Faulty Forbearance Rulings & Remedies

My prior blog post, "Giving Forbearance the Red Tape Treatment," contained some reflections on the Federal Communications Commission’s recently-adopted procedures governing the forbearance petitioning process. The FCC’s new procedures impose certain obligations on forbearance petitioners, such as requiring that petitions be filled out completely, that they explain what rules they are seeking relief from, and that they provide evidence that the requisite elements are satisfied. Certain consequences follow for petitioners who fail to satisfy the FCC’s new procedural rules. But what happens when the FCC fails to meet its own obligations in ruling on forbearance petition—say, by departing from its precedent without supplying a reasoned analysis for doing so? Section 10 of the Telecom Act of 1996 (47 U.S.C. § 160) requires that the FCC rule on forbearance petitions within one year’s time (plus 90 days, if the agency grants itself an extension). When the FCC errs in making forbearance rulings, should the consequences include a deadline to match Section 10's mandate?

A couple weeks ago, the U.S. Court of Appeals held that the FCC acted arbitrarily and capriciously in denying a Verizon forbearance petition from certain unbundling obligations under Section 251. FSF President Randolph May sums up the Verizon v. FCC case in his recent FSF Perspectives piece "Assessing the FCC’s Competition-Assessing Competence":

…the D.C. Circuit remanded a case to the FCC for the agency’s failure to explain why, in evaluating a Verizon forbearance request, it refused to consider the marketplace impact of potential competition. In a couple of forbearance cases, the FCC has acknowledged that potential competition should be considered in assessing whether continued regulation was necessary. In the Verizon case, the FCC has focused single-mindedly on present market share, ignoring the fact that potential entrants constrain whatever market power the existing providers may possess.

As a consequence of the FCC’s failure to explain its departure from its past precedent in rejecting the forbearance petition, the D.C. Circuit panel sent the case back to the FCC to either consider whether competition can be established by evidence other than existing ILEC market share or justify its disregard of precedent. The FCC was also ordered to consider on remand whether and how the existence of potential competition would affect its Section 10 forbearance analysis. But the D.C. Circuit panel refused to impose a requested deadline for timely agency response. In particular, the Court expressly declined to require the FCC to issue any new decision within 30 days or consider the forbearance petition granted.

Ruling for the D.C. Circuit panel, Chief Judge David Sentelle wrote that "the appropriate remedy in a case such as this is to remand for a reasoned explanation," and that "[t]here is now statutory requirement that Sec. 10(c)’s mandate of deeming a petition granted applies to the FCC’s receipt of a petition on remand from this Court." Chief Judge Sentelle also pointed to a 2004 Verizon v. FCC case in which another D.C. Circuit panel similarly held the FCC erred in rejecting a forbearance petition and declined to impose on the FCC a 30-day deadline for a response.

Both Chief Judge Sentelle’s reading of the statute and his description of the result in the 2004 case are entirely correct. Yet, there’s still plenty of good reason to think that a future D.C. Circuit panel can and should properly attach a time deadline and "deemed granted" remedy to a remand order when the FCC improperly rejects a forbearance petition.

For starters, just as the statute doesn’t require that forbearance petitions rejected arbitrarily and capriciously must be remanded with a mandatory deadline for agency response, neither does the statute forbid the D.C. Circuit from adopting such a remedy when reviewing a forbearance petition ruling. In fact, remand with an accompanying deadline is perfectly appropriate in light of Section 10’s shot clock and deemed granted clause.

To recap, under Section 10(c), if the FCC fails to respond to a forbearance petition within one year (or fifteen months pursuant to an extension), the petition "shall be deemed granted." In AT&T v. FCC (DC.Cir.2006), Judge David Tatel described Section 10 as "[c]ritical to Congress’s deregulation strategy." The shot clock and deemed granted clause ensures prompt FCC action on forbearance petitions. A deadline attached to a remand order on a forbearance petition ruling is entirely consistent with the Congressional policy of prompt agency action that underlies Section 10.

Moreover, given the deadline Congress has imposed on the FCC to act on forbearance petitions, it hardly makes sense to give the FCC an unlimited timeframe for it to act when it arbitrarily and capriciously acts on a forbearance petition. That’s like telling an agency to make its ruling promptly--unless it chooses to make a mess out of its ruling, in which case it can take all the time it needs. Instead, it is sensible for a remand order relating to an erroneously forbearance petition give the FCC a deadline of 30, 60, or 90 days to respond. A court could set the deadline based on factors such as (1) amount of time FCC had left on the shot clock when it made its erroneous ruling; (2) whether or not FCC invoked the 90 day extension, (3) whether the FCC is being asked to rule on the record established at the time of its erroneous ruling or on a record that is still open or contains new information; and (4) the amount of time the FCC has taken to respond to prior remands in forbearance petition matters. (In the Verizon case decided by the D.C. Circuit last month, Verizon unsuccessfully requested the Court to order the FCC to clarify its prior ruling within 30 days. By contrast, in the 2004 Verizon case, it took the FCC about 90 days to make its ruling on remand.)

In addition, the D.C. Circuit panel in the 2004 Verizon v. FCC case referenced earlier expressed receptivity to requiring the FCC explain its ruling on a forbearance petition within 30 days in light of Section 10’s deadline for agency action. In that case, Judge David Ginsburg (who was Chief Judge at the time the case was decided) intimated that the panel would have imposed a deadline on the FCC except that Verizon had asked for an expedited ruling based on a record that was supplemented by new information subsequent to the date that the FCC rejected the forbearance petition. Wrote then-Chief Judge Ginsburg:

Lest the intention of the Congress in Section10 to expedite forbearance decisions be set to naught, we would have required the Commission to issue a new order within 30 days had Verizon itself not made clear that it wants a decision based upon the record compiled through the present. It would be inappropriate, however, for the court to require so expedited a decision based upon a record that, as far as we can tell, is not yet closed and may, in any event, require the Commission to consider such material that was not before it as of last October 27 [the date the FCC denied the forbearance petition].

Thus the D.C. Circuit ruling in the 2004 Verizon v. FCC case presents a more nuanced and hospitable approach to court-imposed agency response deadlines in forbearance remand orders than one might read into Chief Judge Sentelle’s brief reference to that case.

In sum, should the FCC erroneously rule on a forbearance petition in the future, a panel of the D.C. Circuit should continue to take seriously its discretion to fashion a deadline for FCC response. With forbearance petitions, Congress has given the FCC a job to do and a timeframe for doing it. It follows that when the FCC fails to do its duty it shouldn’t be rewarded by an indefinite timeframe for response, but that a court-imposed deadline most effectively furthers Congress’s deregulatory purpose.

Independence Day - 2009

The Declaration we celebrate proclaims it a self-evident truth that we are endowed with certain "unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness." We may be endowed with these rights, and they may be unalienable, but to secure them, as John Kennedy put it in his Inaugural Address in a slightly different context, "here on Earth God's work must truly be our own."

The Founders not only inspired us with their words, but through their labors in Philadelphia in the summer of 1787 they bequeathed a government designed to give us the best chance to enjoy the liberty of which the Declaration spoke. The principal means to the end, of course, was a constitutional framework based on enumerated and separated powers. When Franklin was asked what the Framers had wrought, he responded "a Republic, if you can keep it."

So far, we have. But America is a continual work in progress. Vigilance is required to preserve the liberty to which the 1776 patriots pledged their lives and sacred honor.

At the Free State Foundation our mission statement proclaims our commitment to free market, limited government, and rule of law principles. In my view, these principles are predicates to securing the rights the Declaration proclaims. Certainly, the principles are put to the test today as politicians seek to expand government power in the name of addressing economic problems at home and national security threats abroad. Many politicians and governments officials with natural proclivities for aggrandizing government power see opportunities to achieve their grand designs in these challenging times. President Obama's Chief of Staff put it bluntly: "You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before."

So Bill Clinton misspoke when he proclaimed "the era of big government is over." In reality, there is always an ongoing political struggle over the proper size and shape of government and extent of government control. While there is no mathematical formula to be applied, the realm of individual liberty necessarily shrinks as government's realm expands. This does not mean a particular exercise of government power is improper or ill-advised. It just means we should be aware of the relationship between the exercise of such power and liberty.

A significant part of our work at the Free State Foundation is centered on the project of promoting sound, free market-oriented communications laws and policies. Although I am mindful there are other policy elements, in the spirit of Independence Day, I want to focus here on aspects of communications policy relevant to the liberty interests protected by the free speech and property rights secured in the First and Fifth Amendments. These rights are crucial to maintaining the Declaration's promise.

Today there are voices, including some in the Obama Administration and Congress, calling for more government intervention and control of the media. They suggest that more government control is necessary to ensure more "balanced" viewpoints and more "fairness" in what's aired, or to ensure "better," or more "educational," or more "cultural," or less "violent" programming, or, well, to ensure programming that is just more suitable for the citizenry in one way or another. And now they also want the government to mandate and enforce "neutrality" on the Internet and to prevent "discrimination" by Internet service providers.

All this sounds well and good, even appealing, to those who have faith in government officials to determine that the right balance of viewpoints is struck, to know better programming when they see it, and to discern discrimination when it is alleged. Media regulatory regimes with names such as the Fairness Doctrine, Net Neutrality, and Open Access are devised to exercise the desired control. For many, these regimes have a seductiveness about them that makes it easier to excuse the amount of control placed in the government's hands to dictate the content of the speech of private persons.

Granted, many government officials may be perfectly well-intentioned in their desire to gain more power over the media and the Internet in order to implement their version of the "public interest." But surely there are those who actively seek greater government control as a means of cementing and protecting their own political power or the power of their party.

Now, I understand, of course, the seduction is always – repeat, always -- couched in terms of the government's need to ensure that the private person or operator, whether a broadcast station, cable operator, Internet services provider, or the like, does not itself suppress certain speech, or does not present unbalanced or unfair programming. The government's rationale is always put in terms of promoting fairness, neutrality, or openness by the private media owner. Nevertheless, the seduction is exactly that – an excuse for the exercise of government control over private speech.

No doubt it is true that those who operate private media may present programming that is unbalanced, unfair, or discriminatory. But the Founders knew the far greater danger to liberty lies with government control of the media, not private censorship. Hence the First Amendment. History is full of countless examples of governments using their control to suppress the freedom of their citizens. Unfortunately, there are many examples to cite today – Russia, Cuba, Venezuela. And, of course, at the moment we only need look to Iran. It is silly – and naïve – to ignore the fact that it is not the private media in these countries suppressing speech, degrading and impairing Internet transmissions, screening web sites. It is the government.

And note that derogation of property rights and free speech rights usually goes hand-in-hand. If the government can seize your printing press or deny your authorization to operate, or confiscate the profits from your media operation, your right to free speech becomes much less meaningful, or non-existent. So, although the Fifth Amendment's protection of property rights is often minimized in the context of communications policy, it shouldn't be.

None of the above is intended to suggest that the United States resembles Russia, Cuba, Venezuela, or Iran, in its media policy. To the contrary. We have a constitutional tradition and culture that is, on the whole, generally free speech and property-rights protective. And remarkable technological advances have facilitated the development of a competitive marketplace environment in which the newer "technologies of freedom," to borrow from Ithiel de Sola Pool, render attempts at government control more difficult -- and claimed justifications less convincing. See Twitter, YouTube, Facebook, cell phones, broadband, satellite dishes, and the like.

On this Independence Day, I do intend to suggest, however, that at a time when much of our communications policy is under review, and many are urging the need for more regulation and government control, we would do well to appreciate the extent to which our liberty interests are related to the preservation of free speech and property rights.

Who better to turn to in closing than Thomas Jefferson himself, who later in life declared: "The flames kindled on the 4 of July 1776, have spread over too much of the globe to be extinguished by the feeble engines of despotism; on the contrary, they will consume these engines and all who work them." I suspect that Jefferson knew full well he was – once again -- stating an aspiration rather than a fact. The engines of despotism are not feeble; nor have they been extinguished.

But the Fourth of July is a fine time to reaffirm the aspirations for liberty rooted in the Declaration of Independence and our Constitution – and to affirm that a communications policy grounded in our constitutional tradition is the best way to protect and further those aspirations.

Giving Forbearance the Red Tape Treatment

When the Federal Communication Commission’s report and order concerning new forbearance petition procedures was circulating in draft form it furnished the occasion for my recent FSF Perspectives paper, 'Delaying Deregulation: Forbearance at the FCC.' On June 29, the FCC adopted its new procedural rules governing forbearance petitions. While some of the new rules appear designed to facilitate more efficient petition processing, others appear to arm the FCC with new procedural devices to facilitate denying petitions. Under the new forbearance procedures, a deregulatory process just got more regulated.

The new procedural rules include certain proceedings management and petition completeness requirements. Among other things, petitioners are now required to clearly identify the petitioning parties who are seeking relief from regulation. Petitioners must also specify the regulations from which from which they seek relief. These requirements have the ring of reasonable administration. Petitions containing specific requests for relief are probably easier to process than ambiguous or confusing requests. But just how necessary are such completeness requirements? If a petition was unclear about what rules a petitioner is seeking relief from, what’s keeping the FCC from helping things out a bit by framing the petition’s ambiguities in the most common-sense and coherent way it can and then trying its best to make its ruling? A grant or denial of a forbearance petition under those circumstances would likely survive any subsequent court challenge by petitioners. Courts presume good faith on the part of federal agencies, and they analyze agency action in such cases under a deferential review standard.

Petitioners are now formally required to make a prima facie showing that each element of the forbearance criteria is satisfied. Petitions must also factor FCC precedent into their petitions. All things being equal, more thorough petitions that focus on the statutory criteria could bring more immediate agency focus and deliberation to filed petitions. But don’t petitioners already have incentive to make the strongest case possible to meet the forbearance criteria?

What’s more, the new procedural rules place the burden of proof on petitioners. Keep in mind the fact that petitions not acted on by the FCC within the statutory timeline or extension period are automatically 'deemed granted' by operation of law. This fact makes placement of formal burdens on petitioners during the statutory time limit counterintuitive. The disconnect is apparent when one considers the different tie-breaking effects of the FCC’s new procedural rule and the (Telecom Act of 1996) Section 10 'deemed granted' clause. In effect, under the new procedural burdens, a tie goes against the petitioners. The party carrying the burden of proof must persuasively present evidence showing the statutory elements are met. But under the 'deemed granted' clause, a tie essentially goes against the FCC. (In fact, a forbearance petition filed by Verizon that resulted in a deadlocked 2-2 vote at the FCC was 'deemed granted' by operation of law.)

One gets the sense that in adopting these new forbearance procedural rules the FCC is attempting to move itself out of the hot seat. Section 10 is a unique statutory provision precisely because it puts the onus on a government agency to make time-limited decisions about whether it must deregulate. By putting procedural burdens of production and proof on forbearance petitioners, the FCC to shifts some of the attention away from itself and onto the petitioners. Appeals to a quasi-legal procedural apparatus allow the FCC to strike a more judicious tone in its rulings, rather than continue in a discretionary policymaking posture. Reliance on formalities such as burdens of proof can also add a kind of heft to an agency’s decision whereas a substantive rationale alone can make for a closer call.

The FCC’s order and report suggests that more assertive use of one of the Telecom Act of 1996's key deregulatory policies is nowhere on the radar. Section 10 was enacted to give the FCC the discretionary authority to forbear from applying outdated and unnecessary regulations that it had previously been denied by court rulings. To the extent that the FCC interprets forbearance in light of its new procedural regimen for petitioners, the FCC’s own authority to forbear from enforcing onerous and outdated regulations sua sponte appears to have gone by the wayside.

The new procedural rules may be a disappointment but they do not spell doom. A couple bright spots to the FCC’s report and order are worth brief mention. For starters, the new rules include forbearance petition transparency. The FCC pledges in its report and order that it will post to its website a timeline of pending forbearance petitions containing relevant information for each. That is a welcome development. Since the FCC’s website is difficult to search for information, having available and relevant forbearance petition information accessible from a specific part of the site will make pending petitions much easier to track.

Importantly—and contrary to the fears of some commentators in the forbearance rulemaking proceeding—the FCC did not adopt new rules to authorize it to revisit previously deemed granted petitions. This was a wise move by the FCC. There is no basis in Section 10 or any other part of the Telecom Act of 1996 for the FCC to undo congressional policy by revisiting petitions that have been 'deemed granted' by operation of law. As the D.C. Circuit has recognized, when a petition is deemed granted it is a result of Congress’s decision, not the FCC’s.

In sum, the FCC’s report and order on forbearance procedures favors more regulated deregulation. Or should it be called deregulatory regulation? Whatever the case, the result can definitely be called forbearance red tape.

The Federal Internet Rate Regulation Commission

Rep. Eric Massa (D-NY) has introduced his so-called "Broadband Internet Fairness Act," or H.R. 2902. It is surely one of the more misguided pieces of legislation I've seen from this Congress. In the interest of truth-in-disclosure, it more appropriately should be named the "Broadband Internet Rate Regulation Act."

In essence, what the bill does, pure and simple, is require that the Federal Trade Commission conduct a full-blown rate case before broadband Internet providers are allowed to offer any "volume usage service plans." Peruse Sections 3 and 4 of the bill and you'll see that before a provider may offer any such capacity-based billing plan, it must submit cost data akin to that required in the days when Ma Bell's rates were established in months-long rate proceedings. When all the cost data is submitted, the FTC determines whether the rates proposed in the volume usage plan are "unjust, unreasonable, or discriminatory" -- the traditional public utility regulatory standard. The FTC would be empowered to enjoin the plan and issue civil penalties to enforce the prohibition against "unreasonable" plans.

All of this in reaction to Time Warner's very modest proposal in April to trial volume usage billing plans in four cities. As I explained in these two pieces at the time -- the "Free Lunch Free Press" and the "Common Carrier Free Press" -- in light of foreseeable Internet capacity constraints imposed by rapidly increasing peer-to-peer file-sharing applications, these pricing experiments should have been welcomed, not used as a basis for grandstanding. When network traffic reaches certain capacity levels, the only alternative is to build more capacity or reduce the level of traffic or service quality. If more capacity is built and operated, someone has to pay the costs, although Free Press refuses to acknowledge this. Hence the "Free Lunch" Free Press moniker.

The fact is that with 5% of Internet users generating almost half of all Internet traffic, tiered pricing plans based on the amount of usage might be the fairest pricing regime in that the larger number of low volume users would not be required to subsidize the infrastructure expansion costs caused by the smaller number of high volume users. This is not to say that consumers necessarily will accept such plans, or that they are the only way of addressing capacity constraints. But assessing consumer reactions in the real-world marketplace is what Time Warner's trials presumably were intended to do.

But here is the key. Free Press and Rep. Massa simply don't recognize, or won't acknowledge, that we no longer live in a marketplace environment that in any way resembles the monopolistic environment that prevailed when Ma Bell was subject to the very same type of cost-of-service rate case that Rep. Massa wants to impose on today's Internet providers. The broadband marketplace may not be the classical wheat market, but it is effectively competitive. And it is becoming more so every day. This marketplace competitiveness will protect consumers from any abuses far better than turning the FTC into the Federal Internet Rate Regulation Commission.

Indeed, it is more than a little ironic that Rep. Massa wants to put the FTC into the Internet rate regulation business. For it was the FTC staff that issued a comprehensive 160 page report on broadband policy in June 2007, with a particular focus on whether there was any justification for "net neutrality" regulation akin to that advocated by Rep. Massa and Free Press. That report, issued after public hearings and voluminous testimony, concluded it would be a mistake for the government to promulgate and enforce net neutrality-type regulations.

One wonders whether Rep. Massa has read the FTC report. If not, I commend the entire report to him. Below are a few of its conclusions. (Keep in mind the report was issued in June 2007. The broadband market certainly is even more competitive now than it was then, especially in light of the emergence of wireless as an increasingly robust broadband competitor and the rapid deployment of fiber and hybrid fiber networks.)

• Page 100: "This market has quickly evolved from one in which consumers could get broadband only if they had access to cable systems offering it, to one in which many, if not most, consumers can get broadband from either a cable or telephone provider. In 2000, over 80 percent of broadband service was provided by cable modem. By the middle of 2006, broadband service by cable had fallen to 55.2 percent, while DSL's residential share had increased to 40.3 percent."
  

• Page 101: "Broadband deployment and penetration have both increased dramatically since 2000. From June 2000 to June 2006, the number of high-speed Internet lines increased from 4.1 million to 64.6 million, with 52 percent growth from June 2005 to June 2006 alone. Penetration kept pace with deployment, as by 2006, broadband Internet access accounted for over 70 percent of all U.S. Internet access.
  

• Page 155-156: "Specifically, there is evidence at least on a national scale that: (1) consumer demand for broadband is growing quickly; (2) access speeds are increasing; (3) prices (particularly speed-adjusted or quality-adjusted prices) are falling; and (4) new entrants, deploying Wi-Fi, Wi MAX, and other broadband technologies, are poised to challenge the incumbent cable and telephone companies…Such evidence challenges the claims by many proponents of network neutrality regulation that the broadband Internet access market is a cable-telephone duopoly that will exist for the foreseeable future and that the two primary broadband platforms do not compete meaningfully."
  

• Page 157: "Policy makers should be wary of calls for network neutrality regulation simply because we do not know what the net effects of potential conduct by broadband providers will be on consumers, including, among other things, the prices that consumers may pay for Internet access, the quality of Internet access and other services that will be offered, and the choices of content and applications that may be available to consumers in the marketplace."
  

• Page 157: "To date, the primary policy proposals in the area of broadband Internet access include imposing some form of network neutrality regulation. In evaluating such proposals, we recommend proceeding very cautiously."
  

• Page 159: "Further reason for policy makers to proceed with caution in the area of broadband Internet access is the existence of several open questions that likely will be answered by either the operation of the current marketplace or the evolution of complicated technologies."
  

• Page 160: "Two aspects of the broadband Internet access industry heighten the concerns raised by regulation generally. First, the broadband industry is a relatively young and evolving one. As discussed above, there are indications that it is moving in the direction of more – not less – competition. In particular, there is evidence that new entrants employing wireless and other technologies are beginning to challenge the incumbent wireline providers (i.e., the cable and telephone companies). Second, to date we are unaware of any significant market failure or demonstrated consumer harm from conduct by broadband providers. Policy makers should be wary of enacting regulation solely to prevent prospective harm to consumer welfare, particularly given the indeterminate effects on such welfare of potential conduct by broadband providers and the law enforcement structures that already exist."

Markets could actually begin reducing electric rates, if only consumers would give them a try

There is actually some relief for consumers from the huge electric bills that have caused a political furor in Maryland for three years now. The relief – some of it available today -- comes not from the kind re-regulation or economic coercion that have been offered up by the governor and legislators, but from the very markets that were supposed to offer lower prices years ago.

That's the surprising conclusion from a hearing of the House Economic Matters Committee in Annapolis Tuesday. There a panel of industry experts, both distributors and competitive suppliers of electricity, testified that consumers can do better.

Customer choice can save 10% on bills, Mark Case, senior vice president BGE told the committee. There are currently 11 different suppliers to residential customers in Maryland. One of the largest of those suppliers, Washington Gas Energy Services, said consumers could conceivably pay 13-14% less on their bills, according to its president, Harry Warren.

The problem, as Delegate Sonny Minnick put it, is that "most people are unaware that they have a choice in electricity." The Dundalk Democrat said he's launched a personal campaign to inform his constituents about their options.

Committee Chairman Dereck Davis, a Prince George's County Democrat, said even many of the presumably well-informed legislators and lobbyists he's talked to "haven't switched either" even though they'd "definitely be paying less than they're paying now." Davis favors some method of either encouraging or forcing consumers to make a choice of suppliers.

The savings from choosing a competitive supplier have not always been there. To rehearse the decade-long history, in 1999, Maryland restructured its electric industry, allegedly deregulating it, as it really did for power plants and commercial users of electricity, but leaving rate caps for residential consumers in place. Electric rates rose elsewhere, but they were artificially frozen in Maryland till 2006, when there was a massive increase to match the going rates. With the rate freeze in effect, competitive suppliers of energy couldn't compete with residential rates, only on the unregulated commercial rates.

Now businesses large and small pay lower rates, but most consumers are still buying "the standard offer service." Based on power auctions, everyone concedes that these are not the best prices in town. But to get consumers to switch "would require some pretty serious consumer education," said Public Service Commission Chairman David Nazarian.

Rather than focus so much on a return to regulation, that's exactly what state officials should do. While suppliers want the new business, attracting individual residential customers is much more expensive to do than marketing to larger commercial and industrial users.

These reduced rates for consumers would result in overall bills that are only moderately reduced since the distribution charges by BGE, Pepco or the other local utilities would remain.

But it's still worth the effort, given the failure of regulatory efforts to achieve much improvement. Interestingly, Nazarian complained that Maryland rates, though likely to slightly decline next winter, were higher than they should be in central Maryland because of decisions of the Federal Energy Regulatory Commission.

But the faith in regulation remains high. In other deregulated states such as Ohio and Connecticut, Maryland People's Counsel Paula Carmody said, "We don't see any trend for residential participation in the supply market." Only 3% of Marylanders have chosen an independent supplier, and the state should focus on protecting them and reducing rates, Carmody said, even though her office does supply some comparison rates.

There are still serious problems with capacity-challenged transmission lines and generating plants that threaten the long-term reliability of Maryland's energy supply. But those issues haven't and won't be solved by paying higher rates, even the PSC admits. While dealing with those issues, suppliers such as Washington Gas emphasized the importance of "regulatory and legislative stability" -- keeping the current regime of imperfect deregulation in place, rather than adding uncertainty to the mix.

One thing is clear. Consumers who want to lower there electricity bills can do so this minute by taking the time to switch. They might not save a huge amount of money relying on the market, but they'll save more than regulators have been able to provide.

For information about competitive suppliers, the PSC has a list of suppliers with contact information.

The 13% Phone Tax

On Friday, June 12 (a Friday the 13th would have been more appropriate!), the FCC announced that the tax on all interstate and international phone calls has been increased to 12.9%. While the possibility of implementing new regulations to enforce payment of income taxes for personal calls made from business-provided cell phones has been much in the news in the past few days, not much attention has been paid to the large increase in the "phone tax" levied to support universal service subsidy programs. Attention should be paid.

Just since the beginning of the year, the tax has jumped from under 10% to 13%. (I understand the FCC requires the phone companies to call the tax a "fee" and not a "tax." Tell that one to an economist with a straight face. My habit is to call a skunk a skunk when I encounter one.)

To put the matter bluntly, the time has long since past when the FCC (or Congress) should have radically overhauled the universal service regime. It has been irresponsible not to do so. With respect to the universal service regime, the preferred course seems to be to follow the Detroit model a la GM and Chrysler or what may soon be the California model -- just wait for a financial implosion of monumental proportions before finally cleaning up the mess.

It didn't - maybe still doesn't - have to be this way. Most telcom experts agree that the original mission of the universal service regime -- to make voice telephone service universally available -- was accomplished years ago. The subscriber rate has remained stable at around 95% of American households for over a decade, despite billions of additional subsidy dollars poured into the coffers of mostly rural telephone companies and new wireless competitors. Targeted subsidies are available to low-income persons that need help to get telephone service.

Telephone service is as universally available as it is going to get without the expenditure of further billions in untargeted, unnecessary, and wasteful subsidies that have the effect of inhibiting the development of more efficient and cost-effective technologies, services, and competitors. Last year the FCC Inspector General's report found that 23% of the subsidy payments made directly to phone companies from the "high cost fund" were "erroneous." This amounted to $971 million in estimated erroneous payments.

I have explained what needs to be done to reform the subsidy regime many times before. Here's a piece entitled "The 10% Telephone Tax" from December 2006, and here's one from February 2008, optimistically titled "Universal Service Reform in '08." They have the background information needed to understand why the FCC has been derelict in not acting much earlier to reform the regime.
Note that I point out in these pieces that in the first quarter of 2002 the phone tax was "just" 6.8%. Now it is almost double that.

After watching the FCC delay taking action for years, it may be naive to hope that the agency, even under new leadership, can summon the will to radically reform the system in a way that comports with the realities to today's technologically dynamic, competitive telcom marketplace. This would mean substantially reducing the current subsidies.

Rather than reforming the regime, what appears as likely, given the predilections of the current acting Chairman of the Commission and potentially of the new Chairman, is that the newly-reconstituted Commission will propose to glom a new broadband subsidy regime onto the already-broken existing USF regime. This would be a big mistake. If it happens, the current 13% phone tax might look like a bargain.

To the extent that any federal support for broadband is needed, for reasons I explained in my recent FCC comments on the national broadband plan, it should be directed to presently unserved areas. The funds should be distributed through competitive bidding mechanisms, and they should come from the general Treasury, not a tax on communications services.

Thirteen is generally considered an unlucky number. But if the new 13% tax serves as a wake-up call to our policymakers that they can no longer avoid universal service reform, then perhaps the number 13 will come to be seen -- at least among those interested in sound communications policy -- in a more favorable light.

Broadband Nation: Where Do We Go From Here

So, the FCC has now taken initial comments in its inquiry looking to develop a national broadband plan to deliver to Congress next February. There were a boatload (battleship size!) of comments filed with the agency, and this is only the beginning of what is likely to be a year-long paper barrage. Congress probably should have required the FCC to deliver a reforestation plan next February along with the broadband plan.

Here are my comments. The main two fundamental points are these:

• The plan must contain within its parameters sufficient flexibility to allow policymakers and broadband providers to respond to the rapid pace of technological and marketplace changes. Built-in flexibility that preserves considerable private sector discretion for adaptation and experimentation is essential in a dynamic environment.
  
• The plan also should be grounded in certain fundamental free market-oriented principles. These principles should dictate that federal support for broadband should be targeted predominantly to providing access to presently unserved areas and to increasing, if this can be accomplished efficiently and effectively, broadband adoption; that any federal support should favor private sector companies over government providers; that competitive bidding procedures should be used to the extent possible to distribute any federal support; and that the government should not adopt any further net neutrality or open access mandates because these regulations have the effect of deterring investment and chilling innovation.
  

There will be much talk in the FCC's inquiry about the need for new public-private partnerships, new "third ways," new government collaborations, and the like. Much of this talk is superficially appealing, and as my comments make clear, there is role for government to play in achieving certain well-defined objectives. But there is a real risk, especially in the context of the government writing a mandated "plan," of tilting too far in the direction of government control. The government has enough on its hands managing the existing "government collaborations" and "public-private partnerships" with the financial institutions and automakers to become overly involved in managing the broadband marketplace. Note that after investing well over $200 billion in private capital to build-out and upgrade broadband networks, the facilities-based operators are not seeking bail-outs.

The reality is that the nation has made very substantial progress over the past decade in making broadband deployment almost ubiquitous. Over 90% of America's households have broadband available, and close to 60% subscribe. As my FCC comments explain, the focus of the government's efforts should be on providing narrowly targeted support to bring broadband to unserved areas and to encourage, albeit only in efficient and effective ways, greater adoption. (For example, with respect to adoption, it may make sense for the government to narrowly target subsidies for broadband subscriptions a la the LifeLine and Linkup programs, and for the purchase of computers by low income persons.)

Here's another reality. For a long time now, there has been a vocal "talking broadband down" crowd that rather relentlessly has belittled and minimized the progress the U.S. has made regarding broadband deployment and subscription. As I explained in an April 2007 blog, "The Talking Broadband Down Crowd," the crowd has a distinct purpose in mind: "Quite simply, those here in the U.S. who continue to talk down this country's broadband achievements clearly have a policy agenda in mind. The agenda is to impose net neutrality (read: common carrier regulation) on broadband providers on the perverse theory that somehow consumers will take more broadband if all the providers are required to offer exactly the same service--just as in the good ol' days of Ma Bell." Certainly, Free Press, with its proposal, now clear for all to see, to impose common carrier regulation on all broadband providers, is a leader of the talking broadband down pack.

Unfortunately, Acting FCC Chairman Michael Copps too often has fallen in with this company. He has frequently bemoaned the U.S.'s (allegedly) poor broadband showing by uncritically citing the OECD rankings as if they are another one of the gospels – all the while ignoring other indicators of substantial progress. Anyone who wants to understand - and is willing to spend a bit of time to be educated – as to why the OECD rankings are not useful or appropriate benchmarks from which to argue for a pro-regulatory and government interventionist broadband agenda, should watch the video from the Free State Foundation's "Broadband Nation" event on Friday. The event featured Ambassador David Gross, the State Department's most recent U.S. Coordinator for International Communications and Information Policy. He patiently explained in considerable detail the nuances, and the flaws, in the OECD rankings that make them generally inapt to the U.S. situation, and the other panelists – Rob Atkinson (Information Technology and Innovation Foundation), Link Hoewing (Verizon), and Christopher Guttman-McCabe (CTIA) – all agreed on this point.

To be sure, there is more progress to be made. And the government can play a supportive, appropriately limited, role. But it would be a serious mistake to jettison the generally light-handed regulatory regime under which so much progress already has been achieved.

Memorial Day - 2009

Last Memorial Day I was in Ocean City, New Jersey. I was taking an early morning day-dreamish walk through the beach's cool wading pools when suddenly Lee Greenwood's "God Bless the U.S.A." startled me. I looked up to the nearby boardwalk, and there was our flag slowly rising on what turned out to be an official town flagpole.

The beachwalkers and boardwalkers stopped in place as they became aware of the flag raising. So did the bicyclists and tricyclists. And the stroller-pushers. Some put their hands over their hearts. Other simply stood still. Old men and young girls alike.

As Lee Greenwood's voice blared from the loudspeaker near the flagpole, nobody – and I mean nobody -- moved.

Even after the flag was in place atop the pole, nobody moved until "God Bless the U.S.A." ended.

I know there were flag raisings just like the one I witnessed in Ocean City last Memorial Day all over the country, from the tiniest town squares to the largest metropolitan city halls. I was told, in fact, that the flag is raised every single day of the beach season in Ocean City, although I've only spent that one morning there, last Memorial Day, to witness it.

So, to be sure, in one sense I understand the flag-raising in Ocean City last Memorial Day was not unusual at all. Nevertheless, Lee Greenwood's song, also known by many as "Proud to Be An American," was particularly moving to me in the stillness of that late May morning, that morning when all movement on the beach came to a halt. You can listen to the song here, but this is part of the refrain:

"And I'm proud to be an American
Where at least I know I'm free
And I won't forget the men who died
Who gave that right to me…"

Whether we are at Ocean City, New Jersey, or Ocean City, Maryland, or the backyard barbeque, the local shopping mall, or the baseball park, hopefully we will all find a moment in time this Memorial Day to pause and remember all those brave men and women who have died to preserve our freedom. And to remember and be grateful to those who are risking their lives to do so today.

For myself, I'm sure I'll imagine I am standing on the beach in Ocean City, New Jersey, singing along softly to strains of "God Bless the U.S.A." as nobody moves, and we all remember.

From all of us at the Free State Foundation, have a safe, happy, and memorable Memorial Day.

Budget 'Fix' Didn't Last Long

Just over three weeks ago in The Gazette of Politics and Business, I wrote that "the state's budget balancing act is a short-term fix" that "leaves little wiggle room if revenue forecasts come up short." I thought at the time I was talking about this summer or early fall.

Last week, Comptroller Peter Franchot issued his report on April revenues, and yikes, the state was already coming up short for revenues this fiscal year and next. Gov. Martin O'Malley promptly ordered agencies to cut $200 million from a budget that was enacted just last month, with legislators congratulating themselves on the tough job they had done. They should have cut more, and not let O'Malley make all the tough choices.

He's asking for elimination of some programs that have been decimated by previous budget cuts. The failure of the legislature to further cut back on its own spending mandates also ties the governor's hands for fiscal 2010. If things get worse, he may need to call the legislature back in session before next January to reduce spending mandated by law.

And what of the disappearing millionaires Franchot reported? Taxes on people having over $1 million in taxable income were raised retroactively but temporarily in 2008 to replace the computer services tax. In calendar 2005, there were 6,300 of these millionaire returns, 41 percent of them in Montgomery County, and they had an average taxable income of $2.9 million a year. These 6,300 rich folks, about two-tenths of one percent of the tax returns (0.2%) pay about 10 percent of all state and local income taxes.

According to legislative analysts, their tax hike was supposed to raise $154 million in fiscal 2009, and $113 million in fiscal 2010, phasing out the following year. The average tax bill was supposed to go up about $14,000.

Didn't happen. The number of millionaire returns is down by a third, and the taxes they owe are also down, Franchot reported. There are a number of possible explanations. More of them have asked for extensions of the filing deadline. The economic decline undoubtedly has hurt these millionaires, 80 percent of them deriving some of their earnings from business returns as sole proprietors or partners. They also derive a higher proportion of their incomes from capital gains, and possibly may have chosen to take losses last year.

It is easy to speculate about net outflow of Marylanders to lower taxed states, but harder to document. According to state planning department analysis of IRS data, Maryland has had 19 straight years of out-migration to Pennsylvania and over the last 27 years has lost 47,000 people to North Carolina and 133,000 to Florida, which has no income tax. There is anecdotal evidence of wealthy people forsaking Maryland for homes in Florida for the more than half a year to qualify as residents there. Their houses in Maryland, where their businesses may be based, become second homes.

The planning department says the data show that people leaving Maryland is directly related to the state's economic vitality and to its higher cost of housing compared to its neighbors, except for Virginia. In 2007, even before the latest tax hikes, Maryland had "a record outflow … due in part to a relative weakening of the state's economy" and "lower housing costs" elsewhere, the department reported.

Maryland is benefiting from an inflow of federal dollars through BRAC and the stimulus package, but you have to wonder if the 2007 and 2008 tax increases that fell heavily on business and high earners – the millionaire's tax, the sales tax hike (40% paid by business) and the corporate tax hike -- had an impact on that "relative economic vitality."

In any case, the tax hikes didn't solve the structural deficit, and nothing but long-term spending cuts will.

More Evidence of Consumers Supporting a Deregulated Wireless Market

On May 12th, CTIA filed an ex parte with the FCC describing the "unparalleled value" that United States wireless customers currently enjoy due, in large part, to a very competitive wireless market. I have written about this before, but figures in the CTIA report really emphasize the immense benefits that consumers receive from the U.S. competitive model. Carriers are pressed to provide a wide variety of applications, low prices, and overall advanced capabilities in the mobile phones offered on their networks.

Some key facts contained in the CTIA ex parte:

• The United States still has the lowest cost per minute and the highest minutes of use of all 26 OECD ranked countries.
• Over 630 different handset are sold in the United States and consumers have access to over 40,000 applications sold through four newly created app stores. Three more stores and more than 20,000 additional applications are planned to launch this year.
• The United States has a higher percentage of consumers actively using mobile Internet capabilities than any other country measured. Additionally, more than half of all U.S. wireless consumers utilize a data plan on their phones and U.S. wireless web use accounts for 29.3% of all mobile web access worldwide.

These facts indicate that the U.S. wireless industry has already embraced a large measure of "openness," not because of regulatory mandates, but as a result of marketplace demand. Alterations to the current deregulatory wireless environment will only serve to harm America's wireless consumers and destroy or mitigate the U.S. leadership that has resulted from reliance on marketplace forces rather than mandated "open access" or other forms of neutrality mandates.

Deconstructing "Dismantling Digital Deregulation"

Free Press has issued a new report entitled "Dismantling Digital Deregulation: Toward a National Broadband Strategy," authored by Free Press Research Director S. Derek Turner. Alliteration is nice. That's one reason I call this blog "Deconstructing 'Dismantling Digital Deregulation.'"

But the most important reason is that Mr. Turner's 123-page report is deeply flawed. I anticipate that over the course of the next few weeks I will have something more to say about Mr. Turner's paper. Here I just want to identify a few statements that appear in the paper's introduction that are symptomatic of its flaws.

The whole premise of the report is that the deregulation of broadband Internet services – in many instances, in reality what has happened is not deregulation but relaxed regulation – that occurred during the Bush Administration years has led to the demise of "competition," competition that Mr. Turner says emerged and existed after the passage of the 1996 Telecommunications Act. So, for example, the report states that before deregulation "the average American consumer had access to more than a dozen ISPs." Indeed, the report cites as evidence of Internet service provider competition the claimed existence of 6000 ISPs in 2000. Accepting the validity of these figures here for the sake of argument, they indicate the very problematic nature of the vision which animates the entire report.

There is no doubt that these narrowband "competitors" were not facilities-based providers, but rather resellers of services that existed at the sufferance of the FCC price regulation of the providers that actually invested in the construction of facilities. The "dozen ISPs" to which the average American consumer presumably had access, and the 6000 ISPs writ large, had no incentive to invest in new facilities that would offer higher speeds or innovative applications and services. And they did not do so. That is why their services generally were referred to as "plain vanilla" ISP services.

The report bemoans the demise of forced line-sharing and mandated sharing requirements upon which the business models of the resale ISPs were based. The notion that these resellers were real competitors or provided any meaningful competition – the idea upon which so much of the report is premised -- is just wrong. Only competition among facilities-based providers has provided benefits to consumers that are sustainable over time.

After lauding the now largely abandoned forced unbundling and mandatory sharing regimes to which Mr. Turner seeks to return, this statement follows not much further along: "Before broadband, carriers were able to earn perhaps $20 per customer each month selling phone service. In today's converged world, a carrier can earn well over $100 on that same line by offering phone, TV and Internet services."

This should be an "Aha" moment as in: How did we as a nation get from a "before broadband" world to today's broadband world in which broadband is available to over 90% of the country's population at increasingly faster speeds and offers telephone, TV, and Internet over the same line? Answer: Massive capital investment.

And the bulk – not all, but the bulk -- of the investment occurred under a regime in which broadband facilities were not subject to the type of forced sharing regulations to which Free Press seeks to return. Recall that in the late 90s there was a strong push to subject the emerging cable broadband services to an "open access" forced sharing regime. Here is what William Kennard, President Clinton's FCC Chairman, had to say in September 1999 in rejecting the same proposals that Free Press now advocates:

"It is easy to say that government should write a regulation, to say that as a broad statement of principle that a cable operator shall not discriminate against unaffiliated Internet service providers on the cable platform. It is quite another thing to write that rule, to make it real and then to enforce it. You have to define what discrimination means. You have to define the terms and conditions of access. You have issues of pricing that inevitably get drawn into these issues of nondiscrimination. You have to coalesce around a pricing model that makes sense so that you can ensure nondiscrimination. And then once you write all these rules, you have to have a means to enforce them in a meaningful way. I have been there. I have been there on the telephone side and it is more than a notion. So, if we have the hope of facilitating a market-based solution here, we should do it, because the alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America."

The FCC refused to impose an open access mandate for cable under Bill Kennard's leadership and it has continued that deregulatory policy since. In response, the cable industry has invested $130 billion since passage of the 1996 Act to build out an increasingly high-speed two-way interactive broadband networks that incorporates fiber technology.

The same story is true with respect to telephone company-provided broadband as well. Since the FCC in 2004 abandoned the forced sharing regime that prevailed in the narrowband telephone world, capital investment in new broadband facilities has exploded. For example, by the end of 2010 Verizon will have spent over $20 billion alone building out its high-bandwidth FiOS service. AT&T has invested billions in building out its own broadband network infrastructure. In 2008 alone, AT&T says it invested approximately $20 billion in its wireline and wireless infrastructures.

For many years, most recently here, I have said that the call for net neutrality and open access mandates represents a call for imposition on broadband providers of the same kind of common carrier regulation that prevailed in the 20th Century's narrowband world. Mr. Turner's paper unabashedly advocates imposition of such a broadband common carrier regime.

Pervading the Free Press paper is the idea that the policymakers and regulators can establish and enforce a mandatory sharing and unbundling public utility regime to manage competition in a way that might allow the counting of new "competitors" a la the supposed 6000 ISPs that existed in 2000. In today's fast-changing technological and marketplace environment, the policymakers and regulators can't manage competition in a way that will lead to as much investment, innovation, and increased consumer welfare as the marketplace will provide. And they shouldn't try.

A "Media Concentration" Retrospective

Even though it has been a long time coming, yesterday marked the first explicit acknowledgement that Time Warner is seriously considering spinning off AOL nearly ten years after the initial merger occurred between the two. When the merger was announced back in January 2000, some thought that the combination of the United State's top Internet service provider and the world's top media conglomerate would create a "digital media powerhouse." AOL hoped to profit by providing Time Warner's large amount of content to its then fast growing subscriber base. At the same time, Time Warner hoped to use AOL as an entry point to the Internet services business, after several failed attempts on its own to do so.

Numerous "consumer and public interest" groups claimed that the merger would create a dominating entity in both the Internet services and the then emerging interactive TV markets. A Consumers Union representative claimed that the consolidated company "would be in a position to thwart competition in many markets across the country." A Media Access Project representative stated that "the sheer size of these two companies' assets and their inadequate commitment to open access fall short of what the public interest requires and the law permits." A representative of the Consumer Federation of America worried that by "[c]ontrolling both content and distribution, the company [could] design interfaces that capture and lock in customers, while they lock out competitors, except on terms and conditions that are set by the entity controlling the choke point." A Center for Media Education official noted that companies that "control both conduit and content… wield tremendous power in the marketplace of ideas" and possess "the ability to shape the future of the Internet and other digital media."

These groups filed a petition to deny this merger to the FCC, which described the "dangerous new dimension" being added to "the emerging structure of the cable TV/broadband Internet industry… by extend[ing] the reach of two huge, vertically integrated firms across the cable TV, broadband Internet and narrowband Internets." Among the "findings" cited in the petition: "The merger would allow two enormous firms to dominate the markets for broadband and narrowband Internet services, cable television, and other entertainment services, which could leave consumers with higher prices, fewer choices, and the stifling of free expression on the Internet." And the petition claimed that this "media giant" would "be able to quickly capture the new product market for interactive TV."

Clearly, the merged AOL-Time Warner failed to dominate either of these industries. Instead, the deal has resulted in the loss of more than $100 billion of shareholder value.

It is often interesting, and ought to be instructive, to look back at the hyperbolic statements made by those groups who routinely oppose these media mergers (also see my blog on the Sirius-XM merger) to see whether their concerns ultimately proved valid. They certainly did not with respect to the AOL-Time Warner merger. Wouldn't it be nice if these groups acknowledged that the marketplace, especially when it involves the quickly-shifting Internet and media sectors, has a mind of its own that is responsive to consumer demands and not government-dictated outcomes?

Maryland Officials Act Like They Own the Preakness

Many Kentuckians watching Saturday's fabled run for the roses at Churchill Downs in Louisville probably feel they "own" the great race, the way some New Yorkers feel they "own" Macy's Thanksgiving Day Parade in New York or Indianapolis residents claim the "500."

Of course, these are matters of the heart and culture, not expressions of private property rights. Fans don't own these privately sponsored events no matter how much they are attached to them.

The same is true of the Preakness Stakes two weeks from now. It was named by a Maryland governor, has always been run at Pimlico, and is one of the state's largest public events, even though it is marred by massive drunkenness, lewdness and occasional violence.

Yet in April the legislature passed and the governor signed emergency legislation that will purportedly give the state the power to acquire through eminent domain the Preakness from the Maryland Jockey Club and its bankrupt corporate owner, Magna Entertainment.

The state understandably wants to keep the race, a guaranteed source of both gambling and tourism revenues, and favorable national publicity every year. In fact, according to the company and state analysts, without the Preakness the horse racing industry would be dead in Maryland. On that single day, the owners make up for the losses on the rest of the racing days at both its tracks.

It would be like the city of New York taking over the Thanksgiving Parade and Macy's holiday revenues as well.

Lawyers disagree as to whether the state has any legal right to pre-empt the U.S. bankruptcy court in Delaware overseeing Magna's Chapter 11 filings involving assets across the country. Maryland has already asked that judge to enforce an earlier law saying Maryland has the right of first refusal on any sale of the Preakness. I'm no lawyer, but "the right of first refusal" is generally viewed as a "contractual" right voluntarily agreed to by two parties, not an obligation imposed by the state.

Some believe the bankruptcy judge will take the same view, and hence the need for a bigger club to keep the Preakness in Maryland. In addition to the Preakness itself, the state said its sovereign powers allowed it to seize all of Magna's real estate or personal property, plus any "intangible private property, including any contractual interests or intellectual property," such as copyrights, trademarks and logos.

A power once intended to allow the state to take land from a recalcitrant owner to build a highway or a school has been transformed into a gun to take over what the legislation calls "a sporting event of historical and cultural importance to the State of Maryland that … has significant, positive economic development impact" for the state and the horse racing industry, "preserving the state's stature and quality of life."

Thank you, Magna and Maryland Jockey Club, for hosting such a nice event that produces a lot of money and prestige, but you can't take it away. It's too important for us.

Many people who opposed these broad confiscation powers raised the specter of the Supreme Court's Kelo v. City of New London decision four years ago. Unfortunately, those issues were decided by Maryland's highest court took Kelo's approach sanctioning broad eminent domain authority decades ago.

The Maryland Constitution says the "General Assembly shall enact no law authorizing private property to be taken for public use without just compensation." But "public use" has been broadly interpreted by Maryland judges to include the vaguer "public benefit" or "public purpose." And a 1975 Court of Appeals case specifically found that a county could take a property solely for "enhancing economic growth."

That may be Maryland case law, now sanctioned by the U.S. Supreme Court. But how does that extend to an event that state has regulated and supervised but never owned or operated? And then extend the "taking" beyond the event to all the intangible and intellectual property associated with it? And what might be "just compensation" for a piece of private property with its market value undermined by the state's threat to confiscate it?

There are enough legal issues to have lawyers all over this case like flies. But the state's intervention into the market for these scarce goods under the an "emergency measure … necessary for the immediate preservation of the public health and safety" doesn't give much reassurance to other holders of valuable private property to which the public has grown fondly attached. What if the Baltimore Orioles or Ravens attempted to leave the city, much as the Redskins flew off to nearby Maryland?

Let's try to keep the Preakness and horse racing alive in Maryland, but lets do the same for private property rights.

Constitutional Reckoning Still to Come

Yesterday, the Supreme Court handed down its long-awaited decision in the Fox Television case concerning the FCC's regulation of "indecent language" aired by broadcasters. Acting under the authority of a decades-old federal statute banning indecent broadcasts, in 2004 the Federal Communications Commission adopted new policy sanctioning the broadcast of "fleeting expletives," even when used in a nonliteral sense. Previously, the FCC had required more than the isolated use of the expletives (what the Court termed the "F-Word" and the "S-Word") before sanctioning broadcasters.

On administrative law grounds, the Court's five-to-four majority determined that the FCC's new "fleeting expletives" policy was not "arbitrary" or "capricious" within the meaning of the Administrative Procedure Act. For administrative law scholars and aficionados (and I count myself among this group), the six different decisions of the Justices are a rich vein to be mined.

But here I am concerned primarily with what was not decided. As Justice Scalia said at the end of his majority opinion: "It is conceivable that the Commission's orders may cause some broadcasters to avoid certain language that is beyond the Commission's reach under the Constitution. Whether that is so, and, if so, whether it is unconstitutional, will be determined soon enough, perhaps in this very case." Fox and other broadcasters had argued that the FCC's sanctions for fleeting expletives violated their free speech rights under the First Amendment. While the appeals court indicated in dicta it agreed, it did not rule on the constitutional issue because it found, in any event, that the FCC's action was arbitrary and capricious.

Now the case goes back to the appeals court for further proceedings, where presumably the broadcasters will continue to press their First Amendment argument. In a concurring opinion, Justice Thomas made clear that he thought the Court should reconsider the viability of the Court's precedents in the Red Lion and Pacifica cases, which limited broadcasters First Amendment rights, largely on the basis of perceived spectrum scarcity. In a brief cogent opinion, Justice Thomas elucidates the "doctrinal incoherence" of those analog era decisions and explains that, even had they been doctrinally coherent at the time, they are not so in today's much changed digital era of media abundance.

Justice Thomas concludes that "[t]he extant facts that drove this Court to subject broadcasters to unique disfavor under the First Amendment simply do not exist today." I was gratified that in making this point, Justice Thomas cited my very recent law review article, Charting a New Constitutional Jurisprudence for the Digital Age, which appears at 3 Charleston Law Review 373 (2009).

So, it now appears likely that the constitutional reckoning concerning the FCC's new policy is still to come, perhaps soon. In my article which Justice Thomas cites, I stated: "Hopefully sooner rather than later, the Court will revisit Red Lion, Pacifica, and Turner in order to establish a new First Amendment paradigm for the electronic media, one that is much more in keeping with the Founders’ First Amendment vision." The article makes clear that the First Amendment issues at stake go far beyond the government's regulation of "indecent" speech. Under the existing First Amendment paradigm, other speech regulations, such as the Fairness Doctrine and "must carry" obligations, have been sustained.

I concluded the article this way:

"Perhaps it was predictable, maybe even likely, that the First Amendment’s protections would be limited substantially during the twentieth century’s analog age that tended towards a monopolistic or oligopolistic communications marketplace. But, now, in the face of proliferating competitive alternatives attributable to profound marketplace and technological changes, it ought to be considered predictable, and, yes, even likely, for the Court to establish a new First Amendment jurisprudence befitting the media abundance of the twenty-first century’s digital age."

Because I believe the First Amendment's free speech protection, including protection of the electronic media, is central to the preservation of a healthy democracy, I remain optimistic that such a new First Amendment jurisprudence will be established sooner rather than later.

The "Common Carrier" Free Press

In the face of opposition led by Free Press, Time Warner Cable recently withdrew, for now, its announced plans to conduct a trial of consumption-based billing (CBB) in four cities. I explained in my April 16 piece, "The 'Free Lunch' Free Press," why the trial should have been welcomed. Ultimately, the investment in broadband facilities must be recovered from the body of the provider's subscribers. In other words, there is no free lunch.

You should read the entire piece, but the core point is this: For reasons of fairness and economic efficiency, "it is not necessarily best for consumers -- for overall consumer welfare in an economic sense -- for all subscribers to be charged the same flat rate for service, regardless of the amount of their own usage."

There is an additional point that should be made as I read some of the Free Press' post-withdrawal statements as the organization continues to press its case against consumption-based billing. Free Press risks becoming "The 'Common Carrier' Free Press" in addition to the "Free Lunch" Free Press. As I have said countless times during the past five years or so, all net neutrality-like mandates -- and, make no mistake, a prohibition on CBB is a net neutrality mandate -- in effect constitute common carrier-like regulation of broadband providers not dissimilar from the common carrier regime to which AT&T was subject in the twentieth century's monopolistic communications era.

The core elements of common carrier regulation are a non-discrimination mandate and/or some form of rate regulation. Of course, most net neutrality mandates proponents routinely claim that "prohibiting discrimination" is a chief aim. Less often do they say – at least openly – that they also advocate rate regulation. But rate regulation almost always lurks, is inherent really, in broadband restrictions sounding in net neutrality.

Free Press claims that its opposition to TWC's proposal was based on the notion that TWC's prices are too high. Thus, in its initial press release announcing it was organizing a nationwide protest, Free Press referred to TWC's allegedly "healthy broadband profit margins." In its April 16 press release issued celebrating its victory after TWC withdrew the planned trial, Free Press charged TWC with a "price gouging scheme" and "unfair price hikes."

Most recently, in an April 22, 2009 letter to Congress calling for an investigation of all CBB trials by any broadband provider, the rate regulation agenda of Free Press becomes even more apparent. Free Press first says that "no provider has disclosed useful cost information." You might think this would mean Free Press is poised to retract its days-earlier claims concerning healthy profit margins, unfair price hikes, and the like. But no. It is just an opportunity for Free Press to suggest that "the usage fees are well above the marginal cost of providing Internet service." And to suggest that the prices for Internet service "bear little or no relation to costs." And to suggest that the prices may be "arbitrarily above costs."

The point should be obvious, and you don't have to be a brain surgeon, or even a public utility lawyer or an economist, to get it: The only way we really would ever know whether a broadband provider's prices are above marginal or average costs (or any other variation of these two, and there are others), or whether rates are "fair" or "arbitrary," would be to conduct a full-blown rate case. But wait. If you have ever tried, or otherwise participated in any way in a public utility rate case, or even witnessed one, then you know that, ultimately, the determination and assignment of "costs", especially with respect to operators engaged in providing multiple products over the same network facilities, approaches the metaphysical.

Although I know the exponential growth of Internet traffic, spurred by video, poses non-frivolous network management challenges for broadband providers in light of capacity constraints, I am in no position to offer firm opinions on the "marginal" or "average" costs of TWC or other broadband providers. But I am strongly of the opinion it would be a serious mistake for policymakers or regulators to start down the road towards undertaking the nearly impossible task of trying to determine those costs, and, in effect, imposing a rate regulatory regime on broadband Internet providers. It is far preferable, given the extent of already-existing broadband competition, with the prospect of more to come, to rely on marketplace competition to protect consumers. As I said in my April 16 piece: "It would be foolish for TWC to adopt offerings, whether consumption-based pricing or otherwise, which do not meet consumers' marketplace expectations."

We don't need rate regulation of Internet broadband services, or anything roughly resembling rate regulation. What we need, instead, is for the "Free Lunch" Free Press and the "Common Carrier" Free Press to step back and consider whether all consumers won't be much better off if we don't impose a 20th Century common carrier regulatory regime on the competitive 21st Century broadband Internet marketplace.

The Wrong Time for Regulatory Intervention in the Wireless Market

On April 3rd, Free Press submitted a letter to acting Chairman Michael Copps requesting that the FCC reaffirm that wireless services are explicitly subject to the Commission's Internet Policy statement. In the letter, Free Press expressed concern that wireless carriers were preventing consumers from running applications and services of their choosing on their wireless devices. The Commission would be making a mistake if it chose to take any regulatory action in response to the Free Press letter.

The wireless market is competitive and one area where carriers are competing for consumers is in the implementation of "openness" on their networks. To appeal to subscribers, carriers have embraced the emergence of applications marketplaces such as the Apple App Store, Google Android Market, Blackberry App World, and, soon, the Verizon Hub service. Truly for the first time, a typical subscriber, using a variety of phones on a variety of networks, is able to customize his or her wireless experience. Now is not the time for the government to intervene in an attempt to define and enforce its idea of "openness" when, clearly, competition is moving wireless carriers in that direction naturally.

AT&T and T-Mobile have recently come under fire for limiting their customers' access to certain applications on the Apple App Store and the Google Android Market respectively. AT&T allowed Apple to release a Skype application, but required it to operate only over Wi-Fi and not on its commercial network. Meanwhile, T-Mobile requested that Google bar users on the T-Mobile USA network from accessing applications that would allow them to tether their phone's data connection to a computer. Some question whether these examples set a precedent for carriers to limit the applications their users can access.

The reality is that these applications marketplaces have replaced the traditional heavily-restricted carrier-run download sites that limited consumers to only a select handful of specifically chosen applications. Instead, this new model for wireless content is driven by any and all software developers that might be interested. Apple, Google, and Blackberry have all released their software development kits and set up portals for individual vendors in order to encourage involvement and applications development. The Apple App Store currently features over 28,000 applications that have been downloaded over 500 million times reinforcing Apple's claim that "there's an app for that."

And it is clear that U.S. consumers still love their phones. According to CTIA, at the end of 2008, the U.S. wireless industry had over 270 million subscribers, up from around 255 million at the end of 2007. CTIA has also found that cell phones are involved in the everyday life of 87% of the U.S. population. FierceWireless' breakdown of subscribership by carriers shows that, other than Sprint, the major wireless carriers, including AT&T and T-Mobile, have seen significant growth in their subscription rates over 2008. AT&T increased from 71.4 to 77 million subscribers, T-Mobile from 30.8 to 32.8 million subscribers, and Verizon from 67.2 to 80 million subscribers. Only Sprint saw a decline in subscribers from 52.8 to 49.3 million.

Much of this growth seems to be attributable to people flocking from landline phones to data plan-equipped wireless phones in order to take advantage of their newly developing capabilities. A report from Nielsen Consulting on wireless substitution showed that at the end of June 2008, 17.1% of U.S. households had replaced their landline phones for wireless phones. This percentage has grown by 3-4% every year and does not appear to be slowing. In January, the FCC's report on the state of competition in the CMRS marketplace estimated that U.S. subscribers who paid for mobile Internet access increased 28% from the first quarter 2007 to the first quarter of 2008. Revenues from wireless data services have risen to more than $32 billion in 2008, a 39% increase over 2007.

As wireless carriers strain to operate under existing spectrum limitations, some form of network management is always going to be necessary in order to ensure that services are able to be delivered efficiently and economically. But as evidenced by the market's recent move towards open platforms, carriers are still under intense competitive pressure to offer a superior product that appeals to constantly evolving consumer preferences. Given this competitiveness and the fast-changing nature of the wireless industry, the various parameters of services are clearly better set by the marketplace, rather than government fiat. Commission regulation at this point would just be unnecessary and counterproductive.

Maryland Tax Freedom Day Needs to Come Even Earlier Through Spending Reform

Tax Freedom Day in Maryland came Sunday, April 19, a full nine days earlier than it did last year. Calculated by the Tax Foundation, Tax Freedom Day is the number of days Americans work to pay their federal, state and local income taxes.

Marylanders this year will labor five days longer than the average American to pay off their tax burdens. But the average number of tax working days are down across the nation, the Tax Foundation, says because "the recession has reduced tax collections more than it has reduced incomes" and the federal stimulus package includes some large temporary tax cuts.

The thousand plus rain-soaked tax protesters who crowded the Annapolis dock area last Wednesday, April 15, clearly felt they were "taxed enough already" – hence the TEA party.
Not many would have been reassured that overall they were working fewer days to pay their taxes, because too many Marylanders were working less than they wanted to. On Friday, officials announced that unemployment in the Free State had reached a 17-year high of 6.9%. That means a lot of people will be paying a lot less taxes in the coming year.

This will likely mean even lower revenues for the state and its counties. The structural deficits that have been projected by the General Assembly's Department of Legislative Services will likely get even higher than the $8 billion estimated over the next four years.

That makes even more relevant the call for spending mandate reforms to cure the structural deficits in a Perspectives paper I did for the Free State Foundation.

You may have heard that the "structural deficits" caused by mandatory spending increases had been cured by the "hard choices" to pass $1.3 billion in Maryland tax increases in November 2007. Unfortunately, the recession started the next month. As legislative analysts pointed out in early April, from fiscal 2006 to fiscal 2012, general fund revenues are projected to have grown by 17%, while spending went up twice that rate over those six years, plainly unsustainable growth.

What to do? Raise taxes again? Not when Maryland's Tax Freedom Day is the 5th latest in the nation.

No, the solution is the reforms of the spending mandates, formulas, entitlements, pensions and health benefits I recommend in my paper. Many of them should be frozen at current levels. Much of this spending has inflation factors such as cost-of-living increases built into them. They need to be tied more closely to revenues so Marylanders don't have to work any longer they have to pay for government.