As the net neutrality debate hits a fever pitch of hysteria and cataclysm, it is nice to return to a competition policy model for policing the issue. With a strong nod to Jim Speta, here is a sound, well conceived, thoughtful and ingenious way to deal with it.

A coalition of government-subsidized telephone companies has seen fit to attack the DACA universal service report and proposal. This is not surprising. Rent-seekers always protect their booty, even in the face of a moderate proposed reform like DACA.

We will turn to more substantive responses to the coalition's alarmism later, but it is rather remarkable that the rather august group of scholars we brought together could allegedly be so starkly misinformed and careless. In Mike Riordan and Simon Willkie, we have the participation of two former FCC Chief Economists. With Jerry Ellig, we have an eminent regulatory economist known for his work at the FTC and Mercatus, and Bob Crandall has few peers in analyzing regulatory economics. Dale Hatfield, meanwhile, is a rightful industry legend and former FCC Chief Technologist. Phil Weiser is incomparable in all ways, and decidedly moderate in his views on USF. Finally, the Roberts Atkinson, of PPI and CITI, respectively, have long reputations in the regulatory arena, with "Columbia Bob Atkinson" having been Deputy Bureau Chief at the FCC. I realize that arguments from authority are not dispositive, nor should they be, but I do submit that the DACA proposal brings serious intellectual firepower to the fore and offers a considered proposal to make universal service viable for the future.

The depressing part of all of this is the political reaction of the subsidized companies can be nothing but hysterical in the face of proposed reform. I cannot blame these companies for protecting their self-interest by continuing claims to subsidies, but their attempts to dress up their claim as anything more than Logic of Collective Action interest group rentseeking is unavailing.

In re-reading the staff discussion draft (v. 2.0) of the BITS Act, I wonder how it would be construed in light of Trinko, and what would be BITS (v. 2.0)'s effect under Trinko in essentially walling off the Internet space from antitrust scrutiny?

I don't mean this as a cute or loaded question, but rather I sincerely wonder whether BITS with Trinko still vital as precedent would make the respective layers of the Internet realtively antitrust-free? I think the mechanics would be as follows:

Trinko can be read a number of ways, but it seems to me the best readings are as an institutional competence/separation of powers decision. In essence, the Court said that if Congress creates a prophylactic regulatory system that encompasses an entire industry sector, and if that system governs the economic and competitive relationships within that sector, then traditional antitrust will yield to that regulatory scheme. This is because the interrelation between the two systems of law could be potentially quite hazardous, and further because the theory of an administrative occupation of the regulatory field makes the agency more competent than the court to make the relevant decisions.

BITS (v. 2.0), meanwhile, extends the reach of the FCC's jurisdiction clearly and wholly within the Internet space. Instead of the current focus on physical networks, BITS gives the FCC regulatory authority over the logical (net neutrality mandate/interconnection) applications (VoIP) and content (broadcast rules) of the Internet protocol stack.

With the FCC then clearly having regulatory power over the entire Internet protocol stack, to what degree then does antitrust and competition policy fall by the wayside in favor of the specific mandates in the act?

Please discuss....this has to draw Professor Speta out.

The second conference of the Federal-State Framework Working Group of the Digital Age Communications Act (DACA) project offered familiar reactions to our proposal, as well as some new ones. Speakers at yesterday's conference, hosted by the University of Colorado's Silicon Flatirons Telecommunications Program, displayed a rough consensus that the current allocation of responsibility among communications regulators should be adapted to the rapid evolution of the Internet era. Likewise, speakers generally agreed with the Working Group's report -- co-authored by reigning dean of "cooperative federalism" Phil Weiser -- in insisting regulators at all levels must not impede the competition, investment and innovation made possible by digital technologies.

Beyond that common ground, however, speakers' views diverged, generally echoing significant disagreements that erupted during the Working Group's deliberations. Without restating those here, a few observations of the conference are in order.

Back in January 2004, as VoIP was catching on big-time, I wrote a piece for CNET entitled "The Metaphysics of VoIP." I predicted, correctly I think, that much of the coming debate over how VoIP should be regulated under the existing legal regime "would be downright metaphysical." And I pointed out that the dictionary definition of metaphysical means:(1) "of or relating to the transcendent or to the reality beyond what is perceptible to the senses"; (2) "supernatural"; or (3) "highly abstract or abstruse." Of course, in the regulatory world, not only philosophers, but lawyers, find good paying work on metaphysical playgrounds.

So, in another CNET piece, this one published in October 2004 and entitled "Calling for Regulatory Overall Bit by Bit," I called for a new communications law framework that would not be based on what I called "highly abstruse techno-functional constructs." I said such a regime would lead to continuing disputes about the boundaries of service categories that determine regulatory consequences. And I concluded: "What we need is a new market-oriented regulatory model, not a replacement regime based on another set of techno-functional definitions."

Regretfully, the discussion draft released by the House Commerce Committee staff late last week is a framework built on regulatory techno-functional definitions--classifications of BITS providers, VoIP providers, and broadband video providers with attendant regulatory consequences. The serious difficulty with this approach from a political economy and public choice standpoint is that, on the one hand it lends itself to legislators and regulators fiddling with the techno-functional constructs in ways that allow them to shape the market to their own ends, however well-intentioned. And, on the other hand, it leads those who might be benefitted or disadvantaged by manipulating the interpretation of such techno-functional definititons to invest in doing so.

For an example of the first hand, look at the broadband video provisions which require the provision of certain types of (not-yet-offered) integrated Internet functionalities in order to qualify for streamlined franchising treatment. Do the legislators (or regulators who will implement the provisions and, inevitably, the courts who will ultimately interpret them) really know what consumers will demand in the marketplace and or technological capabilities might evolve in the future, absent regulatory constraints, to meet such demand?

Or, to take on the second hand the market participants who seek to qualify for treatment as a BITS provider, or disqualify their competitors. Will the dispute over whether a new protocol is a "successor protocol" of the TCP/IP protocol really be anything other than a metaphysical food fight? And one with likely ongoing uncertainty and attendant long running litigation that will impede marketplace development? (Anyone reading this who remembers the FCC's decade-long struggle to define protocol processing for purposes of drawing the lines between "enhanced" and "basic" services please raise your hand!)

I have great admiration for those who have put in many long hours to produce the discussion draft. It is not easy making sausage on hilltops, especially with a lot of chefs in the kitchen. By virtue of the nature of the process, I believe, however, that the production of the discussion draft can be a constructive step in helping to focus the coming legislative debate. There are elements of the draft that have a deregulatory thrust that are commendable, putting aside for the moment ambiguities in the language that call into question whether that thrust would, in fact, be realized.

I am sure that if one assumes that the discussion draft model, which is what we called the IP Migration model in our DACA regulatory framework group, is the only basis for moving forward with communications legislation, there are ways to improve on the draft language to diminish the likelihood of regulation that is unnecessary and unwise in the current communications environment. To some extent the draft takes what one might call a "clean version" of an IP-Migration model and then reimposes some of the old legacy regulation on top ot it. See, for example, the Section 104 Net Neutrality provision governing "access to bits" or the entry registration requirements throughout. By definition, it is very difficult for any model based on technology distinctions to establish a deregulatory firewall in today's fast-changing technological environment. But it is my intent to offer a few such drafting suggestions that move in the direction of tightening up in another post, assuming for the sake of argument the current draft. I bet some of my colleagues might as well.

But, for now, what I suggest is this: Compared to the techno-functional approach taken in the discussion draft, the market-oriented model ("FTC model") that the DACA Regulatory Framework Proposal released in June presents an attractive, non-techno-functional alternative that deserves to receive renewed attention. It is likely that the reform debate will continue well into next year. There is time enough to reflect and make sure we get the overall fundamental framework right.

The House of Representatives' Energy & Commerce Committee released draft legislation yesterday aimed a cleaning up the nation's telecom and cable laws. A revision of the Telecom Act of 1996 has been in the works for some time and is very much needed, so most parties welcomed this news.

Here at PFF, of course, we've been working hard with a group of respected academics and experts to provide a new framework for communications policy reform. That project is called "DACA," which stands for Digital Age Communications Act.

One thing we largely left out of DACA effort was any in-depth discussion of video regulation. That is, the extensive "public interest" regulatory regime that currently covers the broadcast sector and to some extent cable and satellite services. There were several reasons we left it out of the DACA project; most importantly, we simply felt that most of these rules could easily be sunset in light of growing competition in the multi-channel video marketplace and the media universe more broadly. Under our DACA framework, any "market power" problems that might develop in the future video / media marketplace would be handled with simple competition policy principles borrowed from antitrust law.

So Much for "Hands Off the Net"
Unfortunately, after looking through the House Commerce Cmmt. draft legislation last night, I realize that not everyone shares our opinion about the growing media market competition alleviating the need for extensive "public interest" regulation of the video marketplace. Specifically, Sec. 304 of the bill (which begins on pg. 41 of the discussion draft) is entitled "Application of Video Regulations to Broadband Service Providers." Section A which immediately follows is appropriately labeled "Comparable Requirements and Obligations," and then goes on to not how "each of the following provisions of the 1934 [Communications] Act, and the regulations under each such provision, that apply to a cable operator shall apply to a broadband service provider under this title in accordance with regulations prescribed by the Commission..."

One of the central threads of discussion in the Federal-State working group has been on the apportionment of authority between each level of government. Today I came across the following passage and it serves as food for thought.

"[T]he States can best govern our home concerns and the general government our foreign ones. I wish, therefore... never to see all offices transferred to Washington, where, further withdrawn from the eyes of the people, they may more secretly be bought and sold at market."

Thomas Jefferson, letter to Judge William Johnson, June 12, 1823

If, as Stigler has persuasively argued, regulatory institutions can be captured and public officials of good will tend to work toward the ends of the regulated, which regulatory institutions are more susceptible? Federal or state? Or does the organizational structure matter more than the level of government? Email me your arguments.

If you believe the states are better equipped to resist capture or to err less grievously when captured than their national counterparts, consider that on the one hand, there is generally more diffused power among agencies and the legislature. But, on the other hand there tend to be fewer "watchdogs" at the state level.

One of the principal objections I have heard toward the regulatory framework report is the persistence of a separate interconnection standard or, as some have called it, an interconnection mandate.

First, I would emphasize that it is a standard, not a mandate. Under the framework, regulatory intervention to compel interconnection can only happen upon a showing of: "a substantial and nontransitory risk to consumer welfare by materially and substantially impeding interconnection" to a public communications network. Admittedly, the "public communications network" term is problematic, and I think the working group would be open to alternative terms. Principally, though, this standard does not mandate interconnection but first requires a showing of harm from failure to interconnect.

To put it mildly, the most contentious issue in the working group involved the survival of any state rate regulation. The current draft retains to states the ability to retain a residential basic local rate, with a process whereby that rate can be petitioned away.

On the broader question of price controls, if it had its druthers, the group would abolish all rate regulation. However, a concession to the longstanding universal service tradition of communications regulation leads toward retaining the basic service rate on a grandfathered basis. Under this model then there would be no rebalancing of the rate, but just a "rough justice" grandfathering of the various state rates. This would mean that companies would remove all tariffs, cease all rate filings and cost studies, leaving only local exchange maps and a single basic res service tariff in place (in the lingo, the 1FR) at the state level. All other rates would be deregulated and there could be no imputation of the 1FR rate into any packages.

It is very fashionable to argue against the role of state agency regulation, but the realities of the effectiveness of many state agencies and the notable shortcomings of the FCC make telecom a more complex case. Not to mention, the best uses of preemption--including by the FCC (think equipment regulation)--are when no regulation is appropriate. But the Title I model of DACA envisions a competition policy standard that will require some institution to develop and apply rules that will often turn on fact specific inquiries.

As a matter of institutional design, the Regulatory Framework that DACA proposes takes on the first important question--why should agencies and not courts administer telecommunications competition policy? (On the continuing role for an agency in managing telecommunications policy, you can see my explanation (developed with Jon Nuechterlein, my Digital Crossroads co-author) here.) That a critically important question, but its answer begged a second one: could the FCC do it all itself?

For a host of reasons, some of which Ray ably noted, we concluded that the FCC could not implement competition policy all by itself, even though an integrated federal framework was critical. In taking our best stab at a reasonable institutional strategy, we looked for ways to have both the feds and states play an effective checking function against one another as well as to enable the states to provide valuable institutional support for implementing a federal regulatory regime. After all, if there will continue to be regulation of interconnection and other competitively essential wholesale support (see other debates forthcoming), some agency has to do it. And for those who followed the FCC's one effort to do that in the case of Virginia, which opted out of implementing the Telecom Act, it's hard to imagine the FCC doing 51 of those.