Well, it's Thanksgiving Eve. Time to put aside for a moment thoughts about the digital revolution and count our blessings.

Every year on Thanksgiving Eve the Wall Street Journal reprises the editorial, "And the Fair Land," which first ran in the same space in 1961. It's well worth reading in its entirety, but if pressed for time, consider only this as something for which to be grateful: "We can remind ourselves that for all our social discord we yet remain the longest enduring society of free men governing themselves without benefit of kings or dictators. Being so, we are the marvel and the mystery of the world, for that enduring liberty is no less a blessing than the abundance of the earth."

When my kids were young, I always tore out the piece from the WSJ on Wednesday and then read it at the Thanksgiving table on Thursday before starting the meal. Early on, of course, my children thought it was a pretty silly thing to do. But we kept up the tradition, and, now, when they are home for Thanksgiving, they expect the reading. And I think they would even be disappointed if I didn't unfurl the rumpled copy from my pocket before serving the turkey.

And come to think of it, the digital revolution, which we here at PFF spend so much time thinking about, does empower us--if accompanied by sound policy--in a freedom-enhancing way. Creating an environment in which all the new communications technologies enhance our ability to speak out freely and conduct a rational civil discourse gives us a better shot at "remain[ing] the longest enduring society of free men governing themselves without benefit of kings or dictators."

Well, Happy Thanksgiving to all.

Just catching up on a stack of reading before the Thanksgiving holiday break, so I perused Judge Easterbrook's decision earlier this month in AT&T Communications of Illinois v . Illinois Bell Telephone Co. This is the case in which a federal appeals court held that, yes, the Illinois legislature may pass a law that provides direction to the Illinois Commerce Commission in setting the TELRIC rate for the UNE Platform, but, no, the legislature can't just pick out a couple of cost factors that will move the rate in one direction without looking comprehensively at other cost components.

This sounds about right as a matter of interpretation of the 1996 Telecom Act. But what struck me while reading the Seventh Circuit's decision--in the same way I'm struck every time I think about the mess the FCC has made in implementing Section 251's network unbundling requirement--is how it all might have been different if Congress had been a little less ambiguous in the '96 Act.

After all, consider that, in essence, the whole unbundling and sharing regime devised by the FCC pretty much has come to rest on its interpretation of two little words. The scope of the unbundling obligation rests on the FCC's understanding of the statutory term "impair" in Section 251, and the price at which unbundled elements must be offered by incumbents to competitors rests on the agency's understanding of the statutory term "cost" in Section 252. Really. Most of the discretion conferred on the FCC to establish the UNE regime derives from the ambiguity inherent in those two little words.

Now, it's true that the Supreme Court and the D.C. Circuit both have told the FCC that "impair" means a lawful UNE regime cannot be as unlimited and expansive as the one the FCC thus far has insisted on implementing. (You wonder why one Supreme Court decision was not enough to bring home the point ot the agency!) My guess is that the courts will find the latest iteration in the agency's Triennial Review decision still too expansive to pass muster--and, in any event, as I've written, as a matter of policy, it gets a failing grade.

If Congress only had said a bit more to indicate a preference for promoting facilities-based competition over resale (that's what UNE-P is), then perhaps the Commission would have been forced early on to devise a less expansive UNE regime, one tilted more towards stimulating facilities-based investment. Ah, but it's fun to imagine!

I suspect after the 2004 election, Congress may be ready to turn its attention to begin writing "The Telecommunications Deregulation Act of 2006". Even if the UNE regime has been scaled back by virtue of a judicial bear hug--this time one that grasps the agency and won't let go--it will still be time for Congress to provide a new communications policy roadmap on many fronts. And I bet that, with telecom markets being disrupted, destroyed, redefined, and recreated everyday by new technologies, Congress will understand the need to be more clear about establishing an unambiguously deregulatory course.

One feature of the blogosphere is the shamelessness with which participants promote themselves, their work and their affiliations. Defenders of a healthy Internet-ego claim that it is indispensable for a forum that encourages links and rapid, interactive exchange. A principle objection is that it simply distracts. Regardless of your view, it is fair to say that our nascent PFF Blog has been light on self-promotion. Fear not. We re-enter the mainstream of blogs with this self-congratulatory post.

Tracie Sharp is the president of a very helpful organization called the State Policy Network. SPN is a member organization for state-based, market oriented think tanks and other similar organizations. Members that you may recognize as collaborators with PFF include the Texas Public Policy Foundation and the Pacific Research Institute. Why just last week Randy May visited with the folks at another SPN member organization: The Commonwealth Foundation in Pennsylvania.

Recently, Tracie asked me to join the President's Advisory Council for SPN. It is a delight to work with state think tank executives and I'm very pleased to accept the responsibility.

Regulatory policy peeked its head into the presidential race in the past couple of days. It will no doubt fade back into acronym-laced obscurity. But first, a comment.

Governor Dean called for "re-regulation" of industries, including telecom and electricity. Today, Senator Lieberman and General Clark shot back that Dean's calls for reregulation would be harmful.

Debates premised on a regulation/deregulation axis are rarely illuminating. But let's try.

The issue is one of consumer welfare and how that can best be maximized within the context of real institutions -- corporate and regulatory. In network industries--content, telecommunications, airlines, electricity--there are enormous economies of scale to be achieved through declining average costs, network effects, interoperability and the like. This means big businesses. And these big businesses are good for consumers because their scale allows them to offer low cost products to consumers. Furthermore, the diseconomies of big business -- bureaucracy, manifold agency problems and the like -- are swamped by the economies of scale in these high fixed cost, low marginal cost network industries.

Regulatory institutions, by contrast, have their own problems that we have learned through experience. There are huge information asymmetry problems between regulator and regulated entity. There are enormous incentives for the regulatee to capture the regulator. (Witness AT&T's relationship with the FCC 1934 through the 1970s.) Finally, the tools of regulation stifle and resist innovation and technological dynamism. (Again, witness the FCC's decade-plus delay in wireless phone rollout.) These problems and the dynamism brought out by the digital revolution made a transition to competitive markets possible. Notably, this was a consensus political position. The likes of Stephen Breyer and Alfred Kahn looked at regulation in the 1970s and concluded that consumers would be better off if these closely-regulated network industries were transitioned to competitive markets.

The proper regulation/deregulation policy mix is a prudential decision and thus tough to satisfy with neat, ideological answers. Experience teaches us that consumers benefit, often wildly, from ending administrative regulation of a given industry. That said, the transition is important, and perilous. Incentives for regulatory gaming -- by different parts of the industry and regulators themselves -- go through the roof during these transitions. An improper mix of regulatory and market mechanisms can mean disaster. Witness the California power experience, where the glaring problem was wholesale power worked on a market basis (sort of), while the retail level remained regulated and thus never signaled the wholesale prices of energy to consumers.

In the end, I remain convinced that consumers have much to gain from ending administrative regulation in network industries. But that has to be done at the right time and in the right way. These are the interesting questions. Nonetheless, it is encouraging to see that the Democratic party still has some spokesmen who believe markets serve consumers better than regulation.

Howard Dean is now calling for a comprehensive "re-regulation" of U.S. business, including media companies and the telecom sector. According to the Washington Post, Dean stated, "In order to make capitalism work for ordinary human beings, you have to have regulation."

Dean's call for "re-regulation" brought to mind Dick Wiley's use of that term back in the early and mid-70s. First as an FCC commissioner and then as FCC Chairman, Wiley used the term "re-regulation" as shorthand for his program to re-examine and begin reforming the existing regulatory framework governing media and telecom companies. Recall that at that seemingly long-ago time, three television networks held a dominant position in the media world and AT&T still held dominant market market power in the telco sphere.

But already there were stirrings of change that foresighted regulators could see were creating opportunities for a competitive communications industry--if not smashed in the cradle by regulatory over-zeal (new word meaning overkill) . Cable television was growing, satellites were changing the economics of program distribution, MCI and Sprint's predecessor were already nipping at AT&T's heels, and the FCC had already opened it first Computer Inquiry to look at the blurring line between data processing and comunications.

Granted, Dick Wiley's use of the term "re-regulation" to mean looking for opportunities to lessen regulation always had a bit of an odd ring about it, as even Dick admits. But Dick says that at that time even uttering the word "deregulation" would have raised too many hackles, and he made clear that he didn't mean that regulation should be increased, but rather relaxed where circumstances warranted.

Now comes the 21st Century "re-regulator" Howard Dean--and there is no mistaking what he means to do. He ain't no Dick Wiley. According to the Post, he means to reverse what he thinks have been "the years of government deregulation of energy markets, telecommunications, the airlines, and other major industries."

Like "re-regulation", there's "deregulation" and then there's "deregulation". Maybe we can get Dr. Dean to stop by PFF so we can explain that, at least in the communications and energy sectors, we really haven't seen really meaningul deregulation yet. What we've seen are some halting, but nevertheless welcome, steps in the direction of deregulation. If Howard Dean does decide to drop by--or, for that matter, any other of the presidential candidates, regardless of party--we can explain what real deregulation means, why it is a good thing for the economy in sectors with contestable markets, and what needs to be done to achieve it.

NARUC finishes its 115th Annual Meeting today. While I was unable to stay for its duration - I listened to the telecom committee's debate as it passed four resolutions. Before attaining the luster of NARUC resolutions, the NARUC Board and the full body must review and approve them. Eventually, we'll see them posted here.

Nonetheless, if a committee approves a resolution it is rare for it not to become official policy. Of the four passed on Monday, two are worth looking at in detail. (Congratulations to Jessica Zufolo are in order and hopefully non-controversial.)

The first resolution pats the FCC on the back for the TELRIC NPRM. (Lapsing into telecom acronym geek-speak...must fight the urge...). In two pages, NARUC voices support for UNEs, additional flexibility for states to adjust UNEs, fill factors and other adjustments. When I left, the tentatively approved resolution endorses retaining TELRIC in seven different "Resolved" clauses. A few things stand out: first, there seems to be no embarrassment in stating, as the resolution does, "States should retain the discretion to adoption appropriate fill factors that may vary from an ILECs actual fill factors (emphasis added)". Whew, it is reassuring that the arbitrariness of TELRIC is at least admitted! Second, the resolution claims that TELRIC has been a factor in "encouraging and sustaining local competition." What sort of competition is this? Does it encourage competition or regulatory rentseeking? Sigh. And third, the resolution directs NARUC's General Counsel to file comments in the FCC proceeding. This of course creates an opportunity for our sometimes adversary, and always our friend, Brad Ramsay to enliven the proceedings.

The second resolution, on information services, deserves at least as much scrutiny and perhaps more because of the scope of the issue. Whereas, TELRIC is a method that illustrates the triumph of theory over experience, it has the real world effects on telecom plant and investment as rent control does on housing stock; and Whereas, VoIP and the future of the linguistic debate over information and telecommunications services has very BIG implications; now therefore be it resolved, That future posts will address the substantial and interesting issues of Title I and Title II regulation as seen by the august body of NARUC.

Well, I just got back from Harrisburg, PA. Believe it or not, it is my fourth trip to the Commonwealth in as many years, each time in late November or early December, arguing that competition is developing nicely and that a less regulatory regime should be implemented. Today's event was a breakfast forum sponsored by the Commonwealth Foundation entitled, "The Future of Telecommunications Competition in Pennsylvania: Why New Regulatory Models Are Needed in the Digital Age."

I discussed the paper that Adam Peters and I co-authored which we released today, "Pennsylvania at Another Crossroads: Will It Opt for Less Regulation And Real Competition to Achieve Digital Age Progress"

In essence, we argue that, in light of the competition that has already emerged, the Pennsylvania legislature should adopt a new framework for telecommunications, especially for broadband, that treats all technological platforms, whether wireline, wireless, cable, VoIP, or whatever, in a deregulatory fashion. And we argue there is certainly no need to create new, overlapping bureaucracies, as some of the legislative proposals would do, to micro-manage the broadband investment decisions of the incumbent telcos. Anyway, you can read all about it.

Oh yes, I did bring back a fresh-baked apple crumb pie that I picked up from Bakers Restaurant on the way back. That was for the hard-working crew here at PFF--all of whom declined to get on the road with me at 5:45 this morning for the drive to beautiful downtown Harrisburg. BTW, it's too late to rush over. The pie is gone.

The electricity title of the energy bill passed by the House today is a mixed bag, but on balance I think it's a net plus. Transmission investment has been lagging in recent years and the bill contains several provisions that address this problem, at least to some extent. For example, the bill gives the FERC new siting authority, which the agency can use if the states fail to approve transmission projects of "national interest". It promotes the idea that those who need a transmission upgrade should "pay an appropriate share of the associated costs." In the arcane world of electricity regulation, this notion, which seems like common sense, has become controversial. The bill also promotes incentive-based rates for transmission and repeals the Public Utility Holding Company Act (PUHCA). All of these measures should have a positive effect on transmission investment.

A real solution to the investment problem requires much more, however. Investors have to see the prospect of an adequate return and a substantial reduction in regulatory uncertainty. This gets us to what, in my view, is the most important provision in the electricity title - the one that sends FERC's Standard Market Design (SMD) proposal back to the agency for reconsideration and prohibits finalization of the rule before the end of 2006. Adoption of SMD would likely lead to regulatory uncertainty for years to come. At least now there is the hope - although clearly no guarantee - that the FERC will adopt a more modest approach that will lead to some regulatory stability sooner.

In the same spirit as the SMD remand, the bill contains a sense of the Congress provision indicating that utilities should "voluntarily" become members of Regional Transmission Organizations (RTOs). This is in contrast to the SMD proposal, which would make RTO membership mandatory.

Some have expressed the concern that the loopholes in the bill are big enough for the Commission to accomplish its SMD objectives despite the language to the contrary. Even if this is the case, I would hope that FERC would take to heart the Congress's views on SMD as well as the idea that RTOs should be voluntary.

Here's a novel idea. Why not treat investor-owned utilities the same as Federal utilities, such as TVA and Bonneville, are treated in the bill? The bill makes clear that participation by these entities in an RTO is entirely voluntary - a matter of contract between the Federal utility and the RTO - and that the Federal utility has the right, subject to contract provisions, to withdraw from the RTO and terminate the contract. It seems somewhat ironic that only publicly owned companies would be able to do business this way - which, of course, is the way business is done throughout the economy.

Assuming the bill passes, there should be an opportunity to inject some much-needed new thinking into the electricity "market design" debate. Hopefully, the FERC will be receptive.

Just returned from the PFF Hill Seminar with Nobel Laureates Kenneth Arrow, Robert Solow, and Professor Dennis Carlton. Along with Gary Becker, these gentlemen authored a Lexecon report on behalf of Verizon concerning regulation and innovation. [The link is not yet available on the Lexecon website.]

The points were somewhat familiar: "forward-looking incentives matter, and the current regulatory rules harm the forward-looking incentives of incumbents and competitors, and ultimately consumers...." Nevertheless, to hear these points from the authoritative minds of these economists was worthwhile.

Professor Solow began by noting that productivity gains are the only sustainable way to increase economic output. In recent years, many of these productivity gains have come from information technology and communications. These productivity gains are real, but diffuse, he pointed out, being reflected not just in the communications sector but throughout the economy by firms that use the now more productive communications technology. Citing the well-known example of FCC delay of wireless rollout, he said that regulation can impede productivity gains in ways that have real, macroeconomic impact.

Professor Arrow had my favorite bit of understatement: "competition provides a much richer information pace than regulation." He focused on how resale "competition" killed the incentives to innovate, both for incumbents and new entrants. Furthermore, he noted that regulation begets itself: TELRIC pricing, if low enough, precludes facilities-based entrants from the markets, which is in turn used as evidence that no facilities-based entry is possible, thus justifying the initial move to impose resale "competition" through unbundling.

Professor Carlton closed by noting that dual level rate regulation in the wholesale and retail markets is "in tension." That would be a bit more understatement. Finally, he noted that the consumer harms from mis-begotten regulation are much higher in an arena of rapid technological change as opposed to a stable one.

I would finally add that the professors were generous and gracious. It was an honor to meet them. (This would be the geeky hero worship of big name economists part of the blog.)

The U.S. District Court for the District of Minnesota's preliminary injunction against the Minnesota PUC preserves the current unregulation of VoIP. Qwest Communications has rushed into this void by announcing it will begin to offer VoIP services in Minnesota and Arizona. This move aligns Qwest with Verizon, SBC, Vonage and AT&T, among others, in the tug-of-war over VoIP's regulatory status as an "information service" or a "telecommunications service."

The import of this move, though, is that it will create greater reliance interests upon VoIP as an unregulated de facto information service. Thus, VoIP will gain a foothold as a lower-cost, untaxed service. Consumers will come to rely on this. The onus then will be on regulators -- particularly state regulators -- to "change" VoIP's regulatory status and hence raise its costs with the imposition of taxes, access charges, universal service and public safety obligations. This is much harder to do once consumers are used to cheaper, unregulated service. If VoIP gains a market foothold, it will then be regulators who are blamed for raising the costs -- something regulators will be loath to do.

The broader and obvious point to be made here: regulatory action does not take place in a vacuum, but responds to outside incentives. Given the broad discretion afforded to regulatory decision-makers, those external influences will often be dispositive in legal classification.

Please note: I am not opining here on the district court's legal analysis. Likewise, I offer no opinion about VoIP's status under state law. Indeed, I think under certain state law definitions of telecommunications, VoIP probably qualifies as a regulated service. Hence the urgency for: 1) the FCC to fill the void and rule; and, 2) for VoIP technologies to be used by carriers such that the reliance interests become overwhelmingly stacked in favor of unregulation.