"Regulation and the FCC"

It is a great honor and privilege for me to be here today before the Federalist Society of Pittsburgh.

We marvel at technological advances here in Pittsburgh. The city has always been at the center of new technologies.

Pittsburgh at the turn of the century is an exciting place. The future will remember that it was here that ordinary residents could get big pipes to the home. All with the latest architecture, new technologies, new screens, ways of keeping the bugs out, and all at a remarkably affordable price.

Yes. One could purchase all of these for a new house in Pittsburgh through the Sears mail-order catalog at the turn of the last century.

We can laugh because we know that technology moves in one direction-- always for the better. Generally what can be done technologically in the past, we can do today, and we can do it better.

Technology is information about how people organize themselves, organize transactions, and exchange anything and everything. The best practices in technology can be taught. They can be taught to your children, to your colleagues at work. They can also be learned by your competitors, and you can learn from your competitors.

It's pretty easy to be quite conceited about technology. Technology and time march inexorably in the same direction. We do technology better today than we did in the past. We have every expectation in the future that people will do technology better than we do today.

Unfortunately it is less easy to be conceited about government and law. History is not a uniform improvement in either area; good governments and law can and have been followed by bad ones, and vice versa. We can't simply teach good government and law to our children, to our colleagues. It's not always easy to learn about it from our competitors.

Moreover, improvements in technology have not always led to improvements in government. Technologists do not claim to have created better government. But, oh, the conceit of government about having created better technology. It must be very painful for technologists from Pittsburgh to go to Washington, D.C. or to listen to people from Washington D.C. talking about technology. Is it really credible that someone in Washington could have created the Internet? Or is it any more credible that Washington politicians can claim any and all credit for all sorts of wonderful new technological innovations? As if nothing would happen but for the presence of government officials from Washington, DC.

Regulation following technology

The empirical observation could probably be made at times that regulation follows new technology. Much of the regulation of the railroad, for example, didn't occur until 50 years after the railroad started.

But it doesn't always work that way. Many new innovations were delayed after there were invented by federal regulations, sometimes for decades. One of these is wireless phone service. Back in the 1950s, there were petitions to create new wireless phone services--similar to cellular services and PCS today. The FCC sat on these and other applications for about 30 years.

Then, when it came out in the early 80's, who claimed credit for this wonderful technology? The FCC . It claimed to be doing wonderful things for America

No one has actually sat down to try to calculate how much consumers were harmed by having this wonderful new technology delayed for decades. The number would be staggering.

The Internet and fees

Where does the Internet fit into all of this? I think it's fair to say that the Internet is slightly regulated today. There is no formal federal Internet regulation at the Commission yet, but there are a lot of folks in Washington who would very much like to see that.

Daily clips at the FCC are often filled more with stories about the Internet than stories about the FCC. I'm sure that's true at other agencies around Washington as well. Every agency protests that it does not regulate the Internet, while, at the same time, plotting how to regulate the Internet, directly or indirectly. There is much bureaucratic power to the agency or agencies that eventually regulate the Internet.

When people in Pittsburgh look at the Internet, they see success, the triumph of markets. In Washington many people look at the Internet, and they see failure- the failure of markets.

In Pittsburgh, you may see new technologies that flourish without regulation. In Washington, people see more opportunities for more regulation or new regulation.

You may see the prospect for broadband access as an opportunity to invest and innovate to meet consumer demands for lots of new Internet services. Washington sees broadband access as an opportunity for more regulation or mandates by government not governed by the laws of supply and demand.

Common carriage

Discussion of government-mandated universal service requirements for broadband service is going on at this very moment in Washington. DC. For example, you may see services such as the Internet operating just fine without common carriage requirements. Common carriage means ostensibly requirements for terms and conditions that are equally available to everyone, and it also means an awful lot of regulation. And yet there is a lot of discussion about common carriage obligations for various parts of the Internet.

And just exactly where would the common carriage requirements for the Internet be imposed? Would it apply just to ISPs? To cable operators? To Internet telephony? To electronic commerce?

It's very easy to understand the concept of common carriage for railroads, for airlines, but it is very difficult, I think, to understand the concept of exactly how it would work on the Internet. Designation of common carriage is not merely an obligation to serve. Bound up in the common carriage regulations are a lot of obligations, taxes, and fees. And also limitations on liability.

Taxes and Fees

The taxes and fees are alone are sobering, There is a 3-percent excise tax on all common carrier telecommunication services. It's been in place since the Spanish-American War. And there's approximately a five-percent fee that applies on interstate telecommunications services to pay for universal service. Added together, that's an 8-percent user fee just for the privilege of being a common carrier.

What's universal service? It's about a five billion-dollar federal program nearly half of which goes for schools and libraries. The rest goes to extend telecommunication networks.

And how do we pay for all of this as consumers? Well, Jerry Hausman of MIT has estimated that the fees structure imposed on common carriers, including universal service, is one of the most punishing taxes in the arsenal of the American tax collection system. American consumers pay more than $2 for every dollar that's raised for universal service. Suddenly the 5 billion dollar universal service program cost the American consumer 10 billion dollars.

And that is just the existing Universal Service Fund. Large telephone companies want to replace part of access charges--bad ideas--with new universal service charges--ideas that are no better. These companies simply want to replace one usage-sensitive fee that punishes consumers with another usage-sensitive fee that also punishes consumers. It is giant game of accounting. Remember, because it is called a "fee," the FCC acts alone.

There has been much public discussion about taxation on the Internet. And of that discussion much has been focused on whether taxes can be collected by state or local governments, or whether the Internet will become a tax free zone. Relatively little discussion however is focused on the tax implications of the Internet being labeled telecommunications service or a common carrier service.

And why should you worry about the FCC? Well, because it's the FCC that will ultimately determine whether the Internet, or some portion of it, is a telecommunications service and thus subject for all these fees.

The Commission has started to take steps that could lead inevitably to that result. We've declared that all internet traffic is interstate in nature. That is, all traffic originating at home or office and terminating at any server anywhere in the world is subject to FCC jurisdiction. Even by the standards of Washington, claiming jurisdiction in central Australia is a pretty big stretch, I must say.

We issued a report to Congress in 1998 saying that the content of internet services is not a telecom service. If, however, you make a mistake of using a telephone hand set attached to a computer to call someone who picks up another handset--now that is a telecommunications service. Of course, the set of bits and bytes is indistinguishable whether one uses hand set or not

Now this technologically naive idea has implications not just for internet telephony, it has implications for all the internet because it is impossible to distinguish those bits and bytes that originate and terminate with a hand set from other information that goes over the Internet. And who would tell the difference. Who would try to tell the difference?

The federal government in general, and the FCC in particular, are at their best when they are not out trying to regulate. They are at their best when they are out trying to do the four things that I described earlier: enforcing property rights, enforcing contracts, providing minimal and rational taxation, and in keeping regulation to a minimum.

Property rights

I've already addressed the tax issue, let me just address the other three briefly and then I'll open up to questions. America stands for property rights, and usually our government defends the rights of property owners all over the world, whether it's intellectual property or real property.

But, at the FCC we do things to erode the edges of property rights. We issue licenses for the use of spectrum, and yet we restrict the use of those licenses. We don't provide for flexibility in the use of licenses. We tell people they have to use a license in a certain way, often if alternative uses wouldn't harm anyone.

We also erode property rights for people who have to deal with the FCC by imposing "public interest: standards which are not codified anywhere. Even worse, the public interest standards vary depending on the identity of the party and the type of service providing, sometimes even within the same service.

Contracts

Contracts are negotiated agreements between private parties. While government agencies can and do prescribe certain requirements for contracts, and can and do require certain narrow terms and conditions that must be included in certain contracts, it is very rare for the government specify all the terms and conditions it must be included in every contract, including prices. But, at times, this kind of regulatory approach has been the preferred option at the Commission. The threat of common carriage obligations, is in essence a forced contract that might potentially apply to some new services.

Excessive regulation

Economists have long noted that the potential need for government intervention where there is market failure. Markets may fail for several reasons including information problems and problems of what economist refer to as externalities -factors that are not taken into account in the consumption patterns or supply patterns of market participants

When the Commission uses it power to regulate, it often attributes the decision to "market failure." Markets can and do fail, but not as often or as systematically as one might believe in Washington. When it comes to markets, contempt in Washington is rarely the product of familiarity.

One of the most frequently cited market failures of the Commission has been low demand. To me, that is not market failure. It is a sign the market is working just fine. It's just that there is not a lot of demand out there.

Affordability is another often-cited basis for market failure at the Commission. Again, to an economist, affordability per se is not a sign of market failure. In a perfectly functioning market, much may not be affordable to everyone.

The combination of affordability and demand is leading to much discussion about making broadband access to residences part of universal service. Well, there may be some here in Pittsburgh who would jump for joy at the prospect of the government-subsidized broadband access to the home. But it's a very heavy price to be paid when the government gets involved in these programs, and it's a very heavy price that in the end it is very difficult to justify.

Failing to act

At the same time, there are instances where the Commission can and ought to be involved, where there is a form of market failure, and yet the Commission routinely turns a blind eye. One of these has to do with Section 253 of the Act, which outlaws state, local and federal regulations that establish barriers to entry for businesses to enter telecommunications markets. There is no doubt there are a great many barriers to entry, the telecommunications markets at the state and local level. But the Commission refuses to even look at these very seriously. As a great fan of federalism, I certainly don't want to be out there leading a charge to overturn the state and local sovereignty. But we have a federal responsibility that we often shirk.

The Commission also has obligations under section 11 to review all telecommunications regulations every two years, and if they are no longer needed we ought to get rid of them. The Commission has consistently refused to review all telecommunications regulations, although, this year, we are making some substantial improvements over the effort of two years ago.

WQED and Cornerstone

Let me speak briefly about an issue of great concern here in Pittsburgh, the transfer of the broadcast license for WQED to the Cornerstone group. WQED has what is referred to as a "non-commercial, educational" license. The Commission has, for decades, issued non-commercial, educational licenses.

What does it mean to be a "non-commercial, educational" licensee? For decades, it meant a self-certification process. If an entity claimed to be non-commercial and educational, they passed. Some of these entities have had religious affiliations; some have not.

The federal government has substantial precedent to distinguish between commercial and non-commercial entities. But the government has little unambiguous basis to distinguish between "educational" and non-educational.

What does all of this have to do with WQED? Plenty. The new owner of the WQED license was both a religiously-oriented institution and one with a conservative bent. Some opponents of the license transfer objected because of the religious orientation of the Cornerstone group. Given the absence of objections to other religious entities with education licenses, one of the underlying bases for the objection may well have been the conservative perspective as well.

The Commission response was unseemly. Staff spent countless hours reviewing the content video programming from Cornerstone. Stop and ask yourself the following question: what relevance could the content of video programming have to a governmental licensing decision? Make no mistake: there were no issues of obscenity or indecency or piracy of intellectual property. When government officials review the content of programming and make decisions based on that review, the American public should be concerned.

Recently, the White House's Drug Policy Czar reviewed television programming for sufficiently anti-drug messages. Of course, drugs are bad. Anti-drug messages are good. But government review of program content, for almost any purpose, is inexcusably bad. And all of this review went on secret for years. When confronted with the truth about the review, the White House was brazenly proud. No apologies were offered; indeed, the White House simply trumpeted how effectively its anti-drug policies were working.

The FCC sat on the WQED license transfer for endless months, even long by FCC standards. And then the FCC made an enormous mistake. It tried, for the first time, to establish standards for educational versus non-educational programming. The new standards, despite being brief, were a disaster. The only limitation on what could be deemed educational seemed to be content that might also be religious. The WQED transfer was accordingly conditioned.

The reaction to the new Commission educational standards was quick and appropriate. Congress and the public at large were outraged. The Commission quickly recanted. But it was too late to save the WQED license transfer.

The Federalist Society

I want to thank all of you for coming tonight and to thank the Federalist Society which has its on its emblem James Madison. Some people think of the Federalist Society as some right-wing, nut case group. Perhaps, some people think that James Madison is a right-wing nut case. I'm here to tell you that Madison was not a right-wing nut case.

I don't think people of America in the late 18^th & early 19^th century thought of James Madison as conservative in any way. He was if anything a great moderate. He was a believer that rules and laws mattered, that the Constitution mattered, that the Constitution was necessary, not just for the proper function of government, but to protect individuals from the abuses of government.

I hope that the Federalist Society will continue to champion the cause of insisting that laws be followed and that the constitution be followed. The Federalist Society can serve a great role here in Pittsburgh where individuals, not government, have brought so much great wealth to this country. The wealth has come through the exercise of property and contracts. And yet here there is very much that the government can threaten this great wealth.

I believe that the Federalist Society can do very much to help preserve a great deal that has been created here in Pittsburgh. Thank you very much.