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The Common Carrier Roller Coaster
Whoosh! Hold on to your hats for this one. According to a story on NPR's Morning Edition, a California lawyer is asking the California Supreme Court to rule that all roller coasters should be classified as common carriers. Then, like airplanes and trains, as carriers they would be subject to a higher standard of care.

Hmmm...Somehow I don't think people get on roller coasters for the same reason they get on planes and trains. But you never know what the California courts may do. (For all I know, the California Supreme Court may share the same water fountain with the 9th Circuit!)

Anyway, my (unfortunate) prediction is that the California Supreme Court will decide whether roller coasters should be classified as common carriers before the FCC decides whether broadband should be classified as common carriage, although that issue has been pending at the agency now for going on two years. Here's another (unfortunate) prediction: By the time you get through watching the twists and turns the FCC takes in deciding how to classify VoIP, you will feel like you've been on a roller coaster. (Message to FCC: I hope you prove me wrong.)

Well, here's wishing all your coasting may be safe in 2004.....as we roll into another year!

- posted by Randolph May @ 12/31/2003 04:50:55 PM

Milken Institute Review
The latest Milken Institute Review (Fourth Quarter 2003) has some interesting stuff: Martin Campbell-Kelly, author of a useful history of the software industry, defends software patents (warily); economist Frank Lichtenberg examines the value of pharmaceuticals; and the newly-appointed Chief Economist of the IMF has an excerpt from his book Saving Capitalism from the Capitalists.

I like to plug the Review. (Nothing to do with its good sense in publishing my article on stock options last year, of course.) Subtitled “A Journal of Economic Policy,” it is edited by Peter Passell, a former New York Times-man gone straight, and it is consistently intelligent and readable.

- posted by James DeLong @ 12/31/2003 02:54:35 PM

Naughty and Nice -- Parting Shots
A bit late to the parade, a few contributions to Ray’s list of 2003’s Naughty and Nice:

Lumps O’ Coal –
The California Assembly – Privacy Laws. On July 1, 2004, the California Financial Information Privacy Act takes effect and will allow consumers opt out of information sharing by financial institutions and their affiliates or partners. Following in the manner of the uber-costly and entirely unsuccessful federal Gramm-Leach-Bliley regulation of privacy notices issued by financial institutions, the California law specifically details the form that consumers will receive. Surely this will keep the paper-products industry happy and may even move the U.S. Postal Service into the black though it won’t actually protect the privacy of Californians. (Thanks to Jim Harper’s end-of-year privacy memorandum for the pointer.)

Viral kids who wreck havoc on our lives (and their software creations too.)

Responses to August electricity blackout that focus on new government “reliability standards.” Secretary Abraham noted last month that at least four existing reliability standards were not observed by one participant in the blackout while another pair of standards were not met by a second participant. An interim report on the causes of the blackout is available and it is safe to say that a lack of regulation was not the cause.

Delicious Treats –
Michael Powell and the FCC for rescuing the wildly popular Do Not Call list from legal limbo at the FTC. I maintain that the political and legal implications of a list maintained by the federal government to prevent the reach of legal commercial endeavors from our households are numerous and largely negative, however the Do Not Call list as envisioned by Chairman Tim Muris was a political masterstroke. At once he took off the table far-reaching limits on commercial speech and activity, costly attempts by some states to regulate interstate advertising and self-styled consumer advocates’ who saw the Congress as fertile ground to demagogue against the use of information to lower the costs associated with finding new customers. Muris gave Members of Congress an easy way to do something – fund the list – without running significant risk of new “privacy laws”. In a more positive light, the Trade Commission reminds us all that the government can play a positive role to limit annoyance and to prevent economic harm in the marketplace. Do Not Call is in the anti-fraud traditions of the FTC and serves as a preventative against more costly and damaging policy alternatives.

The Website Team at The Progress & Freedom Foundation for a major overhaul to our principle and digital means of communication with the world.

Bloggers who offer links to primary sources along with their observations.

- posted by Kent @ 12/30/2003 01:59:22 PM

"Fair Use" Barbie
The Ninth Circuit yesterday upheld as “fair use” a series of photographs called “Food Chain Barbie,” which “depicted Barbie in absurd and often sexualized positions.” These included “Malted Barbie” -- a nude Barbie in an old Hamilton Beach malt machine. For “Fondue Barbie” and “Barbie Enchiladas,” use your imagination, or read the opinion.

I’m a big proponent of property rights, including IP rights, but the world definitely needs more parody, especially in this era of grim PC police of all persuasions, and the court got this one right. If you are lucky enough and good enough to create a product that turns into a cultural icon (and everyone knows what “Barbie” means without any explanation), then it should be fair game for all kinds of riffs. Thus I loved it when Ralph Nader took off on the MasterCard “Priceless” slogan in a campaign ad, and the decision against the Cat-in-the-Hat parody of the O. J. Simpson trial has always seemed unfortunate, even though probably correct under existing doctrine.

Furthermore, sensible law of fair use is vital to the long term health and acceptability of intellectual property as an institution. As the Napster experience has shown, it is exceedingly unwise to get into a position where the public feels that IP rights are either too complicated or too restrictive.

So maybe the next in the series should be “Ninth Circuit Barbie,” decorously robed, of course.

- posted by James DeLong @ 12/30/2003 12:23:14 PM

New IP Book
Amazon just delivered PFF’s copy of William Landes & Richard Posner, The Economic Structure of Intellectual Property Law (Harvard Univ. Press 2003). It starts out with a few numbers on the growing importance of IP in the world of law and econ:

+ Increase in patents issued annually from 1985 to 2001: 111,000 to 260,000.
+ Increase in annual U.S. receipts from foreign trade in IP from 1987 to 1999: $10 billion to $36.5 billion.
+ Increase in percentage of federal civil cases involving disputes over intellectual from 1985 to 2001: 100%.
+ Increase in membership of the Intellectual Property Section of the American Bar Association from 1980 to 2001: 5,526 to 21,670.
+ Increase in number of law journals specializing in IP, technology, and art from 1980 to 2003: 2 to 26. [N.B. This seems low to me; a Stanford University Libraries website on copyright has 62 links to journals on the law of IP & technology.]
+ Increase in number of articles in economics journals dealing with IP from 1982 to 2000: 5 to 235.
+ And so on.

A work by these authors is of course AN EVENT for anyone interested in law, economics, and intellectual property. More comment will forthcome after we have a chance to read it.

- posted by James DeLong @ 12/30/2003 10:23:41 AM

Half-hearted defense of the Energy Bill
Received some direct and e-mailed criticism of my classifying the failure to pass the energy bill as "naughty." The criticism went something like this: "how can you defend that pork-laden, ethanol-mandating, special interest tax giveaway monstrosity called the Energy Bill?"

Put that way, it's sure not easy. Next, my essay praising the Alien and Sedition Acts....!

The Energy bill, though a painful orgy of rentseeking, would at least have brought some certainty through the electricity title. Most agree that the incentives for transmission investment are inadequate and further that the nation's transmission system is inadequate. The electricity title, on the margin, would have brought certainty and made investment in transmission more attractive. Likewise, forestalling FERC's standard market design would have allowed a rough armistice to take place between the various regulatory and industry interests. Whether these benefits would have been worth the rest of the Energy bill, I cannot say for sure, but here is my modest defense of why its failure to pass was indeed "naughty."

- posted by Ray @ 12/30/2003 12:22:39 AM

John Windhausen Replies to "Phone Politics"
I offered John Windhausen an opportunity to respond to my December 23 post on "Phone Politics" to close the local loop, at least for this year, and he offers the following:

"I appreciate the respectful comments from my friend Randy May concerning local rate setting. I was not surprised that we agree that local rate-setting has involved "socio-politics". I, too, believe that local
rates should be set at more economic levels. This could be rather easily done with regard to traffic-sensitive costs and direct costs. Of course, there is no agreement even among economists about the sound economic way to allocate fixed, non-recurring costs among a variety of services. These decisions are inherently political, because there is no "right" answer.

But I was surprised that we agreed on one other point -- the need to "implement rate-setting policies based on sound economics." Randy's point appears quite different from the point of the recent PFF paper that would totally deregulate rates. I have little confidence that deregulating local rates would yield a rate structure based on "sound economics" because the ILECs would simply shift arbitrarily the fixed, non-recurring costs to non-competitive markets and to lower prices in competitive markets whether they can drive CLECs out of business.

Yes, CLECs were "encouraged" to enter the market, by Congress, the White House, the FCC and state regulators. Now that we have entered, and have demonstrated the pricing and innovative benefits that competition can bring, policy-makers should transition to a more rational local pricing structure. But the transition should include consideration of the effect on facilities-based CLECs who took the market risk to fulfill the policy-makers' dreams of a competitive marketplace. Like it or not, for competition to succeed against ILECs that have a 100-year head-start, competition must be nurtured and our policies managed carefully."

Here's what I have to say in response. John, the PFF report, Trends in the Competitiveness of Telecommunications Markets, to which you refer makes a strong case, at least IMHO, that the local marketplace, including residential service, is now fully contestable, if not effectively competitive. If that is true, all of the points about the allocation of traffic-sensitive and non-traffic sensitive costs, which are relevant in markets in which a company retains dominant market power in one service segment but not another, become essentially irrelevant. I think competition already has been nurtured (witness the data in the report), and I am all in favor of reasonable transitions. But it is now time for everyone involved in telecom policy to work earnestly towards envisioning and implementing a real deregulatory end-game. Love might be, but transitions are not forever.

Here's what else I have to say to John: Happy holidays and best wishes for the New Year. We'll continue the debate next year...but let's hope, not forever.

- posted by Randolph May @ 12/24/2003 11:51:26 AM

Level 3 Communications today filed a forbearance petition at the FCC. [Not posted yet.] The petition asks the FCC to forbear, to the extent legally applicable, from imposing access charges on voice over internet protocol (VoIP) calls. Specifically, Level 3 wants the FCC to forbear from requiring access charges for IP-PSTN and incidental PSTN-PSTN VoIP. [Note to the uninitiates: access charges are the wildly-inflated charges that long distance carriers pay to local exchange carriers to originate or terminate calls, and which in fact act as a subsidy to keep local monthly rates artificially low. Clear now, isn't it?]

The petition is important because it cements the growing consensus that VoIP be able to escape the legacy regulatory world of access charges and other traditional telecom taxes. It also would give the FCC an opportunity to further develop its Section 10 forbearance authority, a power falling into unfortunate desuetude. It will be interesting to see if there is any support for this petition (other than from pipsqueak, cheerleading think-tankers like me, that is). The other good thing about a forbearance petition is that it forces the FCC to act within one year (light-speed for them), or the petition is granted.

- posted by Ray @ 12/23/2003 10:52:37 PM

Chinese Communists Embrace Property Rights
Assuming freedom to range abroad and a bit afield at year's end, the news this morning that the Chinese Communist Party is proposing to amend China's constitution to provide that "citizens' lawful private assets are inviolable" strikes me as an encouraging development. In any accounting of a "naughty and nice" list (see below), I would put this, at least for now, on the "nice" side of the ledger.

As Madison reminded us in his famous October 1788 letter to Jefferson, written bills of rights, or what he called "these parchment barriers", ultimately may not be efficacious in protecting individual rights. But he went on to say that delineating such rights in the written constitution nevertheless is useful because the "political truths" declared would "become incorporated with the national sentiment." And, when he introduced the bill of rights in the first Congress, he suggested that if rights are incorporated into the constitution, they have a tendency "to impress some degree of respect for them, to establish the public opinion in their favor."

Free speech is guaranteed in the Chinese constitution as well, and we know that is one individual right that the "parchment barrier" has not protected. But the Communist Party's embrace as a constitutional matter of the inviolability of private property is at least a step in the right direction. Presumably one that has Marx and Lenin flinching in their graves. While modern communications technologies can be used for ill as well as good, my bet is that Chinese leaders (and others like them) will find it increasingly difficult to suppress individual expression and the free flow of information in the age of the digital revolution.

As we know from our own American experiment, the protection of private property, including intellectual property, and the protection of individual rights, are both necessary prerequisites to advancing the cause of progress and freedom. Let's hope the announcement from China is a sign of real change to come, and not just some more ink on a "parchment barrier".

- posted by Randolph May @ 12/23/2003 03:22:54 PM

Naughty and Nice--Part I
This being the time for end-of-year lists and appraisals, not to mention for tippling too much eggnog and being a bit too free with your opinions, I hereby offer my nominations for who's been naughty and who's been nice in 2003. I invite my colleagues to join the thread with their own nominations.


The FCC for taking seven months to release it Triennial Review Order, a 500-plus page monument to legal incoherence and economic confusion that the DC Circuit will inevitably deliver us from sometime this spring.

The United States Senate for failing to make permanent or even extend the Internet Tax Moratorium. States and localities looking for tax revenue are now free to belly up to the bar. And, of course, honorable mention for naughtiness should go to the National Governors Association, which lead the charge to be able to tax net access.

The United States Senate (again) for not being able to pass an energy bill. Though pork-laden in parts, it could have incrementally helped solve investment incentive problems with the nation's electric grid and would have delayed the Federal Energy Regulatory Commission from enacting its misbegotten industrial policy called standard market design.

The Ninth Circuit Court of Appeals for [fill in the blank for its lawless decision of the moment]. In this case, I would cite its decision in the Brand X Internet Services case, where it ruled that cable modem service had "telecommunications service" components, as opposed to being a relatively unregulated, "information service." [Hearkening to Randy May's well-coined musings on the metaphysics of communications services.] Of course, the Ninth Circuit in part was filling a void left by the FCC's inaction after the City of Portland case, so it is the FCC's fault too.


The FCC for making incremental, measured, and fact-driven changes to the media ownership rules in the face of shameless mau-mauing and demagoguery.

The RBOCs and the IXCs and the CLECs for reaching a rough consensus that voice over Internet protocol should remain unregulated.

Former NTIA director Nancy Victory and FCC Cable Bureau Chief Ken Ferree for both rejecting as premature calls for so-called 'net neutrality' regulation -- and at a PFF conference no less!

The United States armed forces for accomplishing much and working so hard to protect our freedom. [Very little directly to do with digital policy, but I cannot help but in a small way celebrate their effort and sacrifice.]

The Florida Marlins for beating the Cubs and the Yankees.

- posted by Ray @ 12/23/2003 10:26:35 AM

Phone Politics
Well, I can't resist wading in ankle-deep to the interesting exchange on local phone rate deregulation between Ray ("Been there, done that") Gifford and John ("Keep That Umbrella Up") Windhausen. See below for their respective posts.

In this instance, I think Ray is being appropriately polite to my good friend John when Ray resonds to John's message with a "Fair enough." (I say "appropriately" polite because John is a good friend, good advocate for his cause, and a frequent participant at PFF programs.) But read John's message and you will see that he is arguing that setting local phone rates is all "political" and about "political decisions."

It is true, of course, as John asserts, that, historically, setting rates has involved a good dose of socio-politics. So, no doubt that in most (but not all) states the local rate structure in place today, with subsidized residential rates, has been influenced (heavily) by social policies driven by politics. But in an era of rapidly increasing competition, most people realize that we need to move more quickly to implement ratemaking methodologies based on sound economics--not politics. CLECs possibly might have been encouraged, as John says, "to develop a business plan, raise capital, and build networks because of a political decision to set business prices at X and residential prices at Y." Encouraged by whom? But I'm pretty sure CLECs were never promised by anyone with authority to do so that rates would not be rebalanced to make them more economically rational.

It seems to me that the (still unfulfilled) promise of the Telecom Act of 1996 was that, in order to have consumers benefit from new competiton, we were going to move decidedly in the direction of ratemaking policies based much more on sound economics than sound-off politics. Now, seven years after the Telecom Act was enacted, it's difficult to work up to much sympathy for John's worry about a potential "flash-cut rate change."

If we want phone rates in a competitive era to remain political decisions, then why not just leave the rate-setting to the legislatures? That's where the political expertise lies. No need to waste the time of the supposedly expert telecom regulatory authorities.

- posted by Randolph May @ 12/22/2003 06:08:10 PM

Heightened Terrorism Alert
The elevation of the terrorism alert over the weekend to Code Orange or "high risk" is another reminder that the US still faces threats to grave threats here at home from those who seek to do us harm. It is also a reminder of the importance of the ongoing work to make our nation's critical infrastructure more secure. Along those lines, the paper I issued last week, "Do Feds Risk A Communications Blackout," warrants some attention.

The paper explains why it is important for federal buildings to be served by diverse communications facilities that are truly redundant. And it suggests that the federal government needs a targeted policy to focus in a systematic way on achieving a greater degree of network redundancy.

In my view, the government is doing a very good job of trying to prevent another 9/11. And we all pray, of course, it succeeds. But we're in this war for the long haul. Let's keep preparing to upgrade our infrastructure readiness as if the terrorists might succeed again in a major attack.

- posted by Randolph May @ 12/22/2003 12:09:26 PM

Open Source is Open for Business
As a candidate for the most unimpressive lingering effect of the tech bubble, I nominate: Software Pseudo Words. For years, we rode the tech bubble on the evanescent language of…of who knows what. Telecom acronyms are a tough nut but at least they can be spelled out into some sort of meaning. Software Pseudo Words are like the clown who sits down the hall from you and invariably wears a pointy hat to every office party. With calm amusement and a touch of pity, you simply must ask, “Huh?”

Drawn to a story on the growth of Red Hat – the rare profitable open source firm – I eventually linked up with a corporate press release. It seems that Red Hat sales and earnings are up and they have just inked a deal to buy Sistina Software, a Minneapolis-based storage infrastructure firm.

And what, dear gentle blog reader, was the offending language? According to Red Hat, the $31 million stock deal will provide its customers with a “path to virtualization and vendor-independent storage solutions.” Wonderful. Well even though I don’t get it, yesterday’s numbers demonstrate that Red Hat is making its way as a service company. They may service managers of software systems…but they are a service company nonetheless. Translated to the policy world…all of those would-be public IT managers who would like “free” operating systems should keep in mind the price tag on the service package. Jim Delong is completing a study on this subject next month. No doubt, he’ll help me realize a path to virtualization of all the policy issues surrounding open source. Until then, break out the pointy hats and bubbly.

- posted by Kent @ 12/19/2003 05:19:36 PM

Subpoena Wars
The D.C. Circuit just decided RIAA v. Verizon – the record industry’s effort to subpoena the identities of file-sharers -- in favor of Verizon and other ISPs who argued that the law did not allow RIAA to obtain the information. The ruling was based solely on statutory interpretation: in the court’s view, the relevant language simply was not intended to cover P2P sharing. The court did not reach any of the First Amendment points argued.

The ruling surprised many, most assuredly including me, who thought the RIAA had the better of the statutory argument, and that the district court had made the right decision. (Pass the crow, please.) Verizon’s lawyers deserve credit for tenacity in what was regarded by most experts as a losing cause.

The decision will have serious consequences, not least for Verizon. The statute was passed in 1998 as a bargain; the ISPs got safe harbors and immunity against charges of contributory infringement. The content providers got help in identifying actual infringers. This decision leaves that bargain a smoldering ruin.

So the content industry will now be forced to file John Doe lawsuits to ferret out the identities of the illicit downloaders, which it clearly can do, but which will be more expensive for everyone, including Verizon. And one can expect an offensive by the content industry against the ISPs to limit the safe harbors, charging complicity in the P2P infringement if there is any indication whatsoever that an ISP approved of it or fostered it.

The decision also ensures that the Digital Millennium Copyright Act will be reopened in the next Congress, which will create a thorough mess.

So Happy New Year to all!

- posted by James DeLong @ 12/19/2003 12:16:19 PM

Despite the telecom meltdown, the legal profession has enjoyed a financial windfall through telecom deregulation. In a recent article in the Yale Journal on Regulation, J. Gregory Sidak roughly tied the burgeoning transaction costs of deregulation to the number of attorneys enrolled as members of the FCBA. Indeed, Alfred Kahn’s latest book (highly compelling, per usual) virtually leads off with the same point. Finally, Randy May elected to validate this theory on the ground, and in a previous posting, described the sordid story of being unable to reach the bar at the FCBA’s annual dinner.

But economists need love, too. And with TELRIC back on the front burner, they are getting it in spades. The recent Lexecon report by Kenneth Arrow, Robert Solow, Dennis Carlton, and Gary Becker (on behalf of Verizon) focuses, in large part, on the availability of UNEs at TELRIC-set rates and its deleterious impact on competition. In the current TELRIC proceeding, AT&T has presented the FCC with a series of essays written by William Baumol, and Georgetown B-School Dean John Mayo, among others, in support of TELRIC. This, of course, anticipated the 1286-page bomb that AT&T dropped into the FCC proceedings two days ago, which outverbiaged Ray’s comments by only 1275 pages.

All of this which, under a cynical view, may or may not ultimately lead to incremental changes in the TELRIC pricing methodology. Thus, I propose that the term TELRIC be slightly altered to properly reflect its more natural state. To the telecom acronymia I hereby anoint TELREC: Top Economists’ Long Run Employment Contracts.

- posted by Adam @ 12/18/2003 03:00:46 PM

February in Boulder
I would be remiss if I did not make a pitch for the Silicon Flatirons annual symposium, to be held Feb. 8-9th in Boulder. Silicon Flats, a brainchild of the polymath Professor Weiser, is an academic partner for the IRLE. This year's symposium, concisely entitled The Digital Broadband Migration: Toward a Regulatory Regime for the Internet Age, will feature keynote speeches by Chairman Powell and Larry Lessig. Ray also will be participating on roughly the one year anniversary of his first speech as PFF President, as well as IRLE faculty members Dale Hatfield and Howard Shelanski. As with our Aspen Summit, it is interesting to observe the impact of altitude on the frankness and depth of discussion, particularly amongst those panelists making the trek from inside the beltway. And, as an added bonus, the symposium is timed as such for attendees to enjoy other worthwhile Colorado pursuits.
- posted by Adam @ 12/18/2003 12:24:32 PM

What I think of TELRIC is right here.
- posted by Ray @ 12/17/2003 11:32:28 PM

John Windhausen Replies
John Windhausen took the time to reply to my earlier post wondering (that may be the gentle description) why facilities-based CLECs don't embrace retail rate deregulation:

I'll try to clarify my point about pricing, but I'm not sure I'm going to succeed: My point does not depend on the existence of an artificially high "umbrella." CLECs must price 10-15% underneath the RBOCs whether they are the "correct" prices or not - that's the only way we can get traction in the market. Personally, I don't' believe that there is anything such as a "correct" price when you have several services being provided over the same network. The cost allocation process strikes me as inherently arbitrary, and how you allocate fixed costs seems to me more of a political than an economic decision. My point is this: CLECs were encouraged to develop a business plan, raise capital, and build networks because of a political decision to set business prices set at x and residential prices set at y. That's the hand we were dealt. Now that we have built those businesses and are trying to make money, it would be quite a "bait-and-switch" to suddenly change the entire pricing structure so that business rates are at y and residential rates at x. That's what might effectively take place if local rates were deregulated, because the ILECs have every incentive to lower rates in competitive markets and raise them in noncompetitive markets.

If regulators want for political reasons to change the dynamic to encourage more residential entry and reduce the incentives for business entry, that could be fine, as long as CLECs are given time to adjust their business plans accordingly. But an immediate retail rate dereg plan would effectively implement a flash-cut rate change. Most CLECs would simply go out of business if the ILEC business rates were to drop precipitously.

Fair enough. But I still think this boils down to wanting regulators force the incumbent to hold a price umbrella over competitors. Don't see how consumers win with this one.

- posted by Ray @ 12/17/2003 11:23:53 PM

First Amendment's Big Loss
Before too much time passes, the passing last week of some of our First Amendment freedom should be mourned, especially by someone sitting here at The Progress & Freedom Foundation. The decision upholding most all of the Bipartisan Campaign Reform Act ("BCRA") was one of the longest on record (almost 300 pages), and you can read all of it if you are so inclined.

In essence, the Court said it was necessary to defer to Congress's judgment concerning the need for new restrictions on political speech because there had been a "meltdown" in the campaign finance system by virtue of the exploitation of loopholes in the system. I say better that meltdown than the damage inflicted on free speech by the Court.

There's much to criticize in the Court's opinion. But the decision to affirm the congressional restrictions on broadcast issue ads run by independent groups that even mention a candidate in the period before an election is especially troublesome. Now, the restrictions apply to broadcast ads because Congress considered broadcasters to have the most influence on the public. But Howard Dean and others have shown the Web can be a pretty effective means of reaching people in a campaign. Now that the Court has given Congress such broad discretion to fashion loophole-closing provisions, it is easy to imagine independent ad restrictions being imported to the Net. (How much longer are we going to think of our "TV" screens and our "computer" screens as devices delivering different information, anyway? Not too much longer.)

Oh, and while "media" companies are exempt in the current form of "campaign reform" from the speech restrictions, once the National Rifle Association carries out its plan to buy traditional media outlets, Rupert Murdoch better watch out. And ABC, NBC, CBS, and the Washington Post too.

- posted by Randolph May @ 12/17/2003 05:48:21 PM

What he said...
Dick Notebaert, CEO of Qwest, has a good op-ed in the Washington Times arguing against the regulation of VoIP. It is encouraging to see an emerging consensus against regulating VoIP and an embrace of the "creative destruction of regulation."
- posted by Ray @ 12/17/2003 11:11:53 AM

Against Open Net Ideology -- or any Net Ideology for that Matter
A post today by Kevin Werbach on "the battle for open broadband" deserves a rejoinder. The point of Kevin's post is that the FCC is missing the need to ensure openness at the application layer of the Internet and he fears that physical-layer players will leverage supposed market power up into the applications layer of broadband. Kevin's post comes close to an endorsement of 'net neutrality.'

Kevin's broadband openness call is an instance of a larger movement for "openness" at all layers of the Internet -- physical, logical, applications, content. [This is a slightly crude simplification, but will do for present.] The godfather of this movement is the inimitable, he-of-fashionable-eyewear, Lawrence Lessig. (I reserve the right to be slightly punkish toward the Master because I am a former student -- before he was famous.) In any event, I regard Kevin's post on broadband openness a good example of the open Internet ideology. Unfortunately, as it becomes an ideology, the case for openness loses its empirical focus and lapses into attitudinalizing and complacency. [Note: any ideology, including a pro-market ideology can do this. A dose of Russell Kirk is always a good antidote.]

I find the answer to most of these calls for openness is a resounding "maybe." Openness is good sometimes, but is not without its countervailing costs. Furthermore, markets usually--but not always--reach an equilibrium to set a consumer-beneficial degree of openness better than regulators.

Any calls for 'openness' regulation to my mind must prove themselves as clearly enhancing consumer welfare. Just as important, regulatory proposals for openness must account for the tendency of regulation to: 1) be unable to adopt changed circumstances; 2) be products of and encourage rentseeking; 3) create unforeseen (and unfortunate) reliance interests. I thus approach the question with a presumption against regulatory intervention, but willing to be convinced that it is necessary.

In the broadband arena, the openness principle seems premature, at best; and justifiable only in the context of a monopoly broadband provider. Furthermore, there are manifest rentseeking incentives for the players higher up on the Internet layer--the apps and content guys--such that any current calls for prophylactic regulation should be regarded as suspect.

I end this post by noting that I try to pay close attention to what Kevin is saying, and usually agree with his take. I will also acknowledge that the momentum of this post may have gone beyond his more modest point. Again, I do not reject calls for 'openness' per se, but rather urge a more factually premised case to justify such calls.

- posted by Ray @ 12/17/2003 01:06:29 AM

RE: Deputies
It did not take long for yesterday’s post to garner a response from a state utility commissioner. At the Commissioner’s request, the post is reprinted here anonymously.

“The problem with abandonment is the possibility, however slight, that the order gets upheld, and the FCC then applies its flawed analysis to your state to get its predetermined flawed outcome. The question is whether a state can apply the flawed analysis to yield the right result. Stay tuned...”

Regulators’ confidence in the current rules is low. As indicated above, inaction invites a federal steamroller. Any movement forward must overcome the sense that the FCC has sent us down this road before only to be turned around by the D.C. Circuit Court. While joint board meetings and various resolutions sound the call of federal-state partnerships, they cannot really substitute for the decisions that state commissions must make on their own. Responsibility for the result, not the model or methodology, is state officials are held accountable to their governors or electorate. And facilities-based, inter-modal competition is the gold standard for success.

- posted by Kent @ 12/16/2003 11:10:25 AM

Blame Canada
The IP press over last weekend headlined a conclusion by the Canadian Copyright Board that downloading songs from the Internet is legal, as long as the purpose is to create a copy for personal use. “Blame Canada” said the LA Times, obviously a nest of Southpark fans.

The reasoning was technical. A 1998 (pre-Napster) Canadian law creates this right, and says nothing that would limit the source of the copy. QED, downloading is legal. The Board split the baby by noting that uploading to the Internet remains illegal.

The Canadian Recording Industry Association will appeal to the courts, but it is not really a significant loss, and would have little impact even if transferred to the U.S. The music industry’s enforcement strategy is to disrupt uploading, not crucify downloaders. A swapping system in which no one uploads and everyone tries to free ride is just ducky from the industry’s perspective. It would even build markets for the legitimate services that are rapidly coming on line.

The more interesting part of the decision is the contortions the CCB must go through to supervise Canada’s system of taxing hardware and blank media to create a fund to compensate artists for their losses to this right of private copying. Academia in the U.S. has become entranced by the idea of such non-market systems. But watching the Canadians struggle with rates, coverages (e.g., iPods but not hard drives), exemptions and other issues raised by the 1,500 commenters on the proposed levies should make them pause. Markets and pay-for-what-you-take have simplicity and moral clarity, qualities not found in any administrative proceeding that I have ever seen, and certainly not in this one.

- posted by James DeLong @ 12/16/2003 10:51:30 AM

On Saturday, the ALEC task force on telecommunications and information technology heard a presentation from Rob Tanner, an official at the Federal Communication Commission’s Wireline Competition Bureau. Afterward, he joked that I had let him off easy by not asking any hard questions.

As we proceeded to enjoy our box lunches, I lobbed a softball. I asked if he thought the state commissions had been extra-legally deputized as adjunct offices of the federal government as a result of the Triennial Review’s reliance on their granular assessments and generally, in other recent (and major) proceedings of the Commission. In normal-speak, “Had state commissions been unwittingly deputized by the federal government?”

It did not surprise me to hear him say that states had not been deputized. But to my great surprise, he held out that the TRO explicitly states that states may undergo proceedings on switching but that they were not required to do so. He went on to say that there would be no problem to have a state or states refuse to join hand in hand with the Commission on the Triennial. It’s worth pondering the outcomes.

Any takers among the states? Does any brave regulator want to avoid a grueling regulatory scrum that will probably be overturned by the DC Circuit before it is completed? Anyone?

- posted by Kent @ 12/15/2003 06:08:24 PM

When to Deregulate Retail Rates?
I could not attend Friday's PFF seminar on our latest report, "Trends in the Competitiveness of Telecommunications Markets...". But, in reading today's trade press on the event, I am moved to rebut something that John Windhausen of ALTS said. John is reported to have said that retail deregulation is premature because ILEC's still have too much market share.

One premise of the report is that market share is not material to the deregulation question. Indeed, with the current comprehensive wholesale unbundling regime, you have by definition deprived the incumbent of any market power. Furthermore, because most state retail rates derive not from a cost basis, but rather from a social policy basis where residential rates are kept artificially low and business rates artificially high, then the retail rate structure distorts competitive outcomes. There will be over-entry into the business market because there are supra-competitive profits to be earned there; meanwhile, there will be under-entry into the residential markets because there is no return to be earned where rates are below cost. [And I won't even get started about the perverse incentives the low residential retails rates give to regulators to create margin through aggressively-low wholesale ratesetting.]

I also wonder why ALTs would oppose retail deregulation. There are two reasons I can think of, one good and one bad. The good reason could stem from some sort of predatory pricing fear. But this fear seems attenuated and even impossible to realize, particularly with the current unbundling regime and particularly since the recoupment-phase of a predatory pricing scheme would be too hard to pull off. In practice, predatory pricing schemes rarely succeed, and I cannot imagine in a closely-policed market like communications, how such a scheme would actually succeed -- and of course during the actual predation period, consumers win.

The bad reason for ALTS to oppose retail deregulation is that its members, which almost all play exclusively in the business markets, currently enjoy the price umbrella established by the ILECs' above-cost business rates. In this view, the BLEC sub-set of the competitors likes high business retail rates because they allow a comfy price umbrella to hang out under and earn supra-competitive profits. In other words, the retail regulation lessens the pressure on competitors actually to compete.

Indeed, that is one of the points of the study; namely, that retail rate regulation distorts competitive behavior throughout the market; and, indeed, deprives consumers of the benefits of competition. And that is supposed to be the point of competition: superior consumer welfare than regulated monopoly.

There are parallels here to the long distance market experience. There, AT&T fought throughout the late-1980s and into the 1990's for pricing flexibility. It competitors, however, preferred to limit AT&T's competitive options because AT&T would of course have been a formidable price competitor, not to mention they would lose the protection of its price umbrella.

- posted by Ray @ 12/15/2003 02:49:53 PM

The Swamp Fox in DC
Okay, you know from my posting yesterday (see immediately below) that the Swamp Fox is back in DC ensconced at PFF. And you know that, unlike Charleston, it's too darn cold and there's too much pavement for swamp foxes to survive up here. So rest assured that this is the last time--for a while at least--that I'll be using my nom de guerre earned in South Carolina.

The big news today, of course, is the official release of the report, "Trends in the Competitiveness of Telecommunications Markets: Implications for Deregulation of Local Telephone Services." If you are not convinced after reading this report, co-authored by Richard Levine, Joseph Kraemer, and me, that the telecom world is fast changing, and that even the local telecom markets are already contestable, if not effectively competitive, then you and I need to sit down and have a little chat.

Don't forget to register and attend our seminar on the Hill tommorrow on this very subject--local telcommunications competition, not the habitat of swamp foxes. We're going to have a good discussion, what with John Windhausen, John Morabito, Brad Ramsay, and Blair Levin reacting to the new report. And you and I can even have our little chat about telecommunications competition there!

- posted by Randolph May @ 12/11/2003 05:24:01 PM

The Swamp Fox in Charleston
Well, I just returned from Charleston, South Carolina, where I spoke on a panel on telecommunications competition at a conference entitled “Reconciling Markets and Regulation” sponsored by Michigan State University’s Institute of Public Utilities. The conference was held at the venerable (read: old and a bit musty, but still pretty nice) Francis Marion Hotel. As most of you regulatory animals know, Francis Marion was known as “The Swamp Fox.” Marion earned this endearing sobriquet the hard way. During the Revolutionary War, he led forays against British patrols and outposts in and around Charleston and then vanished ghost-like into the swamps.

In Charleston, I fancied myself like the famous Swamp Fox, making a lightning quick strike into beautiful Charleston to speak to a generally (but not exclusively) pro-regulatory crowd, including many state regulators, and then vanishing, ghost-like, back into the swamps of Washington.

I previewed a report to be released very shortly (watch this website) with the sexy title: Trends in the Competitiveness of Telecommunications Markets: Implications for Deregulation of Retail Local Services. The bottom line of the report: The local telecom market is sufficiently contestable that retail rates should be deregulated.

There was a lot of useful discussion and good fellowship at the conference, and congratulations are due to Dr. Janice Beecher and her staff for putting together the event. As far as I could determine, however, much of the debate was about whether price-cap incentive regulation is an improvement over rate-of-return regulation, whether there are ways incentive regulation might be improved further, and whether new dispute resolution techniques should be used by regulators. Despite the rapid emergence of new competitive threats to incumbent carriers, I didn’t hear anyone else other than myself utter the word “deregulation”—at least at those sessions I attended.

So, the Swamp Fox is safely back in Washington after unleashing his deregulatory volleys into the midst of the red coated-regulatory-minded conference goers. And don’t forget to check back tomorrow to get your own copy of the very foxy (as in sexy cover) but unswamp-like "Trends in the Competitiveness of Telecommunications Markets" study!

- posted by Randolph May @ 12/10/2003 01:05:14 PM

Sunshine & Scalia.
I’m looking forward to joining my friends at the American Legislative Exchange Council again this week. ALEC is an organization that serves state legislators who care about Jeffersonian principles. These folks tend to like limited government, federalism and markets. (Incidentally, the other principle organization for state legislators – the National Conference of State Legislatures – is also meeting this week. Albeit, in gray Washington, D.C. and not in sunny Phoenix, Arizona.)

The ALEC Task Force on Telecommunications and Information Technology has planned a hearing for Saturday that will include presentations on the Triennial Review and the State of Competition. I’m not going out on a limb here to suggest that a fight for the definition of federalism will be a part of the discussion. On these questions of state and federal telecom regulation, it is often helpful to turn to an authority on the U.S. Constitution and how it orders the relationship between various regulatory bodies.

But the question in this case is not whether the Federal Government has taken the regulation of local telecommunications competition away from the States. With regard to the matters addressed by the 1996 Act, it unquestionably has.

Of course, this comes from Justice Scalia’s opinion in the 1999 case of AT&T v. Iowa Utilities Board. I’ll post more on the debate at ALEC, meetings with legislators and federalism after I arrive in Phoenix.

- posted by Kent @ 12/9/2003 04:48:24 PM

Really, really, really, really bad ideas
ICANN has its problems. OK, big problems. But the United Nations taking over Internet governance has to be about the worst idea since, well...at least since The Brady Bunch added cousin Oliver to the cast. Like I said, a very bad idea.

Seriously, ICANN needs reform. More transparency and pluralism should be part of that mix. When was the last time the UN represented these values?

- posted by Ray @ 12/9/2003 12:22:33 AM

Acronym Enthusiasm, Part I: TELRIC
A fearless prediction: the next acronym obsession for the telecom world will be one that never left-- Total Element Long Run Incremental Cost, or TELRIC. Comments in the FCC TELRIC NPRM are due next week. TELRIC, for the lucky uninitiates, is the forward-looking cost methodology prescribed by the FCC to the states in the pricing of unbundled network elements (UNEs). [Interesting, huh?]

As a general matter, the forces will line up exactly as they did in the Triennial Review. The IXCs (AT&T, MCI) will support TELRIC, along with NARUC. The RBOCs will oppose it. Facilities-based CLECs will be of two minds: they like lower loop costs under TELRIC, but they don't want the rates so low that they devalue the CLECs' own assets. Get ready for Triennial Review redux.

I will have more to say about TELRIC next week. In the coming months, TELRIC will join VoIP as the acronym for telecom geeks to talk about.

A preliminary prediction? Though it should do more because TELRIC is the main problem in the current unbundling regime, the FCC will end up tinkering around the edges to raise wholesale rates a bit on the margin. The reliance interests are again too strong for the FCC to make any dramatic moves.

- posted by Ray @ 12/9/2003 12:02:28 AM

Belly Up to The Bar and Bar None
Well, last night I attended my 17th straight annual Federal Communications Bar Association Chairman's Dinner--along with 1800 others. The Chairman's Dinner is an annual highlight of the FCBA's activities, honoring the FCC Chairman.

There may be a severe downturn in the telecom and high-tech sectors, but you wouldn't know it from surveying the crowd. There certainly doesn't appear to be a recession in the legal and consulting community that looks to provide services to the beat-up communications and high-tech companies. Each year the dinner grows larger with more and more of the $1000 tables snapped up by the handful.

Don't get me wrong. I don't want to sound cynical. It takes a lot of lawyers (and, yes, a few economists too) to figure out the impact of changing the network ownership rule from 35% to 45%, or 39%, where Congress ended up. And it takes a lot of lawyers (and, yes, a few economists too) to get the TELRIC rate just right, based on the very latest hypothetical network.

I can remember the first few Chairman's Dinners when the crowd was less than a third the size of last night's horde, when you could actually find your table without a map, and when the FCC chairman just stood up and gave a humorous, self-deprecating talk (except that one exception over a decade ago when a chairman gave a non-humorous, serious talk attacking his opponents. That was a no-no.) There were no Hollywood-style, ritzy-glitzy videos back then, or even a slide show with transparencies. This year Michael Powell gave an appropriately humorous, self-deprecating talk that had people belly-laughing, and the Hollywood-style video, featuring Kudlow & Cramer and Powell doing a "No, I'm not leaving the FCC" riff, was pretty darn good. There were cameo appearances in the video by everyone from Walter McCormick to Rupert Murdoch to Conrad Burns. (Use your imagination!) Oh, and there was the usual Dick Wiley joke ("Anyone in the room with two degrees of separation from Dick Wiley please stand up. I counted four out of 1800 who stood up.)

Trying to get to the bar in this bar group was well-nigh impossible, so I just tucked away my free drink coupon for next year.

Well, I had about as much fun as I can stand in one night. And best of all, because there were 1800 of us there, the FCBA raised many thousands of dollars for scholarships for needy DC kids.

- posted by Randolph May @ 12/5/2003 09:55:15 AM

Three Notes on E-Government.
Three unrelated notes about the state of e-government in our states crossed my desk this week. Yesterday you may have seen a story in the San Jose Mercury News about the state controller in California using eBay to auction unclaimed property. While the eBay approach is novel, it is not unconventional. On one hand are the efficiencies of markets and private firms and on the other is the power of information technologies to drive down management and transactions costs. That is the definition of good e-government.

More news from California: Early this week the California Franchise Tax Board voted 2-0 to continue an unnecessary program under the auspices of “e-government.” Essentially, the state has duplicated efforts of a thriving private marketplace to provide low- and no-cost tax preparation. The manifold public policy problems that arise were documented last year in this study by my PFF colleagues. The CFTB decision continues a very bad e-government program. There are new consumer risks, no efficiencies and wasteful spending on technology for the sake of technology.

I also just received a copy of the new “Economic Vision 2010: Report Card 2003” published by the Indiana Chamber and the Hudson Institute. If you want to know what is happening in the Hoosier State, this comprehensive report is for you. As in years past, our friends at Hudson utilized some of the metrics and data from PFF’s The Digital State to benchmark their home state.

- posted by Kent @ 12/4/2003 02:43:43 PM

Wall Street Electricity Conference
I attended an electricity conference in NY yesterday. It's always good to get a reality check from the investment community. The major take-away (not surprisingly): the "back-to-basics" companies - i.e., those that have stayed with the vertically integrated utility model - have been the most successful, while companies that have ventured into new areas have had problems. Policy makers might also do well to take the traditional vertically integrated world as a baseline - and be prepared to demonstrate that the net benefits of their proposals, relative to that baseline, are positive.
- posted by Tom Lenard @ 12/4/2003 11:58:43 AM

Review of Network Economics Article
What good is a blog if you can't be shamelessly self-referential?

Though I am sure your hard copy is coming in the mail, an article I wrote on "Regulatory Impressionism" is up now at the Review of Network Economics website. With its publication, I announce my retirement from academic publishing -- those economists use a completely different citation method than we lawyers.

Other than my trifling contribution, the whole issue looks worth a read with articles from Tom Hazlett and Arthur Havenner, Tim Tardiff and Bill Taylor, David Sappington, and Paul Vasington, among others. Dennis Weisman guest edited this version of the RNE on incentive regulation. He patiently but firmly put up with my inattention to deadlines and citation style.

- posted by Ray @ 12/4/2003 09:37:02 AM

Exuent Omnes
With yesterday's FCC decision granting Qwest's Arizona 271 petition, the Baby Bells' entry into the long distance market is complete. Though accomplishing much, the end of the 271 process will be mourned by no one, except maybe the armies of consultants who reaped fortunes from it.
- posted by Ray @ 12/4/2003 08:55:00 AM

What Methinks of the Metaphysics of VoIP
Well, talk of VoIP is all the rage this week, what with the FCC conducting its VoIP Forum to consider how VoIP, or Voice Over the Internet, should be classified, regulated, thwarted, promoted, or whatever. It's VoIP week. Check out the piece in today's WSJ. And I don't mean to belittle VoIP one byte--oops, I mean bit--because it is has the potential to render even less relevant the existing legacy regulatory paradigms.

But to metaphysics. My Merriam Webster's Collegiate Dictionary defines "metaphysical" at the very top of page 731 as: (1) "of or relating to the transcendent or to the reality beyond what is perceptible to the senses"; (2) "supernatural"; or (3) "highly abstract or abstruse". Now, I don't mean to imply, of course, that VoIP service itself, in its various forms, is not perceptible to the senses, or that it is supernatural or abstruse. To the contrary. In many ways that are important in thinking about whether VoIP ought to be regulated and how, it is, or is fast becoming, much like what, in the pre-Internet Age, we use to call POTS, or plain 'ol telephone service. To coin a phrase, it is as real as reaching out to touch someone.

What I mean to say about metaphysics and VoIP is this: The discussion at the FCC and before the state regulatory commissions about whether VoIP service, or various VoIP services, are "information services" or "telecommunications services" under the definitions contained in the Communications Act will surely be metaphysical in the dictionary sense of the word. In arguing for or against a particular regulatory classification, with whatever regulatory consequences may attend, there will be much talk about the various shapes for the Customer Premises Equipment used (does it look like a phone or a computer or something in-between?), about what names we call the CPE (suppose we call what looks like a phone a computer), about even the name VoIP providers give themselves (doesn't one of the leading providers advertise itself "the broadband telephone company"?), and especially about the genetic heritage or parentage of the provider (did people use to call it the "local telephone company" and did it really use to be the local phone company?).

If this discussion isn't metaphysical, then I'm not a philosopher, but just an 'ol regulatory lawyer turned think-tanker. But I do recall the decade-long war regarding the classification of "protocol conversion" --not irrelevant to VoIP service--during the '80s. Back then the operative regulatory classifications were "basic" and "enhanced" services under Computer II, and today's "telecommunications" and "information" service definitions are for all intents and purposes just the same.

What's a regulatory philosopher to do? Well, my colleague Ray Gifford is right, of course, that there is no sound rationale for regulation of VoIP by federal or state economic administrative regulators. See his December 1 post below. Methinks, however, you may need to brush up on your metaphysics, maybe, say, with Aristotle, to follow the fight in the regulatory arenas. At the same time we can all pray the regulators stifle the urge to bring VoIP into the regulatory ambit.

BTW, I promise not to use "methinks" for a long, long time. But would you believe it is the very last word on page 731 of my Webster's, so, dictionary-style, across the top of the page you find: "metaphysic-methinks". I couldn't resist!

- posted by Randolph May @ 12/2/2003 04:30:07 PM

In Praise of TELRIC
No, surely not from me. I decided one of those proceedings and it proved an analytical pain I do not wish to duplicate. Nevertheless, the pseudonymous M. Quodlibet offers this rejoinder to Kent Lassman's earlier knock at the NARUC TELRIC resolution:

"The PFF blog (on 11-19-03) appears to take issue with NARUC's recently passed resolution on TELRIC. First, it claims that NARUC was not embarrassed and admitted that its position was arbitrary when it urged that States retain discretion to adopt fill factors that may vary from an ILEC's actual fill factors. It is not arbitrary to suggest that the FCC should resist the temptation to lock in indefinitely fill factors that reflect only current ILEC data, nor is it arbitrary to suggest that the FCC should consider letting the states recognize the "long run" aspect of TELRIC, as upheld by the U.S. Supreme Court, and set fill factors that take into account potential changes in the market. The blog also questions whether TELRIC has been a factor in "encouraging and sustaining local competition." The facts speak for themselves. Local competition has been fostered by the states' application of TELRIC, with more than 13 million lines today in the hands of UNE-P providers, most of the lines being secured after states applied TELRIC principles. The ILECs have in turn been able to offer bundled packages to more than 27 million customers, in direct competition with UNE-P providers. The impairment proceedings currently pending before state PUCs will reveal the importance of their granular analysis- some markets will be deemed competitive and UNE-P will be phased out, in other markets, impairment will be found to exist and the ILECs will continue to receive a fair return on the lines that they lease."

I reprint the good francophile's correspondence complete, but now am obliged to briefly respond. To begin with "fill factors" -- along with average loop length, plant mix, soil mix, depreciation rates and innumerable other factors in a TELRIC cost model are arbitrary insofar as the "LR" part of "TELRIC" admits no fixed point for the regulator or the advocate to prove a factual case about the efficient forward-looking cost. It is the old reproduction cost problem from the 1930s back in the extreme. TELRIC is a fantasy (which can cut any way you like from a public choice perspective; it need not be, as it often is now, UNE-P entrant beneficial). In turn, that fanciful number being generated by the TELRIC cost model obscures a much more real, short-run industrial policy judgment by the regulator: how much immediate, intramodal [UNE-P] competition do we want to create by creating margin under the retail rates at the expense of facilities-based competition? This regulatory industrial policy is the source of the UNE-P competition that M. Quodlibet praises. Personally, however, I see no consumer benefit issuing from this aggressive TELRIC margin-awarding, and great cost from the TELRIC's implosion of Schumpeterian incentives to invest and innovate by all parties, incumbents and new competitors alike.

- posted by Ray @ 12/2/2003 02:28:42 AM

Why Regulate VoIP?
Today's FCC VoIP forum raised three rationales for regulating VoIP: First, to stop arbitrage because internet protocol voice calls currently avoid access charges that other voice calls pay; second, to ensure public safety through access to E-911 services and law enforcement access through CALEA (Communications Assistance for Law Enforcement Act); and, third, to support universal service obligations. Commissioner Adelstein's statement best summarized these regulatory concerns. Indeed, the Commissioner's statement most plainly sets forth the incipient rationales for regulating VoIP as a "telecommunications service," as opposed to a relatively unregulated "information service."

The first and third rationales are one in the same. Namely, VoIP needs to be regulated to preserve the current cross-subsidy system that exists through above-cost access charges. Indeed, it is true that part of the impetus for VoIP rollout right now is access charge avoidance. These rationales, however, are unsustainable in the long-term as voice migrates en masse to a packetized world where distinguishing a voice packet from a data packet is infeasible. Thus, this rationale for economic regulation is best viewed as a last gasp of the old universal service system. [Mind you, these last gasps can last for quite a while.]

The public safety rationale is also problematic from a consumer sovereignty viewpoint. If I as a consumer want a cheap, tencho-cool way to make voice communications without E-911, and I know it, so what? Admittedly, as the service becomes more ubiquitous, the social cost of not having an E-911 mandate may exceed the private benefit from not having to pay for such a mandate. But that day is some time off. Better to follow the advice of Jeff Pulver and let the market and voluntary, private standard setting bodies work on the E-911 development -- as well as try to answer the question about the true social cost of not having a E-911 mandate and comparing to the cost of such a mandate.

The CALEA issue is more difficult to resolve. While we want to encourage new, low cost technological innovations like VoIP, we do not correspondingly want inadvertently to create a communications platform immune from law enforcement scrutiny. [The premise of this statement is of course debatable, but let's work with it for now.] That said, the CALEA issues surrounding VoIP are merely a subset of CALEA-like issues surrounding the Internet as a whole. These issues need to be worked out, but not by the FCC or state regulators.

My ultimate takeaway from the forum is that there is no rationale for regulation of VoIP by state or federal economic, administrative regulators. Given the technological "catch me if you can" problems that VoIP ultimately introduces, regulators' attention will be better spent toward resolving the crises that VoIP will precipitate in universal service cross-subsidies. I think Florida Commissioner Chuck Davidson hit the issue right on in counseling forbearance and retreat by the FCC and the states, a view echoed by the Chairman in a speech days earlier.

- posted by Ray @ 12/2/2003 02:01:21 AM

VoIP, The FCC and NARUC.
VoIP is the word – or telecom acronym – of the day. This morning Chairman Powell introduced a forum at the Federal Communications Commission on Voice over Internet Protocol. You may have seen the Washington Post story over the weekend or seen blog postings by Lynne Kiesling or Tyler Cowen on the issue. (Kiesling and Cowen are both members of our IRLE Academic Advisory Board.)

While the Commissioners’ opening remarks are not indicative of a final policy outcome, they are interesting. Chairman Powell was the most clear in stating his predilections. Statements from Commissioners Adelstein and Copps are also available on the FCC site and while there are substantial differences between the men, they both generally (and favorably) raise the issue of economic regulation for the sake of social (universal service, public safety, and access to persons with disabilities) ends.

Right out of the starting gate, Powell says “I believe that IP-based services such as VOIP should evolve in a regulation-free zone.” He continued with “…the recognition that the Internet is inherently a global network that does not acknowledge narrow, artificial boundaries” before addressing the very real issues that arise from the traditional police powers of state governments. Two state leaders – the established former president and current California PUC Commissioner Carl Wood and an up-and-comer from the Florida PSC Chuck Davidson – attended today’s session.

As promised earlier in this space, herewith we can address the recent resolution passed by NARUC on information services. The resolution seeks technological neutrality. So far, so good. It goes on to “urge the FCC to carefully consider” a laundry list of issues from the practical, public safety and emergency services dialing, to the totally self-serving like “disruption of traditional balance between federal and State jurisdictional cost separations”. One step further, NARUC resolved that “State and federal regulators should work together”. It seems that today the Commission is hitting three for three. Yet, somehow, my hunch is that the official voice of the state regulatory community will cry foul if and when the Commission determines that VoIP should not be saddled with extensive utility regulation.

The real issue is not over the size of the sandbox controlled by state or federal regulators. It is not even the linguistic and legal wrangling over information and telecommunications services and whether Title I or Title II regulations reign supreme. At issue, are consumers’ conveniences and choices. I agree with much of Tyler Cowen's conclusion on this point. "Competition will become more intense, calling will continue to become cheaper," and long-run financing will challenge network owners. Unless regulators find a public interest in choking off these consumer benefits.

- posted by Kent @ 12/1/2003 05:25:12 PM

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