Time to Reconsider Reforming FCC Competition Reporting

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Perspectives from FSF Scholars paper, "FCC's Video Report Reveals Disconnect Between Market's Effective Competition and Outdated Regulation."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

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

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

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

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

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 It could even shed light on the unnecessary and outdated regulatory burdens that now saddle communications services on a variety of platforms.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

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

FCC Regulatory Reform and Administrative Law

I appreciated the invitation to appear as a witness at the July 11 hearingon "Improving FCC Process" held before the House Commerce Committee's Subcommittee on Communications and Technology. And I commend Committee Chairman Greg Walden for convening the hearing. 

My written testimony submitted to the Committee is here, and a video of the entire hearing, which includes the witnesses' oral statements, may be found here. 

As regular readers of this space know, for over a decade I have been arguing for meaningful FCC regulatory reform, including when I testified at the House Communications Subcommittee's June 2011 hearing on the subject. In the last congressional session, the House of Representatives did pass the two regulatory reform bills that came out of that hearing, the "Federal Communications Commission Process Reform Act," [H.R. 3309], and the Federal Communications Commission Consolidated Reporting Act," [H.R. 3310]. Unfortunately, both bills died in the Senate without serious consideration.

Now Chairman Walden has produced new Discussion Drafts that, with only a few revisions added, essentially replicate last session's H.R. 3309 and H.R. 3310. The Discussion Draft for the new FCC Process Reform Act is here and for the new Consolidated Reporting Act here.

The reforms embodied in the two new draft bills are needed now more than ever. As I explained in my testimony, this is because the FCC "needs to change in a way, so that, in today's generally dynamic, competitive communications environment, it will be less prone to continue on its course of too often defaulting to regulatory solutions, even when there is no clear and convincing evidence of market failure or consumer harm."

Aside from the proposed reforms to the FCC's transaction [merger] review process, which are much needed and which I will address again at a later date, the most important part of the new Process Reform Act is the section proposing changes to the Commission's rulemaking process. These changes would require the FCC to: (i) identify and analyze the market failure and actual consumer harm the rule addresses; (ii) make a reasoned determination that the rule's benefits justify the costs; and (iii) make a reasoned determination that market forces and changes in technology are unlikely to resolve within a reasonable period of time the problem the Commission intends the rule to address.

As I testified, requiring the Commission to perform these tasks "should be helpful in combatting the FCC's tendency to default to regulatory solutions without undertaking rigorous economic analysis, considering the cost and benefits of regulations, and evaluating marketplace conditions." In today's dynamic, increasingly competitive communications environment, the agency should be rigorously undertaking such analysis in any event – but the reality is that it often doesn't.

Opponents of the proposed reforms generally don't argue that the communications marketplace is not increasingly competitive and dynamic and that FCC regulations need not take account of these factors. Instead, they argue it is ill-advised for Congress to impose on the FCC rulemaking requirements beyond the minimal procedures prescribed by the Administrative Procedure Act. And they suggest that imposing any such requirements, with new statutory terms such as "market failure" and "changes in technology," will lead to uncertainty and litigation. Professors Richard Pierce and Stuart Benjamin generally advanced these arguments at the hearing, and you can read their witness statements here and here.

I believe the professors' professed concerns are quite exaggerated. Frankly, I find Professor Benjamin's suggestion that the addition of any new statutory terms should be avoided because of the uncertainty introduced and potential for litigation somewhat puzzling, if not a bit (unintentionally, I'm sure) demeaning to the Commission and its staff.

I have confidence that, if Congress directs the Commission to do so in connection with the consideration of new regulations, the agency will be capable of articulating, in appropriate circumstances, the proper meaning of terms such as "market failure" and "changes in technology." Assessing the likelihood of market failure and the impact of changes in technology ought to be central to the FCC's supposed expertise. Indeed, terms similar to these appear elsewhere in the Communications Act. And, as Professor Benjamin knows, under Supreme Court precedent in the Auer-Seminole Rock line of cases, if the FCC wishes to issue its own regulations interpreting these statutory terms because it believes doing so will reduce uncertainty and litigation, the agency's interpretations will receive deference upon judicial review.

Professor Benjamin's professed concerns regarding the increased potential for litigation, which in my view are exaggerated, really are not much different than arguments that can be made – and often are, depending on whose ox is being gored – regarding any proposed new statutory change or proposed regulation. Such arguments should not be a basis for rejecting reforms if the changes, on their merits, will improve the FCC's decision-making process. As (newly) former FCC Commissioner Robert McDowell testified at the hearing in response to Professor Benjamin's claims, the FCC gets taken to court in any event whenever it acts on any major item – so conjured up fears of litigation ought not hold much sway.

Professor Pierce acknowledges in his testimony that he is not an expert on communications law and lacks an adequate basis to discuss proposed changes in the substance of communications law. But he certainly is a leading authority on administrative law whose views and expertise I respect. Indeed, I am pleased that he is a member of the Free State Foundation's Board of Academic Advisors. Professor Pierce also is concerned about the potential for increased delay and uncertainty in the rulemaking process if the additional rulemaking requirements are adopted.

But in his testimony, Professor Pierce concedes there is nothing "inherently wrong" with any of the proposed new rulemaking procedures. In fact, he states that:

"In my decades of studying the rulemaking process, I have come across rulemakings in which agencies have used each of these procedures, though I have never seen any rulemaking in which an agency used all of the procedures that the FCC Process Reform Act would make mandatory. Each of the twelve additional procedures has advantages that cause it to be a potentially beneficial addition to a notice and comment rulemaking in some cases."

Professor Pierce goes on to observe that, in his view, they have serious disadvantages as well. Accordingly, sometimes the benefits of the proposed new requirements are justified, sometimes not. On balance, he would leave the decision as to whether to impose any new analytical requirements to the agency itself.

I respect Professor Pierce's views and his general administrative law expertise, and I agree with him that, in general, Congress should deliberate carefully before deciding to impose agency-specific rulemaking requirements. But there is nothing inherent in sound principles of administrative law that suggests Congress ought not impose particular sector-specific analytical decision-making requirements when it determines that circumstances warrant. And, in this case, in my view, circumstances warrant. Changes to the FCC's rulemaking process are warranted in light of the agency's ongoing proclivity to default to regulatory measures, even when there is no convincing evidence of marketplace failure or consumer harm or reasoned explanation offered as to why market forces or changes in technology are not expected to resolve its concerns within a reasonable period of time.

Without doing a deep dive here, it is worth noting that, due to special circumstances, there are agency-specific and sector-specific variations in rulemaking requirements, even while the APA maintains a certain level of minimal process. For example, the EPA has various rulemaking analytical requirements imposed by statute that go beyond the APA requirements. The FTC and OSHA do as well. And so does the SEC. The Exchange Act requires the SEC to consider efficiency, competition, and capital formation factors whenever it is “engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest.” Additionally, the Exchange Act requires the SEC to consider the impact that any rule promulgated would have on competition and to include in the rule’s statement of basis and purpose “the reasons for the Commission’s . . . determination that any burden on competition imposed by such rule or regulation is necessary or appropriate in furtherance of the purposes of [the Exchange Act].” There are other examples, of course, where agencies, in conducting rulemakings, are required to undertake analyses beyond the minimum requirements specified in the APA.

Finally, I want to commend the Communications Committee's Vice Chairman, Rep. Bob Latta, for introducing, in conjunction with the hearing, H.R. 2649, the "FCC 'ABCs' Act of 2013." Rep. Latta's bill would amend Sections 10 and 11 of the Communications Act, the forbearance and periodic regulatory review provisions, to require the Commission to presume, absent clear and convincing evidence to the contrary, that regulatory relief should be granted. Here is the press release issued by Rep. Latta to accompany H.R. 2649's introduction. As Rep. Latta explains, his bill would "force the FCC to come to more deregulatory decisions by reforming the FCC's forbearance authority and biennial review of regulations by adding an evidentiary presumption."

I'm pleased that Rep. Latta's bill mirrors almost exactly the proposal offered in my April 2011 paper, "A Modest Proposal for FCC Regulatory Reform: Making Forbearance and Regulatory Review Decisions More Deregulatory." There I suggested just such an evidentiary presumption as Rep. Latta has now proposed. It is important to point out, however, that I also urged, shortly thereafter in a blog post and many times thereafter, including in my July 11 testimony, that the regulatory relief accorded by the revised forbearance and regulatory review provisions be extended to all entities regulated by the FCC, not just telecommunications carriers.

When all is said and done, there should be meaningful regulatory reform at the FCC. Perhaps not surprisingly, the agency has been very slow to reform itself in a way that makes it less likely to resort to regulation as a default. So action by Congress, such as that embodied in the revised FCC Process Reform and Consolidated Reporting Act draft bills, and Rep. Latta's new bill, should be welcomed.     

Study Spotlights How Heavy USF Subsidies Hurt Consumers More than Help

Economists Thomas Hazlett and Scott Wallsten have written perhaps the most devastating critique of the universal service fund (USF) to date. In "Unrepentant Policy Failure: Universal Service Subsidies in Voice & Broadband," Hazlett and Hallsten offer an across-the-board analysis of USF waste and inefficiency.

Consumers are the ones stuck with a several billion-dollar bill each year for USF. In particular, USF is funded by surcharges or de facto taxes that are included as a line-item on consumers' monthly phone bills. The USF surcharge ("tax") is assessed against the long-distance portion of consumers' bills, adjusted quarterly by the USAC. 

As Hazlett and Wallsten's study explains, "[b]etween 1998 and 2012, the USF disbursed about $94 billion ($110 billion in 2013 dollars) to support its programs." The study takes on all of the major USF programs, but it is especially hard-hitting when it comes to the High Cost Fund.

According to the study, "annual mean payments for subsidized carriers equaled $580 per line in 2010," thereby "exceed[ing] the price of a year’s worth of cell service with unlimited nationwide voice minutes, texting and data." Hazlett and Wallsten cite 2010 FCC data indicating 99.8% of U.S. households live in areas served by wireless voice service provider. To supply the remaining households with "free unlimited domestic telephone service via satellite would cost no more than $173 million per year using the retail prices stated by one satellite provider offering a recent low-cost unlimited service plan." That's far below the $4.5 billion annual cost of the High Cost Fund.

The $4.5 billion "budget" that the FCC established for the High Cost Fund comes under particularly close scrutiny in the study. The study does give the FCC credit for some of the reforms it has undertaken. (FSF President RandolphMay and I have likewise made the case for further implementing the FCC's USF reforms, all the while acknowledging the FCC still has a long way to go. We have, in fact, called for the sunsetting of the High Cost Fund.) Nonetheless, Hazlett and Wallsten offer a sobering perspective on how effective – or ineffective – the FCC's USF reforms may be in the time ahead.

As the study explains, prior to the FCC's reforms the High Cost Fund "was shrinking due to reductions in fixed lines, with the 2011 total closer to $4 billion than to $4.5 billion." Thus, "the first real effect of the Commission’s budget was to increase the annual HCF by more than $400 million beyond what it would have been otherwise."

Moreover, going forward "the rules now prevent CAF from collecting less than that amount or USAC from estimating demand for subsidies at less than that amount." The study cites to paragraph 560 of the FCC's USF Reform Order (2011), which appears to keep the High Cost Fund needlessly high by now prohibiting USAC from projecting lower demand: "...beginning with the quarterly demand filing for the first quarter of 2012, USAC should forecast total high-cost universal service demand as no less than $1.125 billion, i.e., one quarter of the annual high-cost budget.

The study's critique of E-Rate – which annually funds schools' and libraries' acquisition of telecommunication services, Internet services, and internal network connections to the tune of roughly $2 billion – should also be carefully considered, as the FCC now prepares to revisit the E-Rate program. 

Improving FCC Process Reform

Free State Foundation President Randolph J. May testified at a hearing on “Improving FCC Process” before the House Subcommittee on Communications and Technology, Committee on Energy and Commerce, on July 11, 2013. He commended the Committee for undertaking the effort to reform the FCC's processes and its decision-making approaches. Mr. May supported the proposed reforms in the Discussion Drafts that, along with his additional proposals, would make the FCC less likely to default so often to regulatory measures, even absent clear and convincing evidence of market failure or consumer harm. The link to Mr. May's prepared testimony is here, and the link to a video of the hearing is here.

Computer III: R. I. P.

By Greg Vogt

Visiting Fellow

Since the Third Computer Inquiry rules were adopted in 1986, the FCC has received multiple rounds of comments, including in an outstanding rulemaking proceeding, concerning whether the rules should be eliminated. Despite its recognition that the market has changed drastically, the FCC recently denied a US Telecom request for forbearance from these rules. Instead it once again requested comment on the rules’ elimination. The available evidence justifies that these rules should promptly be consigned to the graveyard reserved for outdated regulations.

The Computer III rules established a complex framework that was designed to enable independent “enhanced services” providers to purchase piece parts of the analog telephone network. These rules now apply only to three companies in a growing field of wired and wireless network providers of considerable size and strength.

Some rules have been streamlined (in its recent forbearance order the FCC rightfully eliminated thousands of annual pages of compliance reports) and the Computer III rules for broadband have largely been eliminated. Notwithstanding, the substantive rules remain in place for a much narrower category of so called “narrowbanding” enhanced services. The Commission specifically identified only a small number of voice mail and alarm monitoring service providers that currently rely on Computer III functionality.

US Telecom demonstrated that these “narrowbanding” services are being provided today over broadband and cable TV networks without reliance on Computer III functionality. Current evidence of competing facilities-based network platforms provide alternatives that justify eliminating the substantive Computer III rules.

Computer III was adopted when telephone service was largely a monopoly. Since then, multiple network platforms provide a communications path into the home. In 2010, Cable MVPD facilities passed 98.5 percent, and wireless services covered over 97.8 percent, of homes. Over 93 percent of Americans in 2012 could receive wireline broadband services at 3 Mbps download speeds or greater.

In its denial of US Telecom’s forbearance request, the Commission asserted that it needed evidence that alternative services were available on competitive terms. This focus was overly narrow and misplaced. The Commission should instead evaluate the technological capabilities of alternative network platforms to determine whether there is a sufficient competitive alternative to Computer III-compliant facilities. The FCC engaged in such an inquiry when it deregulated wireline broadband without looking at specific prices. The same type of inquiry for narrowbanding enhanced services would demonstrate that competitive alternatives do exist, which would promote reasonable terms. There is thus no reason to force Computer III carriers to identify irrelevant information that they may not even be able to access in the first place.

Given the existence of competing alternative platforms, there is little need to be concerned that either consumers or providers could not find “enhanced” services without the legacy rules. In the past, the Commission has solved this type of potential disruption to consumers and providers through limited grandfathering, such as it did when wireline broadband was deregulated. With a reasonable time to locate an alternative source of supply, there is no further need for continued regulation to assure consumer protection. 

The FCC should not retain rules solely to protect existing business plans or services. Both the FCC and the antitrust laws have long refused to protect individual competitors rather than competition. Freezing services in place stifles innovation and unnecessarily increases carrier costs.

The Commission has admitted that the Computer III requirements are burdensome. Other public interest benefits support elimination. As the Commission found when deregulating wireline broadband, eliminating Computer III is in the public interest because it would promote innovation and investment, and reduce compliance costs. And unnecessary rules should be repealed in any event because they skew competition, harming consumers.

It is also ironic that the FCC elsewhere has announced that it needs to promote conversion to a modern network to promote broadband and meet other goals. Its stubborn retention of legacy rules applicable only to the analog PSTN, such as the Computer III rules, potentially works at cross purposes with these other goals.

In its NPRM to explore elimination of the remaining Computer III rules, the Commission should rely on available evidence to eliminate these unnecessary rules without further delay. Competition will continue to make available services consumers desire through a variety of platforms. Computer III: Rest In Peace.

Independence Day 2013

On Independence Day, as we celebrate our American heritage, we are mindful, as we should be, of the individual rights proclaimed in the Declaration of Independence and secured by the Constitution. 

More often than not, our rights-talk focuses on what generally are referred to as "political" rights, such as the right to freedom of speech, the right to freedom of religion, the right to bear arms, the right to trial by jury, and so forth. Less often is the focus on property rights, which, if not ignored completely, are frequently relegated to second-class status. 

While I want to be careful not to be misunderstood as denigrating in any way the importance of so-called political rights – because obviously they are essential to our conception of individual liberty – I wish to highlight in this Independence Day message the importance our Founders also placed on securing property rights. And I wish to suggest, if only briefly, why securing property rights is as important to our personal well-being, and our nation's well-being, as the protection of political rights.    

The Constitution, of course, provides that the government cannot deprive us of "life, liberty, or property," without due process of law. Nor shall "private property" be taken for public use without just compensation. So, the Founders certainly recognized the importance of property in the Constitution itself. 

But it is important to understand that for many of the Founders, there was no meaningful distinction between political and property rights. They were of equal importance. Indeed, they were inextricably intertwined. Hence, in his famous essay, "Property," James Madison, often referred to as the Father of our Constitution, said, "in its larger and juster meaning," the term "property" includes "everything to which a man may attach a value and have a right; and which leaves to every one else the like advantage."

Thus, Madison continued:

"[A man] has an equal property in the free use of his faculties and free choice of the objects on which to employ them. In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights. When an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions."

And then Madison emphasized the importance of government's property-protection role for all property rights of whatever sort, whether tangible or intangible:

"Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals, as that which the term particularly expresses. This being the end of government, that alone is a just government, which impartially secures to every man, whatever is his own."

The protection of property rights is essential to the functioning of our free market capitalist economy and increases the overall economic and social well-being of all citizens. As the late Armen Alchian, emeritus professor of economics at the University of California, Los Angeles, explained:

"Under a private property system the market values of property reflect the preferences and demands of the rest of society. No matter who the owner is, the use of the resource is influenced by what the rest of the public thinks is the most valuable use. The reason is that an owner who chooses some other use must forsake that highest-valued use—and the price others would pay him for the resource or for the use of it. This creates an interesting paradox: although property is called 'private,' private decisions are based on public, or social, evaluation. The fundamental purpose of property rights, and their fundamental accomplishment, is that they eliminate destructive competition for control of economic resources. Well-defined and well-protected property rights replace competition by violence with competition by peaceful means."

Furthermore, under a rule of law regime, property ownership provides the necessary protected realm of freedom – a freedom sanctuary if you will – in which creativity, entrepreneurship, and initiative can take root and flourish independent of government in a way that benefits not only the individual but also society at large.

In concluding his essay on "Property," James Madison declared:

"If the United States mean to obtain or deserve the full praise due to wise and just governments, they will equally respect the rights of property, and the property in rights: they will rival the government that most sacredly guards the former; and by repelling its example in violating the latter, will make themselves a pattern to that and all other governments."

Thus, as we consider the liberty we enjoy, embodied in the words of the Declaration of Independence and secured by the Constitution, we should not forget the signal importance of protecting property rights of all kinds, whether in real or personal property in land or goods, or intellectual property created by marrying the creativity of our minds with our individual initiative.

Indeed, on this Independence Day, we should not forget that property rights are inseparable from the other rights secured by our Constitution and the rule of law.

From all of us at the Free State Foundation, whatever your rightful disposition, or disposition regarding rights, we wish you a happy and safe Independence Day.

PS – Previous Independence Day messages are here: 2007; 2008; 2009; 2010; 2011; and 2012.

Maryland Wireless Taxes Are Too High!

The Tax Foundation's study detailing the wireless service tax and fee rates in the U.S. shows that Maryland's taxes and fees at 12.77% put it at No. 12 -- that is, the state with the 12th highest tax/fee add-ons.

The average state and local rate is 11.36 percent. The Tax Foundation's Map shows that Oregon has the lowest rate at 1.85%, and is tailed closely by Nevada at 2.13% and Idaho at 2.28%. Nebraska has the highest rate at 18.67%, and is followed closely by Washington at 18.62% and New York at 17.85%. 

These rates do not include the additional federal rate of 5.92%, which brings Nebraska's rate to 24.49% and Oregon's rate to 7.67%. The average combined federal, state, and local rate is 17.18%.

With the federal rate added, the total taxes paid by a wireless customer in Maryland is 18.69% -- in other words, nearing 20%. This is just one more example of why Maryland is known as a "high tax" state.