Friday, October 14, 2005 - The Progress & Freedom Foundation Blog

Crossing Thresholds: Questioning the Ends and Means of Social Regulation in Communications

Recent efforts to expand universal service subsidies and to tack public safety provisions onto Senate DTV proposals [TRDaily subscriptions required] underscore policymakers' continued interest in regulating communications companies to achieve social objectives. As I stated in assessing last month's telecom reform draft, government imposition of such "social" obligations may be both understandable and unavoidable, especially where there is evidence of true "market failure."

Yet to the extent participants in the reform debate see the need for social regulation at all, they generally fail to specify a coherent framework for deciding whether and how government should intervene on these issues. Proposals for social regulation emerge, instead, as "laundry lists" held together by naked (or tacit) political judgments. By leaving the objectives and interrelationships of social regulation inchoate, legislators make the reform process needlessly uncertain, while sacrificing the benefit of focused input on these issues by academics and other technical experts.

To ameliorate this situation, policymakers should ask themselves some threshold questions about what social regulation should accomplish and how these goals can be achieved most effectively given other objectives.

How We Got Here
The absence of a coherent framework for social regulation results indirectly from discontent with the previous round of communications reform. The 1996 Act, despite all its benefits, failed to embrace the full implications of the Internet and the growing dominance of broadband digital technologies. Most strikingly, it failed to anticipate the degree to which companies that did not compete historically would enter each others' markets using flexible Internet protocol technologies. The Act merely continued the distinct regulatory treatment afforded each type of company -- telephone, cable, broadcast, etc. The Act thereby frustrated attempts to reconcile disparities among the regulation of increasingly similar, competing services.

The effort to correct these shortcomings of so-called "economic regulation" has consumed much of the analytical energy devoted to reforming communications laws. Analysts have proposed eliminating such regulatory disparities, often by regulating similar services based on the same competitive standard, or by deregulating services entirely. Where reformers also have attempted to address public safety and other social goals, they generally have done so without reference to overarching principle or the reality that achieving one goal may conflict with efforts to achieve others. This arbitrary, "top-down" approach inhibits social regulation from adapting to changed circumstances as technology and markets inevitably evolve.

Congress and others engaged in communications reform would help rationalize their pursuit of social goals by adopting a "bottoms up" approach that establishes (and periodically reconsiders) social obligations based on regulators' answers to several threshold questions. These threshold questions would probe the ends, means and tradeoffs associated with social obligations, both individually and collectively. Although this subject cannot be explored fully in this writing, here's one way in which these questions might be formulated:

What are the goals of social regulation?
Policymakers should answer this question both specifically and comprehensively. By not specifying what broad concepts like "universal service," "consumer protection" and "public safety" entail, Congress makes it difficult for regulators to decide whether and how to respond. Vague goals engender confusion and coordination problems among regulators and invite gaming by parties lobbying for advantage over competitors. Further, to the extent social goals appear to foster "motherhood and apple pie," they risk suggesting that "more is better" and thereby thwart attempts to decide how much government involvement is enough.

Policymakers also should state social goals comprehensively, in conjunction with the goals of economic regulation. Historically, regulation developed in a fragmented manner that shrouded the overall burden on regulated entities and pursued similar goals inconsistently across technologies and markets. But convergence means that the same companies will be providing services that once had been provided via technologically distinct networks. This makes the burdens and inconsistencies of regulation more apparent and thus more critical to address in a manner that never loses sight of the "big picture." Further, goals of communications policy often overlap. Promoting the economic goals of investment and innovation, for example, will simultaneously promote diversity in many cases. Fostering ubiquitous phone usage by promoting universal service affords a mechanism for bolstering public safety and homeland security. Specifying social goals comprehensively will enable policymakers to capture the benefits of such overlap for consumers, while avoiding regulatory overkill.

What are the tradeoffs among policy goals?
Some communications policy goals will not simply overlap; they will conflict. Saddling newer technologies like Internet voice service with too many public safety requirements, for example, may weaken the ability of such technologies to reduce costs and thereby promote universal service goals. And excessive social regulation of any kind can undermine economic goals such as competition, investment and innovation. By first specifying the goals of social regulation clearly and comprehensively, policymakers can reveal these tradeoffs and ensure that the balance between competing goals is set consciously, rather than inadvertently. This approach also will encourage policymakers to implement these goals so as to minimize potential trade-offs. In promoting media diversity, for example, regulators who perceive tension between programming or access requirements and investment in diverse media may decide instead to eliminate barriers to producing or distributing such content.

Are regulatory mandates needed to achieve the desired ends?
Too often, policymakers assume that once they have articulated a policy goal they need to impose requirements on companies to achieve that goal. Yet contractual or other private arrangements may be all that is necessary to achieve some social goals. In these cases, companies' self-interested decisions or responses to the "bully pulpit" obviate making these actions mandatory. For example, broadband Internet access providers afford their customers the "openness" some say demands regulation despite the absence of a "net neutrality" mandate. This avoidance of mandates gives companies the flexibility to meet desired objectives as cheaply and flexibly as possible, thereby also fostering innovation. Further, this avoidance of mandates reduces the risk that regulation will be imposed inconsistently or will expand to cover new types of companies as convergence enables them to enter new markets.

If regulation is unavoidable, what specific actions will best achieve the desired goal in light of other policy goals?
Selecting among alternative mandates has been the traditional focus of regulation, particularly for administrative agencies. Regulators make this selection based on their own expertise and the information offered by interested parties. By answering the above threshold questions, however, regulators would be best-positioned to ensure that any mandates that become necessary are consistent with other rules and that these mandates do not undermine competing objectives.

In crafting mandates, regulators also must deal honestly and rigorously with the facts and causal relationships before them, eschewing reliance on unsupported or facile reasoning. Media and common carrier regulation, in particular, are fraught with unproven assumptions about how companies behave -- assumptions that disintegrate as digital technologies revolutionize companies' capabilities and incentives. Many regulators assume that diversifying media ownership will yield programming diversity. Likewise, many assume telecommunications companies will commit every anticompetitive act for which they have "an incentive and ability," regardless whether self-interest or other factors offer countervailing reasons for carriers to avoid such behavior. Keen attention to facts and causation will be necessary both to debunk such myths and to update (and continually revise) communications regulation consistent with the rapid evolution of digital technologies.

Which government entity should intervene?
Effective regulation requires that the arm of government best-suited to the task implement any mandates that become necessary. With respect to the FCC, for example, questions resurface periodically regarding whether it should continue approving proposed communications mergers or whether trusting that function to antitrust authorities alone would conclude the approval process more quickly and predictably. Similarly, questions have been raised regarding whether, given increasing globalization, state utility commissions should continue to play a significant role in promoting competition among telecommunications companies. Policymakers must learn to allocate regulatory responsibilities anew, resisting the urge to satisfy agencies' (or interested parties') pleas to preserve business as usual. As technology and market forces constantly reshape the communications landscape, no business will remain "usual" for very long.

The challenge of deciding, in a principled way, whether and how to promote social goals in communications is daunting in several respects. Unlike many forms of economic regulation, social regulation lacks an accepted and (arguably) objective analytical framework. Thus, policymakers cannot easily consider reforms without talking past each other or finding themselves stuck in a morass of subjectivity and arbitrariness. Indeed, it may be impossible to shield social regulation from this fate entirely. But if policymakers begin asking themselves some hard questions about what social regulation should accomplish and how it can do so most effectively, we can at least minimize the detriments of such regulation before they overwhelm the benefits that digital technology promises consumers.

posted by Kyle Dixon @ 8:38 PM | Broadband , Cable , Capitol Hill , Communications , General , Innovation , Internet , Mass Media , Net Neutrality , The FCC , Universal Service , VoIP , Wireless , Wireline