Midnight Madness

No, it’s not the traditional beginning of basketball season one midnight in mid-October. It’s tonight at the Portals, the FCC’s headquarters on 12th Street. Not having heard anything yet about the decision on AT&T’s petition seeking forbearance from the Commission’s cost assignment rules, which must be decided today, it wouldn’t surprise me now if the decision is made, literally, at the last minute.

It will surprise me, though, if a majority of the Commission that claims to be market-oriented doesn’t grant the petition. I have explained here and here that the cost allocation rules are a relic from a bygone era. They were put in place when AT&T was the dominant telecommunications carrier in a monopolistic environment. Rates for various AT&T services were based on cost assignments to various categories. This is no longer true in an era when rates are capped by both the FCC and the states.

Almost all economists will tell you that even in the old analog monopolistic environment in which multiple AT&T services used common plant the cost allocation rules necessarily were always somewhat arbitrary and, therefore, subject to manipulation. They are even less relevant and useful, as a practical matter, in a digital era characterized by convergence in which a “bit is a bit is a bit.”

The chief objection appears to be that, although the cost allocation data is not being used now for any important regulatory purpose, it might possibly be useful in the future. This seems a doubtful proposition to me.

For example, in today’s Communications Daily it is reported that the Tennessee regulatory authority says that AT&T accounting data might be useful in the future in evaluating competition, or might be useful if the agency should adopt a state universal service fund. It is hard to understand how cost data collected for regulatory accounting purposes, sliced and diced on a somewhat arbitrary and artificial basis, is necessary, or even useful, for evaluating competition. Information concerning number of existing and potential providers, locations and customers served, prices, and the like, are much more useful in this respect than accounting regulatory data.

As for concerns expressed by Tennessee and a few other states that they might possibly need data in the future, say, if they decide to establish universal service funds, it seems to me that such speculation is not a good reason for maintaining in place a regulatory relic. The FCC’s outdated rules should not be held hostage to speculations about potential future needs that haven’t yet materialized and most likely never will.

Finally, in my view, if it turns out certain states, on an individual basis, decide they want to collect certain cost assignment information relating to intrastate services provided within their states, I see no reason why they would not be free to do so on a focused basis, as long as the information relates to a valid regulatory purpose within the ambit of the state’s lawful jurisdiction.

For that matter, and importantly, I see no reason why the FCC, if it grants AT&T’s petition in the exercise of its forbearance authority, cannot, on a proper record, subsequently change its mind if circumstances warrant. In other words, the FCC could reinstitute whatever cost assignment regulations it deems necessary if it has a rational basis for doing so. A grant of forbearance is not necessarily a decision to forbear forever.

What is not rational is for the Commission to refuse to employ the deregulatory tool that Congress put in place for situations like this when rules that are no longer necessary should no longer be applied. While it may be unlikely that Democratic Commissioners Michael Copps and Jonathan Adelstein, with their pro-regulatory inclinations, will vote for forbearance, it will be disappointing if the three Republicans, Chairman Kevin Martin and Commissioners Deborah Taylor Tate and Robert McDowell, don’t.

Bearing in Mind Forbearance's Purpose - Part II

A couple of weeks ago in this space I took note of AT&T's pending forbearance petition in a piece entitled, "Bearing in Mind Forbearance's Purpose." The piece explained why the FCC should grant AT&T's petition asking the agency to forbear from applying its cost assignment rules now that they have become largely irrelevant in an era in which the FCC and the states have abandoned cost-of-service regulation in favor of price caps. You can read the blog for a more complete explanation.

But I was interested to see the item in today's Communications Daily [subscription required] reporting that the public staff of the NC Public Utilities Commission is urging the commission to eliminate a PUC rule requiring incumbent carriers to submit cost studies for new services. The reason? According to Communications Daily, the public staff, which represents consumer interests before the PUC, said that because all incumbents now are under price caps and face competition, "cost studies mean little." The public staff pointed out that the incumbents' competitors faced no cost study requirement.

From press reports, it appears that Republican Commissioner Robert McDowell may be questioning whether AT&T's forbearance petition should be granted. The petition is scheduled to be acted upon this week. This should not be a difficult call for Commissioner McDowell, who is generally supportive of reducing unnecessary regulation, or, for that matter, for all the other commissioners. The cost assignment rules that are the subject of AT&T's petition are a relic of a bygone regulatory era. If the public staff of the NC Public Utilities Commission can see the need to jettison outdated rules in the context of cost studies submitted to the state commission, the FCC ought to be able to do the same with respect to its rules.

Good News on US Internet Infrastructure

The NYT article on the just-released Global Inforamtion Technology Report done on behalf of the World Economic Forum begins this way:

"Contradicting earlier studies, conventional wisdom and politicians’ rhetoric, European researchers say that the Internet infrastructure of the United States is one of the world’s best and getting better."

I would not put too much stock in any one study, but this one, which employed 68 variables including market factors, political and regulatory environment, and technology infrastructure, is a useful antidote to uncritical acceptance of the OECD reports that are always trumpeted by those in the "talking broadband down" crowd. The TBD crowd is always looking for opportunities to propose more regulation for the Internet.

This study indicating that the US Internet infrastructure is healthy and getting better ought to be a warning to US policymakers not to heed the siren call of public utility regulation of broadband Internet providers in the guise of net neutrality mandates.

Tech Tax Repealed and Internet Spending Website Adopted

There is good news on two fronts as the Maryland General Assembly ends its regular session. The legislature repealed the 6% tax on all manner of computer services that was scheduled to take effect this July. The tax was adopted hastily without public debate in last fall’s special legislative session. And the Assembly has adopted a bill requiring the state to establish a free, easily searchable website that will enable the public to track state spending and contract activity.

The Free State Foundation urged repeal of the computer services tax almost before the ink dried on the legislature’s handiwork. And FSF was an early – and initially fairly lonely – voice urging adoption of the transparency bill when this particular effort to bring more accountability for state government spending was viewed as quixotic in Annapolis.

On the computer services tax repeal, for example, see my This Maryland Tax Doesn’t Compute and Maryland Computer Services Tax Malfunction pieces, my testimony submitted to the General Assembly, and FSF Senior Fellow Cecilia Januszkiewicz’s Random Acts of Taxation commentary in the Baltimore Examiner. All explained that targeting computer services for a new sales tax is surely counterproductive as Maryland tries to encourage the growth of a high-tech sector in competition with neighboring states. As I said as soon as the tax was passed:

The types of services that would be impacted by the new tax are integral to the installation and maintenance of high-speed broadband networks upon which so much of today's information economy depends. By virtue of their importance in enabling the efficient and less costly delivery of other goods and services, computing services have a positive multiplier effect on the economy at large.

The repeal legislation replaces the projected $200 million “revenue loss” with an income tax surcharge on those individuals earning above $1 million, a reduction of $50 million in the transportation trust fund for five years, and a direction to the Governor to cut an additional $50 million from the state budget by July 1. It would have been preferable for the legislature to implement further spending cuts to fill the projected revenue gap, rather than further increasing taxes. Like computer services firms, Maryland’s citizens can move to Virginia too. But when all is said and done, the repeal of the computer services tax is a positive action for which the legislature and the Governor deserve credit.

And the enactment of Maryland Funding Accountability and Transparency Act is another positive action deserving of credit. Last year, when a virtually identical measure requiring creation of an easily searchable website tracking state spending over $25,000 was introduced by two Republicans, Delegate Warren Miller and State Senator Alex Mooney, it received little support, and almost none from Democrats. I published an early commentary, Bring Accountability and Transparency to Maryland Government, in the Baltimore Sun on March 20, 2007, urging enactment, and several blogs as well.

In addition to more writing on the subject over the past year, I submitted testimony this past February in support of the reintroduced measure. This year the bill passed both houses with overwhelming bipartisan support, certainly a tribute to the work of Delegate Miller and Senator Mooney.

Presumably it is also a triumph of the simple but fundamental notion that, in this digital age, citizens ought to be empowered to easily obtain information about how their government spends their taxpayer dollars. While there is a cost to be sure in establishing and maintaining the new website, when other states and the federal government have established such sites the costs have been minimal. For example, when the federal government recently established its spending website, www,USAspending.gov, the database was created for less than $1 million and the software costs about $600,000. Whatever costs are incurred in setting up and maintaining the new portal most likely will be exceeded in short order by the cost savings realized as citizens become more vigilant in monitoring the way the state spends its money. This is the “accountability” part of the bill’s title. Surely legislators and executive branch officials will be more sensitive about spending, grants, and contracts that may not easily withstand public scrutiny.

Indeed, now that the Maryland Funding Accountability and transparency Act has passed, the legislature and Governor should not rest on their laurels. There is much other information impacting the state’s fiscal situation and operation that is not posted (or easily found) on the state’s website. For example, reports from various state commissions often are not posted. There is no reason why, in this day and Internet age, a citizen should have to travel to Annapolis and root through paper files to find and read such information.

The Clock Keeps Ticking on FCC Reform

The clock keeps ticking on FCC reform. It has now been over eight years since then-FCC Chairman William Kennard released a draft strategic plan titled, “A New FCC for the 21st Century.” The plan stated that in five years, “[t]he FCC as we know it today will be very different in both structure and mission.”

For the most part, the predicted change in structure and mission hasn’t happened yet. But in light of the competitive marketplace and rapid technological developments that have occurred since 1999, reducing the need for traditional forms of regulation, certainly changes in structure and mission ought to be implemented. In my view, the FCC probably should not go the way, say, of the now defunct Interstate Commerce Commission and Civil Aeronautics Board. But the agency should undergo institutional reform if it is to be transformed into a regulatory entity in which its structure and practices match its 21st century mission.

Yesterday, I had the good fortune to moderate a panel sponsored by the ABA’s Section of Administrative Law and Regulatory Practice. The panelists were John Duffy, Professor of Law at George Washington University; Sam Feder, now a partner in Jenner & Block’s Washington office and the FCC’s immediate past General Counsel; Andy Schwartzman, President and CEO, Media Access Project; and Joe Waz, Senior Vice President of External Affairs and Public Policy Counsel, Comcast. Perhaps not surprisingly, with the experience and expertise represented by this group, what ensued was an extremely thoughtful, informative, and wide-ranging discussion. I commend to you the excellent reports of the event in yesterday’s TR Daily and Multichannel News, and today’s Communications Daily and BNA Daily Report for Executives. [Subscriptions required].

A lot of ideas were put on the table, some of which would require congressional action, others of which are more modest, in the nature of process reforms, which could be accomplished by the agency itself. I want to offer some selected observations from the panelists that I think are worth noting, at least in the interest of provoking discussion (again, while urging you, if possible, to look at the more complete press reports until the transcript becomes available.)

John Duffy suggested that the way the FCC operates today bears little resemblance to the theoretical and aspirational vision expressed by its congressional creators. Rather than an “independent” institution in which decisions are made by true experts insulated from politics, much of the agency’s policymaking is and always has been political in nature. John proposed splitting the FCC’s policymaking and adjudicatory functions, with the policymaking function moved to the Executive Branch under a single administrator, where the president ultimately would be politically accountable for the policy decisions. The adjudicatory function would remain with a multimember agency resembling the current agency.

Next was Joe Waz. Joe offered suggestions for what he called more immediate moderate reforms that would make the FCC operate in a more transparent fashion. The suggestions include making rulemakings more focused so that they are about adopting specific rules and not wide-ranging inquiries; restricting the ex parte process so that the actual comment period would once again be meaningful; subjecting some draft agency reports to peer review and public comment before being acted on by the Commission; releasing a semiannual agenda that lists what actions the agency anticipates taking during the next six months; notifying the public of agenda items three weeks in advance of agency meetings; and adhering to a “shot clock” to ensure that agency decisions are made on a timely basis, especially in merger proceedings.

Following Joe, Andy Schwartzman looked up from his always ubiquitous crossword puzzle to ask: “Does anybody know a three-letter word for an agency that does as well as anybody could do in a difficult job?” His answer: “The FCC.” Despite this, Andy agreed with much of what Joe Waz suggested regarding process changes, especially changing the way the current ex parte process works. He suggested the FCC needs to require more detailed summaries of meetings in order to make the process more transparent. While agreeing with Joe’s notion of a shot clock to bring Commission proceedings to close in a timely fashion, he would exempt merger proceedings from the requirement. He would also require that the Commission issue the texts of decisions reached at open meetings within 10 days. Finally, rather than moving towards a single administrator for policymaking, Andy would reverse the decision made in 1982 to reduce the Commission from seven to five commissioners.

Sam Feder completed the initial presentations. He said that before coming to the agency, he believed many of its orders were incoherent. Once he got there, he said, he began to understand why this is so, with the compromises necessitated by five commissioners with differing views. Sam volunteered that John Duffy’s idea of putting the agency under the control of a single administrator made a lot of sense. While stating that the FCC was doing a good job operating under the current law, Sam stated there is a need for a new law to provide more congressional guidance in light of changed circumstances.

There was more, and a lot of intelligent back-and-forth discussion among the panelists and the audience. But the above will give you a good sense of the session’s tenor and some of the specific suggestions advanced for modest and not-so-modest institutional reforms.

The issues raised in thinking about reforming the FCC go way beyond the actions of any particular chairman or commissioner, past or present, or any political party. Indeed, they are independent of such. The focus should be on matching the institutional structure and practices to the agency’s mission going forward in a competitive environment that already is much changed from the one envisioned even in 1999.

The panel deserves much credit for advancing the discussion.

Bearing in Mind Forbearance's Purpose

There has been a lot of discussion the past several months about the FCC’s exercise of its forbearance authority. This is the authority granted to the FCC in the Telecom Act of 1996 that requires the agency, consistent with making certain consumer protection and public interest findings, to “forbear” from applying to telecommunications carriers an agency regulation or statutory provision that otherwise applies. Note that the forbearance provision in the ’96 Act says the FCC “shall forbear,” not may forbear, if the requisite determinations are made.

Given what Congress described as the ’96 Act’s “deregulatory” purpose, it has seemed to me for quite some time that the Commission has been much too sparing in its use of its forbearance authority. After all, grant of such authority is a rarity, seldom found in other regulatory statutes. It is unlikely that Congress intended the provision, titled “Regulatory Flexibility,” to be mere window-dressing.

Be that as it may, there are always some close cases, ones at the margin, which reasonably can be argued either way. Fair enough. I do not suggest that the Commission should assume a posture of granting all forbearance petitions willy-nilly.

By the same token, there are some cases that ought not to be close, that are not at the margin. With respect to these, the Commission should bear in mind forbearance’s purpose, and act accordingly.

The FCC has pending before it such a case. In January 2007, AT&T filed a petition asking the Commission to forbear from applying the agency’s decades-old cost assignment rules. The FCC must act on the petition by the last week in April.

Simply put, today’s competitive marketplace environment, coupled with a changed regulatory regime, means that the FCC’s cost allocation rules no longer serve a useful purpose. The rules were devised back in the days when AT&T and other telephone carriers, considered dominant in the marketplace, were subject to rate-of-return regulation which tied a carrier’s rates to its costs. The cost allocation rules assigned costs to different service categories (for example, MTS, WATS, private line) in an attempt to ensure that no service earned more than the authorized rate-of-return and to prevent cross-subsidization among the various service categories.

(Even during rate-of-return regulation’s heyday, devising and then applying the cost assignment rules was always highly problematical. For anyone interested in a research project with historical insights into the nitty-gritty difficulties of traditional public utility regulation, I refer you to the FCC’s decades-long efforts in Docket 18128 and the follow-on Interim Cost Allocation Manual proceedings. The purpose of these proceedings was to establish workable and proper cost allocation rules. Over many years, for example, Docket 18128 explored at least seven different “fully distributed cost (FDC) ” allocation methodologies proposed for AT&T before being ditched around 1980 in favor of the “interim” cost allocation manual. The differences between FDC-1 through FDC-7 methodologies were quite subtle, to put it nicely.)

In any event, when the FCC abandoned rate-of-return regulation in favor of price cap regulation in the early 1990s, the rationale for maintaining in place the elaborate set of cost allocation rules applicable to AT&T evaporated. This is because, unlike under rate-of-return regulation, price cap regulation rates are not tied to the costs of providing service. Rather, consumers are protected because prices are capped. And carriers have an incentive to operate more efficiently because they are allowed to profit from cost savings achieved.

Thus, with rate-of-return regulation abandoned by the FCC and the states covered by AT&T’s petition, applying the cost allocation rules no longer serves a useful regulatory purpose. With price cap protections in place, continued application of the cost allocation rules is certainly not necessary to protect consumers. Even aside from the operation of the price cap regime, increasingly vigorous and ubiquitous marketplace competition protects consumers from unreasonable prices. Moreover, the direct and indirect costs incurred in applying the FCC's allocation rules certainly outweigh any benefits.

In sum, in my view, the Commission has been much too sparing in availing itself of the forbearance tool that Congress gave it in the ’96 Act to reduce regulation in light of changed marketplace conditions. Whether or not one agrees with that general assessment, granting AT&T’s petition should be an easy call for the Commission. The FCC should forbear because it should be for burying the regulatory relic of cost allocation rules.

FCC Reform: Changing the Institution

Since it was created in 1927 as the Federal Radio Commission, and reincarnated in 1934 as the Federal Communications Commission, the FCC has undergone remarkably little fundamental institutional change. To be sure, there have been some changes that impact the way the FCC does business. For example, in 1982, the number of commissioners was reduced from seven to five. The enactment of the Sunshine Act in 1976 affected the way the Commission operates, and the way the commissioners interact – or don’t – with each other. Compared with its preferred mode of regulating during its first few decades, for almost the last half-century the agency has regulated primarily through conducting ex ante rulemaking proceedings rather than post hoc adjudications.

For the most part, it is fair to say that, in fundamental respects, the agency functions much the same today as it has for decades. Certainly, this is true in the decade since the passage of the Telecommunications Act of 1996, which was billed by Congress as “pro-competitive” and “deregulatory” and by President Bill Clinton as “truly revolutionary legislation.” And it is true despite the fact there have been unprecedented marketplace changes resulting in increased competition in all market segments subject to the FCC’s jurisdiction and a definite blurring of traditional service categories due to the transition from analog narrowband to digital broadband communications.

In August 1999, then-FCC Chairman William Kennard released a strategic plan called “A New FCC for the 21st Century.” The first two sentences presciently read: “In five years, we expect U.S. communications markets to be characterized predominately by vigorous competition that will greatly reduce the need for direct regulation. The advent of Internet-based and other new technology-driven communications services will continue to erode the traditional regulatory distinctions between different sectors of the communications industry.” As a result, the plan continued, “[t]he FCC as we know it today will be very different in structure and mission.”

Since then, while there has been some rearranging and renaming of the boxes on the agency’s office organizational chart, it would be a stretch to say today’s FCC is “very different in structure and mission.” Nevertheless, the agency’s annual budget has continued to grow each year, from around $200 million in 2000 to $338 requested for FY 2009.

‘Nuff said, for now. All of the foregoing is my way of calling your attention to a lunch program I am moderating on April 3. The program, sponsored by the American Bar Association’s Section of Administrative Law and Regulatory Practice, is entitled, “FCC Reform: Changing the Institution.” There is a stellar line-up of very knowledgeable speakers: John Duffy, Professor, George Washington University School of Law; Sam Feder, Partner, Jenner & Block and immediate past FCC General Counsel; Andrew Schwartzman, President, Media Access Project; and Joe Waz, Senior Vice President of External Affairs and Public Policy Counsel, Comcast Corporation. The panel will address both potential major structural institutional reforms, which likely will be achieved, if at all, on a longer-term basis, as well as process-oriented reforms that possibly could be implemented over the near-term.

Achieving institutional change is never easy. Even with “change” this year’s dominant campaign mantra, I can’t promise this is the year there will be fundamental institutional changes at the FCC. But as the moderator of this program, I can promise the discussion will be lively and informative.

To sign up, click here.

Computer Services Tax Repeal

Maryland Governor Martin O’Malley has now come out in favor of repeal of the state’s ill-conceived 6% sales tax on computer services performed in Maryland. This tax, scheduled to take effect this July, would be a blow to the state’s hopes to a leader in attracting high-tech industries, especially small business entrepreneurs.

Free State Foundation experts have been early and frequent critics of this tax, which was enacted hastily without public deliberation. For example, Free State Foundation Senior Fellow Cecilia Januszkiewicz, in a commentary entitled “Random Acts of Taxation” published in the Baltimore Examiner on January 21, 2008, explained in detail why the tax “a mistake, and it must be corrected.” Her commentary stated:

“In a random act of taxation, the General Assembly grievously wounded Maryland’s efforts to rival Silicon Valley as a technology magnet. From a lengthy menu of services that are not currently subject to the Maryland sales tax, the Senate Budget and Taxation Committee during the 2007 special session recommended that computer services be subjected to Maryland’s 6 percent sales tax. Now, how will state officials convince technology leaders that Maryland, one of the few states to tax computer services, is a welcoming environment for their businesses when they have increased the cost of those services? The impact of the computer services tax will not be limited to technology companies. It will extend to companies that rely significantly on technology in operating their businesses, precisely the kind of businesses states recruit for their high-wage jobs. Maryland businesses with offices in several states will opt to locate their most sophisticated operations and jobs outside Maryland to avoid the tax. Selecting a non-Maryland location will now yield a 6 percent price advantage.”

And I submitted testimony to the pertinent Maryland House and Senate committees urging repeal. In my testimony, I stated that “[t]he repeal of the tax would correct an error that, if uncorrected, will cost the State significantly more revenue than it hopes to receive from the tax.” This is because:

“Unlike many other business sectors, technology services, including the computer services that are subject to the tax, are highly portable. Already many technology businesses have reported that nearby States are luring their businesses. It is likely that many of these businesses will relocate to avoid the arbitrary 6% surcharge on their services. When these businesses leave the State, they will take with them thousands of jobs. And they will take with them Maryland’s understandable desire to develop a reputation as a technology magnet.”

And there have been other FSF commentaries and blogs to the same effect.

Governor O’Malley’s recognition that the computer services tax --that “random act of taxation”—should be repealed is a positive step. Unfortunately, he wants to make up the supposed loss of revenue by increasing taxes elsewhere. After taking one positive step, the governor should take another: He should recognize that even after last autumn’s special session of the Maryland General Assembly called to address the so-called structural deficit, Maryland lawmakers are still proposing healthy increases in the state expenditures. The Governor (and the General Assembly) should look to reduce state expenditures before looking for more taxes to increase.

Public Access to Public Information

Recently, Maryland Comptroller Peter Franchot released the names of Maryland State employees earning more than $100,000. This caused quite a stir in Annapolis because public information had actually reached the public.

The Maryland Public Information Act provides that the salary of a State employee is public information. Releasing the information to anyone who asks or posting it on the Comptroller’s website is perfectly legal. Why then is a Maryland State Senator launching an investigation into the release? Why does the Senator want to waste State resources investigating the release of information that by law must be made available to the public? Is the Senator afraid that Maryland taxpayers might question some of the salaries? Could it be that our public officials are concerned that taxpayers may learn too much about how our money is being spent and we might wonder whether it is the best use of our money?

The Senator should instead investigate why, despite all the high-priced talent at the Comptroller’s Office, the Comptroller’s web site is so lacking in current information on the State’s finances but full of information about the Comptroller’s public appearances.

I applaud the Comptroller’s devotion to assuring that the public has public information but it would have been far more taxpayer-friendly to post the information on his website than to release it only to the press. Taxpayers should hope that release of the salaries is the Comptroller’s first step in keeping them informed about how their money is spent. Taxpayers should also hope that, in the future, the Comptroller will provide the information directly to them through his website rather than piecemeal through the press.

The Comptroller’s website is very helpful in instructing taxpayers about paying taxes but relatively devoid of information about where all the money that is collected goes. The Comptroller is responsible for paying almost all of the State’s bills and maintains records of the payments. He has the latest technology and talented employees. Using these resources that State taxpayers provide to him, the Comptroller could provide taxpayers with timely comprehensive information about how their money is spent.

Instead of waiting for requests for public information, the Comptroller could make the database of State payments accessible and searchable by ordinary citizens through his website. This would be a giant leap forward for public access to public information. It would also save many State employees time and effort in responding to multiple individual Public Information Act requests for the same information and would assure that the information would be available to the taxpayers without additional charge.

It should take little or no effort for the Comptroller to make information that is by law public information more easily accessible to Maryland citizens.

Pole Attachments and Broadband Deployment

With all the focus on the continued expansion of broadband deployment, including the position of the United States relative to other developed countries, little attention has been paid to a proceeding pending before the FCC that could have a material impact on broadband deployment. The FCC is conducting a rulemaking (WC Docket No. 07-245) that will determine the rates that cable and telecommunications companies pay to attach their equipment to utility poles. Not surprisingly, the facilities that cable and telco companies wish to attach in this day and age are used not merely to provide “cable” services or “telephone” services, but rather to provide broadband Internet access services.

There is a long history to the FCC’s regulation of pole attachment rates, one involving much litigation and some legislative activity. The history comes replete with mind-boggling formulations that have been developed to determine the rates that utilities may charge for access to their poles. Unless you write to request a personal tutorial, I will spare you the pain of all the history, and you should thank me for it. Just take my word that there are now separate rates for attachments used to provide “cable services” and attachments used to provide “telecommunications services,” and the cable rate is lower than the telcom rate.

In the current rulemaking the Commission is asking a couple questions that ought, as a matter of policy, to have pretty simple answers. The agency is asking whether there should be a single pole attachment rate for both cable systems and telecommunications carriers in order to remove regulatory bias from investment decisions regarding deployment of broadband and other services. In its rulemaking notice, the Commission tentatively concludes that, due to the importance of promoting broadband deployment and technological neutrality, “all categories of providers should pay the same pole attachment rate for all attachments used for broadband Internet access service….” In a marketplace environment characterized by technological convergence and competition among providers, this conclusion makes sense.

But, of course, the attachment rate matters too. After explicitly referencing “the critical need to create even-handed treatment and incentives for broadband deployment,” the Commission tentatively concludes the uniform rate should be higher than the current cable rate, yet no higher than the current telecommunications rate.

Perhaps in some way this is supposed to be an appealing split-the-baby Solomonic compromise. But compromise for what purpose? To me, it appears problematic in the sense of running counter to the national policy, to which the Commission pays lip service in the notice, to provide incentives for broadband deployment. I definitely am not suggesting that the cable and telecom providers should not be charged a reasonable rate for attaching their facilities to the utilities’ poles. But the rate that is charged cable operators already has been found to be fully compensatory by the FCC and the courts. (Recall the litigation to which I referred above.) Standing alone, the fact that broadband Internet services are now being provided over the cable attachments does not impact the costs incurred by utilities in allowing pole access.

Unless there is a very convincing economic case to be made otherwise, which is not apparent to me, the FCC should adopt the lower compensatory cable rate as the uniform rate to be paid by all broadband providers, regardless of regulatory classification. Competitive neutrality will be promoted. But more importantly, adoption of the lower pole attachment rate will promote continued expansion of broadband deployment in furtherance of national policy. This is especially so in more rural areas in which broadband penetration may lag behind. I think even Solomon would agree there is no reason to split the baby in this instance.

In my view, the single-most important thing the FCC can do right now to promote broadband deployment is to firmly reject any further attempts to impose investment-stifling net neutrality-like mandates on broadband providers. But, at the same time, it should not neglect other actions that may affect broadband deployment -- such as not increasing the cost to broadband providers of pole attachments.

Tech Tax Repeal

In my Random Acts of Taxation commentary published in the Baltimore Examiner on January 21, 2008, I explained why the enactment of the computer services tax was a mistake that will have a detrimental impact on Maryland and why it should be repealed. Several bills have now been introduced in both Houses of the Maryland General Assembly to repeal the tax adopted in the Assembly’s 2007 Special Session.

HB 187, 196, 253 and 326 and SB 41, 46, 138 and 567 would all repeal the tax. (Bill information is available at the General Assembly's website.) All of the House bills are scheduled for a hearing on March 12. None of the Senate bills have been scheduled for a hearing. Despite the fact that HB 196 has 72 sponsors and SB 138 has 17 sponsors, the repeal of the tax faces an uphill battle because of resistance from the President of the Senate.

All of the bills that would repeal the tax are identical except for the sponsors and all carry the same fiscal note reflecting a loss of revenue of $214 million. While the fiscal note reflects direct losses in State revenues from the repeal of the tax, it does not reflect the positive economic impact of attracting and retaining high tech businesses or businesses whose operations rely heavily on technology. The fiscal note does acknowledge that the repeal of the tax would have a “potentially meaningful” impact on small business.

In addition to the bills proposing outright repeal, several bills propose modifications to the application of the tax. Many of the proposed modifications reinforce the view that the computer services tax is ill-conceived, both in theory and in application.

For example, HB 1169 would exempt computer services that are used to provide Internet based publishing services if the publishing services are delivered exclusively or primarily outside the State. Several questions arise: what constitutes Internet publishing services and who is to determine whether they are delivered primarily outside the State? Are newspaper publications that have web sites considered Internet publishing services? Would the Comptroller’s Office need to count the readers within and outside the State to determine whether the publishing services are primarily delivered within the State?

HB 1183 would exempt services that enable users to access content or information over the Internet, such as access to the human genome database. If HB 1183 does not pass, would taxes be imposed on each visit to any web site that provides content or information? If so, what collection mechanism would be employed for all the free web sites now available?

HB 1169 and 1183 are just two examples of the problems created from the hasty adoption of the computer services tax. The administrative burden for the State to collect and the taxpayers to pay will almost surely exceed the revenues to be generated.

HB 281 would exempt computer services used in fulfilling federal contracts and SB 257 would exempt services for fulfilling both State and federal contracts. Since neither the federal government nor the State are generally subject to State taxes, this raises a question about whether the fiscal note estimate of revenue loss includes loss of taxes on services provided to the federal and State governments.

The computer services tax was a bad idea, hastily adopted. It should just as hastily be repealed.

While Maryland legislators fiddle, state officials from Delaware, Pennsylvania and North Carolina are luring Maryland based information technology businesses. It is time to stop fiddling and repeal the tax.

You Don't Need a Harvard Education

When I was a kid, my mother was wont to say, “you don’t need a Harvard education,” to understand thus and so. She didn’t necessarily mean it as an insult to other educational institutions, but she did mean to say that some things ought not to require a college degree to appreciate.

The FCC commissioners are at Harvard Law School today for a hearing on “broadband network management practices.” The hearing takes place as the agency is receiving comments in response to two petitions. One asks the Commission to declare that Comcast’s and other broadband providers’ handling of peer-to-peer traffic violates the FCC’s Internet Policy Statement. The other asks it to initiate a rulemaking to define in advance what constitute “reasonable network management” for broadband network operators.

The Free Press and its net neutrality advocate allies will use the hearing to try to turn up the heat on the FCC to force net neutrality mandates – that is, old-fashioned public utility regulation — on the broadband providers. Even a cursory review of the Free Press comments filed in the Commission’s broadband industry practices proceeding makes clear that they want an absolute, no-exceptions policy prohibiting any so-called “discriminatory” treatment of Internet bytes, regardless of whether such treatment is necessary and proper in the interest of reasonable network management, much less in the interest of overall efficiency and cost-effectiveness.

You don’t need a Harvard education to see that the net neutrality advocates are trying to draw the FCC into adopting broad net neutrality regulation through the back door, even as they continue their frontal assault. In the Free State Foundation comments filed with the FCC on February 12, I said it is imperative for the Commission “to articulate and demonstrate its understanding that network managers must be given wide berth to manage their networks in the general interest of all their consumers, not smaller segments with narrower interests.” I explained it would be foolhardy, in today’s dynamic and fast-changing technological and marketplace environment, for the FCC to attempt to define in advance what constitutes “reasonable network management.” And I said the Commission’s explicit policy should be, “absent clear and convincing evidence demonstrating substantial consumer harm, it will not act in a way that interferes with broadband providers’ management of their networks.”

You don’t need a Harvard education to know the FCC is ill-suited to play the role of uber-network manager. With all the challenges presented by the explosive growth of Internet usage, especially the explosion in peer-to-peer traffic, and by the persistence of ever-changing forms of malicious traffic, even highly paid, highly-qualified full-time network engineers have a tough time managing broadband networks in a way that provides a satisfactory Internet experience to all their subscribers.

Finally, as my mother would have reminded, you don’t need a Harvard education to know that if you get on a slippery slope, you are likely to find yourself sliding down to a bad place. The FCC should be very careful to avoid being lured onto the slippery slope of a full-blown net neutrality regime under the guise of dictating what constitutes reasonable network management.

Universal Service Reform in '08

Now that the FCC has issued its three notices of proposed rulemakings regarding potential reform of the bloated and insufficiently-targeted Universal Service funds, it is appropriate to point out once again that the agency should make USF reform a top priority this year. The truth is that, now that we have a competitive marketplace with multiple choices of communications services using different technological platforms, the universal service regime needs a pretty radical overhaul. This would mean changing the program so that USF funds are directed mostly to support to consumers who demonstrate they need financial support, rather than, as now, mostly to communications providers who may use the support in ways that do not necessarily benefit underserved consumers, or serve them in the most cost-effective, efficient ways.

Be that as it may, radical USF change is not likely a near-term prospect. This makes it even more important for the FCC to seize the opportunity this year to make some meaningful, even if modest, progress towards reforming the regime. FCC Commissioner Deborah Taylor Tate and Oregon Public Utility Commissioner Ray Baum deserve credit for their patient leadership of the Federal-State Universal Service Joint Board. The panel made some worthwhile recommendations to the Commission.

In line with the Joint Board recommendations, the FCC should cap the size of the high-cost universal service fund at $4.5 billion; stop wireless carriers from receiving subsidies based on the “identical support” received by the incumbent wireline carriers, even though the wireless companies generally have lower costs; and adopt some form of “reverse auctions” as a method of determining which communications providers can serve designated high-cost areas on the least costly basis.

A few of the Joint Board’s statements in its November 2007 Recommended Decision are especially noteworthy. Regarding the overall size of the high-cost subsidies, now at approximately $4.5 billion per year and growing, the Board said this:

"Many areas of government enterprise operate within a budget, and we think that high-cost funding can do likewise, provided that we are willing to make realistic estimates of the funding needed to meet the statutory requirement that we preserve and advance universal service. Over the longer term, we anticipate that total funding can and should be decreased as broadband and wireless infrastructure deployment becomes widespread throughout the country."

Without delay, the Commission should adopt the proposed cap on the size of the high-cost fund. This would stem the growth of the USF tax paid by all consumers, which currently stands over 10%, in contrast to 6.8% in the first quarter of 2002.

The Commission should move with more than its usual dispatch to adopt the Joint Board’s recommendation to eliminate the identical support rule which provides support to wireless carriers without regard to costs. Regarding the wastefulness inherent in this element of the current regime, the Board stated:

"The Joint Board recognizes that the identical support rule has resulted in the subsidization of multiple voice networks in numerous areas and greatly increased the size of the high-cost fund. High cost support has been rapidly increasing in recent years due to increased support provided to competitive ETCs. These carriers receive high-cost support based on the per-line support that the incumbent LECs receive rather than the competitive ETCs’ own costs. Support for competitive ETCs has risen to almost $1 billion. We believe it is no longer in the public interest to use federal universal service support to subsidize competition and build duplicate networks in high-cost areas…The rule bears little or no relationship to the amount of money competitive ETCs have invested in rural and other high-cost areas of the country."

From 2001 through 2007 the financial support to the competitive wireless carriers increased from $17 million to $1 billion, and much of this subsidy has not gone for build-outs to unserved areas.

And, finally, the Commission should adopt some form of reverse auctions, even if initially on some less-than-universal experimental basis. Reverse auctions would provide a means of determining which provider (or providers) should be awarded subsidies to serve designated high-cost areas. The auction mechanism would encourage the provision of service on the most cost-effective, efficient basis, and spur the development of more innovative new network technologies.

Realistically, designing and implementing an appropriate auction mechanism may well take most of the year. But there is no reason why the FCC cannot adopt a high-cost fund cap right away. FCC Chairman Kevin Martin has endorsed the idea, and, with Commissioner Tate, has shown leadership on USF issues. And, it ought not to take that many months, after all the discussion over the past couple of years and the work already done on the issue by the Joint Board, for the agency to adopt the change in the identical support rule.

More comprehensive and fundamental reform of our nation’s communications laws and policies consistent with the new marketplace realities arguably may require several more years of congressional gestation and new presidential leadership. But, in the meantime, the FCC should set its sights on achieving meaningful progress this year in the cause of universal service reform.

Change

Change. It has become this year’s political mantra. Maybe it will, or maybe, it won’t trump Experience.

With change dominating the presidential campaigns, I’ve been thinking about change too. Based on my experience —oops, I am burdened with some of that, almost 35 years worth, to pick a popular figure— communications law and policy is an area ripe for change. Of course, like Rudy Giuliani is fond saying in the debates, there is good change and bad change.

I am under no illusions that the presidential candidates are going to start talking anytime soon, or ever, about the nitty-gritty of communications policy. But perhaps as the campaign progresses, we will hear more about their views concerning general regulatory philosophy, and issues such as broadband policy. How these issues are handled is important to the future of the nation’s economy.

In the meantime, with change in the air, or at least on the airwaves, the FCC itself should think of 2008 as a “change year” and itself as a “change agent”. It can and should implement some fundamental reforms. Certainly the communications marketplace is changing at a dizzying pace, and the FCC must keep pace to the extent it can consistent with the current Communications Act if its policies are not to become a deterrent to innovation and investment, and a drag on the nation’s economy. What is really needed to accomplish the task of fundamental reform commensurate with the dynamics of the increasingly competitive marketplace is a much different, transformational communications law like the Digital Age Communications Act (DACA) introduced in December 2005 by Senator Jim DeMint.

Fundamental reform such as DACA, which would substitute the current techno-functional-centric stovepipe regulatory regime with one that ties regulatory activity to the realities of marketplace competition, may have to wait further gestation. You can read more about this fundamental reform in my Federal Communications Law Journal article, Why Stovepipe Regulation No Longer Works: An Essay on the Need for a New Market-Oriented Communications Policy. In the meantime, the FCC itself can take important actions. Here are a few, and I’ll be saying much more about these and others as we go along this year:

· The agency should move forward with universal service reform. This bloated subsidy system needs fixing to reduce what is, in effect, a 10% tax all telecom users now pay to provide untargeted subsidies. These untargeted subsidies are wasteful, and they distort competition and impede innovation. The Commission should permanently cap the existing high-cost fund, stop basing subsidies to wireless carriers on the “identical support” received by incumbent wireline carriers even if their costs are less, and adopt “reverse auctions” as a means of determining which provider can serve designated areas on the least costly basis. (You can read more here.)

· The agency should return in a serious way to a consistent deregulatory broadband policy. In 2002, the Commission announced that broadband services should exist in a “minimal regulatory environment that protects investment and innovation in a competitive market.” This policy rested on findings that, even then, the broadband marketplace was developing in a competitive fashion, with cross-platform competition the key feature. It is even more so today, with cable, telephone, wireless, and satellite companies competing to provide voice, data, and video services in various packages and configurations. The power companies are sitting on the near sidelines as potential competitors as well. Although the FCC won a hard-fought landmark Supreme Court victory in 2005 in the Brand X case upholding its authority to implement its deregulatory broadband policy, the agency, in the past year or so, nevertheless mistakenly and too frequently has strayed from the policy of minimal broadband regulation. The imposition of a net neutrality “open access” mandate for 700 MHz spectrum is one example. Chairman Martin’s initiatives in favor of increased cable regulation, such as various anti-bundling regulations, are another. After all, today’s “cable” firms are broadband providers. The Commission as a body needs to get back on course with a consistent deregulatory broadband policy, rejecting calls for unbundling and net neutrality regulations. Integral to this effort, the Chairman and Commissioners must begin consistently thinking of the former telephone, cable, satellite, and wireless companies as broadband companies in competition with one another. It is true, of course, that such competition is more or less vigorous, depending on the discrete application or service. But it is important to understand that the marketplace has changed in this fundamental way.

· In line with the above point, as an institutional matter, the FCC should implement an organizational reform that creates a Broadband Services bureau that combines the current Media, Wireline, and Wireless bureaus. Many functions performed by the individual bureaus, such as information-gathering, policy analysis, and regulatory review, ought to be able to be performed more efficiently in a single Broadband bureau with a unified, slimmed-down staff. I understand that some legacy regulatory activities from the various “industry” bureaus are stand-alone, and that, at least for now, eliminating the individual bureaus won’t eliminate these activities. But having a Broadband bureau under unified staff leadership should help focus the agency on the marketplace reality that most wireline, wireless, and cable services are broadband, and the companies in the formerly distinct segments now compete against each other. Hopefully, having such a unified bureau, would lead to a more consistent deregulatory broadband policy.

· The agency should promptly approve the XM-Sirius merger. In an industry a dynamic as communications, absent exigent circumstances which don’t appear to exist here, it should not take a year for the FCC (or the Justice Department, for that matter) to determine whether a proposed merger should be approved. There is much that can be done to improve the FCC’s merger approval process, some of which would require statutory changes. For a more on this, see my articles, “Reform the Process” and “Any Volunteers?” Because I consider satellite radio part of a broader audio information and entertainment market that includes terrestrial broadcast stations, wireless audio services, iPods, MP3 players and similar devices, and the Internet, FCC approval of the merger would indicate an appreciation of the dynamic and competitive nature of the communications marketplace. Most importantly for present reform purposes, the agency should exercise self-restraint and eschew imposing last minute “voluntary” conditions unless they are truly necessary to prevent demonstrable competitive harm that the Commission explains on a reasoned basis. The Commission ought to flat-out stop using the merger review process as a forum for imposing company-specific regulation that is better considered, if at all, in industry-wide generic proceedings. The agency doesn’t need an act of Congress to accomplish this change.

There’s that word again—change. I know there are other ideas as well for fundamental reform in communications policy and the way the FCC operates. Again, I will be discussing more of these in the future. And your feedback is always welcome.

So, in the style of the campaign debate moderator, my question to the FCC: Why not seize the change mantle and get started now with reforms such as those suggested above?

The Threat to the Net from Net Neutering

I’m still catching up a bit on some reading missed during the holiday period, and this piece, “Technology in 2008,” from the Economist.com caught my eye. The subtitle is “Three Fearless Predictions.”

The first fearless prediction --that surfing the net will slow-- makes me fearful. Read the whole piece, but the first paragraph gives you the gist: “Peering into Tech.view’s crystal ball, the one thing we can predict with at least some certainty is that 2008 will be the year we stop taking access to the internet for granted. The internet is not about to grind to a halt, but as more and more users clamber aboard to download music, video clips and games while communicating incessantly by e-mail, chat and instant messaging, the information superhighway sometimes crawls with bumper-to-bumper traffic.”

Stop taking access to the Internet for granted. The information superhighway sometimes crawls with bumper-to-bumper traffic.

To some extent this prediction about a slowing Internet rests on the projected exponential increase in user-generated content, one that is already occurring in what the article calls “tsunami” proportions. According to the Economist, “everyone, it seems, is suddenly a budding Martin Scorsese, bent on sharing his or her home-made videos with fellow You-tubers.” The increase in simultaneous uploading and downloading, coupled with the explosive growth in wireless Internet traffic, Internet television and the like, will have “users screaming for yet more capacity.”

It may be that in the near-term (2008?) the Economist prediction is only half-right. Or maybe only a third or fourth-right. No matter. There is no doubt, is there, that our nation’s various Internet service providers – cable, telephone, wireless, satellite -- will need to continually upgrade and expand their networks to provide more capacity, including capacity to end users?

Unfortunately, as we begin 2008, there are still many, including many policymakers who should know better, who are screaming, not for more capacity, but just for “net neutrality” regulation. There is no surer way to ensure that we will face a capacity crunch than to impose net neutrality regulation on Internet service providers. As I have explained many, many times in this space, regardless of the language used to describe it, net neutrality regulation is no less traditional public utility regulation than the common carrier regime which characterized regulation of AT&T back in the last century at a time when the carrier exercised dominant market power.

It is impossible to prohibit and enforce the non-discrimination mandates that are at the very core of all net neutrality regulation without also ultimately regulating prices. Put another way, net neutrality regulation prevents Internet service providers from finding, or even experimenting with, innovative ways to respond to consumer demand for new services by using price differentiation methods that characterize most markets.

Imposing net neutrality regulation in today’s competitive, dynamic environment will stifle investment in new network facilities by Internet service providers, both existing ones and others who might consider entering the market with an investment in new facilities. This is the inevitable effect of public utility-type regulation that puts in place regulatory straight-jackets and price controls that cap the providers' ability to earn a market-based return on invested capital. It is why I have called net neutrality regulation "net neutering".

So, net neutrality regulation hardly seems to be the right prescription for dealing in a rational way with potentially severe looming Internet bandwidth constraints. Indeed, it would be just the wrong medicine at the wrong time.

Favoring Property Rights In Spectrum

Sprint Nextel and T-Mobile have just submitted a filing at the FCC in support of a proposal to license new fixed services in the “white spaces” of the TV bands. They state that the TV bands, because of their favorable propagation techniques, are well-suited for the delivery of lower-cost and reliable backhaul services needed to operate their wireless services.

What caught my eye is the support for establishing a regime of licensed, rather than unlicensed, use for the so-called “white spaces.” While proposals for unlicensed spectrum use seem to be in high fashion these days, just like all sorts of proposals for “open access” and “unbundling” of communications networks, licensing has the advantage of establishing a property rights-like regime in which the rights and obligations of the license holder can be defined. When the license is bid at auction, this regime allows the spectrum to go to those who value its use most highly in accordance with the rights defined by the license.

Although often the assertion is otherwise, as a practical matter, in an unlicensed regime, there still must be “rules” (sometimes more gently called “protocols” or “standards”) to police against interference to licensed uses. Otherwise, there is little or no incentive for the spectrum to be used in the most efficient, most innovative, and highest value manner. Rather, in an unlicensed regime, without a set of defined property rights in the spectrum, the incentives necessarily run in the direction of “use as much of the spectrum as you can whenever you can” because it is “free” or a “commons.” In other words, the tendency runs in the direction of inefficiency.

This notion of spectrum as a free resource is not unrelated to the dangerously fashionable notion in some quarters that communications networks, having been constructed and operated with billions of dollars of private risk capital, ought now to be shared under mandatory “open access” or "net neutral" regimes that will necessarily require government management and rate-setting.

I haven’t studied all of the questions that might be relevant to establishing any technical rules that might needed for use of the TV bands. As a general rule more flexibility in use when defining the parameters of the licensing rights is preferable to less flexibility. And to the extent that Sprint Nextel and T-Mobile justify their support for a licensed regime for the TV white spaces as a means to provide backhaul for their wireless services in order to avoid what they call unreasonable special access costs, I am not here endorsing their characterization of the current level of special access prices. One thing of which I am sure, though, is that, whatever one believes about the existing state of competition, it is far better for the FCC to try to facilitate even more alternatives, in ways consistent with respect for property rights and property rights-like regimes, than it is for the agency to consider re-regulating the incumbents’ special access services.

In the first few days of this new year, I may already have missed some not-so-encouraging communications policy developments. That's okay. I am afraid there will be plenty to discuss in the days and weeks ahead. But, as 2008 begins, I am happy to take note of an FCC filing that essentially embodies a property rights-protective approach over one that is the antithesis.

The NFL's Chutzpah

The NFL's campaign to enlist Hill folks to pressure Comcast and Time Warner to carry the NFL network on terms other than those reached by voluntary negotiations in the marketplace is an exhibition of sheer chutzpah. (The classic definition of the Yiddish chutzpah is that given by Leo Rosten: "That quality enshrined in a man who, having killed his mother and father, throws himself on the mercy of the court because he is an orphan.") Broadcasting & Cable reports that yesterday another group of legislators urged FCC Chairman Kevin Martin to impose some type of arbitration mechanism on cable program carriage disputes. This follows NFL Commissioner Roger Goodell's proposals to the same effect for mandating "baseball-syle" arbitration to settle the carriage issues.

I wrote here last week in "Peace, Prosperity, and the NFL Network" that I did not understand why politicians "would take time to intervene in a dispute the marketplace is perfectly capable of resolving in a way that maximizes consumer welfare -- at least until the weighty national issues of peace abroad and prosperity at home have all been resolved to everyone’s satisfaction." A week later, I still don't understand why some politicians think they need to inject themselves into a dispute that ought to be settled in the marketplace by private negotiations. Surely there must be more important work for the legislators to do in areas where the government has a legitmate role to play. Surely the FCC has more important work to do.

Back to chutzpah: According to Communications Daily [subscription required], in his latest letter to Time Warner Cable CEO Glenn Britt, the NFL's Goodell states: "The objective is to have a neutral third party determine the price and tier for NFL Network distribution...We view it as a way to make sure that your customers can view our programming on fair terms."

If the NFL thinks it is so important, so much a matter of the national interest, that all Americans be able to watch its games it can opt to have them carried on a broadcast network. Presto! Problem solved.

With an antitrust exemption already in hand, short of a willingness to have itself declared a traditional "essential facility," perhaps on the theory the NFL is "essential to maintain the American way of life," the NFL should quickly back off its full court press to engage politicians in the business of deciding carriage terms. If the NFL keeps it up, at some point the league may convince the politicians that the NFL should be regulated as a public utility "in the public interest."

As I said last week, with competition now the rule among video providers, private negotiations in a marketplace setting are perfectly capable of resolving disputes between the owners of programming, including "high value" programming, and the owners of the facilities used to distribute such programming. Back to chutzpah. For Goodell to say to Time Warner that he views arbitration as a way "to make sure that your customers can view our programming on fair terms," well, that takes chutzpah. Why does Goodell think he knows more about what will best serve Time Warner's customers than does Time Warner? In today's competitive video marketplace, you can be sure that Time Warner, and Comcast too, are attentive to the desires of their customers.

In this instance, one of the customer desires that the cable operators are probably attending to is not overpaying for NFL programming that they perceive may be desired by a certain segment of their customers, but not by all. The politicians ought to let them tend to this business themselves and reject the NFL's pleas for government intervention.

Maryland's Looming Employee Benefits Deficit

In a commentary in the Baltimore Sun on August 30 of this year, I warned that, despite Maryland’s looming budget deficit of $1.5 billion, “almost no attention has been paid to unfunded health benefit liabilities for government employees that will cost the state billions of dollars into the future.”

Now comes the Washington Post story on December 19 reporting on a new study conducted by the Pew Charitable Trust Center for the States which calculates the unfunded liabilities owed by the states for retirement and health care benefits for state employees.

Note this at the outset of the story:

“Maryland, which has about 90,000 state employees, is facing a particularly high liability for its health insurance promise, $14.5 billion, compared with the $2.3 billion that Virginia owes its 100,000 employees, according to the report released yesterday. The difference is that Maryland is more generous to its retirees than Virginia is, researchers said.”

With roughly the same number of employees, the difference in the size of the liability for benefits between Maryland and Virginia is huge, and not in the direction that inspires confidence in Maryland’s fiscal discipline. The General Assembly just completed a special session to deal with the state’s budget deficit without taking any meaningful steps to address the huge projected budget liability attributable to benefits promised to public sector employees.

A state official is quoted in the Post story to the effect that the Pew study failed to account for $100 million the state put away this year to cover public employee benefit expense. This is $100 million is a small fraction of the estimated $14 billion in liability.

The official is also quoted to the effect: “We’re trying to figure out what we should do,” noting that retiree benefit cuts are likely to be seen as part of a solution.

The governor and General Assembly do need to begin to take seriously the task of figuring out what they should do about this huge unfunded liability. The figuring will require a commitment to fiscal discipline, especially on the spending side of the equation, which, more often than not, has been lacking in Annapolis.

Peace, Prosperity, and the NFL Network

In one sense it (almost, but not really) reassures me to know Sen. John Kerry is seeking to intervene in the dispute between the NFL Network, on the one hand, and Comcast and Time Warner, on the other, regarding the carriage of the NFL Network’s games on the cable operators’ systems. The NFL Network already is carried on the cable operators’ sports package tier for which subscribers pay an extra fee, but the league wants to have its package of a few selected football games carried on the lower-priced basic expanded tier.

According to a Broadcasting & Cable report, Sen. Kerry has called for a meeting between high-level Comcast, Time Warner, and NFL Network executives at which he proposes to mediate the carriage dispute. The sense in which Sen. Kerry’s efforts (almost, but not really) reassure me is that I could be lulled into supposing all the issues surrounding the Iraq war, climate change, health care, the subprime lending mess, and even the overall economy have been resolved. After all, these are the weighty issues that usually preoccupy Sen. Kerry. If he has time to worry about whether NFL Football games are carried on one cable tier or another, then perhaps the country is in much better shape than he usually portrays it to be.

The sense in which I am not reassured is wondering why Sen. Kerry thinks the government, in this instance in the person of a senior member of the Senate Commerce Committee, should intervene in this dispute between the football league and the cable operators. Doesn’t Sen. Kerry understand that, ultimately, someone has to pay for the NFL’s high-priced programming (unless the government decides to subsidize it, or, perhaps as a matter of the national interest, simply nationalize the National Football League)? Doesn’t Sen. Kerry understand that the NFL already enjoys a significant government benefit in the form of an exemption from the normal operation of the antitrust laws?

In this case, Comcast has made a business judgment that those football fans who desire to watch the extra NFL games should pay more so that the larger body of cable subscribers who don’t value watching these particular selected games as much won’t be burdened with paying the higher costs. This may or may not be a sound business judgment, or one that stays the same for all time. But Comcast’s decision surely is a business judgment about the use of its property that ought to be left to the marketplace. It is a decision that the private sector parties should be left free to negotiate without Sen. Kerry (or any other government official) intervening. Such government intervention, even if initially under the rubric of simple mediation, almost inevitably leads to coercion of one side or the other.

I understand that Sen. Kerry's interest here is that he may believe it is of paramount national interest that all Americans be able to watch -- as cheaply as possible -- the New England Patriots make their stretch run to a potentially undefeated season. If the NFL wishes, on its own accord it could resolve Sen. Kerry's Patriots' problem by moving the Patriots' game to broadcast TV and replacing it on the NFL Network with another game. But instead of doing this, what the NFL wants to do, if it can, is to enlist the government in putting pressure on Comcast and Time Warner so that the league can enrich itself as much as possible at the cable operators’ expense. In the league’s eyes, why be satisfied with an antitrust exemption?

What I don’t understand is why Sen. Kerry, or any other government official, would take time to intervene in a dispute the marketplace is perfectly capable of resolving in a way that maximizes consumer welfare -- at least until the weighty national issues of peace abroad and prosperity at home have all been resolved to everyone’s satisfaction.

Burying Communications Law Relics

Rep. Marsha Blackburn introduced a bill yesterday that would bury a relic of communications law that may have made sense when adopted but no longer does. The Consumer Freedom of Choice in Cable Act would repeal the FCC's authority to impose new regulations on cable operators under the so-called 70-70 provision of Section 612(g) of the Communications Act. Under this provision, the FCC is given discretion to impose additional regulations if it finds cable is subscribed to by 70% of the households to which it is available. Reps. Edolphus Towns and Joe Barton are co-sponsors.

A good case can be made for comprehensive reform of our communications laws in a way that replaces the current market-distorting techno-functional regulatory regime with one based on post hoc determinations grounded in competitive marketplace realities. But, in the meantime, there is something to be said for reform one step at a time, especially with repsect to a measure that has been as contentious as the 70-70 rule.

The way the brouhaha evolved in the last two weeks over whether the FCC should, or could, find that the 70-70 test was met did not do the agency much credit. And the truth is that it never should have happened. Despite the different and ambiguous ways in which the data may be constructed and interpreted, everyone knows that cable operators face vigorous competition in the video segment of the larger broadband market from two satellite providers, and, increasingly, from the telephone companies. Cable's share of the video segment has been declining, not increasing. Rep. Blackburn's bill, if enacted, would ensure that this or a future FCC doesn't use the 70-70 rule as a basis to impose new regulations on the cable industry at a time when the agency should be adhering to the agency policy pronouncement adopted five years ago: Broadband operators, regardless of the technology platform employed, should be subject to a "minimal regulatory environment."

The statutory provision that Rep. Blackburn's bill would repeal authorizes the FCC to impose additional regulations, even assuming that the 70-70 finding were made, only if "necessary to provide diversity of information sources." In 1984, when the statute was enacted, policymakers may have had a legitmate concern about the availability of a diversity of information sources. In today's environment of media abundance, it is fanciful to suggest there is a lack of information diversity.

Rep. Blackburn has a good understanding of the difference between the media and communications environment now and then. She delivered an excellent Keynote Address at the recent Free State Foundation/Institute for Poilicy Innovation communications policy conference, and I commend the full text to you. But note this line which presages her action on the 70-70 rule: “It should be the free market that decides what works and what does not work, not government intrusion. And, as the process unfolds, it is going to be critical for the United States Congress and for the Commission to hold the line on light touch regulation. And to resist the urge to unbundle what is already working in the free market system.”

Repealing the provision giving the FCC authority to impose additional regulation on cable providers makes sense in today's competitive broadband environment. And taking the free market-oriented philosophy embodied in Rep. Blackburn's keynote address and making it central to an ongoing effort to envision a new competition-centered communications law that puts marketplace realities at its core also makes sense.