May & Darby Urge Deregulation, Attack "Phantom Economic Theories"
WASHINGTON, D.C. - Taking direct aim at the “phantom economic theories” offered by defenders of the Federal Communications Commission’s “more unbundling is better” regulatory regime, two noted telecommunications experts – Progress & Freedom Foundation Senior Fellows Randolph J. May and Larry F. Darby – are prescribing a stiff dose of economic reality.
In reply comments filed with the FCC today, May and Darby argue that overzealous unbundling and pricing regulations have caused phone companies and their competitors to invest less in new broadband facilities, helping to cause the current telecom mess. Further, they question whether inaccurate accounting practices at WorldCom and other companies may have inflated the level of facilities-based investment claimed by CLECs. They urge the Commission to employ a “Net Present Value” framework that considers objective “drivers of network investment”. They laid out their framework in earlier comments in the same proceeding.
“Simply put, no economic or financial theory, no empirical evidence, and no analysis offered in the initial comments in this proceeding shake the unequivocal conclusion that forcing firms to sell output at a loss reduces their incentive to risk scarce capital to build facilities for producing that output,” May and Darby write in today’s filing. “Opponents mount a spirited attack on that basic conclusion – by categorical assertions to the contrary, by invoking phantom economic theories, and by ad hominem argument -- but fail to undermine it.”
What cripples opponents’ analysis is a reliance on what May and Darby call the “Industrial Organization” theory that “fundamentally misconstrues the basis for investment decisions”. That theory “holds that investment is driven by rivals’ behavior with little or no regard to other effects on financial value and incumbent investment” and “ignores the fundamental distinction between winning customers and making money.”
In their previous filing, May and Darby suggested the FCC should exercise forbearance authority granted by the 1996 Telecom Act. They also urged the use of such authority under Section 10, when appropriate, and “narrowing the availability of the existing unbundled elements under the ‘necessary and impair’ test.” Finally, they suggested a “sunset” framework for UNE requirements to “reach the facilities based endgame that the agency acknowledges best promotes consumer welfare.”
The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.