Regulation in the 21st Century
                                              KMB Video Conference
                                                      April 28, 1999 
  
  
  Mike Beilis has asked questions about regulation in the 21st Century
  
  Will it be different from 20th 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.
  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.
  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
  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.
  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  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
  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
    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
  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.