House Telecom Proposal Opens New Frontiers for Regulation
September 22, 2005
The Internet has flourished without oversight by the Federal Communications Commission, yet, for some reason, a draft proposal for re-writing the Telecommunications Act of 1996 tells the FCC to regulate it.
Regulation is the enemy of innovation, and all sides have agreed that as competition develops it should be possible to eliminate regulation. Unfortunately, that’s not the overall direction of the draft broadband legislation in the House of Representatives. The proposal, which is 77 pages long, is reminiscent of the 1996 Telecom Act in that it solves some longstanding problems while opening vast new frontiers for regulation and litigation. Perhaps the biggest error that Congress made in the 1996 Act was not reducing the size and the power of the FCC. The 1996 Act gave the FCC significant new powers to promote competition, and the regulatory blunders that contributed to the telecom crash were a direct consequence. The same mistake is made in this proposal, which doesn’t use the word “repeal” a single time.
There are several good provisions in the House proposal. Broadband services would be subject to exclusive Federal jurisdiction and would be free from any regulation of rates, charges, terms or conditions. A streamlined franchise process would let video service providers commence service within 15 days, and cities would be prohibited from granting preferences or advantages to any broadband provider. These provisions mirror legislation in the Senate introduced by John Ensign of Nevada and John McCain of Arizona. If enacted, these provisions would provide clarity and certainty that are badly needed to attract investment.
What is not clear is why new and existing regulation is needed when the telecom and cable markets are awash with competition. Competition in voice is thriving with 162 million downloads of Skype, more mobile phones than fixed lines and a surge in VoIP subscribership. Direct broadcast satellite and now Verizon and SBC are placing enormous competitive pressure on the cable companies. Under the House proposal, the regulatory burdens on both telephone and cable services would remain. For newer services, incremental deregulation comes with a lot of regulatory baggage.
For example, the FCC is directed to ensure the reliability and integrity of advanced services, to establish procedures for FCC oversight of coordinated network planning, participate in standard-setting and supervise interconnectivity. A threshold objective of telecom reform ought to be to codify the longstanding FCC policy of protecting the Internet backbone from regulation and the policy of extending that protection to Internet access in recognition that the market is sufficiently competitive.
Instead of reducing subsidies for legacy telephone service so that subsidy growth does not penalize new sources of competition, the FCC is directed to conduct an immediate inquiry in which it will be a forgone conclusion that the Universal Service support base will be expanded to include VoIP. Since it has been politically difficult for the FCC to introduce basic efficiencies and cost-controls, the solution is for Congress to take Universal Service away from the FCC. Pay for it out of general tax revenues. Let the Congressional Budget Office, the Joint Committee on Taxation and the General Accounting Office scrutinize it and let it compete with all of the other recipients of federal assistance.
It has been fashionable to talk about reducing prescriptive regulation that anticipates every conceivable need for regulation, and replacing it with a stronger enforcement presence by the FCC. A mandate to place more emphasis on mediation and arbitration to resolve disputes will serve as a de facto regulatory vehicle that could be worse than the one we have, which at least theoretically is governed by the Administrative Procedure Act. In mediation and arbitration, the FCC can exert pressure on parties to act in ways that go beyond what the agency could require by regulation.
Rather that reduce cable regulation the bill would extend it to new video services. Most of this cable regulation is premised on the false notion that bandwidth is scarce and that government intervention is necessary to assure diversity, localism and fairness. That is plainly no longer the case, if it ever was. The FCC would be required to draft regulation to prevent redlining and the proposal contains a place holder for buildout language. These requirements are appropriate in a monopoly environment, but Verizon and SBC are building competing video networks from scratch. If these companies are allowed to wire the most profitable customers first, those customers will underwrite the cost of serving everyone else.
Finally, there is a “net neutrality” provision which provides that broadband Internet transmission service providers may not block, impair or interfere with any content, applications or services on the Internet. The burden of proof will be on service providers, because that will be the only way to enforce this. They will have to track and report on the latency characteristics of individual packets to prove that they don’t degrade their competitors’ service. With open ended language like we see in the House bill and the enthusiasm of the federal courts for deferring to the expertise of the FCC in the absence of an unambiguous statute, net neutrality could become a playground for lawyers and lobbyists.
The FCC does not need to be given new enforcement powers to prevent blocking. When the National Association of Realtors adopted a policy allowing traditional brokers to block their web-based competitors' customers from having full online access to all Multiple Listing Services (MLS) listings, an antitrust lawsuit was filed by the Department of Justice. A violation of Section 1 of the Sherman Act, under which the complaint was brought, is a felony. There is no reason that an antitrust remedy would not work in telecom.
Re-writing the 1996 Telecom Act is the single most important step Congress could take to revive the tech sector. Clearly, some amount of give and take is necessary to enact any new law. But if previous experience is any guide, the bad things in this proposal could outweigh the good.
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