The Tortoise and the FCC...and the FCC Loses!

Once in a while -- well, more than once in a while! -- the FCC takes an action that makes you wonder. More specifically, that makes you wonder when the FCC will get serious about implementing real agency institutional reform.

Case in point.  The FCC's Wireless Bureau just issued an order approving applications filed by AT&T Mobility and KanOkla Telephone Association to assign AT&T two of KanOkla's 700MHz licenses in two local markets, one in Kansas and another in Oklahoma.

The good news is that the FCC finally approved the assignment of these two local market licenses.

The bad news? The assignment applications were filed on September 4, 2014. So it took the Commission almost a full year to grant the approvals -- even though the applications were not opposed. The FCC order states that the agency "received no filings in response to the Accepted for Filing Public Notice." In another place it reiterates that no petitions to deny or comments were filed regarding the applications.

You can read the FCC's 11-page order and decide for yourself whether it should have taken the FCC a year to act on unopposed applications relating to two local wireless markets in Kansas and Oklahoma.

I've already decided that it just shouldn't take that long.

We all know the story about the tortoise and the hare. The FCC's job is not to make the tortoise look good so often.

Procrustes at the FCC

The Federal Communications Commission has a Procrustean problem. The agency would do well to acknowledge it as a means of reforming its regulatory process.

I borrow from FTC Commissioner Maureen Ohlhausen's address, "The Procrustean Problem with Prescriptive Regulation," delivered at the Free State Foundation's Sixth Annual Telecom Policy Conference on March 18. If you missed the conference and haven't seen the C-SPAN video of Commissioner Ohlhausen's speech or read it, you should. It ought to be required reading at the FCC.

In her speech, Commissioner Ohlhausen briefly relates the Greek myth of Procrustes:

"Procrustes was a rogue blacksmith, a son of the sea god Poseidon, who offered weary travelers a bed for the night. He even built an iron bed especially for his guests. But there was a catch: if the visitor was too small for the bed, Procrustes would forcefully stretch the guest’s limbs until they fit. If the visitor was too big for the bed, Procrustes would amputate limbs as necessary to fit them to the bed. Eventually, Procrustes met his demise at the hand of Greek hero Theseus, who fit Procrustes to his own bed by cutting off his head."

According to Commissioner Ohlhausen, "[t]he general lesson of Procrustes is a warning against the tendency to squeeze complicated things into simple boxes, to take complicated ideas, technologies, or people, and force them to fit our preconceived models." Hence, regulators should resist the urge to simplify – to think they have the expertise or knowledge to simplify – and learn to tolerate complexity.

How should regulators confront the Procrustean problem? Commissioner Ohlhausen offers two fundamental principles, especially for those regulators who exercise authority in markets in which technology plays a large role: (1) embrace regulatory humility and (2) focus on evaluating consumer harm. As Commissioner Ohlhausen puts it: "Because it is so difficult to predict the future of technology, government officials…must approach new technologies and new business models with a significant dose of regulatory humility."

With regard to the second principle, what Commissioner Ohlhausen says about the FTC should be equally applicable to the FCC as well: "By focusing on practices that are actually likely to harm consumers, the FTC has limited its forays into speculative harms, thereby preserving its resources for clear violations. I believe this self-restraint has been important to the FTC’s success in tackling a wide range of disparate problems without disrupting innovation." The emphasis is on protecting consumers, not protecting competitors.

To adhere to the principles of embracing regulatory humility and focusing on consumer harm, Commissioner Ohlhausen emphasizes a point I have made in this space (literally) countless times: an ex post enforcement approach, based on the filing of individual complaints, is preferable to ex ante prescriptive regulations. As she puts it, the ex post enforcement method, employed by the FTC, "typically focuses on actual, or at least specifically alleged, harms rather than having to predict future harms more generally." In contrast, the FCC's general resort to prescriptive ex ante rulemakings necessarily suffers from systemic knowledge problems that are exacerbated in the context of a dynamic market with fast-changing business models and technologies.

Finally, and importantly, Commissioner Ohlhausen rightly takes on the invocation of the now common shibboleth, "data-driven." Too many regulators, including those at the FCC, believe that if they simply repeat the well-worn mantra "our decisions are data-driven" that their actions ought to be accepted, without question, as proper. As Commissioner Ohlhausen reminds us: "[D]ata isn't knowledge or wisdom. 'Data-driven' decisions can be wrong. Even worse, data-driven decisions can seem right while being wrong."

I was pleased that Commissioner Ohlhausen suggested some skepticism is warranted regarding ritual incantations of "data-driven" decision-making because, frankly, I have been doing the same for years. As I said in a blog three years ago, "data, no matter how sweet-sounding the oft-repeated 'data-driven' mantra … is viewed differently, and put to different uses, depending upon one's regulatory philosophy and perspective." Or, to the very same point, in a 2010 piece I suggested Chairman Genachowski's "data driven" mantra, even then, already was being overworked because "regulatory philosophy matters a lot" in deciding how to interpret and make use of data.

I'm certain that Commissioner Ohlhausen doesn't mean to imply that regulators should not seek to obtain relevant, accurate data, or ignore it when they have it. And I don't either.

But I do want to suggest that, by following Commissioner Ohlhausen's two fundamental principles – embracing regulatory humility and focusing on consumer harm – the temptation of regulators to cover shoddy reasoning by invoking the "data-driven" mantra may be lessened. That is to say that abiding by the principles enunciated by Commissioner Ohlhausen will lead to sounder decisions that are less dogmatically pro-regulatory. Overall consumer welfare is more likely to be improved by such decision-making.

In the next year, the FCC will be making some important decisions in major proceedings – for example, in the incentive auction, the Comcast-Time Warner Cable merger, and IP transition proceedings, to name but three. Free State Foundation scholars have addressed issues in each of these proceedings before, and I am certain we will do so again in the months to come. I don't want to do so here.

Except to say, in closing, that I am confident the Commission's decisions in these matters, and others, will benefit consumers most if Chairman Tom Wheeler and his colleagues take to heart Commissioner Ohlhausen's message concerning the virtue of regulatory humility.

That means slaying Procrustes in his own bed at the FCC.

Time to Reconsider Reforming FCC Competition Reporting

On Friday, July 19, the FCC is expected to release its Fifteenth Video Competition Report in the course of its public meeting. I wrote about the Fourteenth Report in my Perspectives from FSF Scholars paper, "FCC's Video Report Reveals Disconnect Between Market's Effective Competition and Outdated Regulation." This new report should at least summarize more recent data on competitive developments in the video market.

The timeliness, scope, and frequency of FCC competition reports to Congress were all touched on during the U.S. House Subcommittee on Communications and Technology's hearing on "Improving FCC Process."

FSF President Randolph May provided testimony at that hearing. And his blog post, "FCC Regulatory Reform and Administrative Law," offers a further response to the hearing's discussions.

At the hearing, one of the discussion draft bills that Chairman Greg Walden called attention to a discussion draft bill that would consolidate the FCC's competition reports into a single, biennial "State of the Industry" report. In the 112th Congress, the House passed such a measure – the Consolidated Reporting Act of 2012 (H.R. 3310) – on a voice vote. Unfortunately, the Senate gave the legislation no consideration.

In my Perspectives paper, "Convergent Market Calls for Serious Intermodal Competition Assessments," I explained why I thought consolidated reporting legislation was ripe for reintroduction:

Combining disparate competition reports would structurally conduce to intermodal competition assessments. It should come as no surprise if the current system of separate FCC reporting on specific services results in largely silo-like analyses. That is what current law all but invites. A more comprehensive approach to digital age communications services – combined with a specific directive regarding intermodal competition assessment – could offer a better perspective on the competitive state of voice, video, audio, and data services as well as the substitutability of wireline, wireless, satellite, and other platforms. It could even shed light on the unnecessary and outdated regulatory burdens that now saddle communications services on a variety of platforms. Combined FCC reporting could also reduce the administrative burdens.

Combining future FCC reports is something that a June 25 GAO report also called attention to. And the forthcoming release of the FCC's Fifteenth Video Competition Report should likewise provide occasion to consider the benefits of reform.  

For Independent Agencies, SEC Regulatory Accountability Bill is an Act to Follow

Everyone needs a reality checks sometimes, even "the experts." When so-called expert independent agencies consider regulating areas of our economy, shouldn't they check to make sure new regulations won't cause more economic harm than good? Isn't it worth double-checking the results once new regulations are in place?

For independent agencies, cost-benefit analysis should provide that reality check. And post-adoption "look back" assessments should serve as a double check. This is the basic approach of the SEC Regulatory Accountability Act (H.R. 1062). It's an economic-minded reform bill scheduled for consideration soon on the floor of the U.S. House of Representatives.

H.R. 1062 offers a constructive model for regulatory reform for other independent agencies – like the FCC. Provisions of the SEC Regulatory Accountability Act could form the foundation of a future "FCC Regulatory Accountability Act."

Absent market failure, regulation typically reduces economic efficiency and technological innovation. Regulation reduces the freedom of market participants to rely on their informational insights and skills to pursue new technological and service strategies to meet consumer demand. Freedom and knowledge is replaced by prescriptive government rules. Those come with compliance costs and are more likely to preserve the status quo. And regulatory costs to providers routinely reach consumers in the form of higher prices.

Where regulation is suggested to remedy a perceived problem, cost-benefit analysis can help identify those situations where regulation is justifiable. This means an economically grounded assessment by the assigned government agency. Such an assessment can improve the likelihood that proposed regulations might outweigh the negative consequences often attached to government controls on markets.

Requiring a government agency to conduct a cost-benefit analysis prior to imposing regulation offers a check on bureaucracy. It is an informative procedure that can help stave off harmful overregulation.

The SEC Regulatory Accountability Act (H.R. 1062) would reform Securities and Exchange Commission processes for assessing, adopting, and reviewing rules. Among the legislation's provisions, two features stand out.

H.R. 1062's first standout feature is its requirements for agency cost-benefit analysis. Before issuing a regulation under the securities law, the SEC would be required to:

[U]tilize the Chief Economist to assess the costs and benefits, both qualitative and quantitative, of the intended regulation and propose or adopt a regulation only on a reasoned determination that the benefits of the intended regulation justify the costs of the regulation.

Also, "[i]n deciding whether and how to regulate," the SEC must assess costs and benefits of alternative approaches, "including the alternative of not regulating." The SEC must pick the approach that "maximizes net benefits."

H.R. 1062 lists components of such cost-benefit analyses. Those include whether the rulemaking: (i) "will promote efficiency, competition, and capital formation"; (ii) " is tailored to impose the least burden on society, including market participants, individuals, businesses of differing sizes, and other entities"; and (iii) "is inconsistent, incompatible, or duplicative of other Federal regulations."

H.R. 1062's second standout feature is its post-adoption impact requirements regarding "major rules." The SEC would have to track the consequences of new regulations likely to have an annual economic impact over $100 million or which result in "a major increase in costs or prices" for consumers or industries. When adopting major rules, H.R. 1062 would require the SEC to set out post-implementation metrics to measure their economic impact. 

Those metrics would form the technical basis of a required SEC "assessment plan" regarding major rules. The assessment plan would have to consider "the costs, benefits, and intended and unintended consequences of the regulation." That plan sets the groundwork for an assessment report, submitted by the SEC's Chief Economist within two years of the major rule's adoption. Within 180 days of an assessment report's publication, the SEC would be required to propose amending or rescinding the major rule, or to publish a notice stating no action will be taken.

In short, H.R. 1062 reform proposals are commendable and worthy of the U.S. House's full consideration.

And Congress should consider applying the SEC Accountability Act's cost-benefit analysis and post-adoption assessment requirements to other independent agencies. Both of H.R. 1062's standout features are suitable for application to the FCC and for inclusion in FCC reform legislation.

As observed earlier, the FCC is not required to attempt cost-benefit analyses before it imposes expansive regulations. For example, the FCC's decision to impose network neutrality regulation on broadband Internet access services was criticized on this count. The FCC lacked any cost-benefit basis for its sweeping regulatory intrusions. Its Open Internet Order was further criticized for dismissing any need to demonstrate existing or likely anticompetitive conduct or consumer harm before imposing regulations.

More recent FCC notices, such as its proposed rulemaking regarding spectrum aggregation, invited interested parties to explain likely costs and benefits of different agency actions.

But asking marketplace competitors to offer the assessments the agency should consider is not a serious accountability measure. And the FCC is vigorously defending its legal authority to impose net neutrality regulations without any cost-benefit analysis in the D.C. Circuit.

For that matter, the FCC has no empirically-based process for measuring and examining the results of its new regulatory undertakings. The FCC's two primary tools for removing outdated regulations – Section 10 forbearance authority and Section 11 biennial review authority – have been largely neglected by the agency.

In many instances, H.R. 1062's language could be lifted directly from the bill and made applicable to the FCC context. Other bill provisions would need only minor recalibration.

An "FCC Accountability Act" would help ensure proposed regulations are justifiable. And it would serve as a check against agency overregulation. Requiring the FCC to undertake cost-benefit analyses prior to adopting rules and to measure results post-adoption is sound policy. It makes economic sense too.

See Videos of Senator Rubio and Commissioner Pai from FSF's Fifth Annual Conference

Now available online is the video of Senator Marco Rubio's Keynote Address at FSF's Fifth Annual Telecom Policy Conference on March 21. It can be found at FSF's YouTube page and it's also embedded below.



The text of Senator Rubio's Keynote can be found here.

In addition, the YouTube video below features FSF President Randolph May's conversation with FCC Commissioner Ajit Pai at FSF's Fifth Annual Telecom Policy Conference.

Panel Proposes Ideas for Communications Law and Policy Reform in 2013

FSF has now released the expert panel transcript from the "Ideas for Communications Law and Policy Reform in 2013" seminar. 

The panel was moderated by FSF President Randolph May. Experts on the panel included Robert Atkinson of the Information Technology & Innovation Foundation, James Gattuso of The Heritage Foundation, David Honig of the Minority Media & Telecommunications Council, and Adam Thierer of the Mercatus Center.   

As I mentioned in an October blog post, YouTube videos of the proceedings are available through FSF's YouTube page. 

The seminar began with a conversation between FSF President Randolph May and FCC Commissioner Robert McDowell. That transcript is also available.

The FCC Should Reject CWA's Job Protection Pleas

On November 26, my colleague Seth Cooper and I filed comments in the FCC's proceeding reviewing the proposed T-Mobile-MetroPCS merger. In those comments, we concluded that, "considered in a proper analytical framework, this proposed combination will likely improve the competitive standing of T-Mobile/MetroPCS in reaching wireless consumers across the nation and thus serve the public interest."

The only other party to submit comments on that date was the Communications Workers of America, which asked the FCC to condition approval of the proposed transaction on the imposition of certain job protection requirements. On December 5, I posted a blog, "The FCC, Merger Reviews, and Job Protection Pleas," in which I said: "No one wants to see people lose jobs, especially in today's difficult economy. I certainly don't. Nevertheless, CWA's request for job protection conditions is out of place in the merger proceeding."

In concluding, I summarized this way:

"[T]he FCC has no business abusing its merger review authority by conditioning the merger on adoption of the job protection plan put forward by the CWA. Regardless of whether the Commission has abused its authority this way in the past, such a condition is simply too far afield from any legitimate view of the Commission's exercise of its merger review responsibilities."

In catching up post-holiday on my reading backlog, I see that a group of organizations, ranging from the AFL-CIO and NAACP to the Sierra Club, Jobs for Justice, and the Center for Community Change, have submitted a reply comment in support of CWA's position. These groups ask the FCC to adopt the same job protection provisions requested by CWA and, like CWA, they assert that "[t]here is ample evidence in the record to raise concerns about post-merger job cuts by a merged T-Mobile/MetroPCS."

In my December 5 blog, I explained in considerable detail why it would be wrong for the FCC to adopt CWA's request to impose job protection conditions. So I don't want to repeat all that here.

Without belaboring the matter, let me just emphasize these points.

•      Even granting that the "public interest" standard under which the merger is being considered may be vague, were the Commission to attempt to employ such vagueness as a basis for imposing – or for seeking to impose on T-Mobile through a wink-and-a-nod "voluntary" extraction – job protection conditions, the agency will commit an egregious abuse of its regulatory authority. However broad the FCC's "public interest" authority may be, in the context of reviewing proposed license transfers, it is not so broad as to encompass injecting itself into the management of the size and composition of the workforces of companies subject to the agency's regulatory authority. This is far afield from its legitimate responsibilities. If the Commission goes down the road sought by the CWA, it will be confronted with incessant requests to adopt further job protection plans in different contexts.

•      While it is would be improper for the FCC to grant the relief sought by CWA and the other public interest organizations in the context of the T-Mobile-MetroPCS or any other license transaction review, it is appropriate for the Commission to consider the impact of its regulations on investment, innovation, and job growth in generic regulatory proceedings. Regulations which are unduly burdensome or which are unnecessary to prevent consumer harm have an adverse economic impact.

•       It would be wrong for the Commission to allow the objections of CWA and the other public interest organizations to slow down processing of the proposed merger. Apparently there are no other non-frivolous objections to the transaction, so this should be a case in which the Commission shows that it can act with dispatch in reviewing merger proposals. Perhaps it can even be a precedent of sorts that, going forward into 2013, the Commission intends to consider proposed license transactions much more quickly than it has in the past.

Elections Matter, But So Do Powerful Ideas

Elections certainly matter. But the sheer force of powerful ideas matters too. That's why the Free State Foundation masthead proclaims, "Because Ideas Matter."

Reform of communications law and policy in a free market, First Amendment-friendly, rule-of-law direction is a powerful idea that ultimately will win out. This is because the present legacy regulatory model, grounded in outdated notions of static monopolistic markets, is so poorly suited to the competitive realities and technological dynamism of the digital age.

It may be that, in light of the elections' outcome, the pace of communications policy reform will not be as quick as it otherwise might have been. Nevertheless, from my vantage point, focusing not on politics but policy, I remain optimistic that the power of free market ideas will prevail, and sooner rather than later.

Why?

Well, one answer is given by Bruce Owen, a member of the Free State Foundation's Board of Academic Advisors, in the concluding chapter of FSF's new book, Communications Law and Policy in the Digital Age: The Next Five Years. Based on his decades of experience and scholarly research, Professor Owen explains how the political economy of the regulatory state creates an anti-reform communications policymaking bias. But after delivering a blunt account describing this anti-reform bias, Professor Owen concludes: "This cannot continue indefinitely in an economy that faces global competition, and therefore it will not."

I too am confident "it will not."

Then FCC Commissioner Michael Powell (subsequently FCC Chairman and now President of the National Cable & Telecommunications Association) gave a remarkably prescient address in December 2000 at a Progress and Freedom Foundation conference concerning what he called "The Great Digital Broadband Migration."  In his address, Mr. Powell conceptualized the challenges facing policymakers in light of the "the great technological migration" from narrowband to broadband, from analog to digital, that already had begun as a primary policy reform challenge: The need to focus on innovation incentives; to implement deregulation of competitive markets; to rationalize the regulatory structure to account for the "bit is a bit" phenomenon; and to improve regulatory procedures to make agency decision-making more efficient.    

Although surely there has been some progress since 2000 toward meeting the policy challenges anticipated by Mr. Powell, unfortunately, there certainly has been backsliding as well due to the strength of anti-reform bias described by Bruce Owen. (Think net neutrality regulation, increased wireless regulations, and more intrusive video regulations as prime examples.) AT&T's "Petition to Launch a Proceeding Concerning the TDM-to-IP Transition," filed last week with the FCC, is a useful vehicle for focusing attention on the fact that the "great digital migration" is by no means complete – and for focusing attention on the fact that unnecessary regulation necessarily will slow down the transition to all-IP networks.

While the objective of transitioning to all-IP networks may be broadly shared, there is, of course, an ongoing battle of ideas concerning the way forward. I submit that Congress, ultimately, but, the Federal Communications Commission itself, in the meantime, must reorient communications policy so the agency's regulatory activity is tied to standards requiring demonstrable market failure and consumer harm before government intervention. Presently, the FCC still too readily relies on the more amorphous standards of "the public interest" or "reasonableness" or "discrimination" to default to anticipatory government intervention. These latter standards, the principal hallmarks of regulatory regimes initially developed in the 19^th century designed to regulate monopolies, are no longer appropriate in today's marketplace environment.

Why are they no longer appropriate?

Because, whether intentionally or not, in a technologically dynamic digital environment, application of the monopoly-era legacy standards stifle experimentation with new business models that may benefit consumers and, ultimately, enhance overall consumer welfare. The anti-reform bias favors the status quo over change, and uniformity over differentiation. And it too quickly presumes – without waiting for evidence of market failure and consumer harm – that new business models are inconsistent with "the public interest" or that they are not "reasonable" or that they "discriminate."

The ultimate effect of the anti-reform bias, although never admitted by the pro-regulatory forces, is to favor government dictates regarding the parameters of service offerings rather than consumer choice.

Those who favor the status quo, or even more regulation, are quick to presume that any differences in service offerings, whether related to price, service quality, or other terms, are "unreasonable" or "discriminatory," and what's more, evidence of lack of competition. The pro-regulatory forces analyze markets in a way that narrows the scope of market definitions, whether by excluding services that, while, not identical, are substitutable in the sense of meeting differential consumer preferences. And they downplay potential competition and new entry. The Commission, for example, in evaluating competition, still resists the notion that wireless is substitutable for wireline service. Even as well over 30% of U.S. households have terminated their wireline service, the agency clings to the status quo view. It is difficult to conclude that such thinking is guided by anything other than a strong desire by the agency to maintain its regulatory grip.

This pro-regulatory "one size fits all approach" that narrows market definitions so as to presume lack of competition necessarily is incompatible with ongoing experimentation in business models and the development of innovative new offerings. This type of thinking, which presumes agency "experts" know which "one size" – which combinations, say, of speeds, price points, features, functions, or bundles – best serves consumers reflects a regulatory hubris ill-suited to the digital age.

As Christopher Yoo concludes in his chapter in FSF's new book: "On a broader level, policymakers would benefit from taking seriously the possibility that the days of a 'one size fits all' approach to Internet regulation may well be over and that looking backwards for the lessons of the past may not always be the past way to promote future success."

I would put it this way. If such "one size fits all" thinking persists, the FCC will maintain its regulatory grip for longer than it should in areas in which regulation is no longer appropriate. Perhaps the regulators – and the pro-regulatory forces – may, in some sense, consider themselves to be short-term winners.

But this would be wrong. For consumers surely will be the long-term losers.

* * *

FSF's new book, Communications Law and Policy in the Digital Age: The Next Five Years, is filled with many good reform-minded ideas regarding implementation of a free market-oriented communications policy. You may order the book from Carolina Academic Press here. If you order from CAP before December 31, 2012, and use the special discount code MAYFSF12, you will save 20%!

You may also order the book from Amazon here or from Barnes & Noble here.