Subject: [NEXTEL-1] Testimony of Raymond L. Gifford President, The Progress & Freedom Foundation

From: [email-masked]
Date: Thu, 29 Apr 2004 11:41:30 -0400

U.S. Senate Committee on Commerce, Science, and Transportation
“Telecommunications Policy: A Look Ahead”
Testimony of Raymond L. Gifford President, The Progress & Freedom
Foundation
(Former Chairman of the Colorado Public Utilities Commission)

April 28, 2004

Mr. Chairman, members of the Committee, thank you for the opportunity to
speak with you this morning. My name is Ray Gifford. I am President of
The Progress & Freedom Foundation, a think tank that explores legal and
policy issues of the digital age. Also relevant to my testimony here
today, from 1999-2003, I served as chairman of the Colorado Public
Utilities Commission, which means I had to try and implement what
Congress thought the 1996 Telecommunications Act meant, and what the FCC
told me Congress meant in the Act.

The topic here today is what a reworked Communications Act should look
like. I have some thoughts about that. First, however, before thinking
about a new Communications Act, we need to think about the current Act
and what we have learned.
I believe that the Telecommunications Act of 1996 should be judged a
qualified failure. It may have been a failure of concept or of
implementation, but it certainly did not live up to the hope of its
framers. The current Act is a failure because it does not provide a
framework that anticipates the packetized, broadband Internet age; it is
a failure because it presumes that two mutually incompatible goals --
market competition and universal service -- can be seamlessly
reconciled; it is a failure because it added a pervasive layer of
wholesale regulation to an already encompassing retail regulatory layer;
it is a failure because of statutory ambiguity and self-contradiction.
Finally, it is a failure because the competitive successes of the past
eight years – in wireless, in broadband and now-emerging Voice over
Internet Protocol (VoIP) services – happened despite the
Telecommunications Act of 1996, not because of it. That failure is
qualified, though, because the sectors the Act left relatively
unregulated, wireless and cable, provide a roadmap of how to allow
markets to emerge, regulation to recede and consumers to benefit.

I understand that you are always supposed to have three overarching
points to make, but I’ll consider my testimony a success if I convince
you of two. My first point is that law and regulation should not --
indeed, cannot -- contain the dynamic, multi-platform competition of the
broadband Internet Age. This premise counsels a recognition that
regulatory burdens need to be minimized, and, more importantly, that the
incentives for special interests to manipulate regulation to preordain a
given market outcome need to be written out of the next Act.

My second point is that the institutions charged with implementing the
legislative vision you enact are in need of fundamental reform and
redesign. These progressive-era institutions – the FCC and state
commissions, which have in many ways served us reasonably well in the
age of the circuit switched, copper network – must have a different
charge in the age of spectrum and the photons.

The System Is No Longer Closed

The Communications Act of 1934 was written when the country had a
unified, closed platform, the twisted-copper-pair-based Public Switched
Telephone Network (PSTN). Every consumer needed access to that platform.
People who wanted to communicate were locked-in to that platform.
Because it was distance-sensitive, the

regulatory apparatus could encompass the entire communications universe.
There was a single product. It was voice communications. State
commissions could set retail and intra-state rates; while the FCC could
handle inter-state long distance. Rates could be manipulated to serve
the social goals of keeping rural and residential rates low by making
business and long distance rates high.

Of course, technology started to erode this hermetic world. First,
competitive entry came in the long distance market, where artificially
high long distance rates attracted entry. Next, gradually, competition
came to the business market in the late-1980s and early 1990s, where
artificially high business rates induced new competitors to enter under
the incumbents’ price umbrella. This world, interrupted only slightly by
the Modification of Final Judgment (MFJ), led us to the
Telecommunications Act of 1996, which aimed to bring competition into
the local voice communications market.

That single-platform voice world had some defining characteristics that
made it necessary and relatively easy to regulate. First, it was
localized, meaning that it was divisible into distinct local and long
distance parts, and the infrastructure on which the communications
traveled followed a knowable geographic path. Second, it was
self-contained, meaning that the regulator could accomplish social goals
by manipulating rates to accomplish desired ends. Third, this world had
a single product – voice – integrated onto a single platform, the PSTN,
and therefore could be regulated distinctly as a “telecommunications
service.”1 Finally, that world could be regulated according to the
broadest of broad standards, the “public interest.”

This age is at an end. Today multiple existing and emergent platforms
compete for consumers’ communications dollars. Along with traditional
PSTN-based service, consumers can choose between wireless PCS, e-mail
and instant messaging, circuit-switched cable telephony and emerging
VoIP technologies. VoIP in particular promises to bring a torrent of
choice and progress that will rush over, through and past the old legacy
regulatory rules. Moreover, these emerging platforms will only thrive so
long as they avoid the old legacy regulatory quagmires and
classifications.

If we have moved from a closed to an open system of competing platforms,
what does this mean for law and regulation?
As an initial matter, communications is no longer local, but instead
national and even international in scope.2 A packet-ized communication,
be it voice or data, does not followed a prescribed geographic path. The
traditional jurisdictional distinctions cannot hold.

Second, the self-contained regulatory world and the legal distinctions
that sustained it no longer signify. Further, maintaining these
distinctions into the future will do serious harm to consumers and
producers. Legal definitions of “information service” and
“telecommunications service” – such as are fought about endlessly in the
Brand X Internet case, the FCC’s VoIP proceedings, and the FCC’s title I
Broadband proceeding – have no relation to today’s underlying
technological reality. Thus, while the legal fights remain, to quote my
colleague Randy May, mired in “metaphysics,” the underlying
technological reality remains that a “bit is a bit is a bit,” and should
therefore be regulated as such in the next Act.
.

Third, it is no longer necessary for carriers to integrate facilities
and services at the physical layer of the communications platform. The
regulatory regime needs to adapt to the architecture of today’s
networks. Thus, the physical layer should be regulated the same across
all platforms, and the remaining logical, applications and content
layers may or may not be integrated depending on the preferences of
consumers. The layered conception of regulation means voice is merely
another application running over a physical network, and thus cannot be
distinguished for special regulatory purposes.

Just because a layered conception of an Internet communications world is
helpful, that does not mean it dictates given regulatory outcomes. We
simply do not know the optimal degree of bundling and integration that
will best serve consumers. In a competitive broadband, packetized world,
there is reason to believe the market will drive to an optimal result of
integration and bundling that is beneficial to consumers. A premature
“common carriage” requirement on all physical layer connections could
destroy the integration that serves consumers best, and there is reason
to believe that an unregulated market will drive to this result.
Further, this equally-regulated, multi-platform world means that
regulators loosen their control over pricing decisions. The old
regulatory system allowed rates to be set to effectuate a vast
cross-subsidy mechanism. In the new world, technologies like VoIP will
evade the regulators’ attempts at special regulatory treatment. In the
end, just as now, the costs of networks must be borne by consumers. A
freer, more explicit pricing system will serve them best. Related to
this, the intercarrier compensation system must be radically reformed so
that access arrangements between carriers are rationally related to
cost, or better yet, left to the market, as is done currently with the
Internet backbone market.

Last but not least, the flourishing of networks means that universal
service policy needs to be rethought and refocused. What is universal
service for? Will it subsidize a basic, local voice line or a broadband
connection? If you are going to subsidize connections, who is eligible
to receive compensation and at what rate?

Rural America need not be left behind, but recognize that the
traditional means of universal service values -- rate averaging,
cross-subsidies -- are not sustainable. Rural America then needs a
universal service policy that encourages innovation, scale and
competition. The viability of programs such as reverse auctions, which
would create competition for universal service support and encourage low
cost innovators, need to be studied. Likewise subsidy mechanisms that
spur competitive innovation rather than protect legacy industry
structure need to be encouraged.

The Institutions Must Reform

The Committee also needs to think about what sort of institutions need
to implement the next Communications Act. The FCC is slow; technology is
fast. The FCC is riven by muddled political compromises and legal
uncertainty; capital markets that will finance the next generation
networks need certainty and legal clarity. Because of its tendency
toward political, as opposed to legal, determinations, the FCC has a
dismal record in the courts on appeal.

Put broadly, there are two sorts of regulation—“mother may I” and “wait
‘til your father gets home.” Administrative regulation, such as is
currently practiced by the FCC and state commissions, is “mother may I”
regulation. “Mother may I” regulation relies
on advance permission for engaging in this practice or that. Thus,
companies have to get permission from the regulator to do business, get
permission from the regulator to define the terms of a contract, and get
permission from a regulator to charge a given price for a given set of
services. This regulation was devised for an era of regulated monopoly,
when there was a single provider and a limited set of services.

This regulation is prone to high error costs because it presumes to set
rules in advance. By its nature, mother may I regulation assumes the
regulator knows best. But if the regulator does not, or even makes an
honest mistake, then the whole industry can suffer.

By contrast, “wait ‘til your father gets home” regulation occurs after
the fact. This, for the most part, is what we empower agencies like the
Federal Trade Commission and Antitrust Division with doing.4 In this
sort of world, the market and market players are free to do what they
want, use what technologies they want, do business with whom they want
and charge what they want, subject only to after the fact oversight for
antitrust violations, consumer fraud or other breaches of legal or
contractual obligations.

This, I submit, is the sort of regulatory model that is better suited
for the next Communications Act. It is law-applying rather than
law-making. It minimizes regulatory errors. “Wait till your father gets
home” regulation has the added advantage
3 A shining example of how the law of unintended consequences applied to
the Telecommunications Act came with the reciprocal compensation
debacle. There, the prospect of garnering huge windfalls from
Internet-bound reciprocal compensation distorted innumerable
telecommunications business plans, all to no competitive benefit.

4 This is not strictly true with functions such as merger reviews
conducted by the Department of Justice or the Federal Trade Commission.
The other salient difference between the FTC, DOJ and the FCC is that
the former agencies are held accountable – by having to bring and prove
their cases in court – to a rigorous standard of proof. By contrast, the
FCC is subject only to after the fact review of their rulings under a
deferential – but in recent years rarely met – administrative review
standard.

State regulation, in its traditional role of regulating prices,
dictating contractual terms and conditions, has no place in the next
Communications Act. State agencies have proven politically attentive and
possess skills and resources necessary to regulate franchised
monopolies. But they are ill-suited to make competition policy. This is
not to say that state regulation need by wholly tossed aside. States
have adjudicative capabilities that the current FCC does not. So long as
private carriers do not resort to private arbitration models for
contracting and dispute resolution, there could be a state role here.
Likewise, state regulators might be better prepared to assume a greater
role in consumer protection.

Finally, the size and structure of the FCC should be reconsidered.
Congress needs to consider whether a single agency administrator, like
Great Britain’s communications regulator, would better serve the
policymaking needs of the broadband Internet age. Congress should also
consider making that administrator part of the executive branch, thus
making communications policy – like antitrust policy – accountable to
the President.

My experience with the FCC is of an agency of singularly dedicated and
qualified individuals working tirelessly to follow the law and make
sound policy. Yet, the FCC’s record in the courts is dismal. The
fluidity of the FCC’s processes and the political nature of its
compromises are designed for an agency charged with close-regulation. To
become an agency geared toward implementing sound competition policy,
the FCC must

But, finally, states themselves need to think about their willingness to
allow their state resources to be conscripted into a federal statutory
and regulatory scheme. The current clamor for more state involvement in
federal communications law decisions belies that this is a federal
mandate on the states, and an unfunded one at that.

Conclusion

The next Communications Act is of enormous import.

Congress cannot write a statute that means all things to all people.
Congress will have to make unambiguous choices about what sort of laws
it wants to govern the broadband Internet age. Those choices will
dictate the nature and speed of the current and next-generation
broadband networks. The choices will further determine the competitive
station of the U.S. compared to the rest of the world. Thus, this is not
merely a matter of which company “wins” with this provision or that
provision of a rewritten Communications Act. It is a matter of
international competitiveness and America’s role as the preeminent
digital age economy.
On Monday, President Bush noted that “clearing out the underbrush of
regulation, …we'll get the spread of broadband technology, and America
will be better for it.” President Clinton’s administration championed
“the unregulation of the Internet.”

Unregulation and clearing out the underbrush should be the charge you
accept. I do not deny that in lawmaking there is an element of
predictive judgment in my testimony today. With the proper regulatory
conditions in place, new technologies will eclipse what remaining
pockets of market imperfection persist in the communications space. But
your choice is not between correcting market imperfections with perfect
regulation. Your choice is between slightly immature, but largely
self-correcting markets and demonstrably imperfect regulation,
regulation that does not self-correct and, to the contrary, often
impedes progress and economic growth.

As you sit down to fashion our next Communications Act, remember what we
have learned since the ’96 Act. Competition and innovations flourishes
where regulation retreats. I urge you to bring that to the whole
communications sector.

Thank you again for the opportunity to speak with you this morning.

http://commerce.senate.gov/pdf/gifford042804.pdf

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