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Deja Vu All Over Again
But seriously, are President Bush and Prime Minister Blair using the same playbook? This from today's Computing:

Blair told delegates at the Labour Party conference that if re-elected in the General Election, expected next year, he wants to 'end the digital divide' and ensure broadband is available to every home that wants it by 2008.

- posted by Adam @ 9/30/2004 05:31:49 PM

EU Says MCI/Sprint Merger May Proceed
According to a Tech Daily story [subscription required]: "The European Court of First Instance, the European Union's second-highest court, ruled that the commission no longer had the power to prohibit the merger because the plan had been abandoned by the two companies."

Okay, I think I get it. Over four years ago, MCI and Sprint withdrew their merger proposal after running into problems at DOJ and before the EU Competition Commission. Despite the withdrawal of the merger proposal by the parties, the Competition Commission went ahead and adopted an order in June 2000 blocking the merger on the theory that the proposal might be revived in the future. Now, the Euopean Court of First Instance has ruled that the Commission lacked power to block the merger.

Perhaps MCI, having survived a near-death experience and reportedly for sale, might again hook-up with Sprint. But I doubt it. The telecom world has much changed since the US and EU got exorcised about the potential dominance of the "long distance" market if MCI and Sprint got together. (Remember when the "long distance" and "local" markets were distinct?)

Well, I'm glad the Court of First Instance cleared all this up. And, considering it took four years to unblock a merger that had already collapsed, that body is not likely ever to be called the "Court of Anything Close to Instant."

- posted by Randolph May @ 9/30/2004 03:27:05 PM

Rewriting the Telecom Act from KMB Videojournal
The KMB Videojournal meets twice a year in Tampa as a confab of state regulators and policy types. This session is devoted to rewriting the telecom act. The early report is that we are not quite ready to rebuild the tower of babel. That said, based on some of the comments, Jeff Pulver has reason to be scared where VoIP regulation will be headed if some of the views expressed here hold sway. The "universal service" values that have driven telecom policy from the start will not go quietly into the night. Because of this, the internal logic of regulation and universal service needs to bring any new services and platforms within its purview so as to maintain the power to tax and subsize (which 'universal service' is a pleasant euphemism for). I'll post my remarks on universal service delivered to the conference last night soon, once I clean up the written text.
- posted by Ray @ 9/30/2004 08:37:17 AM

Enabling Legal Change -- DeLong on Posner
My colleague Jim DeLong has an excellent post over at IPCentral.info on the common law's ability to adapt to different social and technological circumstances as it relates to intellectual property laws. I cross-reference it not only as flagrant cross-promotion, but also for the applicability of these principles for the regulatory arena. In particular, I think the contrast between the common law reasoning-style of antitrust with the rigidity of administrative regulation is quite salient. (This contrast is more than a tad ironic since administrative regulation was meant to be adaptable, but maybe it's too adaptable with things like property and contract rights).
- posted by Ray @ 9/29/2004 10:24:02 AM

Four Years Later...
The European Court of Justice holds that the European Competition Commission was wrong to block the WorldCom-Sprint merger one day after the companies called it all off anyways. Talk about crossing the "limits of antitrust."

According to the EU Observer:
This ruling sets a crucial legal precedent as it means that companies may now pull out of merger deals if they fear an unfavourable ruling from the EU's competition body.

Let's not get carried away here. For instance, I would guess that this doesn't really set a "crucial legal precedent" for domestic telcos, who already need to withstand superfluous* antitrust scrutiny before the DOJ, FCC and 50 state PUCs. But it does illustrate that a wildly aggressive EU will only add to the transaction costs and uncertainty when these deals are contemplated.

*Today's Communications Daily reports that an Illinois appeals court reversed an Illinois Commerce Commission decision which required SBC to invest $600 million annually in its network as a merger condition when it acquired Ameritech in 1999. According to the article, SBC has invested 3.7 billion in its Illinois network since then.

- posted by Adam @ 9/28/2004 07:17:23 PM

Voices In The Howling Wind
Lynne Kiesling and Tyler Cowen properly rail against the inevitable hoary story that the destruction from all the hurricanes will be economically beneficial. As Lynne said, she was just wondering how long it would take for this story to pop up--and, presto, it did. Next, stories on the benefits of digging ditches and filling them back in.

As evidence of the great economic benefits from the hurricanes, take a look at these stories, noting that the hurricanes will likely cost BellSouth 4 cents a share on earnings, and that CenturyTel and Progress Energy (parent of Florida Power & Light) are revising earnings guidance because of storm damage.

- posted by Ray @ 9/28/2004 09:33:19 AM

The Coase Theorem and the Wireless 411 Plan
The Senate Commerce Committee has narrowly approved the "Wireless 411 Privacy Act." The Wireless 411 directory, as it is being developed by six of the major wireless carriers and CTIA, would allow customers to opt-in and make their numbers available through a directory listing service - those numbers would not would not be published nor, as its proponents state, made available to third parties such as telemarketers. During the Senate Committee hearing, a representative from Verizon Wireless stated that "a Wireless Telephone Directory would be a terrible idea, and we will not publish our customers cell phone numbers or otherwise participate in the plan you have heard about today."

An editorial in yesterday's Denver Post questioned whether VZ Wireless' stance is good for its customers, but supported cementing in privacy guarantees through legislation due to fears of telemarketing and spam.

First off, the notion that there is a need for governmental involvement here is nonsense. In a "but for" scenario, the participating wireless carriers already have the incentive to comply with whatever reasonable provisions that could be included in legislation. This is being driven by the competitive environment within the industry itself - and as VZ Wireless' position against the directory illustrates, there are plausible ways to compete by differentiation. It should be noted that the fear of telemarketing is further mitigated by the existence of the federal do-not-call list (which includes mobile phone numbers) and prohibitions against auto-dialing and telmarketing calls to cell phones.

Ultimately, this issue really boils down to a property rights question and an application of the Coase Theorem, which compels the rather glib conclusion of "Who cares?" Parties will negotiate to an efficient solution, especially since the externalities created by a wireless directory are both positive and negative and impossible to accurately predict in advance. The traditional rationale for a directory listing is that it can create a positive externality (hence, wireless customers who currently want to be listed in the White Pages must pay a fee). On the other hand, the number of subscribers to the federal do-not-call list is plainly evident of negative externalities. In this light, it would appear that the proper equilibrium is the general approach being privately pursued under the 411 Plan.

9/27 UPDATE: Declan McCullagh has a nice perspective piece on News.com today, accurately entitled Legalized extortion by any other name

- posted by Adam @ 9/24/2004 10:42:06 AM

Spreading the Wealth
The "Smith USF Reform Bill" made it out of the Senate Commerce Committee by a 13-9 vote yesterday. The bill seeks to modify the formula used by the FCC to determine "non-rural" (interpreted as "rural") cost support, which constitutes about 7% of the USF high-cost fund and is one of the more curious USF distribution mechanisms out there. Mississippi, West Virginia and Alabama currently receive over 80% of these subsidies, while Nebraska, with a third of the population density of Mississippi, receives nothing. By replacing the current methodology, which compares the average statewide cost per line to a national benchmark, with a formula based on the cost of serving wire centers, the Smith Reform bill would spread more of these subsidies to rural carriers west of the Mississippi. In short, good for the Big 12 Conference, bad for the SEC.

- posted by Adam @ 9/23/2004 01:07:07 PM

To the Heartland
Off to Chicago today for The Heartland Institute's Emerging Issues Forum and Anniversary Dinner. My panel on regulation and digital technology will reunite me with Institute for Regulatory Law & Economics faculty member Lynne Kiesling, who should be pitching her house-buying/renovating/econ insights to HGTV as their next reality series. Should be fun, but I am still trying to figure out how to make it to the south side for some Harold's Chicken Shack goodness. If Joe Bast really wants a special 20th Anniversary for Heartland, he'd have Harold's cater it.
- posted by Ray @ 9/23/2004 08:08:43 AM

I have seen the light -- why Randy is wrong
Randy May chides USA Today for their glowing account of Danville, Virginia's municipally-owned broadband network. I used to think that way too. It seemed to me a dubious proposition that local governments could run a broadband company.

But I have seen the light and think the model should proliferate. I think now that all industries should be entered by governments, particularly industries where there may only be one or two providers in the local market.

Newspapers, for instance. Too many towns are only served by one newspaper, thus limiting the views and vitality available to towns that don't have private newpapers of sufficient quality and quantity. Towns with more newspapers can create more jobs, and have a more robust, vibrant local economy. It's a matter of economic survival. And Gannett, Knight-Ridder, Tribune and other chains are just too slow in getting these communities the newspapers they need. Like Danville, towns with municipal-owned electric utilities should use their reserves to start newspapers. Good things will follow, because goverments will have a great business sense for running newspapers. What's worse, those monetary reserves from the electric company otherwise would just go back to consumers or into necessary electric projects.

And restaurants, I think too many small towns don't have good enough restaurants. Municipalities should look into this business. And hardware stores. I love Home Depot, but many communities don't have one. Municipalities should open their own competitors to Home Depot to bring the benefits of "Big Hardware" to their communities. And bowling alleys...we are worried today about becoming a nation that "bowls alone," but with more bowling alleys and a concerted local government effort to promote bowling at the government bowling alley, we could recapture that golden age of bowling leagues, just as was portrayed on The Flintstones.

Only with this entry, will these communities get that which seemed so unlikely just a few years ago: hope.

- posted by Ray @ 9/22/2004 07:10:22 PM

You just can't make this stuff up
The FCC Kidzone is where all the cool kids go for their communications regulation news. This week the kids learn about the wonder of the no-call list -- that's why dinners are no longer interrupted,because of the magnanimity of the FCC (and FTC, too). What the FCC missed, however, is that those solicitor calls were when little Johnny fed his peas to the dog and thus "ate" his vegetables. Damn FCC.

If that's not enough though, the aspiring kindergarten teachers at the FCC explain wireless number portability to the kids. Wow! We get to pay to avoid lock-in effects--the market would have never internalized those costs. Thanks FCC.

- posted by Ray @ 9/22/2004 07:03:24 PM

Pass the Porridge
Ray has a nice essay in the San Jose Mercury News this morning. It is not every day that the morning paper carries an op-ed relating a classic children’s story to “industrial policy aesthetics.” Unfortunately, the descriptions of the California PUC and its choices are an accurate portrayal of utility commissions across the country. No doubt this piece will raise the ire of some folks within the tight knit regulatory community. Ire, or no ire, it is hard to see how UNEs are set in a non-arbitrary fashion. Long ago dispassionate telecommunications regulation succumbed to political trade offs.

- posted by Kent @ 9/22/2004 11:07:49 AM

Government-Owned Communications
USA Today has a story painting a pretty rosy picture of Danville, VA's new government-owned and operated broadband system which is being built in phases. At this point, there are only anecdotes to go on as far as measuring success or failure. It will be interesting to see how things develop as Danville gets deeper into the communications business.

I'm pretty confident that, over time, the evidence will show that, absent unnecessary regulatory impediments, the private sector can provide consumers and businesses with the broadband services they desire more efficiently than government. For a study of government-owned systems that contains more than anecdotes, see the paper by my colleague Tom Lenard that demonstrates that the most prominent municipalities that have entered the communications business thus far have not been able to cover their costs without being subsidized. And there is very little prospect of any of the municipalities paying off the initial investment.

Maybe next time USA Today will dig a little deeper.

- posted by Randolph May @ 9/22/2004 09:31:48 AM

Telecom reform efforts NOT irrelevant
Surprise! For my inaugural entry on the PFF Blog, I thought I'd clarify (okay, deny) what was news to me when I read it in Washington Internet Daily (September 20, 2004), which reported on a broadband reform panel on which I sat last Friday. Specifically, the Daily (inadvertently) suggested that I believe "[r]egulatory reform doesn't bring anything to consumers." Given that such a position would deem superfluous the last few years of my career (not to mention the work of countless other policymakers and observers), I decided I should clarify the record.

My point, as elaborated in my complete remarks, was that the companies and entrepreneurs investing in broadband are the ones who bring these valuable services to consumers, not regulators. That said, regulatory reform can play a critical role in facilitating (or at least not obstructing) that process by minimizing regulatory costs, uncertainties and economic distortions.

I should add that this point deserves clarification particularly with respect to the relative importance of regulatory reform versus other approaches to promoting broadband deployment (e.g., massive subsidies, making government the primary supplier). I have yet to see a detailed, credible plan that relies on such approaches that does not also potentially saddle consumers and taxpayers with enormous costs, or with significant risks that regulators will fail to select the broadband solutions that make the most economic sense in the long run.

So never mind -- regulatory reform remains a critical lever in bringing broadband to more Americans, no matter what you thought I said last Friday.

- posted by K Dixon @ 9/21/2004 05:20:32 PM

Wi-Fi on Layaway
Cities such as Philadelphia and St. Louis are considering whether they should deploy city-wide wi-fi networks on the cheap. It's right sexy. But while this idea may be more economical (i.e., less misguided) than municipalities getting into the business of building out fat broadband pipes, it still has all of the same potential shortcomings. Today's MIT Technology Review has an article explaining how long-term maintenance costs and management expertise make this a risky use of taxpayer (or tourist) dollars.

- posted by Adam @ 9/21/2004 05:11:02 PM

Scalia: On Democracy and the Courts (and Agencies)
Maybe it's too bad that Justice Scalia doesn't allow audio or video broadcasts of some of his public appearances. Last night I heard him give a wonderful talk (and engage in a spirited 30 minute Q&A) at the Ethics and Public Policy Center. Full of wit and wisdom, Justice Scalia gave a vigorous defense of his understanding of what "originalism" as a method of constitutional interpretation demands.

For purposes of this page, it was very instructive that Justice Scalia began his lecture by attacking the progressive vision that animated the creation of independent regulatory agencies like the FCC. He rebuffed the notion that we should expect disputed policy issues before these agencies somehow to be susceptible to resolution by "experts" divorced from political considerations. Scalia declared that for many, if not most, controversial agency issues (he gave the example of the FCC's media ownership policies) there is no one "right" answer waiting to be discovered by the "experts". The issues necessarily involve policy predilections informed by one's philosophical dispositions (in the case of media ownership, say, one's preference for higher quality programming attributable to economies of scale versus fear that diversity is threatened by too much concentration). He then went on to make his principal argument: That too many of today's judges consider themeselves to be "experts" qualified to decide issues that should be--and in his view, are--left under our Constitution to be resolved by the democratic process, rather than the judiciary.

Of course, drawing the line between proper law interpretation and improper judicial lawmaking is often not easy. And I don't necessarily agree with every jot and tittle of Justice Scalia's defense of his own originalist interpretive method. But I do agree with what he had to say last night about why it is not only naive--but wrong--to think that important questions of communications policy should be resolved by unelected "experts" too far removed from political accountability.

I bet the good Justice would like my August 23 National Law Journal piece ("Consolidate FCC Power") suggesting that we seriously consider moving a much slimmed-down version of the FCC to the Executive Branch. Maybe he reads the PFF blog and saw the link.

- posted by Randolph May @ 9/21/2004 11:51:39 AM

Regulatory La La Land
Today's Communications Daily reports that the Michigan and California commissions are scheduled to vote on UNE rate increases this week. Given the current state of the law, how does one raise rates on network elements that are not under any order to be forcibly unbundled?

- posted by Adam @ 9/20/2004 03:02:58 PM

Rather Fowl Than Fair
The brouhaha over Rathergate called to mind how much the media landscape has changed since the Fairness Doctrine was repealed by the FCC in the mid-1980s. Before the repeal, and the emergence of talk radio and issue-oriented cable news networks, it would have been much more difficult for doubters of the authenticity of the documents to mount a credible challenge to the intial storyline and to get their views out. The requirement that each outlet ensure "balance" in presenting both sides of controversial issues--at the risk of fines or even the yanking of licenses for violations-- chilled vigorous debate about issues of public importance.

There's a lesson here for today's would-be communications reformers, especially the younger ones. When then-FCC Chairman Mark Fowler, the Reagan-appointed FCC chief, announced he wanted to repeal the Fairness Doctrine in the interest of free speech, he was greeted mostly with hoots, including from many mainstream broadcasters who were perfectly happy with the comfortable status quo. Many said it couldn't be done, the courts and Congress wouldn't stand for it. Fowler just put his head down and kept charging full steam ahead. Congresspersons were mortified, of course, and the courts slowed down the effort. But ultimately Fowler prevailed on what was, to my mind, the most important communications policy issue of the 1980s decade.

In pursuing communications policy reform in the post-Rather media age, we might be well-served by thinking boldly, Fowler-like, about big ideas, rather than worrying too much at the outset about the odds for success.

- posted by Randolph May @ 9/18/2004 03:12:25 PM

The Sinister Practice of Bundling
I subscribe to NERA Weekly, an e-mail newsletter from the economic consulting firm NERA about what its experts are doing. This week's edition highlighted a talk by Dr. Mark Williams of NERA about the economic effects of bundling:

In his presentation, Dr. Williams pointed out that a cautious enforcement approach towards bundling may encourage firms with anticompetitive motives to implement their agenda through bundling, rather than a more "clear cut" abusive practice.

"There are not many general rules in the analysis of bundling. Yet, bundling allegations merit careful investigation as the effects on competition can be very large indeed," said Dr. Williams. "The Chicago Critique only applies under particular assumptions."

Dr. Williams illustrated the possible anticompetitive effects from bundling that recent developments in economic analysis have identified. He pointed out that bundling can be used to raise barriers to entry as well as to exclude rivals by creating artificial economies of scale. Said Dr. Williams: "Many types of abusive behavior can be replicated by bundling."

Now, I grant that Dr. Williams is light years smarter and more precise than I could ever be with these microeconomic questions about the benefits and harms of bundling. And neither did I attend his talk, so can imagine how a press release account of it would miss most of the nuance. Nevertheless, can you imagine a antitrust or regulatory regime premised on the notion that all bundling is subject to the "rule of reason"?

If bundling can have anticompetitive effects and can be used to erect entry barriers, then all attempts to bundle are worthy of regulatory scrutiny and economic analysis.

Think of a historical instance of the approval process: "Dear Antitrust Division, Please take note that I, Henry Ford, would like to manufacture something called an automobile. This auto consists of a bundle including: a frame, engine, tires, windshield and horn. The pro-competitive effects will be.... I promise not to create any artificial economies of scale. Please allow me to bundle this product. Sincerely, H.F."

And, indeed, this absurdity is not too far from what the EU wants to do with Microsoft in the antitrust action or what folks routinely urge the FCC and state commissions to do with communications bundles. Simplicity and administrability are the two cardinal virtues of U.S. antitrust law, at least after the Chicago school revolution. Efforts of fine-minded economists to lose those bright-lines by turning interesting academic questions into litigable ones should be resisted at every turn.

- posted by Ray @ 9/17/2004 10:31:00 AM

Adventures in Hot Cuts
For those calling PFF in the last 24 hours and receiving a "this number is out of service" message or just non-stop ringing, we apologize as the porting process appears to have been handled by Moe, Larry and Curly, with an assist from Shemp, who worked for our old carrier. That'll teach us to go with the low cost option... Oh, and the carrier "forgot" to port our direct dial numbers, so everyone calling today gets the added pleasure of talking to our delightfult receptionist, Marcia.

I trust that ultimately this will get worked out to our satisfaction. If not, the beauty of a competitive market will allow us choice to find a better carrier. That said, CLEC-to-CLEC porting (as in this case) is governed, at best, by the interconnection agreements between those carriers, if there is one. More often, the porting needs to involve the incumbent, whose recompense for this process is below their costs (TELRIC non-recurring costs can get preposterously low--assume non-union robots in an automated porting process and pay the incumbent that!). For the end-user, as PFF now knows rather pointedly, this is a crucial but non-transparent process. You don't even know who to scream at--it might be your new carrier's fault, your old carrier's fault, or some third-party's.

My strong preference here still is to have the regulatory process retreat from this area and allow contract to work it out. The regulatory process will not for historical reasons countenance remedies like expectation damages for harmed consumers. A market might offer this term, particularly to businesses willing to pay for it. Likewise, the coordination problems between carriers are real and non-trivial, but the compensation each pays the other is regulated. Finally, the incentives between the carriers are askew. The losing carrier has little incentive to execute the port properly -- they are losing a customer, after all. I would think contract mechanisms might be better at solving this temporal externality problem than regulation.

This is the tortured thinking that just changing your phone company inspires. Pity me.

- posted by Ray @ 9/16/2004 09:34:04 AM

Mediate Don't Arbitrate--One Cheer for Regulatory Uncertainty
More from the QROC: Cheryl Parrino is discussing the Qwest-MCI mediation for interconnection related to Section 251 unbundled elements. Cheryl also mediated an omnibus ICA between Qwest and all CLECs. The Qwest-MCI ICA was executed by both parties.

What strikes me most about the process is that is happened because of regulatory uncertainty. Since neither the CLECs nor Qwest knew who would "win" the Triennial Review appeal decision, they each had adequate incentive to negotiate. The regulatory background rules still defined the parameters of the discussion, but only because neither party had a clear property right was the mediation a success. For instance, if MCI knew it had an unambiguous property right to Qwest's network at TELRIC rates, it would not negotiate. Correlatively, if Qwest knew it had its rights to its own network, then its pricing offers would have been much different. I have no idea whether there is a general rule to tease out of this experience.

- posted by Ray @ 9/13/2004 04:35:13 PM

The Tyranny of Perfect Competition
I am at the Qwest Regional Oversight Committee in Missoula, Montana. The QROC only sounds like the radio station in Lubbock that discovered Buddy Holly. Instead, it is the bi-annual convocation of the Qwest state regulators, my former peers, who still tolerate me enough to invite me back to these things.

Sitting through the finanacial analysts' panel is a depressing tale, particularly from the grim reaper of analysts, Anna-Maria Kovacs (and that's not a swipe at Anna-Maria, she is a chronic bearer of bad tidings for the telecommunications industry). But, to the point.

The point is the damage done by perfect competition models to the regulatory psyche. There is an unstated supposition that you need multiple firms, all being price-takers, for "competition" to be deemed a success. For this misapprehension, I'd love to blame Mark Cooper, but even Mark's voice isn't loud enough to be that pervasive.

The lament that there might be only two, three or four competitors in communications markets should not be. It should be a celebration of exactly what network industries yield. The competition that matters here is the Schumpeterian competition for platform dominance over time, not the short-term static competion that neo-classical economic analysis can capture. Furthermore, as Vernon Smith and his colleagues have shown, so long as the market default rules are right -- and so long that there is freedom to devise suitable long-term contract terms and conditions, then an industry can be quite competitive with only two -- two! -- players. [This is not true in all cases, necessarily, but it does demonstrate that a competitive equilibrium can be achieved in markets with very few firms.]

Thus, the regulators' challenge in a (limited) multiple platform world should be in getting the default contract rules right, not on the continued manipulation of contract and property rights to achieve some short-term vision of perfect competition. That, and disabusing themselves of the pernicious orthodoxy of perfect competition.

- posted by Ray @ 9/13/2004 01:46:59 PM

Re-discover your belief in limited government
For those struggling with their inner-libertarian, go here and let it out. Surely this will come in right behind Google for popular stops on the Web.
- posted by Ray @ 9/13/2004 01:42:31 PM

John Stanton on the Wireless Market
John Stanton, CEO of Western Wireless, is speaking and has a great taxonomy: digital natives and digital immigrants. By natives, he is speaking of the youth market that is growing up immersed in the digital world and considers it second nature. By immigrants, he is talking about us oldsters, over whom the digital age is washing but in which we still sometimes feel like strangers. I think there is much explanatory use with these categories.

That said, one point of his presentation is that the senior market is their second largest growth market (behind the youth market). Perhaps the tale of old aunt Agnes out on the farm with he AT&T rotary phone is just that, a dwindling myth. Maybe Aunt Agnes is IM'ing her sister across town on their wireless phones.

- posted by Ray @ 9/13/2004 01:29:37 PM

Epstein/Barr on Takings
The Federalist Society Telecommunications Practice Group hosted a session yesterday at George Mason Law School on the Constitutional Dimensions of Telecom Competition. The half-day session specifically focused on the Takings Clause implications raised by the 1996 Act, even in the wake of Verizon v. FCC.

With all due respect to the other presenters, the moderators of the panels proved to be the highlight, through force of personality if nothing else. Bill Barr, General Counsel of Verizon and former Attorney General, and Richard Epstein, one of my former Professor's at Chicago in whose presence I always feel like a first-year law student again, proved the maestros of the event.

Richard Epstein's general theory for takings analysis is particularly useful in analyzing the issues surrounding telecommunications takings issues. He posits three justifications for regulation: fraud, externalities and monopoly (with externalities being a rough proxy for solving situational monopoly problems). Regulation must then be directed to these valid purposes, or it is a per se takings problem, according to Epstein. As a general theory, this is quite helpful.

This general theory does not, though, address the administrability and institutional competence issues that follow from identifying a taking. Professor Richard Pierce from George Washington focused on these problems and they are indeed non-trivial. Short of courts composed of Breyers, Posners and Easterbrooks, the ability and patience of courts to slog through the issues of costing and pricing are, shall we say, limited. Perhaps, again, the per se category of takings solves this difficulty and the role of doctrine should be to define this category better. Incidentally, General Barr certainly thinks TELRIC belongs in this category, in case you couldn't guess.

And no, no viruses, just bad medical puns.

- posted by Ray @ 9/10/2004 10:52:57 AM

Europe Preparing for VoIP
World Markets Research Centre in TelecomDirect News reported yesterday that Ofcom, the British communications regulatory agency, has decided to support the growth of VoIP in their home market by taking a ‘laissez-faire’ approach. Their commitment to VoIP is expressed by their resolve to allow providers access to the traditional numbering system and emergency 999 services, to clarify and renew all existing regulation and to consult with all parties to establish an appropriate framework for consumer protection.

This is a significant development for US VoIP companies like Vonage who are scheduled to make their UK premier this year in preparation for a European invasion. However, the positive signals coming out of the UK may not represent the whole picture as the EU Commission prepares a much anticipated decision on how (not if) they will regulate the emerging industry. In June it published a report promising regulation if VoIP services satisfy four conditions as a service that:

1) Is available to the public.
2) Originates and receives national and international phone calls.
3) Gives access to emergency services.
4) Uses numbers in a national or international telephone numbering plan.

Brussels, to the continual frustration of many Europeans (and especially the Brits), has a strong tendency to meddle in any industry it can. Ofcom may be acting decisively in a move to influence EU policy. Whatever the result, it is relevant for US users in that the network effect is important for VoIP adoption (especially with free global in-network calls).

It will be interesting to see what Brussels decides in the coming months. Meanwhile, the message to US VoIP companies looking to cross the Atlantic:

- posted by Rich @ 9/8/2004 09:15:13 AM

FERUP Summit
FERUP is hosting its first annual summit on September 14 at the Willard Hotel in Washington, D.C. Looks like a great line-up of speakers with Chairman Powell, Commissioner Adelstein, Duane Ackerman, Jeff Pulver and Ed Whitacre slated to speak. You can register here.
- posted by Ray @ 9/3/2004 04:41:09 PM

Competition and Universal Service
I had an e-mail exchange with a friend over what this Wall Street Journal article (subscription required) means for the future of universal service and rural areas where, to date, competition has not arrived. Accepting the Journal's analysis, my answer is as follows:

I have a pedantic answer and a practical one, neither of which is probably very comforting.

The pedantic answer is borrowed from Richard Posner’s classic essay ‘Taxation by Regulation.' There, Posner asserts that the purpose of regulation is not constraint of monopoly prices – it manifestly fails at that – but redistribution of benefits among different favored classes. In telecom, this explains universal service in all its implicit and explicit forms. The regulatory system redistributes “rents” from urban to rural and from business to residential and from LD users to non-LD users. Posner explains that the logic of this system presupposes that it is closed. No one can be able to escape the regulated universe because then the ability to effect the redistribution falls apart. Likewise, no one can be permitted to arbitrage the system too much or it again falls apart. Thus, regulation must keep all substitutable services within its domain or it cannot accomplish its purposes, in this case universal service.

Into this closed market, technology comes along and allows for regulatory escape. Law, meanwhile, remains static with categories that were invented for earlier iterations of the technology. So, states only have jurisdiction (depending on the state statute) over wireline voice, but usually not wireless voice. Federal jurisdiction cleaves into two worlds, the relatively unregulated information services and the regulated telecommunications services. VoIP enters the picture and stresses these classifications to the breaking point. Thus, both law and our expectations of what regulation can accomplish must change. Universal service will have to become explicit and it will no longer be possible to use the incumbents as a piggy bank through which to effectuate transfers of benefits. The open secret about markets is that they distribute goods and services efficiently, but not equally when unequal costs are involved. Consequently, higher cost regions will have to pay those costs because they will no longer be blended into average cost rates.

The practical answer, to my mind, is much less encouraging, absent significant legal overhaul. If the concern is rural, non-competitive areas, your ability as a regulator to force cross-subsidy through implicit universal service mechanisms is dwindling, perhaps rapidly. Explicit mechanisms – state USF funds, geographically averaged retail rates and provider of last resort requirements – are probably not much further behind. However, the very reasons those regions are less competitive is likely because of these explicit and implicit USF mechanisms in the first place. No one will enter a market where the retail prices are below cost or where the service territory entry requirements force the obligation to serve high cost customers. Thus, if you want it, universal service will have to be accomplished through a broadened contribution base (not that I necessarily endorse this) and a distribution method that decides first what is to be supported, a single voice line or a broadband connection, and second, how that support is apportioned. On the second question, I am partial to auctions if you can get two bidders. I think in the end then the solution is to deregulate retail, let the rates trend toward cost, and then see where and who you need to subsidize. In the interim, with the technological tumult and the legal and regulatory institutions unable to catch up, there will be dislocation to be sure.

In the short run, I do think the Bell companies face huge challenges. Their advantages – an installed base of customers; an installed network base; and a competent labor force – have a downside – customers will migrate to cheaper or more convenient platforms in an instant; the installed network base in a declining cost industry is a liability, not an asset; that competent labor force is high wage union labor. The BOCs are disadvantaged compared to wireless and cable, particularly when cable comes hard with VoIP, because these other platforms don’t have the regulatory burdens or the universal service obligations of the incumbents. Fiber in some flavor – to the premises or to the node – is their muti-billion dollar bet to stay alive and it is the nature of network industries that that is often a winner-take-all or at least close-to-all proposition (think Microsoft Windows, which beat our at least a half-dozen credible platforms in the mid-80s).

Finally, I do think the IP-ization of voice does mean the end to state regulation in large measure. The closed cross-subsidy world in which the states operated is slipping away onto multiple and, in some cases, unregulable platforms. There may be some federal grant back to the states of certain powers, but the traditional roles of ratesetting, tariffing and service area definition are over.

- posted by Ray @ 9/2/2004 04:47:58 PM

Reinventing the FCC
In an August 31 article in the New York Sun [subscription required], former FCC Commissioner Harold Furchtgott-Roth asserts that a major candidate for improving government in a second Bush term should be improving communications policy. Agreed.

He claims the FCC has contributed to the malaise in the communications sector "with weak communications policy, including indecision, overly complex rules, and rules that are frequently overturned in court." Agreed. (In fact, I said the same thing in my August 23 article, "Consolidate FCC Power," in the National Law Journal.)

But Harold then goes on to say: "The first step is perhaps the least obvious: Disengage the White House from communications policy." He says communications policy issues "should not compete for executive office attention with war on the terrorism, tax policy, or other issues vital to the president."

Granted that the president (himself) must priortize his time and can't be personally involved in deciding all issues. Of course. But that is not an argument against moving most communications policymaking into the Executive Branch where the president nevertheless would be accountable for the actions of those that make policy--and get involved where need be. Right now it's hard to blame the president, as Furchtgott-Roth seemingly does, for the indecision, overly complex, legally vulnerable rules that the former commissioner bemoans. You can blame the so-called "independent" FCC commissioners, if you wish, but you certainly can't vote to replace them.

In my view, communications policymaking would benefit from the slimmed-down decision-making and Executive Branch accountability that I propose for consideration in my NLJ article. Let's don't naively assume that policymaking doesn't involve politics; it does, and it should.

Sounds like the debate concerning a reinvented FCC is one worth having as we begin to contemplate a Telecom Act rewrite.

- posted by Randolph May @ 9/2/2004 02:12:50 PM

Get Rid of the Middleman
In January, the FCC plans to conduct an auction of "C Block" PCS spectrum licenses, which were returned to the Commission as a result of the now-infamous NextWave bankruptcy. Nearly half of these licenses will be available through closed bidding to "designated entities," in furtherance of meeting congessional objectives to distribute spectrum to small businesses.

Recently, I filed reply comments to the FCC supporting a waiver of the closed bidding rules for this auction or, in the alternative, for a rulemaking to drop them altogether. Due to exceptions in the FCC's rules, large regional or national carriers can back DEs in these auctions through careful construction of affiliate relationships. In the end, the DE set asides create a perverse set of incentives by creating a layer of "middlemen" who obtain valuable spectrum licenses, meet their first construction benchmark, and then (if they don't go bankrupt first) flip the spectrum to larger regional or national carriers for a hefty profit. By keeping valuable spectrum out of the hands of those firms who value it the most, the rules make little sense where, as here, the market for wireless services is predominantly national in scope.

In an article on the subject in today's issue of Wireless Week, FCC Wireless Bureau Chief John Muleta responded to the "middleman" concern by stating that "the market will sort it out." Which is true, just as the market does with liquor wholesalers, car dealers, and other intermediaries who are paid a ransom for no reason. Here, the possibility of further delay in getting rid of the DE rules and adopting an open bidding approach, with the use of bidding credits, likely outweighs the harm to consumer welfare.

- posted by Adam @ 9/1/2004 04:31:27 PM

Fishblogging: Colorado Secretary of Technology Leroy Williams upstages his guests and shows off a monster brown trout pulled out of the Roaring Fork before the Aspen Summit

- posted by Ray @ 9/1/2004 12:49:52 AM

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