Changes in Attitudes: Competition Policy and the FCC

Changes in Attitudes: Competition Policy and the FCC
June 17, 2014

Randolph J. May

Randolph J. May is President of The Free State Foundation in Potomac, Md. (read full bio)

Remember the opening line from "Changes in Latitudes, Changes in Attitudes,"one of my favorite Jimmy Buffet songs:

 

"I took off a weekend this month

Just to try to recall the whole year."

 

Those lyrics - which I am now singing to myself, and you can too - kept coming to mind this past weekend, in this sense. There is so much happening, and so quickly, on the communications policy front that I often spend the weekends just trying to recall what happened during the past week - and trying to make sense of it all.

 

I am not necessarily proud to admit that this is the way I spend a good part of my weekends. It ain't "Margaritaville," for sure. But we are in a critical time for determining the future direction of communications policymaking, so I do so freely in the hope of changing attitudes, if not latitudes.

 

Here are some observations that I put together this past weekend, relying on current FSF work, regarding "Competition Policy and the Role of the Federal Communications Commission," net neutrality regulation, and FCC Chairman Tom Wheeler's promotion of municipal broadband systems. As you might suspect, they are all related.

 

First, I put "competition policy and the role of the FCC" in quotes because this is the title of the House Commerce Committee's Third White Paper seeking public comment as part of the committee's process to update the Communications Act. I have said many times that the Communications Act is in need of updating, and I am pleased that Free State Foundation scholars have participated actively in the House committee's process.

 

A proper understanding of "competition policy and the role of the FCC" is at the core of understanding why and how the direction of communications policy needs to change. While I hope you will read the entire paper, I want to highlight and emphasize a key portion of the Free State Foundation submission:

 

A combination of rapid technological innovation, consumer choice, and disruptive changes in the communications market has altered forever the traditional competitive landscape. These profound structural and technological changes point to the need for a competition policy that leaves free from government regulation those market processes that continue to propel further innovation and competition for new services. Regulatory intervention is only warranted in instances where there is convincing evidence of a market failure that is likely to harm consumers. Absent such evidence of market failure, service and product suppliers should be free to exercise their informed business judgment in an entrepreneurial fashion. Their success will be shaped by how an ever more sophisticated generation of telecommunications consumers respond to their business offers.  The interaction of both sides of the market place will outperform any effort by the FCC to chart through government design the direction of future innovations in the ever larger and more complex Internet marketplace.

 

This statement of competition policy principle should guide Congress as it considers revising the Communications Act. And it also should be a guide for the FCC, presently, when the agency is not otherwise constrained by a contrary statutory direction.

 

Which brings me to net neutrality, where the Commission is certainly not constrained by the statute to take any action at all. Indeed, since the agency's second judicial rebuff in its attempt to impose net neutrality mandates, I have suggested many times that it would be prudent to await further direction from Congress. While it may be, at least in the D.C. Circuit's view, that the Commission is authorized to act, it is not required to do so.

 

But let's assume that the Commission's majority is determined to move forward to adopt some form of net neutrality regulation. The specific approach the Commission takes matters a lot, of course. For reasons I have delineated over and over, classifying Internet providers as common carriers under Title II almost certainly would stifle the future development of the Internet. Internet providers - and the reach could extend to so-called edge providers as well - shouldn't be turned into public utilities like electric companies and put in the same regulatory straightjacket devised to control monopolies.

 

If the Commission adopts new net neutrality regulations, it should adopt the approach proposed in the rulemaking notice to the effect that it will not interfere with the Internet providers' practices if they are commercially reasonable. If implemented properly, this "commercial reasonableness" approach could provide the ISPs the flexibility they need to experiment with offering new services responsive to changing technological capabilities and consumer demand.

 

Here is the way I explained proper implementation in my blog, "The FCC's Approach to Net Neutrality: The Wrong Approach for Regulatory Presumptions," published on June 4th.

 

In light of the technological dynamism and multiplatform competition that exists in the broadband marketplace - with cable, telephone, fiber, satellite, and various wireless companies all offering consumers alternative choices for Internet service - the proper approach for the Commission is to presume that, absent clear and convincing evidence of market failure and consumer harm, Internet providers' practices, including practices involving prioritization of services, are commercially reasonable. In other words, the rebuttable presumption should run in favor of not imposing new public utility-style regulations on Internet providers.

 

In short, absent convincing evidence of market failure and consumer harm, "commercial reasonableness" should be presumed, not the other way around. Were the Commission to adopt this approach, it would take a step in the direction of adopting rules that, while perhaps unnecessary, represent a possible way forward. This would be a principled approach consistent with the Free State Foundation submission to the House Commerce Committee.

 

Now, finally, about Chairman Wheeler's ongoing suggestions that he's contemplating getting the FCC to act to preempt the 20 or so states that have adopted either an outright ban or some form of restrictions on municipal broadband systems.

 

By way of explanation for his possible support for preempting these state laws through FCC action, in line with previous statements, Mr. Wheeler simply offered this: "Being pro-competition means being pro-competition."

 

Well, yes, but....

 

Of course, the matter is not all that simple. All so-called "competition" is not the same. For example, in the Free State Foundation's submission to the House Commerce Committee, we focus on the importance of facilities-based, cross-platform competition as opposed to competition derived from government mandated facilities-sharing regulations. And, directly to the point here, for more than five years, we have examined some of the many failures of government-owned municipal broadband systems. Here are just some recent FSF pieces recounting the failure of many government-owned networks: Burlington Telecom's February $10 million settlement with Citibank over loans to its ailing system, along with examples of municipal "broadband busts" includingMooresville and Davidson, North Carolina, Utah's UTOPIA network, Provo, UtahLafayette, Louisiana, and theN.C. Eastern Municipal Power Agency.

 

I have never taken the position that, as a matter of policy, there may not be rare circumstances when construction and operation of municipal-owned telecom systems would be proper. If it is clear that private sector companies are unable or unwilling to offer service, then there may be a proper role for a municipal system. But these rare circumstances have little to do with proclaiming a "pro-competition" mantra or with the policy impetus behind the state laws that Mr. Wheeler now contemplates preempting.

 

As my FSF colleague Seth Cooper explained earlier this year in a Perspectives from FSF Scholars: "Such laws prevent local government conflicts of interest with the private sector marketplace competitors who invest tens of millions of dollars in localities to build out their broadband networks. They also protect local taxpayers from potentially devastating financial losses from poorly-run municipal broadband projects."

 

In short, the tax and other documented financial advantages, along with other preferences such as permitting privileges and rights-of-way preferences, conferred upon government-owned communications networks means it is too simplistic to declare for "competition." In order to have a serious discussion, Mr. Wheeler surely must grapple with the underlying fundamental distinction between government and non-government networks that are the impetus for the adoption of the state bans.

 

And aside from these policy questions, Mr. Wheeler must grapple with the legal questions, including serious constitutional questions, which arise in any discussion concerning preempting state laws restricting municipal networks. Here it suffices to refer to Seth Cooper's excellent seminal piece on the subject, "FCC Preemption of State Bans on Municipal Broadband Networks Is Most Likely Unlawful." In any proper conception of our federalist constitutional system, it can't be enough to blithely suggest that the wishes of municipalities should prevail over the state sovereigns under which they are created.

 

After all, in our constitutional regime, we do not recognize, as a matter of legal status, "citizens" of Provo or Lafayette, but we do recognize citizens of Utah and Louisiana - and the Constitution confers upon these state citizens the authority to exert their will, through either their elected representatives or sometimes through referenda, to adopt laws that restrict municipal activities.

 

Well, it is another week, which I'm sure will be all too busy. But this is the way I was thinking, over the weekend, about last week. Hoping to spur, if not changes in latitudes, then perhaps some changes in attitudes.

 

Find more information here.

Randolph J. May

Randolph J. May is President of The Free State Foundation in Potomac, Md. (read full bio)