Text of FCC Chairman Ajit Pai's Farewell Free State Foundation Address Now Available

On January 8, the Free State Foundation hosted a virtual farewell address by FCC Chairman Ajit Pai. The topic was FCC process reform. The text of his remarks is now available on the FCC's website.

Chairman Pai discussed three pillars of good government: transparency, reliance upon economics and data analysis, and maximizing the effectiveness of the people who do the work of the agency – in his words, "the FCC's greatest asset."

As noted in an earlier post to the FSF Blog, video of Chairman Pai's speech can be accessed on our YouTube page.

The Free State Foundation congratulates Chairman Pai on his many accomplishments at the FCC's helm and wishes him well in all future endeavors.

FCC Streamlines its Administrative Hearings Process

 On September 14, the FCC adopted a report and order to streamline its procedures for administrative hearings. The Commission's report and order does three main things:

(1) codify and expand the use of a process that relies on written testimony and documentary evidence in lieu of live testimony and cross-examination; (2) authorize Commission staff to act as a case manager to supervise development of the written hearing record when the Commission designates itself as the presiding officer at a hearing; and (3) dispense with the preparation of an initial opinion whenever the record of a proceeding can be certified to the Commission for final decision. 

The report and order is intended to "expedite and simplify the Commission’s hearing processes" consistent with the Communications Act and Administrative Procedure Act "while safeguarding the rights of parties to a full and fair hearing. The report and order is based on a proposal that was the subject of a short blog from September 2019. 

FCC Proposal Would Reforms its Administrative Hearings Processes

On September 6, the FCC released a proposed rulemaking that would streamline its administrative hearings processes by providing for hearings on written records. The proposed rulemaking states:

In our experience, disputes in Commission proceedings typically involve criticisms by one party of the evidence proffered by another party or the legal significance of that evidence, not actual conflicts in testimony between two witnesses concerning outcome determinative facts. 

This proposed agency process reform is strong on the merits. If adopted, this reform would reduce costs to parties as well as administrative delays in decisionmaking. 

For discussion of other agency process reform proposals, including reforms proposed in Congress, see blog posts by Free State Foundation President Randolph May, available here and here.

Commissioner O’Rielly’s Speech on FCC Process Reform at FSF’s Seminar

In a speech before the Free State Foundation’s June 28, 2018 Policy Seminar, FCC Commissioner Michael O’Rielly spoke about the FCC’s recent process reforms and next steps. He noted that process reform has been a mission of his since soon after he joined the Commission in 2013 and that he spoke about FCC process reform three years ago at another Free State Foundation conference.

The most groundbreaking reform recently adopted by the FCC, according to Commissioner O’Rielly, has been the online posting of items three weeks before their consideration at monthly Commission meetings:

When I first proposed the idea, I knew that providing information to all, instead of to the few with pricey D.C. representation, would enhance the transparency and legitimacy of the agency. But, the response from many was that it would bring the FCC’s work to a halt, Commissioners would be hesitant to negotiate, and some sort of regulatory chaos would ensue. None of this has come to pass. Instead, the Commission’s process has become far more efficient. Meetings are targeted to specific issues, unnecessary discussions of non-existent issues have been eliminated, conversations are more productive, Commissioners are still speaking their minds, and work product has greatly improved.

Commissioner O’Rielly also discussed the progress being made in establishing the FCC’s Office of Economics and Analytics “to ensure that the new office has the ability and power to institute drastic and long-lasting change to how we consider the economic impact of the rules we adopt.” As a result, future cost-benefit analyses performed by the FCC will require “a rigorous, economically-grounded analysis for any rulemaking that will have an annual cost to the economy of $100 million or more.”

As for next steps, Commission O’Rielly noted, “At last count, I have approximately 50 ideas – both old and new – that I plan to discuss with the Chairman. No need for anyone here to run for the doors; I am only going to highlight some of these ideas today.” He then described five of these ideas. 

1. Codify Commission Procedures. According to the commissioner: “Most of you would probably be shocked to learn that few of our internal workings are written down anywhere. They are merely passed down through the years under the guise of ‘how we’ve always done it.’ How does one disagree with a current practice when the practice doesn’t technically exist?” His solution is to direct FCC staff to start putting the Commission’s working practices down in written word and publishing them in the Code of Federal Regulations for the entire world to see.

2. Formalize Timeframes and Timelines. After noting that too often FCC proceedings “can get stuck in regulatory quicksand,” Commissioner O’Rielly said: “The Commission should take the necessary steps to ensure that all work is concluded expeditiously, and that the public has an opportunity to challenge a decision promptly. Appropriate timeframes should be placed on all FCC proceedings, the 180-day merger shot clock should not be aspirational, and clear deadlines need to be placed on Team Telecom’s review of the foreign ownership implications of certain applications before the FCC.” 

3. Eliminate the Administrative Law Judge Process. Commission O’Rielly said “We should not continue the practice of prolonged proceedings to determine that a hearing is needed, to then transfer the issue to an ALJ for a drawn-out hearing, just for the matter to come back to be fully considered yet again and voted on by the Commission. What a waste of time and resources.” He noted that despite the thousands of proceedings and applications that come before the FCC, only six active cases designated for hearing.

4. Deregulatory Presumption. For this recommendation, Commissioner O’Rielly endorsed a proposal made by Free State Foundation President Randy May in 2011 that the FCC start with “a presumption that regulation is not necessary due to the presence of meaningful competition,” which “could only be overcome by clear and convincing evidence to the contrary.” He added: “there is no reason why the Commission, on its own accord, could not use such an approach when considering forbearance petitions or reviewing rules. And, if for some reason regulation is found to be necessary, the Commission should impose sunset provisions or require periodic reviews for any new or retained rules.” 

5. Fixing Enforcement. His last recommendation focused on the forfeiture collection process, noting that the FCC’s policies in this area are too inconsistent in terms of how penalties are calculated, transparency, how well the collection process is enforced, and when the statute of limitation expires. He added: “Enforcement proceedings should never be used to set policy or precedent that will apply to multiple parties without the opportunity for basic notice and comment.” 

As Commissioner O’Rielly acknowledged, FCC process reform is not always splashy and does not necessarily generate headlines. But it is nonetheless very important for the Commission to succeed in its substantive goals: “For the agency to accomplish the big-ticket items, it must have a process that is efficient and one that is respected internally and externally. Otherwise, the Commission leaves itself open for both process complaints and substantive objections.” He concluded that at least some of these proposals could be implemented first on a trial basis to see how they work in practice. He added that trialing may not be necessary, but it could be used to advance the reform agenda. In any event, Commissioner O’Rielly explained, such trialing “must be a good idea because Randy May wrote a blog on this very idea back in January 2017.”

O'Rielly Asks FCC to Stop Censoring Commissioners

On February 24, 2016, FCC Commissioner Michael O’Rielly published a blog entitled “Stop Unfairly Censoring Commissioners.” Commissioner O’Rielly, who has published many blogs on process reform at the FCC, discusses the need for more transparency within the FCC rulemaking process. He argues that draft items should be released publicly, but at the very least, he says Commissioners and their staffs should be able to discuss items with the public, whether through blogs, tweets, fact sheets, or interviews. Commissioner O’Rielly stresses the importance of transparency and public feedback:

It is common sense that, if the Commission wants the strongest and most defensible items, it needs to talk to the outside world, including interested and affected parties.  This simple principle is embodied in the Administrative Procedure Act notice and comment rulemaking process.  Similarly, Commissioners also need the opportunity to discuss ideas, problems, and alternative ways to do things than the prescribed proposal contained in any draft item.  As it stands now, it is immensely frustrating to sit in ex parte meetings and be unable to test out other concepts and options or correct any misunderstandings of those in attendance.  But if we were to have such conversations today, my fellow Commissioners and I would risk potentially violating the Commission’s disclosure rule by revealing nonpublic information about items.  The end result is weaker Commission items.

Commissioner O’Rielly was the keynote speaker at the Free State Foundation’s July 2015 lunch seminar on FCC process reform, which can be viewed here. Free State Foundation President Randolph May has testified three times in front of the House Subcommittee on Communications and Technology regarding the need for process reform at the FCC (May 2015, July 2013, and June 2011). Mr. May also released two blogs in the summer of 2015 on this important topic, “Why Process Matters” and “Why Process Matters – Part II.”

Commissioner O’Rielly has been a strong leader on process reform at the FCC and we hope he continues his fight for more transparency and accountability at the Commission.

FCC's "Gatekeeper" Theory Is a Flawed Market Failure Analysis

When analyzing the cost-effectiveness of a regulation, the first questions that should be asked are: Does the regulation address a market failure or systemic problem? If it does, how does it correct the perceived market failure? And do the benefits of the regulatory solution outweigh the costs of imposing new regulatory requirements? The Federal Communication Commission’s (FCC’s) February 2015 Open Internet order failed to properly address these questions.

On August 6, 2015, thirteen economists from prominent universities and policy institutes submitted an amicus brief to the D.C. Circuit Court of Appeals demonstrating that the FCC’s 2015 Open Internet order failed to include a basic cost-benefit analysis. One of the main arguments in the amicus brief is that the FCC employed an inaccurate assessment of market failure. The brief states that “the FCC had no basis for its finding that, absent Title II, Internet Service Providers will utilize ‘gatekeeper’ power to harm consumers and content providers.”

So how does the Commission attempt to justify the Open Internet order? It makes a number of assumptions about ISPs and consumer preferences but it fails to provide any evidence to back up these assumptions. The Commission claims that ISPs are monopolies. It argues that ISPs are “gatekeepers” who control the point of Internet access between content providers and consumers. The Commission says that this relationship encourages ISPs to harm consumers by discriminating against content providers who do not pay for priority.

In reality, ISPs have no incentive to block or throttle content when consumers have a choice between multiple providers. But the Commission creates a false narrative that so-called “switching costs” (or the time and/or money spent in order to switch from one provider to another) are too high, creating monopolistic market power even when multiple providers offer access in a given area. The order claims that “once a consumer chooses a broadband provider, that provider has a monopoly on access to the subscriber.”

The amicus brief responds with the following: “The same ‘monopoly’ could be said to exist for customers who have entered a movie theater or restaurant.” The amicus brief also explains that competition within a local market creates consumer choice and “compels ISPs to offer high quality services at attractive prices to prospective consumers in the hope they become actual customers.” For example, if one provider in an area requires early termination fees for a contract, competitors in the area would likely offer a lower priced service to offset those fees and attract consumers to switch.

The amicus brief gives the following example of how consumers respond to what they perceive is harm: “Time Warner Cable’s losses of broadband subscribers during its dispute with CBS in 2014, even when that dispute was over access to television content, is indicative of how strongly and rapidly consumers respond to changes in content availability.”

The Commission’s “gatekeeper” analysis is completely inconsistent. The Commission claims that the requirements of the Open Internet order, which supposedly prevent ISPs from acting as gatekeepers, are especially important for “rural areas or areas served by only one provider.” But then the Commission claims that areas with multiple providers are also essentially monopolies. The Commission also manipulates its broadband competition analysis by stating that “mobile broadband is not a full substitute for fixed broadband connections.” This despite the fact that 10 percent of Americans have a smartphone but do not have a fixed broadband subscription, according to the Pew Research Center. The fact that 10 percent of Americans made this switch means that the valuation of switching costs and the substitutability of broadband technologies are subjective to the individual consumer and should not be objective determinations by the Commission.

The Open Internet order uses Title II public utility style regulation, which was created for telephone monopolies, so I can see why the Commission – wrongly – attempted to justify its action by claiming that ISPs are monopolies. But because the Internet access market is dynamically competitive among multiple technologies, these regulations create costs which will crowd out innovation and investment. And the burdens of these regulations are likely to harm smaller competitors even more than larger, more-established ones.

So then how does the Open Internet order correct the perceived problems of gatekeepers, high switching costs, and alleged broadband monopolies? It doesn’t. In fact, the Open Internet order creates the exact problems that it is supposed to fix. The order creates an Internet access gatekeeper – the FCC – which must first approve ISPs’ (and likely content providers’) decisions to innovate, interconnect, and invest. It ultimately creates a higher market concentration due to higher regulatory costs pushing out competitors. And the order creates higher switching costs because, as competition decreases, consumers will have fewer choices.

The Commission’s attempt to create a market failure or systemic problem was inconsistent and its analysis was inaccurate. Unfortunately, it seems as if the decision to regulate the most dynamic market in the world came before any assessment of a market failure.

Why Process Matters - Part II

In my July 27 blog, Why Process Matters, I explained that the rule of law requires process that incorporates “knowable, predictable, rule-based decision-making.”

In his keynote address at last week’s Free State Foundation event, “Implementing Real Regulatory Reform at the FCC,” FCC Commissioner Michael O’Rielly once again made an important contribution to the ongoing discussion regarding FCC process reform – which, in material respects, is central to adherence to rule of law norms.

Here I want to address briefly the problematic way in which the FCC is approaching “enforcement actions” that impose sanctions, one of the areas of activity Commissioner O’Rielly identifies as in need of reform. The FCC appears to be abusing its enforcement authority by sanctioning those it regulates for alleged violations of rules that the regulated entities could not reasonably have known constituted violations prior to the assessment of a penalty.

What the Commission is now doing runs against accepted rule of law requirements, which include due process, because the agency is asserting authority to punish those it regulates without first establishing “knowable, predictable” rules. As Commissioner Ajit Pai put it in dissenting from the proposed fine in the TerraCom/YourTel America case: “A core principle of the American legal system is due process. The government cannot sanction you for violating the law unless it has told you what the law is.”

In the TerraCom/YourTel America case, the FCC’s Enforcement Bureau proposed a $10 million fine claiming that the companies had failed adequately to secure customers’ sensitive personal identifiable information (PII). Of course, any data breach is no cause for celebration. But the alleged “violation” in this instance was not clearly proscribed by any law or regulation. The Commission relied on Section 222 of the Communications Act and its rules issued thereunder, but these provisions deal with CPNI (“customer proprietary network information”), not PII, which is a broader category of information not covered by the statute or the agency’s rules.

And the agency also relied on Section 201(b)’s requirement that a carrier’s practices be “just and reasonable,” a standard too vague to put a regulated party on fair notice that an unintentional data breach could be sanctioned. As Commissioner Pai concluded: “[T]he Commission asserts that these companies violated novel legal interpretations and never-adopted rules.”

And the $100 million fine that the FCC proposed in June to be assessed against AT&T for allegedly violating the 2010 Net Neutrality Order transparency regulation is a further indication the agency doesn’t take seriously, or doesn’t understand, its rule of law obligations. The AT&T case looks to be another instance of the Commission seeking to sanction conduct – and impose an enormous fine – based on “novel legal interpretations and never adopted rules.”

According to the Commission, AT&T violated the transparency rule by, at times of network congestion, reducing the speeds of customers subscribed to “unlimited” data plans. AT&T’s response appears to have considerable merit. The Commission previously had not given any indication that throttling speeds for purposes of network management during congestion periods is inconsistent with an “unlimited” data plan description. Indeed, to the contrary, for many years prior to the proposed fine, the Commission had been aware of AT&T’s targeted speed-reducing practices and of AT&T’s various disclosures making “unlimited” plan customers aware of such practices.

It may be that the Commission could adopt a rule or announce a policy that would indicate clearly – in other words, that would provide fair notice – that throttling speeds in the way AT&T is alleged to have done is prohibited conduct. Indeed, perhaps AT&T’s conduct might – or might not – violate the 2015 version of the agency’s net neutrality rules. But that’s much different than proposing to sanction AT&T under the 2010 transparency rule.

The Commission, if it wishes to conform to rule of law norms, can’t expect parties subject to its jurisdiction to be “mind readers.”

But, unfortunately, mind reading may be just what is expected by Internet providers – or at least what will be required –if they are not to run afoul of the agency under the 2015 version of the Commission’s net neutrality regulations. The FCC’s self-described “catch-all” general conduct standard makes it unlawful for an ISP to “unreasonably interfere with or unreasonably disadvantage” end users or edge providers. [See paragraph 21 of the order.] Obviously, this “catch all” provision leaves the Commission with virtually unbridled discretion to sanction conduct that regulated parties have no way of knowing, in advance, is prohibited.

In other words, to go back to first principles, the Commission, regrettably, has gone out of its way to avoid “knowable, predictable, rule-based decision-making.”

And, to make matters worse, the Commission has delegated broad authority to its Enforcement Bureau staff to administer, interpret, and enforce the standardless “catch-all” rule. Given recent history, turning the Enforcement Bureau loose in this way does not augur well. In his keynote address, Commission O’Rielly identified “delegation of matters to staff” as an area ripe for reformist changes. I suspect that, over time, the authority delegated to the staff to enforce the net neutrality rules, especially the “catch-all” provision, will only heighten concerns about the use of “delegated authority.”

Perhaps the effort to engage in meaningful process reform will take hold at the Commission. Those the agency regulates – and the broader American public – deserve no less. In any event, whether or not you agree with all of his proposals, Commissioner O’Reilly deserves credit for the serious manner in which he is approaching the subject.

If you missed FSF’s event, here is the video with Commissioner O’Rielly’s keynote, along with the panel discussion that followed with Richard Wiley, former Chairman, Commissioner, and General Counsel of the FCC, and Gus Hurwitz and Daniel Lyons, both telecom and administrative law scholars and members of FSF’s Board of Academic Advisors.

New Year, New Approach: A Turn Towards Regulatory Modesty in the FCC’s Transaction Review Process

The New Year has just begun, and the FCC, like the rest of us, could stand to make some New Year’s resolutions. A key one could be reforming its transaction review process.

Already, there are a few potential mergers and acquisitions that may require Commission review in the coming months. Frontier Communications announced in December that it seeks to acquire AT&T’s wireline business and statewide fiber network assets in Connecticut, and Sprint is reportedly seeking to acquire T-Mobile, according to the Wall Street Journal. In perhaps a leap of anticipation, the American Antitrust Institute (AAI) has already urged the FCC and the Department of Justice to block any merger of Sprint and T-Mobile, arguing that it would stifle competition and harm consumers. And it is at least conceivable we could see a transaction involving Time Warner Cable and other parties.

The FCC’s transaction review process has drawn much attention and discussion over the last few years. In 2011, the House Subcommittee on Communications and Technology held several hearings on FCC process reform. On May 13, 2011, the Subcommittee heard testimony from Chairman Julius Genachowski, Commissioner Michael Copps, Commissioner Robert McDowell and Commissioner Mignon Clyburn on what was working at the FCC, recent improvements to the FCC’s processes, and what still needed attention.

Chairman Walden opened the hearing by proposing several reforms to FCC processes. Regarding the FCC’s transaction review process, Congressman Walden stated, “the FCC’s transaction review standards are vague and susceptible to abuse.” The Congressman also highlighted an observation by Chairman Emeritus Dingell, who stated in a hearing back in March 2000 that there is “great need to address and to reform the way the FCC handles its merger reviews. These are a remarkable exercise in arrogance, and the behavior of the Commission, oft-times by reason of delay and other matters, approaches what might well be defined as not just arrogance, but extortion.” Congressman Stearns, Congressman Christensen, and Commissioner McDowell particularly focused on the need for reform of the FCC’s transaction review process throughout the May 2011 hearing.

In July 2011, Congressman Walden circulated a Discussion Draft of the FCC Process Reform Act of 2011. Later that month, the Subcommittee held another hearing on “Reforming FCC Process,” and heard testimony from industry representatives, think tanks, consumer groups, academia, and the States. FSF President Randolph May testified and supported many of the proposed reforms in the Discussion Draft, particularly reform of the Commission’s transaction review process:

In my view, the provision reforming the Commission's transaction review process is as important as any other in the bill in light of the abuse of the process for many years now. The agency often imposes extraneous conditions -- that is, conditions not related to any alleged harms caused by the proposed transaction after they are "volunteered" at the last-minute by transaction applicants anxious to get their deal done. The bill's requirement that any condition imposed be narrowly tailored to remedy a transaction-specific harm, coupled with the provision that the Commission may not consider a voluntary commitment offered by a transaction applicant unless the agency could adopt a rule to the same effect, would go a long way to reforming the review process.

In November 2011, Congressman Walden introduced H.R. 3309, the FCC Process Reform Act of 2012. Among many reforms, the bill proposed changes to the Commission’s transaction review standards. That bill passed the House in March 2012, but died in the Senate. 

Another Discussion Draft was circulated during the summer of 2013. Now entitled the "FCC Process Reform Act of 2013," it retained two substantial reforms proposed for the Commission’s transaction review standards from the original 2012 bill: that the Commission could only condition its approval of a transfer of lines, licenses or other transaction if:

“(A) the imposed condition is narrowly tailored to remedy a harm that would likely arise as a direct result of the specific transfer or specific transaction,” and;

“(B) the Commission could impose a similar requirement under the authority of a specific provision of law other than a provision empowering the Commission to review a transfer of lines, a transfer of licenses, or other transaction.”

In addition, the 2013 Discussion Draft added a provision, which would require that the Commission could not impose conditions on approval of transactions unless “(C) the likely harm described in (A) is uniquely presented by the specific transfer of lines, transfer of licenses, or other transaction, such that the harm is not presented by persons not involved in the transfer or other transaction.” By adding this provision, the Discussion Draft proposed to further strengthen the transaction review standards contained in the original 2011 draft of the FCC Process Reform Act of 2012. 

In his July 2013 testimony on the Discussion Draft before the House Subcommittee on Communications and Technology hearing, “Improving FCC Process,” FSF President Randolph May specifically praised the proposed transaction review process reforms included in the most recent draft of the bill:

The provisions [proposed], especially the addition that would allow the Commission to condition approval of a proposed transaction only if the condition addresses a likely harm uniquely presented by the specific transaction, would go a long way toward combating abuse of the transaction review process.  

A few months after the Discussion Draft was circulated, a compromise version of the bill was reintroduced in December 2013 as H.R. 3675, the FCC Process Reform Act of 2013. The compromise version of the bill removes the provision in the FCC Process Reform Act of 2012 that would have required conditions to be “narrowly tailored” and that would have more narrowly defined the “harm” resulting from the transaction. Although it would have been preferable for these provisions to remain, the FCC Process Reform Act of 2013 nonetheless retains important improvements for the Commission’s transaction review process.

The current bill still provides that the Commission may only condition its approval of transactions if the condition remedies a harm likely to result from the specific transfer or transaction pending, the harm is unique to that transaction, and the imposition of the condition is within the Commission’s authority other than that granted by sections 214, 309, or 310. These provisions would make it more difficult for the Commission to impose conditions on transactions under review unless they are necessary and appropriate.

Even absent congressional action, the FCC itself could institutionally reform its transaction review process to reflect the changes proposed in the FCC Process Reform Act of 2013. The Commission could do so by approaching pending mergers and acquisitions with regulatory restraint.

The FCC currently reviews transactions under the broad public interest standard. As such, the Commission could undertake reforms absent passage of the FCC Process Reform Act of 2013 by issuing a formal policy statement expressing its intent to abide by the proposals included in the Act. Or, the Commission could simply act in accordance with the transaction review standards proposed in the Act when approaching pending transactions. Modifying its transaction review process by issuing a policy statement or by acting consistently with the reforms proposed in the FCC Process Reform Act is within the FCC’s discretion. Further, these institutional changes by the agency would remove unnecessary burdens, promote efficient marketplace transactions, and in turn, benefit consumers.

For a long time, FSF scholars have focused on the need to limit the Commission’s ability to manipulate the transaction review process. As far back as 2000, in Any Volunteers?, FSF President Randolph May discussed how the Commission regulates, in effect, by imposing “voluntary” conditions on transaction approvals rather than engaging in general rulemaking proceedings that would be applicable to all similarly situated parties. Mr. May stated, “Indeed, even when the ‘volunteered’ conditions relate more closely to the Commission's articulated competitive concerns … regulation by condition is unsound, because it imposes new burdens only on the merging parties.”

There are many other pieces on the FCC’s transaction review process on FSF’s blog. The point is, the FCC has imposed unnecessarily burdensome, “voluntary” conditions on many major transactions in the past, even when those conditions were not related to the unique issues or harms presented by the pending transaction.

The FCC Process Reform Act of 2013 would substantially improve the transaction review process. However, without awaiting the passage of new legislation, the Commission should begin the New Year by committing to take a new approach to this process by acting with regulatory restraint, and reviewing proposed transfers and transactions in conformity with the review standards proposed in the Act.

Perhaps under Chairman Wheeler, reform of the transaction review process could be a New Year’s resolution the Commission can keep. 

House Unanimously Passes FCC Consolidated Reporting Act

This week, the House unanimously passed the FCC Consolidated Reporting Act (H.R. 2844) in a 415-0 vote, with 227 Republicans and 188 Democrats voting yea. The legislation requires one Communications Marketplace Report instead of the eight separate reports previously required, and it also strikes redundancies and outdated references in the Commission’s reporting requirements.

Representative Steve Scalise kicked off the House debate on Monday by stating: “This bill is another step in the process of streamlining government so that businesses can focus their time and resources on growing our economy and creating jobs, instead of complying with outdated and burdensome mandates from the federal government.”

Free State Foundation President Randolph May called for the passage of the Consolidated Reporting Act in his testimony at the July hearing before the House Subcommittee on Communications and Technology entitled, Improving FCC Process. May stated:

“I wholeheartedly support new Section 14, the proposed Federal Communications Commission Consolidated Reporting Act of 2013. The required consolidated report would replace the myriad of existing sector and technology-specific marketplace reports that the Commission is now required to compile on a periodic basis. Consolidation of the various competition/marketplace status reports should help reduce the agency's workload somewhat because there necessarily is some inherent duplication in producing the half dozen or more separate reports. But, more importantly, the requirement to produce a consolidated report should steer the Commission away from its pronounced tendency to view the separate technology-based services as confined to their own "smokestacks" and non-competitive with each other. In today's competitive digital services environment characterized by convergence, adhering to the "smokestack" view inherently neglects marketplace realities. For example, the Commission still refuses to acknowledge the extent to which wireless services compete with wireline services, even though nearly 40% of U.S. households have abandoned landline telephone service.

The draft bill requires the Commission to assess competition in the communications marketplace, taking into account all the various services and technologies, and it specifically directs the agency ‘to consider the effect of intermodal competition, facilities-based competition, and competition from new and emergent communications services, including the provision of content and communications using the Internet.’ This requirement is especially important as part of the necessary effort to get the FCC to take a more realistic, economically rigorous, view of the extent to which competition now prevails in the communications marketplace.”

FCC Commissioner Ajit Pai said in a statement Tuesday, “this is straightforward, good-government legislation, and I hope that the U.S. Senate will act quickly to send this bill to the President for his signature.”

I agree.

Getting Out of the Business? Reform of the FCC’s Merger Review Process

While the FCC considers pending mergers such as the application of AT&T and Atlantic Tele-Network, Inc. (“ATN”) filed in March of this year, as well as others, it is timely to reexamine the FCC’s review process for such transactions. On August 27, the FCC stopped the 180-day “shot clock” on Day 175 in order to allow AT&T to submit further information, claiming that the requested information is necessary for the Commission’s determination of whether the transaction meets the public interest test. This delay and its somewhat ambiguous justification are just another indication of the need to reform the Commission’s transaction review process in order to curb inefficiency and promote clearer standards of review. 

In thinking about the FCC’s transaction review process, perhaps a larger, more fundamental question should be considered: Should the FCC have the authority to review mergers at all?

In July of this year, the House Subcommittee on Communications and Technology held a hearing entitled “Improving FCC Process,” in which panelists and Representatives commented on discussion drafts of the FCC Process Reform Act of 2013 and the FCC Consolidated Reporting Act of 2013 presented by Chairman Walden. During testimony on the proposed legislation, particularly on the Process Reform Act, panelists and Representatives alike recognized that the merger review process is an important issue to consider in the context of FCC reform efforts overall.

The FCC Process Reform Act recommends changes to the Commission’s transaction review process. The provisions in the proposed act would allow the Commission to condition the approval of a transaction only if the condition addresses “a likely harm . . . uniquely presented by the specific transfer or other transaction.” This change is intended to combat the Commission’s systematic abuse of the merger review process, in which the Commission frequently withholds approval of transactions unless and until applicants “voluntarily” agree to conditions that often do not relate directly to the transaction at issue.

In the context of the discussion concerning the merger review portions of the draft legislation, Congresswoman Eshoo stated that what underlies much of this reform effort, “driving [it] more than anything else,” are not only the problems in the review process, but also the FCC’s very authority to review acquisitions and mergers. She stated this issue is where there is “concern, disagreement, agitation, and aggravation.” Stuart M. Benjamin, Professor at Duke University Law School, then pointedly raised the question of whether it is appropriate for the FCC to be “in the business” of reviewing mergers at all.

In response, Richard J. Pierce, Professor at George Washington Law School and member of the Free State Foundation’s Board of Academic Advisors, stated that “it would make a lot of sense to take the FCC completely out” of the merger review process.  Professor Pierce, an expert in the administrative law field as well as in antitrust law, elaborated that “the FCC does not know much about antitrust law; the FTC and the Department of Justice know a lot about antitrust law.  They have the power to impose conditions, they regularly impose conditions on mergers, and those conditions are specifically tailored to address the competitive issues that are raised by a proposed merger.” Professor Pierce proposed that “the far more sensible thing” than reforming the FCC’s merger review process would be introducing a statutory change that states “the FCC has no power over mergers. That is exclusively the realm of the DOJ and the FTC.” 

The need for reform of the FCC’s transaction review process has been discussed by Free State Foundation scholars for years. In his piece, “Any Volunteers?” released in 2000, FSF President Randolph May noted how the FCC has used the license transfer review process to essentially regulate by condition, consistently conditioning transaction approval on concessions from communications companies. He advocated that the review process should be reformed to prevent this type of abuse.

Moreover, in “Any Volunteers” as well as in “Reform the Process” released in 2005, Mr. May noted that the FCC largely duplicates the efforts taken by the DOJ and FTC in reviewing mergers by requiring that the transaction “enhance competition” under the public interest standard. He proposed that the Commission exercise regulatory self-restraint by principally deferring to the DOJ’s or the FTC’s expertise regarding competitive concerns, since both agencies are already tasked with determining whether transactions would “substantially lessen competition.” In an age of justified concern regarding government efficiency and the effective use of resources, it is important that agencies neither duplicate efforts, nor undertake processes that other agencies are better equipped to handle. 

Professor Pierce’s suggestion that the FCC merger review process should not be changed, but that the FCC should be out of the business of reviewing mergers and transaction applications, deserves closer consideration. Agencies like the Antitrust Division of the DOJ or the FTC already have statutory standards based on antitrust principles that are more easily applied to merger reviews, in addition to greater expertise and experience in antitrust law. 

In contrast, the FCC’s ambiguous public interest standard creates opportunities for abuse and over-regulation. Indeed, the FCC has justified the imposition of burdensome, so-called “voluntary” conditions on many major transactions under the nebulous public interest standard, even when those conditions were unrelated to the specific issues presented by the pending transaction. 

The reforms proposed by Chairman Walden in the FCC Process Reform Act would require that the FCC only impose conditions that are narrowly tailored to remedy the unique effects of the pending transaction, and those reforms would prevent the FCC from justifying merger conditions under the over-broad public interest standard. These meritorious changes would go a long way to reforming the review process.

But in the context of discussing reform of the merger review process, it is worth considering Professor Pierce's point: Should the FCC be in the business of merger review at all?