** **

 "Transition From Regulation to Competition"

Comments of

Harold Furchtgott-Roth

Commissioner, Federal Communications Commission

Before the

Wisconsin Public Utility Institute

Madison, Wisconsin

January 19, 2000

> It is a great pleasure to be here in Madison. Many states are named
> after great Americans, but none greater than Madison. The author of
> the Constitution was a great believer in government, in the proper
> role of government, in limited government. He also understood, perhaps
> better than anyone else of his time or any time since, the delicate
> balance between state and federal governments.
>
> How fortunate for the people of Wisconsin to have a state capital
> named Madison.
>
> Wisconsin has produced more than its fair share of civic-minded public
> leaders, people who cared passionately not just about government, but
> about good government. I understand that the Wisconsin Public Utility
> Institute holds Bob La Follette as such an example, and with good
> reason.
>
> And how fortunate for the people of Wisconsin to have been ably served
> for many years by Cheryl Perrino. She served as chair of the Wisconsin
> Public Utility Commission; chair of the prestigious national trade
> association for regulators known as the National Association of
> Regulatory Utility Commissioners; and now, her most difficult
> challenge yet, President of the Universal Service Administrative
> Corporation. It is an impossible task managing new programs and old;
> collecting, accounting for, and disbursing, billions of dollars
> annually. It is an enormous challenge, but---as I have often said---if
> any one can do it, Cheryl Perrino can.

# Measuring regulation and competition

> The topic of today's talk, "Transition from Regulation to Competition"
> suggests a one-dimensional characteristic, such as temperature, that
> varies by degree from hot to cold. For temperature, there is a
> thermometer, with a simple scale, to measure heat and coldness. It
> turns out, hot and cold are easy to define relative to one another --
> they are opposites. One is the absence of the other.
>
> Regulation and competition are neither one-dimensional, nor are they
> opposites. Competition refers to the state of a market, particularly
> how businesses behave in a market. Regulation refers to how government
> interferes with the market.
>
> Absent government intervention, markets may be competitive,
> monopolistic, or anywhere in between. With government intervention,
> markets may take on any characteristic, although I believe the
> likelihood of competition is diminished by substantial government
> intervention.
>
> Consequently, I see nor causality, no necessary and sufficient
> conditions in any direction between competition and regulation.

# Role of government

> Then why do we speak of a "transition to competition?"
>
> Because in the case of utility regulation for most of the 20^th^
> Century, regulation meant monopoly regulation, competition was
> outlawed, what is the role of the government in competition?
>
> In the narrowest sense, government addresses law-and-order issues such
> as:
>
> Enforcement of contracts
>
> Protection of property
>
> Non interference
>
> Provision of a stable currency
>
> Provision of a national defense.
>
> The government has other roles that go beyond law enforcement. These
> may include limited interventions when there is clear and compelling
> evidence of
>
> Externalities or
>
> High administrative and transactional costs
>
> These may provide a basis for clear and defensible government
> intervention. For example, at the FCC, we recently had a matter
> involving spectrum licensing where there would be high administrative
> and transactional costs present in market contracts absent government
> licensing.
>
> One could conceive of pure property right to spectrum without public
> records. But like real estate and intellectual property, there is
> public government role in licensing and deeding where they are more
> efficient.
>
> In telecommunications, there is also a clear government role in
> enforcing contracts, whether between and among carriers or between
> consumers and carriers.

# Efficiency and distribution regulation

> The issues above are what I might call "efficiency regulation." Such
> regulation neither creates nor precludes competition. Some purists,
> who think "regulation" an evil word, would not call these
> law-and-order issues regulation at all.
>
> The role of government is not merely efficiency, but distributional as
> well. Government is concerned about outcomes, concerns about equity.
>
> Thus there is a government role, according to many, in wealth, service
> offerings, quality of service, pricing, and other factors in a market.
>
> These are important issues but it is here that government starts to
> get into trouble. Equity regulation can have profound effects upon
> competition, often not good effects.
>
> Paradoxically, most of the failings of 20^th^ century regulations were
> not based on what I would call "equity regulation", but rather on a
> misapplication of "efficiency regulation."
>
> Although there were always equity trappings of helping one group or
> another, the core of 20^th^ century utility regulation was premised on
> the notion of natural monopoly, that certain types of industries
> always face declining average cost curves and could thus be served
> most efficiently by a single provider. Both to protect and to restrain
> the monopolist, all sorts of regulations were imposed.
>
> The notion of single providers, natural monopolists, is at best dated,
> at worst demonstrably false. Remove the assumption of natural
> monopoly, and much of 20^th^ century regulation begins to unravel.

What replaces 20^th^ century regulation? Is it no regulation? Is it
competition?

Let me see if I can give some insights with my views of competition. Let
me briefly discuss two particular issues:

Mergers and acquisition;

And universal service.

> Mergers and acquisitions raise important issues for efficiency
> regulation, but these are antitrust issues, not telecommunications
> policy issues. Antitrust principles are extremely important for
> competition, but they are related to telecommunications regulation
> only to the extent that telecommunications regulation is based on
> natural monopoly concepts. To the extent that telecommunications
> regulation does not rely on theories of monopoly, it is unclear what
> is uniquely telecommunications policy related to the review of mergers
> and acquisitions.
>
> Under the Telecommunications Act of 1996, the FCC has no clear role in
> the review of mergers of acquisitions, other than under the Clayton
> Act which is never invoked. Paradoxically the FCC continues to review
> mergers, not under explicit statutory authority, but under its license
> transfer authority. I am uncomfortable with this exaggerated
> interpretation of legal authority.
>
> I believe in letting professionals handle issues. That is precisely
> the role of the Department of Justice and the Federal Trade
> Commission, the professional antitrust arms of the federal government.
> These agencies have explicit legal authority to review mergers and
> acquisitions, and they have the professional staffs to do them
> competently, as they demonstrate continuously.
>
> In contrast, the FCC has neither the explicit authority nor the
> expertise. Our indirect process, without written rules, has become a
> back-door, closed-room deal process. One need only look at the license
> transfer situation for SBC and Ameritech.

2.  In contrast, universal service is not an area of efficiency
    regulation but one of equity regulation. The Telecommunications Act
    of 1996 requires universal service in high cost areas. Absent FCC
    regulation, this program might not exist. There are counter examples
    -- Fed Express, gasoline and food essentials -- are provided in
    high-cost areas even without federal intervention. But universal
    service need not hinder competition, and an appropriately structured
    program would not.

> Competition is the ultimate market structure. It is both efficient and
> equitable. The proper role of regulation, in addition to following the
> law as it is written, is not to harm or to preclude competition.

What is competition?

I will summarize competition with seven characteristics. Others may have
been chosen, and some of these deleted. My main emphasis here is not an
exhaustive and comprehensive definition, but rather a definition that
helps illustrate what, if anything, a government regulatory agency has
to contribute.

A. [Unrestricted entry]{.underline}

The first characteristic is unrestricted entry to sell the good or
service. If you want to sell electricity or telephone service in
Madison, those markets are competitive only if no one prohibits such
selling.

Many people confuse \"unrestricted\" entry with \"free\" or \"costly\"
entry. Entry may be costly, but as long as everyone faces roughly the
same costs of entry, including those already in the market; and these
costs are not in some sense \"unnatural,\" this condition is met.

For the economists in the audience, I don\'t want to get in a protracted
debate now about sunk costs. Let me focus instead on the \"unnatural\"
costs of entry. Just a few years ago, it was unlawful to offer
competitive phone service in Wisconsin under any circumstances, and that
may still be the case for some selected other services. The cost of
entry was what I might call unnaturally high. Entry might lead to
government confiscation of assets, perhaps even jail time. Hardly what I
would call a competitive market.

In a market heavily influenced by organized crime, entry might also be
discouraged or allowed only with certain payments to a local mobster.
Hardly competition.

Unrestricted entry must also be voluntary entry. If I want to offer
telephone service in Madison, but a government official who has the
power to stop me insists that I have permission to serve Madison only if
I agree to serve Milwaukee as well, I have no unrestricted entry into
either city. In a truly competitive market, someone else will enter if I
don\'t, and the proper role of government is not to restrict entry or
even condition it.

Ultimately, only government officials and mobsters can impose what I
would characterize as \"unnatural\" barriers to entering a market. Some
people confuse the two. But when government restricts entry, or force
entry, or conditions, it - willingly or not - is engaged in a corrupt
practice of picking winners and losers in a market, the net effect of
which may be indistinguishable from that of the gangster.

B. [Unrestricted Exit]{.underline}

The second characteristic of a competition is unrestricted exit. Michael
Jordan may be the greatest, most competitive basketball player ever.
When he chose to retire, no government law, regulation or underworld
gangsters stood in the way and forced him to continue to play. Every
year, millions of Americans choose to retire, most in occupation for
less glamorous than professional basketball. No one stands in the way.

Suppose, however, I wanted once I had begun, to stop offering
telecommunications services in Madison. If I were a new entrant, no one
would stand in the way. But if I were SBC, now that is a different
matter.

In a perfectly competitive market, entry and exit are fluid, and those
who exits are replaced by others in the market or by new entrants.

The proper role of government is not to interfere with this process
either by limiting, conditioning, or prohibiting exit from markets. To
do so is, once again, no different from picking winners and losers in a
market, a corrupt form of practice little different from a mobster not
wanting one of his paying customers to go out of business.

C. [Market determination of available goods and services]{.underline}

In a competitive environment, markets, not government laws or officials,
determine which goods and services are available. In a competitive
market, if the people of Madison want a call-forwarding feature on their
phones, and it is technological feasible, it will magically be
available. In a market governed by excessive regulation not competition,
the magic may take years of regulatory review to allow the service.

The American public was forced to wait decades for wireless telephone
service and cable video services entirely as the result of regulatory
delays. Under competition, these delays could never have occurred.

When government officials, not markets force pick the goods and services
that will be available in a market, consumers always lose. Some goods
and serving will be delayed or not offered at all. Others, with
insufficient market demand to warrant being offered, can be sustained in
a market only by taxing consumers, directly or indirectly. Picking goods
and services in a market corrupts the regulatory process into a game of
winners and losers. Competitive markets cannot sustain such
intervention.

D. [Market determination of quality]{.underline}

In a competitive market, the quality and characteristics of goods and
services are determined by the power of supply and demand. In an
overregulated market, these decisions are made by government
administrators after protracted deliberations. Consumers wind up paying
more than they wish for some services whose service quality is set too
high, and do little for other goods and services whose quality is set
too low.

E. [Market-determined prices]{.underline}

Prices are the central form of information in a competitive market. When
bid up, prices help encourage entry. When bid down, prices encourage
exit. But, when prices are set by REGULATION, entry and exit conditions
are confused and corrupted. Prices set too high encourage over
investment and entry. Prices set too low discourage investment and
entry.

F. [Market Determined Quantities]{.underline}

Under competition, markets determine how much is supplied for each good
and services in each market. Under excessive government regulation,
government officials do. Prices and quality of service adjust to make up
the difference.

Much of economics is a recognition that transactions in competitive
markets can be summarized with three elements: Prices, quantities, and
quality characteristics. An old theorem is economics holds that if, you
try to restrict any one of these elements, the other two will respond
accordingly in a manner that the net result is harmful to both
businesses and consumers.

Restrictions on two of the three elements lead to substantially reaction
in the third element, and have potentially more serious economic
consequences.

According to the economic theorems, it is impossible to restrict all
three elements at once. The economists who propound the last part of
this theory have obviously never visited the FCC.

G. [Protection of Information Insurance, Intellectual Property and
Related markets]{.underline}.

Competitive markets are usually based on free and competitive operation
of supporting activities such as information, insurance, and
intellectual property. Local mobsters have a stake in some of these
markets and do not want competition there. When government officials
intervene in these activities they threaten all related markets.

There you have my views of competition.

Will regulation take us there?

 

My hope is \"regulation won't stand in the way.\"