Eleven Point Four. We Won't Pay!

“Eleven Point Four. We won’t pay!
Eleven Point Four. No way, no way!”

You could almost hear – or maybe it was my imagination – a background chant at Tuesday’s hearing on the “Future of Universal Service” convened by Rep. Ed Markey in his capacity as Chairman of the House Subcommittee on Telecommunications and the Internet.

All consumers now pay an 11.4% surcharge, in effect, a tax, on all interstate telephone calls. This tax funds the various universal service subsidy programs. In 2000, the tax was 5.5%. I got the sense at Tuesday’s hearing that at some point between 5.5% and 11.4%, a threshold, a Universal Service Rubicon of sorts, was crossed. Because it seemed clear from statements at the hearing that a bipartisan consensus is developing that the current regime is broken and needs meaningful reform. Many of the committee members who spoke, including significantly Chairman Markey, referred to the 11.4% surcharge on all calls as an impetus for getting on with the business of reform. Consumers finally have begun to pay attention to the size of the dollar amount of the item typically denominated as “Federal Universal Service Charge,” or some such, on their bills.

Chairman Markey is to be commended for holding a future-oriented hearing on universal service. As a hearing witness, I offered the committee some key guiding principles for reform and some specifics for applying them in today’s competitive and rapidly-changing technological environment. The principles are pretty simple but fundamental: Market forces, rather than subsidies, should be relied on to the greatest extent possible to achieve the universal service objectives. If there are to be subsidies, they should be targeted narrowly and financed broadly. The current regime is at odds with these principles, which is why, despite more competition and new, less-costly technologies, the surtax on telephone calls has climbed to over 11%. You can read my full testimony here.

With an apparent emerging consensus that the current regime largely has achieved the goal of making voice service ubiquitous – universal, if you will – the hearing, quite appropriately, focused mostly on broadband. The question is whether broadband service should now be brought into the existing universal service subsidy regime, or one similar. I addressed this question in my testimony. I pointed out that, without any significant government subsidies, market forces already have worked to make broadband service widely available to the American public. I urged policymakers to “retain this minimally regulated environment that has encouraged so much private sector broadband investment in a relatively short time.” And, if policymakers determine that some subsidies nevertheless are desirable to achieve more ubiquitous deployment at a faster rate, I urged they be distributed through some form of competitive bidding process that narrowly targets disbursements only to unserved high-cost areas or low income persons. Any such subsidies should be financed through general Treasury appropriations.

At bottom, I urged: “Any broadband subsidies deemed necessary should not be disbursed or financed through an unreformed universal service regime that resembles the existing one. To do so would perpetuate a system that is economically inefficient, wasteful, and competition-suppressing. It would saddle the broadband world – and the American public – with an outdated relic of the narrowband world.”

Finally, another indication of what I take to be the gathering reform momentum is the bill introduced by Reps. Joe Barton and Cliff Stearns on the day of the hearing. Rep. Barton is ranking member of the Energy and Commerce Committee and Rep. Stearns ranking member of the Telecom subcommittee. To my mind, their “Universal Service Reform, Accountability, and Efficiency Act of 2008” is the most reform-minded, consumer-friendly universal service bill ever introduced. It deserves very careful consideration. Most importantly, the Barton-Stearns bill would not bring broadband into the existing subsidy regime, with all of its competition-distorting rules and built-in inefficiencies. With respect to narrowband, recognizing that the goal of universal voice service largely has been achieved, the bill would cap the universal service funds at their current sizes. Among other things, it would substantially change the subsidy distribution method to incorporate competitive bidding mechanisms for high-cost areas without affordable service and curtail subsidies presently going to high-income areas. (Aspen is the proverbial example of a high-income area that currently receives substantial subsidies under the current regime.)

Chairman Markey deserves credit for holding a hearing on “The Future of Universal Service” at which a serious conversation about serious reform was begun. And Reps. Barton and Stearns deserve much credit for fashioning a bill that ought to contribute significantly to pointing the way forward.

“Eleven Point Four Percent. We won’t pay!
Eleven Point Four Percent. No way, no way!”

Maybe the background chant I was hearing during the hearing was all imagined. But my sense is that something has changed, that the consumer’s “pain at the phone” threshold has been crossed. And that, as a result, there is now an opportunity for meaningful universal service reform that leads to a less costly, more efficient system that is also much less competition and technology-distorting than the existing regime.

Communications Policy in the Next Administration

As in other areas, the differences between the communications policy visions of Barack Obama and John McCain are stark, at least as presented by their surrogates at this week's Federalist Society debate at the National Press Club. And the surrogates are no newcomers to communications policy -- former FCC Chairman Reed Hundt representing Obama and former FCC Chairman Michael Powell representing McCain. You can find the audio and video for the debate here.

There were some sharp partisan jabs, mostly by Reed Hundt, which struck me as a bit at odds with his candidate's professed notion of trying to reach out to all sides and transcending "politics as usual."

But putting aside the entertainment value of the debate's sharpness, for those interested in the future of communications law and policy the debate was very instructive. There is no doubt that Mr. Hundt presented Obama's vision as one in which traditional analog-era regulation plays a much more prominent role than it does in McCain's. This difference in the willingness to maintain (or in some instances re-impose) regulations put in place long ago in the twentieth century's monopolistic communications environment ran throughout the debate.

Here I'll just highlight one instance in which I think the difference in regulatory philosophy is particularly stark, and important -- in the way in which the two surrogates approach the net neutrality controversy. Mr. Hundt enthusiastically embraces what he called the "broadband future-oriented modern version of common carrier," with an "absolute rule against discrimination." Mr. Powell vigorously disagreed, saying that adopting Mr. Hundt's common carrier regime would amount to "the first fateful step of inviting the federal government towards regulating the Internet." Responding to Mr. Hundt's embrace of the need for net neutrality legislation that strictly prohibits discrimination, Mr. Powell said at this point it is "far from clear what problem you are trying to solve," and that the "consequences of empowering legislation around difficult technical and architectural questions is dangerous." While not denying there could be instances of anticompetitive conduct that should be addressed, Mr. Powell said, "the better approach in a new and vibrant market is to put greater emphasis on an enforcement model, an antitrust model." For the core of the back-and forth regarding net neutrality, you can tune in beginning around the 26 minute mark of the replay.

Mr. Hundt is at least forthright in conceding net neutrality mandates are simply another name for a traditional common carrier regime. Some net neutrality advocates shy away from doing this for fear such directness harkens too much to the past. I have explained on many previous occasions why such a regime, with rate regulation and a no-discrimination prohibition at its core, is not an appropriate model to apply on a forward-looking basis to broadband Internet providers in today's competitive communications environment. Perhaps this model was appropriate for the railroads in the nineteenth century, and for AT&T throughout much of the twentieth century, although respected scholars such as Bruce Owen, a member of FSF Board of Academic Advisors, have serious doubts. (See Bruce's scholarly essay on this point here.) But relatively fewer scholars in the field of regulatory law and economics share Mr. Hundt's (and Obama's) view that the Internet should be subject to a public utility-style common carrier regime.

Anyway, as they say, the debate speaks for itself, and tuning in is a worthwhile way for all those interested in communications policy to spend an hour or so.

Maryland’s Budget System: An Imbalance of Power?

In 1916, the citizens of Maryland approved a budget system that gave primary budget authority to the Governor. Almost a century later, the debate continues about whether the legislature gave away too much of its power and should ask the citizens to restore it.

Those who argue that it is time to increase legislative authority maintain that more legislative power would allow more citizen participation and flexibility into the budget process. I believe that the General Assembly already has significant budgetary power and that allowing the General Assembly to rearrange the Governor’s budget would exacerbate Maryland’s spending problem (often referred to as the structural deficit). As noted in the September 18, 1916, issue of the Baltimore Sun by William Milnes Maloy, one of the members of the Goodnow Commission that recommended the current allocation of budgetary responsibility, “If the Maryland legislator served his State as well as he serves his county or district, a budget system would not be necessary in Maryland. …it must be said that most of the members of Parliament, of Congress and of every State Legislature in the Union are more mindful of the public interests of the localities they respectively represent than of the general welfare of the nation or the State.”

You can read my arguments and those on the other side by Prof. Roy Myers in a new report issued by The Maryland Budget and Tax Policy Institute, a project of the Association of Maryland Non-Profits.

Broadband Policy, Dollars and Sense

The United States has had a generally deregulatory broadband policy since 2002 when the FCC declared that broadband services “should exist in a minimal regulatory environment that promotes investment and innovation in a competitive environment.” Despite the fact that, since 2002, the broadband marketplace has continued to become more competitive and broadband services more ubiquitous and innovative, the FCC has not adhered in a consistent fashion to its declared deregulatory posture. When it has strayed, the results have not been good.

Take the recent 700 MHz auction of spectrum for wireless broadband services. FCC Chairman Kevin Martin insisted a portion of the spectrum to be auctioned be encumbered so that the auction winner would be required to use the spectrum consistent with net neutrality principles. The spectrum would be an “open access” zone in which all content, applications, and devices would be required to be treated on a “non-discriminatory” basis. With 80 years of common carrier non-discrimination regulation as historical context, potential bidders knew a regulatory quicksand pit when they saw one. The result: The auction bids fell way below the FCC’s reserve price, and the spectrum block, so-called prime real estate for advanced wireless services, will continue to lay fallow. And, in the meantime, the U.S. Treasury is deprived of the funds that would have been realized in an unencumbered auction.

Now Chairman Martin apparently is proposing another encumbered auction for another chunk of spectrum that can be used to provide broadband services. This time the auction winner would be required to offer a “free” broadband service of some bandwidth capacity to some percentage of the nation’s population over some future build-out schedule. And, for good measure, this free service would be required to filter out “indecent” programming.

The FCC should have learned its lesson from the 700 MHz auction. It is unsound public policy to encumber spectrum auctions in this way, rather than auctioning the spectrum on an unencumbered basis that allows market mechanisms to work properly. The spectrum is devalued, and U.S. taxpayers lose. And the FCC establishes a regime that will, assuming a bidder meets whatever “reserve price” the Commission in its wisdom sets, will invite, nay, ensure, regulatory scheming and litigation over the “free” block rules far into future. There will be attempts by all interested parties to use the regulatory process to game the regime, with ongoing battles over bandwidth requirements, the build-out schedules, and the interpretation and enforcement of the “indecency” regulations. What about a waiver of this rule? Why not a waiver of that rule? For how long? Pretty please! Any casual observer of the FCC’s regulatory history knows this to be true and understands the troubles such encumbrances promise.

Like virtually all goods and services, broadband capacity is “scarce.” Indeed, it takes huge capital investments to build-out broadband networks, and once built-out, unless periodically upgraded and modernized, they quickly can become less than the moving target that is called “state-of-the art.” It is important, therefore, that regulators allow the broadband market, like other competitive markets, to work in a way that uses price signals to respond to changing consumer demand. Of course, a zero-price of “free” is no price signal at all.

U.S. broadband penetration has been remarkable over the last several years, with over a 100 million lines now in service, and broadband service available in over 99% of the zip codes in America. To be sure, these figures do not demonstrate that broadband service is ubiquitous, or that everyone who would like broadband, has it, or even that those that have it, have as much bandwidth capacity as they would like today or tomorrow. There is still more progress to be made, and, truth be told, there most likely always will be with respect to ever-increasing demand for more bandwidth.

If policymakers determine that measures are needed to address broadband penetration or usage rates in certain high-cost geographic areas or among certain low-income persons, any such measures should be carefully and narrowly tailored to address those areas or persons in the most economical and efficient manner. But to continue the progress already made, policymakers should not abandon market mechanisms for regulatory encumbrances, whether they happen to be in the form of requirements for “free” service, “open access” zones, or “net neutrality” mandates.

In a not unrelated development, Time Warner announced earlier this week that will experiment in a few markets with plans that tie bandwidth usage to price. In other words, heavy users would be required to bear more of the burden for the capacity demands they place on Time Warner’s network than light users. In another context, this is just a variation of the point made above – that in a competitive marketplace, price signals must be allowed to allocate a scarce resource if overall consumer welfare is to be enhanced. Hopefully, the pro-net neutrality crowd won’t be allowed to derail such pricing experiments or plans if they prove to be a sound way to address network management issues and capacity constraints.

Reforming the Sunshine Act

There are many things, large and small, that should be done to reform the FCC in an institutional sense. They range, on the one hand, from major substantive changes to the Communications Act that would require the agency to rely more heavily on a competition-based standard rather than the indeterminate public interest standard, to various process-oriented reforms that the Commission could accomplish on its own.

At last week's Cable Show in New Orleans, amidst all the discussion of substantive issues like net neutrality, leased access, and whatnot, FCC Commissioner Copps again talked about the negative impact of the Sunshine Act on the Commission's decisionmaking process and the agency's sense of collegiality. He reminded the audience that he and then-FCC Chairman Michael Powell had sent then-Senate Commerce Committee Chairman Ted Stevens a letter in February 2005 urging that the Sunshine Act be amended to allow the commissioners to deliberate together outside of public meetings.

When Commissioner Copps renewed his plea at last week's Cable Show, he suggested that, rather than amending the Sunshine Act on a permanent basis and for all agencies, Congress might authorize changes in the Act on a trial basis. The notion of changing any jot or tittle of the Sunshine Act is not popular among the press, even though its failings have long been obvious to many others, including academics of all stripes who have studied the issue extensively. Commissioner Copps deserves credit for continuing to raise the issue.

In 1995, I chaired a special committee of the Administrative Conference of the United States ("ACUS") that recommended, after taking testimony from many agency witnesses and interested members of the public, that Congress authorize a pilot program which would allow agency members to meet in private provided the agency requires that such meetings be memorialized by a detailed summary of the meeting to be made public no later than five working days after the meeting. The ACUS report and a brief law review article I published introducing the report are here.

The ACUS report laid out all the familiar reasons why administrative law scholars and many close observers of agency behavior have urged that the open meeting law be modified, and I will not repeat the report here. This excerpt captures a good part of the argument:

"[A]s a practical matter, it is at least arguable that the Sunshine Act produces an effect contrary to one of Congress’s principal purposes for its enactment: creating multi-member agencies to obtain the benefit of collegial decisionmaking from persons who bring to the decisionmaking process different philosophical perspectives. experiences, and expertise. Unable to deliberate together in private, agency members resort to communicating with each other in writing, through staff, or in one-on-one meetings with other members (assuming the agency has more than three members so that even one-on-one meetings are allowable). Obviously, these indirect means of communication are not conducive to fostering collegiality in the same sense that it is fostered when all agency members are able to engage in a simultaneous collective discussion."

A principal impetus for initiating the ACUS study back in 1995 was that all five FCC commissioners signed a letter asking that the study be performed because they were concerned the Sunshine Act adversely impacted the quality of agency decisionmaking. I understand that it is difficult to get Congress to modify the Sunshine Act. But if all five FCC commissioners once again signed on to a joint letter asking Congress to authorize a trial for a limited period for only the FCC, Congress might well be receptive to such a pilot program. The trial could be limited to rulemakings and require that any closed door meetings be memorialized in a summary of the meeting to be placed in the public record.

I hope Commissioner Copps will draft such a joint letter, take this idea to his colleagues, and secure agreement from all. No one disputes the notion that the FCC ought to function in a way that fosters collegial decisionmaking, consistent with holding agency members accountable for their actions. To that end, the agency's members ought to act collectively to urge Congress to authorize a limited trial to determine if modifying the Sunshine Act will indeed promote such collegiality and improve agency decisionmaking, while still maintaining public confidence in the integrity of the Commission’s processes.

Memorial Day 2008

It is hard for me to think of Memorial Day without Abraham Lincoln injecting himself into the same stream of thought. After all, the first Memorial Days, then called Decoration Days, arose shortly after the Civil War ended to honor the Union’s war dead. The celebration held on May 5, 1866, in Waterloo, New York, is often credited with being the first official Memorial Day commemoration. (Napoleon take note!)

Lincoln can inspire in many different ways. But as I contemplate Memorial Day 2008, with a presidential election at hand, I am reminded that after winning the presidency, Lincoln brought into his War Cabinet all of his principal rivals for the Republican nomination. And then he added a few Democrats for good measure. He did so knowing full well that in every instance these men considered themselves – wrongly, as it turned out – to be his superiors.

Doris Kearns Goodwin tells the tale of Lincoln’s cabinet in her magnificent Team of Rivals. Her book gives us a new appreciation for an aspect of Lincoln’s character rare in politicians of any age, and certainly not always abundantly in evidence today -- the willingness to reach out to political opponents and seek common cause to advance the public’s interest, rather than self-interest.

In arduously melding his “team of rivals” -- a group of disparate personalities with conflicting loyalties -- into an effective governing unit, Lincoln had two paramount goals: first, save the Union, and, second, lead the nation to what he called in Gettysburg “a new birth of freedom,” meaning, in that time and place, emancipation of the slaves.

In our time and place, on this Memorial Day, and on all Memorial Days since the first, are there really any national objectives more paramount than preserving the Union and the individual freedom for which America has come to stand? To be sure, even since the Civil War, here in America such freedom certainly has not always been enjoyed by all, or enjoyed perfectly in the same way. But is there a country other than America that more truly embodies the spirit of the liberty principle for which the Civil War was fought, for which so much blood was shed to preserve the Union? I think not.

At a time when America finds itself still at war, with our brave soldiers fighting and dying abroad, it should not be too much to hope that, in this election year, our political candidates at all levels might adopt a more Lincolnesque posture. Without compromising on matters of fundamental principle, it ought to be possible in difficult times to seek common cause with rivals whose politics differ. Considering the bonds that bind together all Americans, this is especially true on matters relating to protecting America’s security and the freedom which that security enables.

Sandwiched between the crowning of the latest American Idol and the first trip to the beach or first backyard barbeque, it is all too easy to forget Memorial Day’s true meaning. But let’s don’t. This Memorial Day, as each year, let us remember all those who have shed their blood fighting under America’s flag, and, as Lincoln put it at Gettysburg, “resolve that these dead shall not have died in vain.”

Straight Talk on Net Neutrality Straitjackets

In yet another hearing on Net Neutrality yesterday before the House Subcommittee on Telecommunications and the Internet, Christopher Yoo's testimony was especially straightforward and persuasive -- for those with open minds and willing to be persuaded. Yoo is Professor of Law and Communication and Founding Director of the Center for Technology, Innovation, and Competition at the University of Pennsylvania. He is also a member of the Free State Foundation Board of Academic Advisors.

Professor Yoo's testimony is worth reading in full. His bottom line: Instead of enacting new laws or regulations, "[t]he better solution is to pursue what I have called 'network diversity,' in which different providers are permitted to experiment with different approaches and to let the choices of consumers control the ultimate outcome."

Here are some highlights that lead him to this conclusion:

• "Internet traffic is growing not only in terms of size, but also in sophistication. During the Internet’s initial phase, the primary applications were e-mail and web browsing. For these applications, delays of a fraction of a second were virtually unnoticeable. The current Internet is increasingly dominated by more sophisticated applications such as streaming media, online gaming, telemedicine, and virtual worlds, which are often much more bandwidth intensive and much less tolerant of delay. The most important development is the deployment of IP video, which some experts estimate will cause that traffic to grow once again at a rate of 90% to 100% each year. Network providers are pursuing a number of strategies to meet this rapidly increasing demand. Unlike the initial transition to broadband, which only required reconditioning existing cable and telephone technologies, the new strategies require significantly greater capital investments."
• "But perhaps the most important and most often overlooked development is the emergence of wireless as a major broadband competitor. The most recent FCC data reveal that wireless has skyrocketed from having no subscribers as of the beginning on of 2005 to controlling 35 million subscribers and 35% of the market for high-speed lines as of June 2007. Published reports indicate that wireless broadband has continued to grow rapidly. The result is that the broadband industry is becoming increasingly competitive. Even network neutrality proponents concede that an increase in competition undercuts the justification for regulatory intervention."
• "Network providers must thus make decisions that involve difficult tradeoffs based on their best guess of what the future will bring. These considerations underscore the problems associated with any one-size-fits-all solution to the Internet. The network now consists of very different transmission technologies, each of which is susceptible to different problems and different solutions. In addition, the number of potential solutions is vast, including building additional bandwidth, storing content locally, and network management."
• "Thus, in order to protect against 'death by a thousand cuts,' any regulator would have to undertake comprehensive oversight of essentially all facets of the business relationship between the parties. The challenge of doing so would be particularly demanding in industries like broadband, which are undergoing rapid technological change. This has led many commentators to conclude that any attempts to mandate access to such complex technologies are likely to prove futile. Indeed, past efforts to impose similar access regimes, such the controversy over protocol conversion and vertical switching services under the Computer Inquiries, leased access to cable television networks, and unbundled access to network elements under the 1996 Act, have become bogged down in incessant controversies and litigation."

In the past several years, Professor Yoo has emerged as one of the leading scholars on the "law and economics" of network industries, particularly with respect to broadband and the Internet. I am under no illusion that his testimony will put to rest the campaign by all of the net neutrality advocates for the enactment of new "neutrality" laws and regulations. But I do remain hopeful that it will give pause to at least some of these advocates.

With all the changes and dynamism occurring in the marketplace and in technology described by Professor Yoo, now is not the time to risk stultifying and ossifying the Internet by adding new laws and regulations that are likely to prove to be straitjackets with unforeseen and unpredictable consequences.

A Good Day for Universal Service Reform

There were two positive developments yesterday for those, like me, who favor meaningful reform of the federal Universal Service subsidy programs.

First, the press reported that FCC Commissioner Robert McDowell has now voted to cap the high-cost Universal Service fund. The annual subsidy provided to support telecommunications service in high-cost areas is around $4.5 billion per year. The subsidy has been escalating rapidly in recent years, primarily because wireless carriers have been applying for and receiving support in ever increasing amounts. The cap, intended to be an interim measure, pending adoption of more comprehensive reform, is an important step in staunching the uncontrolled growth of the high-cost fund. After all, consumers already are paying an 11% surcharge (some would say, rightly, a tax) on all their interstate calls.

Commissioner McDowell has now provided the third vote necessary to implement the funding cap. In my view, he should have acted sooner in concert with the leadership that FCC Chairman Kevin Martin and Commissioner Deborah Tate have shown on the issue. But, as the saying goes, better late than never.

And the second positive development? At yesterday’s Free State Foundation seminar on USF reform, Neil Fried, senior counsel for telecom policy, House Energy and Commerce Committee, unveiled a Universal Service discussion draft bill, the “Universal Service Reform, Accountability, and Efficiency Act of 2008,” on behalf of Ranking Member Joe Barton. A full transcript of the seminar's proceedings, in which many good ideas were discussed, will be released in a couple of weeks.

Rep. Barton’s draft bill would accomplish fundamental reform in a way that, in my view, is consistent with recognizing what already has been achieved in making telecom services available to almost all Americans and consistent with acknowledging that new competition and constantly-evolving technologies have rendered the existing subsidy system wasteful and inefficient. Without elaborating here, it should be noted that Rep. Barton’s reform measure includes a permanent cap on the entire USF fund upon enactment, shifts the contribution mechanism to phone numbers rather than interstate revenues, focuses support on voice communications services, and relies on reverse auctions as a distribution mechanism, capped in each succeeding auction at the level of the previous winning low bid.

I will have more to say about Rep. Barton’s draft bill in the weeks and months ahead. For now, I will simply note that the draft received a generally warm reception at yesterday’s FSF seminar. For example, Colin Crowell, chief telecom staffer for Rep. Ed Markey, who chairs the House telecommunications and the Internet subcommittee, stated: “The draft is beneficial and positive to the debate….People are looking for reform of the system. . . . This helps contribute to the conversations we are having up here.” This was not intended by Mr. Crowell to be an endorsement of all of the ideas in the draft. But I took it to be a genuine and gracious acknowledgment that the Barton draft serves a very useful purpose in focusing on the tough choices that will need to be made if the country is to move towards a support system that is much more economically efficient – one that enhances overall consumer welfare -- than the regime we have today.

One of the choices highlighted at the FSF seminar by John Rose, President of the Organization for the Promotion and Advancement of Small Telecommunications Companies, is the extent to which subsidies for broadband services explicitly should be included in a reformed Universal Service program. Like the current regime, as a practical matter, Rep. Barton’s bill likely would not preclude support payments to winning reverse auction bidders from being used for broadband applications offered in conjunction with provision of voice communications. But, unlike the Joint Board and other proposals, it does not specifically direct funds to support broadband infrastructure.

So, Rep. Barton commendably has stepped forward and made an important contribution to the USF reform debate. (I know that Neil Fried, and most especially committee counsel Courtney Reinhard, worked very hard in putting together the discussion draft and they deserve much credit.)

I am pleased that Rep. Barton’s draft was unveiled at yesterday’s FSF event. And I am pleased that Commissioner McDowell yesterday provided the third vote at the FCC for the high-cost cap. All in all, a pretty good day on the long road to Universal Service reform.

The FCC Takes A Positive Deregulatory Step

Late last night, the FCC largely granted AT&T's request that the agency forbear from continuing to apply decades-old cost assignment rules that no longer serve and useful regulatory purpose. As I explained in this space yesterday in "Midnight Madness," the rules "were put in place when AT&T was the dominant carrier in a monopolistic environment." In that era, rates for various AT&T services were based on cost assignments, admittedly necessarily arbitrary, to various serivces. As I said yesterday, "this is no longer true in an era when rates are capped by both the FCC and the states."

It seemed to me this was an important test of the FCC willingness to recognize that outdated and costly rules which no longer serve a useful purpose in today's competitive environment should be eliminated. And, as I explained in two earlier pieces, "Bearing in Mind Forbearance's Purpose" and "Bearing in Mind Forbearance's Purpose-Part II," it was an important test of the Commission's willingness to use the forbearance authority contained in the Telecom Act of 1996 to accomplish such deregulatory purposes. It is very rare for Congress to include such forbearance authority in a regulatory statute. Recognizing the dynamic and fast-changing nature of technology and the communications marketplace, Congress included forbearance authority in the '96 Act for a good reason.

AT&T's petition asking the FCC to stop applying costly rules that no longer made any sense presented a paradigmatic case for the exercise of forbearance. There will surely be criticism from those who refuse to recognize the dramatic changes that have occurred in the marketplace, and who oppose any efforts to change the FCC's rules to recognize the new competitive realities. But FCC Chairman Kevin Martin, and Commissioners Deborah Tate and Robert McDowell deserve much credit for exercsing leadership and taking a worthwhile deregulatory step.

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.