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March 28, 1996

Hearings on the
Federal Communications Commission

Before the House of Representatives Subcommittee on
Telecommunications and Finance of the Commerce Committee

Testimony of Peter K. Pitsch

 

Summary of Testimony

Important as the Telecommunications Act of 1996 is, important systemic telecommunications reforms are still needed. Although some federal and state regulation remains appropriate, experience has now shown that industries governed by market forces generally work better than government-run or regulated ones:

  • Markets produce objective information on how consumers and producers value resources and strong incentives to act on this information. The FCC's delay of cellular is estimated to have cost America over $80 billion.
  • Competitors often use the regulatory process to delay innovation and competition by several years or even decades. Consider customer premises equipment, long distance yesterday and today, cable, video dial tone, VHF drop-ins, low power TV, and DBS.

  • The pace of technical change, especially regarding digital technologies, has increased the cost of regulation. Digital technologies make most regulatory distinctions between voice and data and video just plain silly. In accordance with these principles, much of the FCC's current responsibility should be devolved to the states, transferred to the Department of Justice and most important of all committed to the marketplace, in the end the true agency of consumer protection.

First, most federal price and profit regulation of telecom markets should be eliminated, either because the relevant markets are effectively competitive, regulation is better left to the states, or such federal regulation is counterproductive. Possible forbearance targets recommended by some members of the Progress & Freedom Foundation Working Group are attached to my testimony. They include tariffing, service bundling, and self-certification reforms.

Second, the electromagnetic spectrum should be largely privatized. Existing spectrum licensees should be given freedom to use their spectrum as they see fit as long as they do not interfere with other licensees--their cochannel and adjacent channel neighbors. Unallocated private and underutilized federal spectrum should be made available in flexible assignments through auctions. A detailed proposal for reforming the electromagnetic spectrum developed by members of the PFF Working Group is attached to my testimony. Third, much of the FCC's general public interest authority is better exercised elsewhere. Attempts to address the broader public interest by assuring there is adequate children's programming, by regulating mergers, or by conducting international negotiations should be handled by Congress or state legislatures in explicit actions or by other agencies such as the Department of Justice or State.

The case for dramatic reform is now more compelling than ever before. Growing global competition, merging markets, and the revolution in digital and related technologies make the unintended and untoward effects of government regulation far more costly than in the past. A regulatory framework that slows innovation in this area, despite any plausible shortrun efficiency gains it might achieve, will foreclose a tremendous opportunity for the American people.

 

Testimony

Introduction

Thank you, Mr. Chairman. It is an honor to be here to testify before this Committee about the restructuring of the Federal Communications Committee. As you know I worked at the FCC for eight years in the 1980s, first as Chief of the Office of Plans and Policy then as Chief of Staff to Chairman Dennis Patrick. Since then I have been in private practice, an adjunct professor at Georgetown University Law Center, and an adjunct fellow at The Hudson Institute and The Progress & Freedom Foundation. I am a member of the PFF Working Group that last May proposed eliminating most of the FCC's current functions over the next three years. Today I am representing PFF and myself and no one else.

This Congress and this Committee are to be congratulated for passage of the Telecommunications Act of 1996 which creates a new legal and policy playing field based on the presumption that competition, open entry and market forces should regulate the telecom industry. Important as that legislation is, and it is the most important telecommunications legislation of the last 60 years, important telecommunications reforms are still needed. Some might benefit from legislation. Others only require diligent oversight by this Committee. I want to address four broad points. First, I want to lay out the case for reform. Second, I will list the structural reforms that should be implemented over time. Third, I will discuss reforms that the FCC should undertake today. Finally, I want to stress the importance of these reforms to the American people.

Before I begin I want to be clear about what I am saying and not saying:

  • I am not here to proclaim the end of communications history. I am not saying that all communications regulation by all agencies, federal and state, is inappropriate.

  • Nor am I saying that my policy prescriptions could be implemented overnight. Indeed, even with a free hand, it might take two or three years to transition to a new system. As an aside, additional resources should be given to the FCC to meet the legislation's mandates, but only if this Committee is satisfied that the FCC is doing everything it should to pare back through forbearance and privatization.

  • My message is not partisan. My criticisms of the FCC are systemic. They cross administrations. They span the decades. Time and again and to this day well intentioned regulation has hurt consumers, often the poor and those least well represented in the Washington regulatory game.

  • Lastly, because in my eight years at the FCC I got to know many FCC employees first hand, it is important to me to make explicit that my comments are not intended to be a criticism of FCC employees, who perform their jobs in an exemplary fashion. The cost of the FCC is not salaries. The overriding costs of the FCC are the foregone benefits of competition and innovation.

Why Dramatic Reform Is Needed

Why replace the FCC? What's wrong with regulation? Experience has now shown us that industries governed by market forces generally work better than government-run or regulated ones--competition regulates prices and profits better than the administrative process. Markets produce objective information on how consumers and producers value resources and strong incentives to both to act on this information.

  • Regulation, in contrast, comes up short on both counts. Regulators lack the necessary information and the proper incentive needed to make prudent decisions that will most benefit consumers.
  • Consider spectrum allocation decisions, e.g., the cellular mobile radio and VHF television allocations were billion dollar debacles. The FCC's delay of cellular is estimated to have cost America over $80 billion. Consider too the government's current use of the 6 to 10 GHz of spectrum below 30 GHz spectrum. Most experts outside government believe that that spectrum is underutilized.
  • A second failing of the regulatory process is that it is often used by competitors to delay innovation and competition by several years or even decades. Few companies and no trade association can resist the temptation to use the regulatory process to stymie a competitor or delay a new entrant. Most of those efforts have injured consumers. When it comes to communications pleadings H.L. Mencken's quip is surely right, "It may be a sin to think evil of others, but it is seldom a mistake." Again let's look at the record. It's replete with examples of where regulation impeded competition and new service such as customer premises equipment, long distance yesterday and today, cable, video dial tone, VHF drop-ins, low power TV, and DBS.
  • The pace of technical change, especially regarding the digital technologies, has increased the cost of regulation. In the old days it was ridiculous for the FCC to allocate land mobile frequencies on a nationwide basis to narrow industries, such as taxis and forestry management. The inevitable consequence was an overallocation of frequencies to taxis in Boise and an underallocation in New York City and vice versa for forestry management frequencies. Digital technologies make most distinctions between voice and data and video just as silly and far more expensive.

What Structural Reforms Are Needed

What's the answer? As this Committee and Congress have recognized in the Telecommunications Act of 1996, it is to rely more on market forces. Where regulation is necessary to check market power, it should seek to preserve the information-producing and feedback mechanism of the marketplace. Subsidies should be explicit and competitively neutral to minimize their distortive effect. Deferring to state regulators and employing case-by-case mechanisms such as the common law rather than imposing nationwide structural rules will maximize the opportunity for experimentation.

In accordance with these principles, the current FCC should be replaced with a much smaller federal agency. Much of the FCC's current responsibility should be devolved to the states, transferred to the Department of Justice and most important of all committed to the marketplace, in the end the true agency of consumer protection.

FCC regulation can be divided into three parts. First, there is utility regulation, that is, the regulation of natural monopoly and universal service. Most federal price and profit regulation of telecom markets should be eliminated, either because the relevant markets are effectively competitive, regulation is better left to the states, or such federal regulation is counterproductive. States should be given principal responsibility for defining universal service and any federal universal service subsidies should be made explicit and means-tested. Regulation of local exchange facilities should be devolved to the states, subject to federal guidelines necessary to the development of local competition and the assurance that interstate users of local exchange facilities have non discriminatory access. I discuss possible forbearance targets below. Second, the management of the electromagnetic spectrum should be largely privatized. Electromagnetic spectrum allocation decisions should be made principally by private parties in the marketplace. Existing spectrum licensees should be given freedom to use their spectrum as they see fit as long as they do not interfere with other licensees--their cochannel and adjacent channel neighbors. Unallocated private and underutilized federal spectrum should be made available in flexible assignments. The assignment of spectrum should be made through the use of auctions where there are competing applicants. I have attached a detailed proposal for reforming the electromagnetic spectrum developed by members of the PFF Working Group. Third, much of the FCC's general public interest authority is better exercised elsewhere. Attempts to address the broader public interest by assuring there is adequate children's programming, by regulating mergers, or by conducting international negotiations should be handled by Congress or state legislatures in explicit actions or other agencies such as the Department of Justice or State. Regulation of mergers should be done through antitrust enforcement, not structural rules. Any federal regulation of programming content should be by explicit subsidy through legislation or enforcement in federal court.

Forbearance Actions That Can Be Taken Immediately
The Commission should immediately undertake several deregulatory initiatives that would benefit consumers, promote competition, and reduce its budgetary needs. Some of these initiatives are made possible, indeed required, by the Telecommunications Act of 1996. Section 401 of the new law adds a new provision to the 1934 Communications Act, as amended (new 47 U.S.C. section 160) which requires the Federal Communications Commission (FCC) to forbear from regulating telecommunications carriers or services, under certain circumstances. Other initiatives, especially those that do not pertain to telecommunications services, can be done under previous Commission authority and discretion. For example, the Commission can use self certification and updated licensing procedures to speed up license transfers and reduce its resource needs. Other functions, especially handling public inquiries, could be streamlined and possibly privatized.

As the Commission seeks to promote competition, it should not delay the forbearance process. These and other initiatives should be taken to begin the FCC's smooth transition to a competitive environment. Congress should give the FCC flexibility to adjust its processes and move its personnel to expedite this process. An initial list of forbearance and privatization proposals prepared by members of the PFF Working Group is attached. Some of those recommendations are:

Private Carriage Contracts. Private carriage promotes competition, the satisfaction of customers' demand for tailored offerings, and the avoidance of unnecessary regulatory costs. There is no good reason to require AT&T, MCI, Sprint, or other long distance firms to file single-customer offerings. Typically, these single-customer offerings appeal to the largest communications customers, firms which spend millions (and, in several instances, hundreds of millions) of dollars annually, and which have large, sophisticated in-house communications staff. Extensive FCC tariffing requirements thus serve little of the customer protection role traditionally associated with tariffing. Instead, those requirements have become at best an unneeded expense and, at worst, a means of price signaling and coordination.

Computer Inquiry Rules. The new forbearance law should be applied to Computer Inquiry rules that prohibit carriers from bundling various services and equipment and impose other unnecessary requirements. For example, all long distance and regional Bell operating companies are prohibited from bundling basic services with either customer premises equipment or enhanced services. Also, AT&T and the Bell companies must:

    1. get prior FCC approval of enhanced affiliates' interconnection plans.
    2. disclose changes in basic network interfaces.
    3. file non-discrimination reports allocate joint and common costs incurred in the provision of basic and enhanced services.
    4. In all these cases, where the FCC determines the basic service involved is effectively competitive, the regulation is no longer necessary or productive

Dominant Carrier Reforms. Steps should be taken to simplify FCC price and profit regulation of telecommunications companies still deemed to command "market power." The FCC needs to move toward a regime of price, not profit regulation, by adopting a "pure" incentives-based ("price caps") regulatory system, along the lines followed by Britain's progressive Office of Telecommunications. The FCC's current approach "caps" permissible prices for "interexchange access" based on a complicated formula keyed to the prevailing rate of inflation and forecasted productivity attainments. But it also requires local exchange carriers to "share" profits above a pre-determined level with customers. By focusing on the appropriate productivity factor and eliminating the "sharing formula," the FCC could discard all the paraphernalia associated with traditional rate-base or rate-of-return regulation, such as depreciation regulation and cost allocation rules.

Sea Change in Approach. In every telecommunications proceeding underway, the FCC should ask if the relevant market is competitive. If so, it should refrain from regulating or consider how it can adapt regulation to promote rather than hinder competition. An illustration of the need for a dramatic change in outlook is the FCC's proposal to impose mandatory resale on paging operators. That market has numerous competitors and no serious observer contends that it is not effectively competitive.

This approach should also be taken as to the rulemakings required by the new law. Two examples include the rulemakings the FCC must undertake to promote geographic averaged rates and universal service. Imposing geographically averaged rates is inconsistent with competition. Long distance competition could be distorted by companies limiting their activities to low cost regions. In that case national carriers might find it difficult to compete in those areas. Under the forbearance section, the FCC should find that competitive concerns require any geographic averaging of rates to be limited and transitional. Similarly, universal service subsidies must be reduced and targeted to those who need them. Market-based mechanisms can be fashioned to phase out unnecessary subsidies that could distort and impede the development of competition.

License Transfers and other changes. The Commission reviews the assignment and transfer of all broadcast stations. Instead, it could adopt a self-certification approach that would put the onus on the buyer who would certify that all the relevant statutes and FCC regulations have been met. The FCC should where necessary clarify its regulations to ease the certification process and use audits as the basis for determining compliance. Alternatively, the FCC could select a self regulating organization (SRO) which could review all license transfers and assignments. Self certification of transfers and assignments would likely be supported by the industry as evidenced by its endorsement by Broadcasting and Cable magazine.

Why Reform Is Important

We are all familiar with the rapid change in the computer industry. In the space of five years, IBM lost roughly $70 billion dollars of market capitalization. In the same period, many small hardware and software companies grew exponentially, more than offsetting those mainframe losses. Who can seriously question the likelihood that if Apple, Intel, Compaq and Microsoft had required FCC approval to get to the market, the personal computer revolution would have been postponed.

The case for dramatic reform is now more compelling than ever before. Growing global competition, merging markets and the revolution in digital and related technologies make the unintended and untoward effects of government regulation far more costly than in the past. Heightened competition has often undercut the rationale for regulation. Moreover, the increasing pace of change makes the costs of regulatory delay increasingly unacceptable.

Fundamental reform of the FCC would unleash innovative and entrepreneurial forces and would build on the U.S.'s current but perishable lead in the global digital derby. Reform of the electromagnetic spectrum, alone, could promote the development of competition in local telecommunications markets and create a raft of new wireless digital services and devices. America is positioned to leave other countries in a cloud of silicon dust. A regulatory framework that slows innovation in this area, despite any plausible shortrun efficiency gains it might achieve, will foreclose a tremendous opportunity for the American people.

 

 

The Progress & Freedom Foundation