"**Regulation and the FCC"**

# comments of

# Harold Furchtgott-Roth

Commissioner, Federal Communications Commission

Federalist Society of Pittsburgh

Pittsburgh, Pennsylvania

April 20, 2000

# 

##  

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.