.] 

Friday, September 07, 2012

Video Report Promises End to FCC's Non-Compliance with Federal Law

Shortcomings to the FCC's new Video Competition Report are the subject of my Perspectives from FSF Scholars paper, "FCC's Video Report Reveals Disconnect Between Market's Effective Competition and Outdated Regulation." In that paper I briefly alluded to the fact that the new Video Report puts the FCC back into compliance with federal law – at least for now. Given the FCC's recent history in this area, it is a bigger deal than one might think.

Section 628(g) of the Communications Act states that "The Commission shall…annually report to Congress on the status of competition in the market for the delivery of video programming." But the FCC issued no Video Competition Report in the first three-and-a-half years of the current Administration.
Instead the FCC became sidetracked by its own agenda. It expended considerable energy and resources imposing controversial new mandates like network neutrality regulations and data roaming regulations. Those mandates have been vigorously criticized for being beyond the FCC's delegated statutory authority. During that time the FCC likewise devoted significant time and attention to imposing new procedural requirements regarding regulatory forbearance. Nowhere required by statute, those new forbearance rules and standards have had the practical effect of making it exceedingly difficult to make use of a key tool designed by Congress to grant relief from legacy-era telephone regulations. The FCC also expanded certain program access regulation involving terrestrially delivered video. And it issued a slate of proposed rulemakings to alter or, in some cases, expand existing video regulations.
While the FCC busied itself with its own pro-regulatory undertakings, its express statutory duty to annually release Video Competition Reports was ignored. The FCC claims to be data-driven in its policymaking. And FCC policy typically relies on the data it collects in its reports. But for more than three-and-a-half years, the FCC offered no report to Congress about the video market's current competitiveness upon which to base its video-related regulatory rulemakings, adjudications, and litigation.
Actually, the FCC's outdated Video Competition Report problem was worse still. FSF President Randolph May and I briefly noted this problem in our Perspectives paper "Accelerate New Video Breakthroughs by Rolling Back Old Regulations." The 13th Video Report, predecessor to the new Video Report, was itself inexcusably late. Released in 2009, the 13th Video Report came nearly three years after its respective predecessor. Even then the 13th Video Report provided little insight. Due to its being mysteriously withheld from the public after its internal approval by a vote of the FCC's Commissioners in 2007, the 13th Video Report contained data and information current as of 2006. And questions surrounding alleged manipulative use of data and strong agency bias in called the reliability of 13th Video Report into question.
Thankfully, with the new Video Report the FCC can now move beyond that debacle.
Most important of all, the data contained in this new Video Report presents a video market that is innovative and competitive. But as my Perspectives paper points out, the data makes all the more evident the disconnect between the video market's competitive conditions and the outdated regulations that restrict it.