D.C. Circuit to Decide Fate of FCC's Net Neutrality Regulations, Again

News outlets are now reporting that lawsuits challenging the legality of the FCC's order imposing network neutrality regulations will go to the U.S. Court of Appeals for the District of Columbia Circuit. It was the D.C. Circuit that hammered the agency a year ago April in Comcast v. FCC (2010) in its prior attempt to impose net neutrality mandates. As I blogged in "Comcast v. FCC: A Game Changer For Net Neutrality Regulation," the D.C. Circuit thoroughly and forcefully repudiated the agency's alleged jurisdictional basis for imposing net neutrality mandates.

For starters, it is highly probable the D.C. Circuit will strike down the FCC's net neutrality regulations once again on jurisdictional grounds. FSF's public comments to the FCC in its Section 706 Inquiry, for instance, point out that Section 706 is a directive that the agency exercise regulatory forbearance and other means to accelerate deployment "by reducing barriers to infrastructure investment" – operative term being "reducing" – and not an independent grant of regulating authority, as the FCC has recently re-interpreted it.

There are equally strong reasons for regarding the FCC's net neutrality regulations as "contrary to constitutional right." Much of FSF's writings regarding net neutrality have concentrated on the significant First Amendment problems posed by such regulations.

With the FCC's net neutrality regulations only recently published in the Federal Register and going into effect on November 20, this D.C. Circuit sequel case could spell a short life for the FCC's new rules.

Issue Analysis Urges Reforms to Roll Back Regulation's Heavy, Hidden Tax

CEI has just released the latest in its Issue Analysis series that draws important parallels between runaway growth in federal spending and runaway growth in federal agency regulation. In "The Other National Debt Crisis: How and Why Congress Must Quatify Federal Regulation," CEI Vice President for Policy Wayne Crews takes the starting point that "[i]n order to restrain the impulse to regulate everything, Washington must measure regulation as it measures spending." This Issue Analysis provides an overview of the continuing staggering growth of federal regulations and the enormous compliance costs that those rules impose. (In an study from earlier this year, "Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State," Crews cited an estimate that 2008 regulatory compliance costs were more than $1.7 trillion). "Reforms must become a priority for the administration and Congress," writes Crews, "because no viable mechanism exists for measuring or disciplining regulation comparable to even the limited control applied to spending."

Here are some of the reforms recommended by Crews:

• The President should extend his January 2011 Executive Order to all regulations – not just ones described as "out-dated."
• The President should issue new executive orders lowering the threshold at which a rule qualifies as “economically significant” from $100 million in annual costs to perhaps $25 million annually in order to "increase the number of rules brought to public attention each year."
• Congress should require that "summary regulatory data— classified by type of regulation and by agency—be published in the annual federal budget, the Economic Report of the President, a stand-alone document, or some other accessible venue."
• Congress should establish an Office of Regulatory Analysis to examine and analyze rules in detail, similar to how Congressional Budget Office examines and analyzes fiscal and budgetary matters.
• Congress should enact the Regulations from the Executive In Need of Scrutiny (REINS) Act or similar legislation that make Congress directly accountable for "economically significant" regulations by requiring congressional approval of new rules.

CEI is at the forefront in fighting the runaway regulatory state on both the policy and legal fronts. So it's no surprise that this latest issue analysis is a worthy read on a timely topic deserving of much more attention. Particularly, in an economy so desperate for job growth, curbing the rising tide of federal regulation is as important as putting responsible limits on out-of-control federal spending. As Crews reminds us, "[r]egulation does not control itself, and agencies will not apply the brakes. We have to do it, through our elected representatives."

Supreme Court Sends Spurious Cell Phone Suits Packing

On October 3, the U.S. Supreme Court declined to review the Third Circuit's decision in Farina v. Nokia (2011). By denying to hear the case, the Supreme Court leaves standing the Third Circuit's rejection of various state law-based claims raised against wireless manufacturers and carriers. Farina v. Nokia is multi-state class action lawsuit based on allegations that wireless devices contain unsafe levels of radiation. The Third Circuit ruled that the FCC's regulations of radio frequency (RF) radiation levels in wireless devices preempt the state law claims. Those state claims conflict with the purposes of the FCC's regulations in ensuring an efficient nationwide wireless service subject to uniform standards and the agency's balancing of those concerns with public health and safety.

As I mentioned in a July blog post, the evidence continues to contradict the far-fetched claims of those who say that cell phones operating within the FCC's current RF standards are somehow unsafe. But as Farina v. Nokia reaffirms, the FCC is the proper place to bring those types of concerns, not state courts or city councils.

U.S. House to Take Action Against Discriminatory Wireless Taxes

CommDaily reports that the U.S. House of Representatives is expected to soon pass the Wireless Tax Fairness Act (HR-1002). This is encouraging news.

We have previously described the economic dislocations and consumer burdens as well as inequities resulting from heavy and often discriminatory taxation of wireless. As I mentioned in my blog post "Calling for a Moratorium on New Discriminatory Taxes," the legislation would impose a five-year moratorium on any new discriminatory taxes imposed on wireless services by state and local governments.

The House bill is sponsored by Rep. Zoe Lofgren. CommDaily also reports that a Senate Finance Committee hearing has been requested for its companion bill (S-543).

A Regulatory Time-Out

I love Sen. Susan Collins new bill that would that would impose a "regulatory time-out." The “time out” would be a year-long moratorium on “significant” rules, typically defined as those expected to cost $100 million annually. There are a lot of good regulatory reform proposals percolating in Congress.


You don't have to like all aspects of each one to appreciate the fact that there is a growing consensus -- even President Obama seems to want to be part of it, at least in theory -- that Congress should act to halt the  over-regulation that now is putting a damper on jobs and investment.  

New Supreme Court Term Holds Promise for Media Speech Equality

Today's abundance of media content choices and competing media outlets calls for equal treatment of all types of media speech under the First Amendment, which also means a more limited role for government regulation of media speech. Nevertheless, aspects of today's media marketplace are still subject to government speech restrictions based on decades-old assumptions about spectrum or other scarcities and their effects. Continued reliance on those old assumptions means that broadcast outlets as well as cable operators continue to receive a lesser degree of First Amendment protection than other types of media, while government assumes a larger degree of regulatory control than it ought.

Now with the opening today of the new term at the U.S. Supreme Court comes renewed optimism that those outdated assumptions will begin to be peeled away. In its new term, the Supreme Court will yet again be considering FCC v. Fox – the now famous "fleeting expletives" case. Last time around, the Court confined its ruling to Administrative Procedure Act (APA) issues raised by the litigation. This time, the Court is set to address First Amendment issues. In particular, FCC v. Fox II provides the Court the perfect opportunity to finally jettison the old spectrum scarcity doctrine and thereby end broadcast media's unequal First Amendment treatment.

The Supreme Court firmly enshrined the so-called "scarcity doctrine" into its jurisprudence in Red Lion Broadcasting Co. v. FCC (1969), and further expounded on it in FCC v. Pacifica (1978). The doctrine supplies the rationale for subjecting broadcast media to a lesser degree of protection, as broadcast media regulations are subjected only to intermediate-level scrutiny by courts instead of strict scrutiny.

The scarcity doctrine received its most recent judicial sanction from the U.S. Court of Appeals for the Third Circuit in its July 7 ruling in Prometheus v. FCC (2011). In Prometheus, the Third Circuit ruled that the FCC's 2008 order changing its newspaper/broadcast cross ownership rule failed to satisfy notice and comment requirements of the APA. But it upheld most other media cross-ownership rule changes adopted in the FCC's order. In regard to First Amendment questions raised by the FCC's media ownership rules, the Third Circuit's rationale for upholding government regulation of media that uses or involves electromagnetic spectrum rested squarely on the scarcity doctrine. In the Third Circuit's words, the scarcity doctrine "establishes that '[i]n light of [their] physical scarcity, Government allocation and regulation of broadcast frequencies are essential…'"

Consider also the following pronouncement by the Third Circuit in Prometheus: "The Supreme Court's justification for the scarcity doctrine remains as true today as it was in 2004 — indeed, in 1975 — 'many more people would like to access the [broadcast spectrum] than can be accommodated.'"

In reaching its decision, the Third Circuit's characterization of the scarcity doctrine's validity was certainly unnecessary. It is also entirely unconvincing. Whatever validity the factual assumptions supporting the doctrine may have once held, they have long since evaporated. In Prometheus, the Third Circuit compared the amount of spectrum to persons who it claims want broadcasting licenses. But if one compares that supposed scarcity with media channel substitutes now available, one should conclude that abundance exists, not scarcity.

The U.S. Court of Appeals for the Second Circuit seemed to get this point in its remand consideration of Fox v. FCC. The Second Circuit considered itself bound to follow Red Lion and Pacifica until the Supreme Court changes the law. It ultimately decided the First Amendment questions at issue on vagueness grounds, rather than scarcity doctrine. Nonetheless, the Second Circuit saw fit to observe:

The past thirty years has seen an explosion of media sources, and broadcast television has become only one voice in the chorus. Cable television is almost as pervasive as broadcast – almost 87 percent of households subscribe to a cable or satellite service – and most viewers can alternate between broadcast and non-broadcast channels with a click of their remote control... The internet, too, has become omnipresent, offering access to everything from viral videos to feature films and, yes, even broadcast television programs… As the FCC itself acknowledges, "[c]hildren today live in a media environment that is dramatically different from the one in which their parents and grandparents grew up decades ago."...Moreover, technological changes have given parents the ability to decide which programs they will permit their children to watch.

A hint that the Supreme Court may take the Second Circuit's observations into consideration and throw out the scarcity doctrine was provided in Fox v. FCC I by Justice Clarence Thomas's concurrence. In that opinion, Justice Thomas insisted that "[t]he extant facts that drove this Court to subject broadcasters to unique disfavor under the First Amendment simply do not exist today," citing, among others, FSF President Randolph May's 2009 Charleston Law Review article, "Charting a New Constitutional Jurisprudence for the Digital Age."

Given the extent of video competition provided by cable and DBS and the myriad of news outlets now provided through such video services, the Internet, and other alternatives – the Supreme Court should replace the scarcity doctrine with a media abundance doctrine and thereby subject media regulation to the same First Amendment standards that it subjects other restrictions on free speech.

And in a future case, the next step for the Supreme Court would be to revisit and revoke the so-called cable "bottleneck" rationale, thereby eliminating cable's unequal treatment under the First Amendment. As I've explained in blog posts from May and July, and on several prior occasions, subjecting cable providers in today's competitive media market to intermediate-level scrutiny because of early and mid-1990s perceptions about cable bottlenecks makes no sense from a factual or First Amendment standpoint.

At the outset of the Supreme Court's 2011-2012 term, here's hoping that Fox v. FCC II will mark the beginning of a constitutional reckoning for free speech in the digital age.

Contrary to Constitutional Right

To no one's surprise, Verizon has appealed the FCC's misguided net neutrality rules. In its petition for review in the DC Circuit, among the other reasons for vacating the FCC's rules, Verizon asserts, in the words of the APA's judicial review provision, that the regulations are "contrary to constitutional right."

By this, I assume that Verizon means that the rules violate the First Amendment. I was one of the first, if not the first, to argue that net neutrality mandates are inconsistent with the First Amendment. You can find my law review article, "Net Neutrality Mandates: Neutering the First Amendment in the Digital Age," here.

I hope Verizon presses this argument on appeal.

Regulation Hypocrisy

Michael Powell, President of the National Cable & Telecommunications Association, and former FCC Chairman, has a good blog exposing the hypocrisy of CEA's Gary Shapiro in continuing to urge the FCC to adopt "AllVid" technical mandates governing set-top boxes. Well worth reading.

For well over a year, the Free State Foundation has argued, in its Perspectives and blogs way too numerous to recount here, that the Commission's proposed "AllVid" regulations are completely unnecessary and counterproductive. We have also explained, for example here in "AllVid's First Amendment Problem," that such mandates prescribing video content are likely inconsistent with the First Amendment.

Here's a piece by FSF's Seth Cooper, published just last week, that once again convincingly makes the case that not only should the proposed All-Vid regulations not be adopted but that the entire set-top box regulatory regime should be sunset. Again, many more pieces are on our website, going back many years.

Michael Powell was right to call Gary Shapiro on Gary's hypocritical stand -- opposing regulations and espousing marketplace freedom, except when he thinks such regulations will give his members some ill-gotten regulatory advantage. Of course, it is the consumers who suffer from this pro-regulatory gamesmanship.

Study: Stop the Vicious Circle of USF Subsidies and RUS Loans

In a blog post on September 14 titled New USF Tax Hike Adds Urgency to Reform Effort, I called attention to the USF fourth quarter contribution rate increase to 15.3%. The contribution factor translates into the line-item surcharge added to the interstate long-distance portion of consumers' monthly phone bills. That USF surcharge (a tax, in effect) pays for subsidies to telephone companies in rural or high-cost areas, as well as schools, libraries, some health care facilities. In the last ten years, the USF subsidy system has also grown exponentially, with subsidies for service in high-cost areas climbing from $2.6 billion in 2001 to $4.3 billion in 2010. As explained in that post, reforms are urgently needed to reverse this costly upward trend in USF subsidies.

A recent study now points to problematical aspects of government loans to carriers receiving USF subsidies. "The Rural Utilities Service Should Reassess Its Reliance on Universal Service High-Cost Support to Leverage Broadband Loans," a study released earlier this month by Jeffrey Eisenach of Navigant Economics and commissioned by NCTA, asserts that "current RUS rules create a self-reinforcing multiplier effect, in which USF subsidies not only support inefficient investments, but provide the financial basis for RUS loans to support still more inefficient investments (which, in turn beget more USF subsidies, and so forth)."

RUS operates three major programs to subsidize construction of telecommunications infrastructure through below-market rate loans: the Broadband Initiatives Program (BIP), the Rural Broadband Loan Program (BLP), and the Telecommunications Infrastructure Loan Program (TIP). Between 2008 and 2010 the programs approved some $2.23 billion in loans to carriers to build telecommunications infrastructure, particularly for broadband services.

The study provides an interesting overview of how RUS rules for its loan programs and how they relate to USF subsidies. In short, RUS has historically assumed that USF subsidies constitute a stable revenue source during the terms of long-term loans, thereby providing security for such loans. Moreover, "RUS effectively assumes that the increased USF subsidies that will result from the investment indicate the project is deserving of public support." As the study explains:

[R]ather than signaling the social value of a particular infrastructure project, [high-cost fund] subsidies under the current system may instead indicate nothing more than an individual firm's success in making investments – however unjustified or inappropriate – solely to increase its USF support. By tying RUS loans directly to USF support, RUS effectively creates a vicious circle: The more a firm invests in inefficient infrastructure, the more it gets in USF support; the more it gets in USF support, the more it can qualify for in RUS loans; the more it can qualify for in RUS loans, the more it can invest; and, the more it invests, the more it gets in USF support.

The study includes an estimate that increased USF subsidies procured by RUS-financed investments "leav[e] borrowers themselves responsible for less than 25 percent of the payments, even though they earn 100 percent of the resulting profits." This means that taxpayers, by funding the RUS loan programs, are "in the fundamentally unsound fiscal position of being the primary source of repayment on their own outstanding loans."

Along the way, the study challenges RUS claims that USF reforms would result in financial calamity for loan-receiving carriers that are dependent on future high-cost subsidies. USF reform has been a long time in the making, and for that reason it is not an unexpected event that should blindside recipients of high-cost subsidies. Moreover, the FCC has made clear in its NPRM for comprehensive USF and ICC reform that it will avoid "flash cuts" and implement its reforms incrementally.

In the end, the study calls for RUS to:

implement an immediate moratorium on further loans to USF-supported entities, or require such entities to qualify for any further loans without relying on USF subsidies. After the FCC concludes its proceeding and new rules are in place, Congress and RUS can reassess whether a loan program continues to be needed and if so, how that program can be better coordinated with the USF program to eliminate the problems inherent in the current RUS regime.

That is a sensible policy recommendation worthy of consideration, as is the study.

FCC Should Let the Sun Set on Its Set-Top Box Regulations

On September 7, the FCC's Media Bureau released an order granting TiVo a waiver from its set-top box rules requiring "digital cable ready" devices be capable of accessing analog cable channels and receiving over-the-air broadcast service. The Commission concluded that waiving its rules should reduce "by $80 to $100" the cost of TiVo's Premier Elite all-digital, CableCARD-enabled DVR.

The TiVo waiver order follows close behind the FCC Media Bureau's release of two other waiver orders on August 25. Those orders extended waivers of the FCC's set-top box integration ban for two small cable operators. The integration ban prohibits set-top boxes provided by cable operators from being self-sufficient in order to create and manage a niche market for independently manufactured set-top boxes. The ban forcibly separates conditional access (or video content navigation) from security functionalities, prohibiting both from being performed by a single device.

In one integration ban waiver order, the FCC concluded that James Cable, LLC, demonstrated financial hardship justifying a partial extension of its waiver. And in the other order the FCC concluded that a waiver extension should be granted to Choice Cable T.V. Rico since the record demonstrated that "the integration ban would make HD service prohibitively expensive for rural Puerto Rico residents and could potentially eliminate the availability of HD/DVR service for the few residents who can afford it."

The FCC has granted waivers from its set-top box rules before. And these orders are welcome as far as they go. One can appreciate the Commission's willingness to provide the requesting parties at least some relief from the agency's self-imposed device design requirements. But limited waivers from set-top box regulations aren't enough.

Given the costs of its set-top box regulations – recognized in part through its granting the waiver orders – and the dynamic growth of the video marketplace since late last century, the agency should – even if belatedly – consider a course change for this century. The FCC should exercise its powers under the sunset provision of Section 629 and waive all set-top box regulations. Permanently.

The FCC's integration ban rests on a conceptually counterintuitive and counterproductive regulatory policy. By disintegrating those set-top box functionalities, the FCC seeks to make independently manufactured set-top boxes and set-top boxes leased to subscribers by cable operators both rely on the same security solution. This is meant to make it more attractive for cable customers to purchase independently manufactured set-top boxes at electronics retail outlets.

However, the FCC's integration ban has never created the niche market that the agency first imagined back in the 1990s. In a FSF Perspectives paper from last year titled "The FCC's Continuing, Costly Video Navigation Device Regulation," I wrote that:

The costs of the integration ban — ultimately leading to more expensive devices for consumers — should have lead the Commission to jettison its ban. But the Commission instead tries to cabin its concession by insisting that the exemption can still work 'without undermining the effectiveness of the integration ban.' This despite the Commission's own admission that since the ban went into effect: 'most manufacturers have abandoned the [CableCARD] technology. Indeed, since July 1, 2007, cable operators have deployed more than 22.75 million leased devices pre-equipped with CableCARDs, compared to only 531,000 CableCARDs installed in retail devices connected to their networks.'

Those numbers suggest that consumers usually prefer to lease set-top boxes from cable operators (and trade them in for more advanced devices) over making trips to the store and fronting the cash to purchase devices that will become outdated after a few years.

Nevertheless, the FCC stubbornly persists in enforcing its set-top box regulations, including its CableCARD rules. The FCC amended those rules in part in 2010, and further tweaked them in early 2011, with the most recent set of changes not going into effect until year's end. The end game of FCC's propping up of the CableCARD regime is to eventually install an expansive set of video device navigation regulations called "AllVid."

In a blog post this spring titled "Video Competition Should Lead FCC to End Old Regulation," I pointed out how the landscape of the video marketplace has dramatically altered since the 1990s. For instance, where so-called cable bottlenecks once existed, consumers now enjoy competition from two national DBS providers, and in some places telco entrants into the video services market. Consumers are also experiencing broadband-delivered video content through a variety of devices, including PCs, video game consoles, Internet-connected HD TVs, and even wirelessly-connected tablets and smartphones.

These dynamic video market developments suggest that government regulation of set-top boxes or other video navigation devices is wrong-headed. If anything, video device regulation should be the exception rather than the rule. In other words, in today's competitive video market, aggrieved competitors or consumers should first demonstrate an abusive exercise of market power or anticompetitive conduct before regulatory restrictions on video devices should be imposed. But the system we have still takes the opposite approach: set-top box regulation is the rule unless special waivers can be obtained from the regulators. Unfortunately, that approach relies on 1990s assumptions about the marketplace.

Through its waiver orders and its recent amendments carving out new exceptions from its CableCARD rules, the FCC's recognizes at least some of the costs imposed by its set top box regulations. But a broader view of the history of its set-top box regulations shows that the promised benefits of the FCC's integration ban and CableCARD regulatory regime have never materialized.

It's undesirable and an overreach to have government controlling video device designs in a competitive market. And developments in the video market that have led to new services and platforms for video delivery suggest a market that is effectively competitive, making existing or any future set-top box or video navigation device regulation unnecessary and outdated.

Fortuitously, Congress gave the FCC a unique "sunset" power under Section 629 to eliminate such regulation when it determines the market is effectively competitive.

The FCC should let the sun set on its set-top box regulation.

Constitution Day at the FCC - Daily Caller

The Daily Caller has my piece, "Constitution Day at the FCC", which ends by urging that "everyday should be Constitution Day at the Federal Communications Commission."

Would that it were so.

Before it is, "the agency needs to understand the First Amendment was included in the Constitution to prevent government interference with private speech, not to authorize the government to interfere with private speech on the premise that it is enabling more important, balanced, or fairer speech."

Mr. Copps and the First Amendment

I have no hesitancy in congratulating FCC Commissioner Michael Copps on receiving the Four Freedoms Award from the Roosevelt Institute the other day. I have never questioned Commissioner Copps' good faith. I just have profound a difference of opinion regarding his regulatory philosophy and his understanding of the Constitution.

For example, in accepting the award, Mr. Copps used the occasion to expound on the most persistent theme of his long tenure as a commissioner -- that the agency has failed in ensuring that the public receives through the media the type of content that Mr. Copps believes it should receive. I know Mr. Copps doesn't put the point so boldly.

But what else can he really mean when, in an era of media abundance heretofore unimaginable, he continually rails against the lack of what he calls "quality news" and "dumbed-down civic dialogue."

It's become clear over time that Commissioner Copps just wishes the news and dialogue was more to his liking. He insists the FCC should ensure that "the people's airwaves serve the people's interest."

In an era with so much media, and so much competition, presumably they already do.

It's a pretty scary proposition when an FCC commissioner really wants to define what constitutes "quality news".

Again, I am happy to offer my congratulations on Mr. Copps' award. But, I wish, in return, he'd read, and take to heart, my piece in today's Daily Caller, "Constitution Day at the FCC." I have a profoundly different view of the First Amendment's free speech guarantee than Commissioner Copps.

New USF Tax Hike Adds Urgency to Reform Effort

On September 13 the FCC issued a public notice announcing that for the fourth quarter of 2011 the universal service contribution factor will be climbing back up to 15.3%. The contribution factor translates into the line-item surcharge amount that is added to the interstate long-distance portion of consumer’s monthly phone bills. So, in essence, for the last few months of this year consumers will get hit with a 15.3% surcharge (a tax, in effect) on the long-distance part of their bills.

The USF system subsidizes telephone companies in rural or high-cost areas, as well as schools, libraries, and some health care facilities. And, in some instances, it subsidizes providers serving qualified low-income consumers. The USF subsidy system has also grown exponentially over the last decade, with the program subsidies for telecommunications service in high-cost areas growing from $2.6 billion in 2001 to $4.3 billion in 2010.

Below is a chart that shows the decade-long trend of steady increases in the USF contribution factor that is resulting in surging surcharges hitting consumers to fund the system:

This dramatic growth of the USF system, as reflected above in the dramatic growth in the USF contribution factor, highlights the urgency of USF reform.

Earlier this year, FSF submitted comments and reply comments to the FCC in its comprehensive USF and intercarrier compensation reform proceeding. In those comments we emphasized the need to impose a cap on the overall size of the USF high-cost fund. We also urged the FCC to set a goal of eventually eliminating subsidies for telecommunications providers altogether by establishing a ten-year sunset on USF high-cost subsidies.

In comments submitted by FSF in the Lifeline and Link Up Reform and Modernization proceeding, we recommended the FCC implement reforms to control waste, fraud, and abuse. Just as important, we urged the FCC to treat Lifeline and Link Up as the exclusive, or at least the near-exclusive, mechanism for distributing USF support once the high-cost fund is sunset. Lifeline and Link Up are targeted to low-income individuals who can choose a communications service that best fits their needs. Such targeted subsidies are more efficient and can be more reliably monitored for accountability than subsidies targeted more broadly to service providers.

And in FSF's comments in response to the FCC's Further Inquiry regarding comprehensive USF and ICC reform, FSF President Randolph May commended the FCC for its urgency in finally undertaking such reforms. And he called the ABC plan offered by six price cap companies "a major step forward." But he also offered points for the FCC to consider for improving on the ABC plan. Reiterating the position FSF staked out in earlier comments, the FCC should "explicitly and immediately impose a hard cap on the high-cost fund at $4.5 billion per year, without any loopholes for overall subsidy increases above that cap." The FCC should also establish a sunset date for rate-of-return ("ROR") regulation.

As Mr. May further explained:

"Rate of return regulation provides all the wrong economic incentives – incentives that inevitably lead to an inefficient, wasteful allocation of societal resources. In most areas of the country, incumbent wireline telcos are subject increasingly to intense competition from wireless, cable, and satellite operators. Under these circumstances, it is difficult to understand why these providers are subject to ongoing rate regulation at all, much less ROR regulation. In any event, however, at this stage in the development of marketplace competition, it makes sense for the Commission to establish a firm – and not unduly long – transition for ending all ROR regulation. If any rate regulation is deemed necessary,it should be in the form of price cap (incentive-based) regulation."

Many of these USF and ICC reform issues were discussed and debated at FSF's July 13 seminar "Universal Service and Intercarrier Compensation Reform: Will the FCC Finally Bite the Reform Bullet?" And Professor Gerald Brock, a member of FSF's Board of Academic Advisors, recently wrote a Perspectives paper urging the FCC to "Abolish Access Charges Now."

By imposing a cap on the USF high-cost fund and eventually eliminating subsidies to carriers resulting from high-cost service, ROR, and outdated access charges, the FCC can reduce waste and inefficiencies, limit subsidies and target them to those who actually need them. And, of course, it would give consumers much-deserved relief from a USF surcharge now exceeding 15%.

And in so doing, the FCC can transform the outdated system we are still stuck with into a more disciplined system that fits the intermodal competition and broadband-centric world that exists today.

Rep. Blackburn's Privacy Roundtable - Tomorrow

Tomorrow I am participating in an Online Privacy Roundtable discussion from 8:00 - 9:30 AM in the Capital Visitors Center Meeting Room North. The roundtable is hosted by Rep. Marsha Blackburn, a member of the House Energy and Commerce Subcommittee on Telecommunications and vice chair of the Subcommittee on Commerce, Manufacturing, and Trade.

Rep. Blackburn is one of the leading free market thinkers -- and doers -- in Congress, and she is especially knowledgable on communications, Internet, and high-tech issues. So, the roundtable, with a number of other free market think tankers participating, is sure to be informative and interesting.

Details, including a listing of the other participants, is here. All are welcome to attend!

9.11.11

9.11.01.

9.11.11.

Ten years later, above all, we should reaffirm that we will never forget those innocent Americans who died in a wanton Islamic terrorist attack – the worst attack by a foreign adversary on American soil in our nation's history.

We must never forget to remain vigilant against future attacks, while at the same time remaining faithful to our Constitution and the liberties it guarantees.

I have no hesitancy in proclaiming today, or any other, that America is an "exceptional" country. I do so proudly.

At the Free State Foundation, we strive, through our research and educational activities, to promote free market, limited government, and rule of law principles. In our view, adherence to these foundational principles is central to restoring and maintaining America's economic prosperity, including marketplace dynamism in the communications, Internet, and high tech sectors in which we principally toil. And adherence to these principles is central not only to promoting the general welfare here at home, but also to providing the basis for ensuring we possess the strength to remain secure in a dangerous world.

While we will never be shy about trying to influence the direction of law and policy in a free market, limited government, and rule of law direction based on our understanding of the proper application of these principles, we recognize others have different views and understandings. And we respect their right to hold and advocate them. Indeed, a considerable body of our work promotes the defense of First Amendment free speech rights against government interference.

Right after the 9.11.01 attacks, the French newspaper of record, Le Monde, ran a front-page headline reading "Nous sommes tous Américains," or "We are all Americans."

This expression of solidarity from a foreign quarter was especially comforting at the time. But on 9.11.11, regardless of our political or philosophical persuasions, it is we Americans who should remember, "We are all Americans."

And, above all, on 9.11.11, we should remember that we should never forget.

Labor Day 2011

I am an optimist by nature, but it is difficult to be optimistic about the nation's economy this Labor Day. Indeed, as he prepares to address the nation next week on the dire jobs situation, President Obama acknowledged on August 31 that the nation faces "unprecedented economic challenges."

President Obama has a certain special way of exaggerating – does he recall the Great Depression? – but there is no doubt the economy is in serious straits.

It is sad to take note, on this Labor Day, that the most recent report shows the nationwide unemployment rate at 9.1%. Yesterday the Obama Administration announced that it expects the rate to remain around 9% well into 2012. When President Obama took office in January 2009, the unemployment rate was 7.6%. The latest report indicates there are13.9 million unemployed persons in the U.S., with 6.2 million of those classified as long-term unemployed.

President Obama's policies are not solely responsible for the current poor economy and jobs situation. But they must bear significant blame for the sorry state of economic affairs.

And surely President Obama's regulatory policies are a substantial contributor to the economic malaise. Despite recent rhetoric to the contrary, however welcome, the Administration has been on a regulatory binge, apparently oblivious to the costs imposed by unnecessary regulations. These costs raise prices to consumers, and they dampen incentives to invest in new plant and equipment – and, importantly, in new job hires.

There are many research reports tracking the Obama Administration's increased regulatory activity and the costs imposed. Here is a relevant excerpt from a recent Heritage Foundation research report:

The cost of new regulations, however, can be tracked, and it is growing substantially. Following record increases in fiscal year (FY) 2010, regulatory burdens have continued to increase in 2011. Overall, from the beginning of the Obama Administration to mid-FY 2011, regulators have imposed $38 billion in new costs on the American people, more than any comparable period on record.

In total, according to the Government Accountability Office, 1,827 rulemaking proceedings were completed during the first six months of FY 2011 (between October 1, 2010, and March 31, 2011). Of these, 37 were classified as “significant/substantive” or “major,” meaning they each had an expected economic impact of at least $100 million per year.

Fifteen of those rulemakings increased regulatory burdens (defined as imposing new limits or mandates on private-sector activity). No major rulemaking actions decreased regulatory burdens during the first half of fiscal 2011.

The annual costs of the 15 new major regulations total more than $5.8 billion, according to estimates by the regulatory agencies. In addition, the regulations impose nearly $6.5 billion in one-time implementation costs.

The Free State Foundation focuses primarily on communications and Internet law and policy, and related high-tech issues. Here the Obama Administration's FCC record mirrors that in other areas – adopting and proposing new regulations that are not necessary to protect consumers or the public, and the failure to repeal costly, outdated regulations that are no longer needed.

The FCC's adoption of new "net neutrality" regulations to control the business practices of Internet providers, which the agency pursued doggedly for a year-and-a-half in the face of the expenditure of significant public and private resources, is a prime example. The FCC never presented any persuasive evidence of existing market failure or consumer abuse. Yet it adopted the Internet regulations before it even attempted to quantify their costs and weigh the costs against the claimed benefits.

Even now, more than eight months after the FCC majority voted to adopt them, the new Internet mandates (thankfully) have yet to become effective as the Administration's Office of Management and Budget conducts an after-the-fact proceeding to try to quantify just the information collection costs associated with the new regulations. CTIA, the association representing wireless operators, has told OMB that the transparency prong of the new Internet regulations specifies over 30 different topics an Internet provider may be required to disclose in order to offer service.

As for proposed regulations, the FCC's so-called "bill shock" regulation, which would require wireless operators to provide a range of new usage notifications and additional information disclosures, is another case of regulatory overkill. A review of the Commission's rulemaking notice indicates this proposal is driven primarily by anecdotal evidence of a small number of claimed abusive incidents without regard to the substantial overall costs that would be imposed.

There are other examples, of course. The FCC's current so-called "AllVid" proposal to mandate, despite the fierce competition among providers in the video marketplace, uniform technical standards for the delivery of video through set-top video boxes, comes readily to mind as another example of a costly, unnecessary regulation. And like other FCC regulations affecting media companies, this one raises serious First Amendment concerns, as my colleague Seth Cooper explains here. The same is true for the FCC's outdated media ownership regulations, which were adopted over three decades ago when most Americans got the news from a daily newspaper and three television networks.

Most importantly for present purposes, aside from the impact of unnecessary regulation in other market sectors, the adverse economic impact caused by such unnecessary regulation in the communications, Internet, and high-tech market sector is likely to be especially acute – and unfortunate. This is because the communications/Internet/high-tech sector is one of the few bright spots in the nation's economy, one of the few sectors that has experienced increased investment and job growth.

Again, there is much evidence for this. But an August 16 report in USA Today, entitled "IT Jobs Thrive Despite Lackluster Economy," captures the point well:

"Even in a tough labor market, IT is where the jobs are. The unemployment rate for technology jobs was 3.3% in June, compared with a 9.2% unemployment rate overall that month, according to the Bureau of Labor Statistics. In the most recent edition of its Occupational Outlook Handbook, the BLS said it expects IT employment to grow 'much faster than the average' of all occupations through 2018."

According to Dice's Spring 2011 report, "The Rising Demand for Tech Talent," "the unemployment rate for technology professionals has been generally half the rate of the overall labor market in the U.S."

The long and short of it is that, confronted with an increasingly competitive and dynamic communications and Internet marketplace, the FCC should be aggressively seeking to reduce unnecessary regulations, not seeking to impose new ones. Following the lead of President Obama's recent rhetoric and Executive Order on Regulation for Independent Agencies, FCC Chairman Julius Genachowski has now begun to talk the talk. On August 22, as the FCC announced in a news release that the agency was eliminating outdated rules, Mr. Genachowski stated: “Our extensive efforts to eliminate outdated regulations are rooted in our commitment to ensure that FCC rules and policies promote a healthy climate for private investment and job creation." Good.

It's one thing, however, to talk the talk. As they say on the streets, Mr. Genachowski now needs to walk the walk. For while he touted the elimination of the Fairness Doctrine rule, which hasn't been enforced for a quarter century, and the Broadcast Flag rule, which hasn't been enforced for many years, taking these and other outdated non-enforced rules off the books has no practical impact, except perhaps to make the Code of Federal Regulations volumes a slight bit slimmer. Mr. Genachowski's FCC has yet to seriously engage in a review of the multitude of outdated regulations that do remain on the books and that do have a practical – and costly -- impact.

President Obama's Executive Order No. 13563 ["Improving Regulation and Regulatory Review"], issued on January 18, 2011, directs agencies to review existing regulations to determine whether they are "outmoded, ineffective, insufficient, or excessively burdensome." This order was issued to carry out President Obama's injunction, as he put it in his January 2011 "Towards a 21st Century Regulatory System," Wall Street Journal commentary, to initiate a government-wide review to "remove outdated regulations that stifle job creation and make our economy less competitive."

As I write this, we have just learned that the Department of Justice will go to court to block the proposed AT&T/T-Mobile merger. Without delving into the merits of that decision here from a strict antitrust perspective, I have little doubt that in the high-tech, communications, and Internet venues in which executives are making day-to-day decisions, the Administration's action will be viewed more negatively that positively with regard to future hiring and investing. After all, the wireless sector is one of the economy's most dynamic – with a consistent record of declining prices and increasingly innovative product offerings.

It is way past time for the Obama Administration generally, and the FCC specifically, to forget the rhetoric. It is time to get serious about the elimination of unnecessary regulations.

On this Labor Day, the country desperately needs more job creation and more investment that elimination of unnecessary regulations would bring. Period.

As I said at the outset, I am an optimist by nature. It is in that spirit that I wish you all a happy and safe Labor Day.

More Spectrum Will Make 4G an Economic Force Multiplier

Deloitte's new report, "The Impact of 4G Technology on Commercial Interactions, Economic Growth and U.S. Competitiveness," previews many of the technological, economic, and social benefits that we should expect from 4G mobile broadband. According to the report, "U.S. investment in 4G networks could fall in the range of $25-$53 billion during 2012-2016." Applying industry-specific multipliers, the report cites estimates that "conservatively, these investments could account for $73-$151 billion in GDP growth and 371,000-771,000 new jobs."

Moreover, "the GDP and job estimates do not take into account the wider effects of applying 4G technology, such as the production of new devices and applications; the creation of new companies; and better ways of working, living, and learning. Any attempt to quantify those effects confronts the difficulty of anticipating the way entrepreneurs will make use of the new platform — just as in the early days of 3G mobile broadband it was impossible to foretell how social networks, smartphones, and tablets would emerge." But given the improved performance characteristics of 4G, it’s a safe bet that 4G will lay the foundation for another generation of breakthrough innovations.

In terms of enhanced capabilities, the report points out that, "[f]rom a technical standpoint, 4G promises three benefits over 3G: increased throughput, lower latency, and stronger security.One result is a reduced cost per megabit." Moreover, "4G networks combined with cloud computing and other advanced technologies have the potential to facilitate interactions among all components of the ecosystem, and thereby accelerate the process through which supply and demand signals interact and create new economic activity."

We have been consistently urging Congress, NTIA, and the FCC on in their efforts to locate and auction more unencumbered spectrum for flexible commercial use. And the report similarly deems it a U.S. policymaking priority to ensure sufficient spectrum supply allocated by free market mechanisms. The report gives a nod to the NTIA/FCC joint effort to free up 500MHz of additional spectrum in the next decade. But it warns that even if that goal is achieved, it could be difficult to keep U.S. commercial wireless spectrum supply and demand in balance as interest in new 4G offerings grows." Thus, "there is a need to find additional ways to make better use of available spectrum and to unlock more."

Report: U.S. Wireless Consumers Enjoying Better Services with Lower Bills

"Americans get more value from wireless communications than anywhere else." That's the takeaway from a report released on August 24 Future and Roger Entner of Recon Analytics. "What's It Worth To You? Comparing Wireless Pricing in 14 Countries" analyzes recent trends in wireless prices and services in the U.S. and provides an international comparison. The numbers and analysis contained in the report reveal how Americans wireless consumers are reaping increasing value from wireless services and enjoying a comparative advantage than their counterparts in several other nations

As the report points out, in recent years, U.S. wireless consumers are getting more while paying less. For starters, prices for wireless voice services have dropped. "From 2007 to 2010, in the United States," says the report, "wireless voice spending per customer has declined by more than $12 per month and total spending on wireless services has declined by more than $4 per month."

Meanwhile, U.S. consumers are increasingly enjoying wireless data services, such as text messaging and wireless Internet. Although the average American spend approximately $7 more per month on wireless data services in 2010 than in 2007, all told their dollars are stretching even further than a few years ago: "Combining wireless voice and data spend, Americans are spending $4.38 less a month on mobile communications than they did three years ago, while the ability and opportunity to do more with their minutes and their bytes has expanded in an unprecedented way."

Taking the wireless markets in several foreign countries into account, the report provides an interesting comparison by "considering how long the average person has to work for their gross income to equal what they spend on a wireless subscription." And the report concludes that "[w]hen it comes to affordability, Americans lead the world: they can talk more than 19 minutes for every work minute." By contrast, consumers in Canada can only talk 4.6 minutes for every work minute, consumers in the U.K. can only talk for 2.4 minutes for every work minute, and consumers in Japan can only talk 1.6 minutes for every work minute.

The report also provides some interesting insight regarding wireless consumer surplus; that is, "the difference between what people actually spend versus what they are willing to spend," or "the amount that consumers are able to spend on other goods and services and are therefore better off by that amount." According to the report, "[t]he 2010 wireless voice consumer surplus in the U.S. was at least $448 billion per year or $1,480 per wireless subscriber in the United States per year." That's a near tripling of the consumer surplus since 2004.

Developments in the dynamic U.S. wireless market continue to enhance wireless consumer welfare. That's the hallmark of a free market characterized by competition. Numbers contained in the report on advanced wireless services and prices present striking evidence of the U.S. wireless market being "effectively competitive."

Address Problems with Wireless Applications, Not Regulations

News outlets have recently covered New York Senator Charles Schumer's urging wireless providers to deactivate stolen cellphones. The Senator is also reported to have sent letters urging the FCC and DOJ to study the United Kingdom's policies for deactivating stolen cellphones.

It's one thing for policymakers to merely urge wireless providers to take certain concerns into account in their business practices. But it's quite another thing to impose new regulations. Urging the FCC and DOJ to consider UK policies sounds like setting the groundwork for new regulations.

Considering the dramatic and dynamic innovation and growth of wireless in recent years has taken place in a light-touch regulatory environment, one should always think twice before imposing new regulations on wireless. When markets are characterized by rapidly changing technology, even well-meaning regulation has the potential to stifle innovative and impose costly controls.

And when it comes to wireless, the lesson for policymakers is that they should never underestimate the app. Wireless apps offer consumers countless ways to obtain functionalities for their own needs. As the FCC's latest Wireless Competition Report points out, "several application stores have launched within the last three years, with each offering thousands of applications for download." The total number of apps downloaded from the Apple App Store surpassed 6.5 billion by September 2010, and by that same time, "the Android Market had over 80,000 available applications and had passed one billion downloads." Ubiquitous, creative, and customizable wireless apps thus provide useful tools as well as ready solutions to problems, rendering well-intentioned regulatory mandates pointless, if not harmful.

Prior calls for FM chipset mandates in wireless devices or "bill shock" regulations miss the fact that wireless apps can deliver many of the same functionalities in an individualized manner that proposed regulations supposedly promise. Similarly, while advanced wireless devices may be attractive items to thieves, those devices also provide their own capabilities to for wireless consumers to protect themselves. There are a number of wireless apps available for consumers to password protect their devices and data, to lock down their devices remotely, and to track the location of their devices.

It's also worth remembering that once a wireless device is reported stolen, typically wireless providers terminate the customer's service to that device. That protects the consumer from incurring charges on the stolen device and sharply reduces the value to the thief who then has a device lacking service though the customer’s account.

When a wireless app can do the job, regulation becomes redundant and perhaps even irresponsible. So in the case of stolen cellphones, policymakers should always consider the ready consumer protections offered by wireless applications before taking a more heavy-handed approach by imposing new regulations.

Eliminating Unnecessary Regulation

The Obama Administration's Regulatory Czar, Cass Sunstein, has an op-ed in today's Wall Street Journal touting the Administration's newfound interest in eliminating unnecessary regulation. This is welcome, because if Administration officials talk enough about reducing unnecessary regulations – regulations for which the costs outweigh the , they may start believing it actually needs to be done. And, to his credit, OIRA Administrator Sunstein seems intent on following through.

Over at the FCC, Chairman Genachowski, following the Administration's lead, is also talking about eliminating unnecessary regulations. In other words, he's talking the talk. Just yesterday, the FCC announced in a news release its intent to eliminate 83 outdated rules. They include the Fairness Doctrine rule, which hasn't been enforced for a quarter-century, and others, like the "broadcast flag" rule, which have not been subject to enforcement for years.

All well and good to get outdated rules off the books that have no practical effect. It will make the CFR books thinner.

But when the FCC starts eliminating outdated rules that are still being enforced, and, therefore, which do impose ongoing unnecessary burdens, then we'll know that Mr. Genachowski is actually walking the walk, not just talking the talk.

Saying No to Merger Review Regulation by Arbitration

The latest and most far-fetched attempt to bog down the proposed AT&T/T-Mobile merger is the subject of a handful of recent press reports. A law firm has been recruiting customers and filed arbitration claims on their behalf against AT&T in a number of jurisdictions across the country in an attempt to try to get arbitrators to tie up the deal.

Apparently, the law firm argues that AT&T customer contracts regarding individual billing disputes gives arbitrators the ability to decide antitrust claims under the Clayton Act. On the face of things, it seems bizarre to suggest that arbitrators are empowered to decide antitrust issues concerning AT&T/T-Mobile. Not surprisingly, AT&T has now filed lawsuits in those same jurisdictions to put a stop to the ploy.

AT&T/T-Mobile is already subject to review by two federal agencies – the U.S. Department of Justice as well as the FCC. DOJ's merger review, in fact, includes an antitrust analysis, focusing on anticompetitive concerns. Regardless of one's views of the competitive merits of the AT&T/T-Mobile merger, those merits are best assessed through the federal regulatory process we have in place. And antitrust issues, in particular, are here best left to DOJ.

We've previously raised concerns about unnecessary duplication of federal merger review processes, as well as the drawbacks from saddling telecom mergers – including wireless mergers – with assorted state regulatory reviews. Now we see yet another unhelpful and most likely harmful obstacle to a sound merger review process, this time through a misuse of the arbitration process to disrupt AT&T/T-Mobile.

Tying up proposed mergers by ginning up lawsuits premised on strange notions of arbitrator activism is bad policy. And it's hardly the best approach to ensuring careful market analysis and promoting overall consumer welfare. In the end, the only good that could come of this legal excursion would be an eventual court appeal and definitive precedent to stand in the way of any similar future attempt to roadblock proposed telecom mergers.