Regulation in the 21^st^ Century

KMB Video Conference

April 28, 1999

Mike Beilis has asked questions about regulation in the 21^st^ Century

Will it be different from 20^th^ Century regulation. We have heard much
about technology of the past two days. I want to talk about people.

Many of us here are regulators.

We have enormous responsibility and power under the law.

Businesses fear and hate us.

Consumer misunderstand and hate us.

There is a common theme here.

We are simply human. Fallible. Capable of great things.

Capable of great mistakes.

Why should we, as individuals, have this power?

It is not because we are special.

Nor is it because we have responsibilities to discover new technologies.

Lots of companies do that.

Or to make consumers rich. Various advocates do that.

Our job is not to be advocates.

Our job is to follow the law.

**Regulation.**

All of which brings me to my second topic -- regulation, or as it's
paradoxically and mischievously called in Washington, "deregulation."

Based on what I have just said about competition, what is the proper
role of a regulatory agency. There is such a thing as "good" regulation.
I will summarize my views with six points.

A.  [Follow the law]{.underline}.

First, follow the law. Few concepts promote consumer welfare and deter
corruption more than willingness of government agencies to follow their
legal authority humbly, and not to exceed it. Laws are typically
written, and when followed they are predictable in their application and
appealable. When agencies do not follow the law, everyone loses, except
those with the power to influence the extra-legal activities. I wish
that I could say that the FCC steadfastly follows the law, but I cannot.

Regulators are not legislators.

It the law is imperfect, it is the legislators, not the regulators, who
must correct it.

If the law has obvious problems, legislators can and will fix it. By
trying to perfect a law by going beyond it, regulators are doing no one
a favor. We are not helping the public because they look to the
legislature, not regulators to write law.

We can never be self-anointed legislators. Our only legitimacy comes in
the legitimacy of the law. When we go beyond the law, we tarnish it,
reduce its legitimacy, and by extension ourselves.

The most effective way to force a legislature to correct a bad law is to
implement it as written.

As government officials, we must be simple pensive, indifferent
implementations of the law, not advocates for its change, and not
advocates exceeding it.

We do not create new technologies. We do not create new services. We do
not create consumer's benefits. Markets do all of these. And more.
Regulators are merely people. But we help markets by following the law
diligently. And merely doing that helps markets immeasurably.

We can claim to do nothing more.

B.  [Economic Basis]{.underline}.

Second, good regulation has a simple economic basis. Ultimately,
benefits demonstrably and unequivocally exceed costs. These benefits may
derive from capturing economic externalities in market transactions or
reducing transactions costs for access to government-owned assets. Much
regulation at the FCC is of another type -- mimicking competition where
competition does not exist. All too often, the reason competition does
not exist is, in fact, precisely FCC regulation. In few if any
instances, however, does the FCC actually document that the benefits of
our regulations closely exceed the costs.

C. [Simplicity]{.underline}

Good regulation should be simple. It should be accessible and visible to
ordinary Americans, not an arcane art for Washington lawyers. Mere
citizens should be able to go to a Web site and understand immediately
the status of a regulation or the status of a license application. They
should not have to hire high priced specialists to do this job. They
should have every confidence that the information they find from such
public sources as a Web Site contains all relevant information. No one
is meeting behind closed doors at the FCC. Decisions aren't made without
public explanation. There is no secret hand shake, no need to hire fancy
lobbyists. No deals are made based on influence or power.

Simple rules are also easy for everyone to understand, interpret, and if
need be: appeal. They follow the motto -- "Better to be approximately
right than exactly wrong." Simple rules are rules that have a chance of
casting for a long time. They do not depend on a complicated computer
model and endless data: a computer model and data that constantly change
beyond the view and vigilance of mere citizens. Simple rules mean that
mere citizens do not have to hire experts to interpret regulation nor
insiders to lobby for it.

C.  [Non Discrimination in Application of Rules.]{.underline}

Good regulation is not only simple but it is non-discriminatory. Have
you ever wondered why regulated firms hire lots of regulatory
consultants? Sometimes it is to understand better written rules.
Sometimes it is to understand better-informed rules. Sometimes it is to
help explain technical issues. All of these are good purposes.

But what happens to the firm that does not hire regulatory consultants?
Or hires the wrong ones? Do the decisions reached by the regulatory
agency differ depending on which candidates are hired?

When an individual applies for a driving license, consultants may be
hired to help prepare for a standardized test, but not to influence an
agency about whether or not to grant a license to a person who has
passed a standardized test. Consultants usually are not hired when
individuals apply to transfer motor vehicle registrations or apply for a
fixing license.

Individuals sometimes hire consultants when they file income tax
returns. The consultants help fathom the paperwork and forms but not
personally lobby the IRS. The IRS computers treat tax returns prepared
by hired professional no differently than applications prepared and
filed directly by individual. In each of the cases, the government
agency has exhaustive written rules that describe how the process works,
and the process works in an impersonal, anonymous, but efficient manner.
Individuals know throughout the process that they will be treated the
same as everyone else and not subjected to different standards simply
based on their identity.

Some agencies that handle large numbers of license applications do not
have written rules about how to handle those applications. These
agencies necessarily make up the rules as they go along. Some
applications receive close scrutiny. Some receive light scrutiny, and
some receive no scrutiny. And those that receive close scrutiny have no
way of knowing how that scrutiny will be applied. But they know scrutiny
is never exactly the same for any two applications.

What would you do if you were applying for a license and were faced with
such a situation? Why, you would hire an army of consultants familiar
with that regulatory agency. If any of this sounds familiar, it should.

Good regulation is non-discriminatory. It treats all similarly-situated
parties alike. There are no individualized rule makings; there are only
general rules that apply to everyone. Waivers are, of course, considered
individually, but on standard criteria.

At the FCC, we do not have written rules for many forms of applications
for license transfers. Application reviews vary, and, in this area, we
could not easily defend ourselves against claims that our decisions are
arbitrary.

Usually, license transfer reviews at the FCC are secretly conducted
outside of public view. Currently however, we have a highly publicized
review of license transfer applications for the proposed merger of SBC
and Ameritech. As a matter of public record, these companies and FCC
staff are negotiating.

But exactly [what]{.underline} are they negotiating? Not about the
proper application of our rules because, in this area, we have no rules.
Not about conditions on granting an application, because we could not
possibly develop individualized conditions for all of our licensees.

Or are they? No one knows what goes on behind closed doors. Whether this
or other proceedings are discriminatory is fact specific, and the public
will never know for sure. But the perception is unmistakable. A
perception of discrimination tarnishes the agency and reduces the
public's trust in the agency.

Ultimately, individual proceedings and rulemakings leave agencies with
enormous discretion about the success or failure of individual
applicants --

The application process, without written rules, can be used to favor
"friends" and punish "enemies." Even if there are no "friends" or
"enemies," discretion places an agency in the uncomfortable position of
picking winners and losers. Applicants come before the agency and plead
not "Grant the applications because it complies with your rules" but
"Please grant the application because I can succeed with it but not
without it."

Agencies can apply written rules in a non-discriminatory manner. Meet
certain written criteria and you win, otherwise, you lose. Agencies are
rightfully blinded to the activities of applicants outside of the
application\
process. But when agencies consider information not specifically germane
to the application process, the agency unavoidably places itself in a
discriminatory role, picking winners and handicapping losers.

In most government agencies, licenses are neither granted nor denied on
the basis of stipulations about future behavior. Based on written rules,
a drivers license may be conditioned on the licensees using corrective
eye glasses or contact lenses, but licensing agency's cannot and does
not condition a license on the licensee agreeing to go to night school
or to buy a new car. The agency has no authority to condition licenses
in such a manner and prescribing such individualized conditions could
never be consistently applied with hundreds of thousands of license
applicants.

E.  [Decentralization of Decision Making]{.underline}

Even simple rules may may require the consideration of detailed
localized information. And, it is possible that different localities may
have different sets of simple rules with which to evaluate the same
information.

Good regulation is not necessarily centralized regulation. Where the law
permits decentralization, it should be decentralized.

State regulators can and must do what is necessary under their state
laws regardless of what the FCC does. Conversely, the FCC must follow
federal law regardless of what the States are doing.

F. [Humility]{.underline}

Finally, and perhaps most importantly, we must have humility about our
role as regulators.

Many of us profess to be pro-consumer.

As if anyone is anti-consumer?

But consumers don't look to us for friendship. Or for lower prices. Or
for new services.

They look to markets.

The best friend a consumer ever had is not a government official but a
new competitor with a better service at a lower price.

And then a new best friend appears with even better service and lower
prices.

G. [Bad Regulation]{.underline}

There is such a thing as bad regulation. At times, there seems to me to
be quite a lot of it. In essence, it is regulation that interferes with
competition. I gave a speech about competition in St. Louis earlier this
week. I won't repeat it now. Let me simply say that the following sorts
of regulations impair competition.

1.  Limitations on entry into a market.

2.  Limitations on exit from a market.

3.  Regulatory determinations of what goods and services will be offered
    in a market.

4.  Regulatory determinations of quality of goods and services in a
    market.

5.  Regulatory determinations of prices in a market.

6.  Regulatory determinations of quantities in a market.

7.  Interference with information, insurance, and intellectual property
    in a market.

Sometimes laws require regulators to impair competition through one or
more of these interventions. But often, we are not required to do so.
Yet we do it anyway.