May 2004
On May 13, 2004, the AEI-Brookings Joint Center hosted two panel discussions on regulating wireless communications: the first panel focused on whether the states should regulate wireless services, and the second addressed how the Federal Communications Commission (FCC) should resolve competing claims to spectrum. Kathleen Abernathy, commissioner at the FCC, delivered the luncheon address.
The first panel consisted of Anne Boyle, chair of the Nebraska Public Service Commission; C. Boyden Gray, partner of Wilmer, Cutler & Pickering; and Peter Passell, senior fellow at the Milken Institute. Robert Hahn, executive director of the AEI-Brookings Joint Center, moderated this discussion. The second panel consisted of Gerald Faulhaber, professor of business and public policy and management at the University of Pennsylvania; Thomas Hazlett, senior fellow at the Manhattan Institute for Policy Research; and Bryan Tramont, chief of staff for FCC chairman Michael Powell. Scott Wallsten, fellow at the Joint Center, moderated the second panel.
Panel I: Should the States Regulate Wireless Services?
Anne Boyle
Nebraska Public Service Commission
Ms. Boyle addressed issues pertinent to consumer complaints and concerns about wireless services. She described stories in which consumers filed complaints against service carriers and received insufficient or delayed responses from federal and state regulatory commissions. One story involved a consumer forced to pay a service tax to a city in which he did not live. After receiving no help from his mobile telecommunications provider or the twenty-one different government agencies he contacted, the Nebraska Public Service Commission helped him resolve the problem.
Ms. Boyle emphasized the need for greater human interaction in resolving consumer complaints, more studies on the costs to consumers, and more cooperation between the states and the Federal Communications Commission (FCC).
C. Boyden Gray
Wilmer, Cutler, & Pickering LLC
Mr. Gray suggested that the harm from economic regulation usually exceeds the benefits, with few exceptions, and that deregulation has brought tremendous gains to consumers and the economy. He cited, as an example, the benefits from the deregulation of the airline and trucking industries in the late 1970s and early 1980s. He argued that further deregulation of telecommunications would also yield large benefits because the industry is so competitive that no regulator can keep up with the business. Moreover, he warned that federal deregulation should not be an invitation for the states to regulate. Finally, he acknowledged consumer complaints and billing problems, but noted that the customer always has the option of switching to a different carrier.
Peter Passell
Milken Institute
Mr. Passell discussed whether economic regulation of wireless has more benefits than costs and whether wireless should be regulated at either the state or the federal level. He stated that the wireless industry is "the paradigm of competition," with extraordinary possibilities for dynamic change. Due to this competition and rapid technological change, there may be less need for regulation at any levels.
If regulation were required for wireless, Mr. Passell would prefer federal regulation to state regulation because most of the externalities associated with regulation are national in nature. He described several problems with state regulation of wireless. First, larger states' regulations are often imposed on smaller states by default to facilitate interstate commerce. Second, the "race-to-the-top theory," in which competition between states improves regulation by giving the business to the best regulator, does not apply to wireless because wireless systems, unlike wireless users, are not mobile. Finally, "interest-group capture" in several states can create a significant disadvantage for smaller firms. He estimated that the cost of the California Telecommunications Bill of Rights was twice as high for the smaller wireless firms as for the largest ones since many of the costs of such consumer regulations are fixed costs.
Panel II: How Should the FCC Resolve Competing Claims to Spectrum?
Gerald Faulhaber
University of Pennsylvania
Mr. Faulhaber began by criticizing the current regulatory regime for exacerbating spectrum scarcity when spectrum could be more abundant. He considered alternatives to the current licensing regime for spectrum, which appears to lead to substantial inefficiencies in spectrum allocation. Specifically, he examined a market-based property rights regime and a commons, or unlicensed, regime. He defined the current regime as one of regulated exclusive licenses. Commons advocates take issue with the exclusive licenses, while market advocates think that regulation is the problem and that the FCC should be removed from the allocation and dispute resolution processes. Mr. Faulhaber maintained that the "light" regulation that commons advocates are calling for is an oxymoron since the unlicensed spectrum required many rules. An unlicensed governance structure would simply shift the locus of lobbying. Mr. Faulhaber concluded that the debate is over the governance of spectrum and "where you stand on the debate depends on where you stand on regulation."
Thomas W. Hazlett
Manhattan Institute for Policy Research
Mr. Hazlett argued that spectrum should be allocated by market forces, rather than by the current command-and-control regime. He suggested that spectrum rights are still routinely allocated by administrative fiat, resulting in licenses, which are then auctioned. He also summarized the state of play at the FCC. The FCC says we have three choices: licensed, unlicensed, and command-control. He said that while the FCC claims that unlicensed spectrum has been a success, there is little evidence to support that claim.
Mr. Hazlett advocated the use of markets for spectrum sharing. Eliminating exclusively owned flexible-use rights makes it almost impossible to use these wide swathes of spectrum. He proposed a new regime, "EAFUS," or Exclusively Assigned Flexible Use Spectrum. Citing a paper by Kwerel and Williams, he stated that the amount of consumer surplus from the limited amount of spectrum to which we have applied EAFUS is approximately $81 billion, annualized. He also simulated a real-world model that demonstrated that if the United States let spectrum into the market for EAFUS for the CMRS (Commercial Mobile Radio Services, 70 MHz to 230 MHz), the price of the spectrum would decline from 11 cents to 9 cents, and social welfare would increase by $34.8 billion. Finally, he recommended that the FCC make more spectrum available to increase consumer surplus.
Bryan Tramont
Federal Communications Commission
Mr. Tramont suggested that the FCC is moving toward a more market-based approach to defining and distributing spectrum. He indicated the while auctions are the predominant and desirable method of distributing spectrum rights, there are some exceptions, such as rights for public safety, digital television, and educational public broadcasting. In addition, he suggested that the unlicensed spectrum does not replace exclusive rights but supplements them. Overall, he maintained that the FCC is moving in a positive direction by granting flexible rights and eliminating technology-based limitations.
Mr. Tramont revealed that a major concern at the FCC is what to do when incumbents exist and additional rights are possible. If sharing is not possible, then the FCC either has to relocate the incumbent or grant the incumbent the additional rights. Often, the incumbents are so entrenched that the transaction and political costs of relocating the incumbents are too high. Mr. Tramont concluded that the question is not about the right regulatory model, but how to distribute the remaining spectrum rights when many incumbents exist.
Kathleen Abernathy, Luncheon Address
Federal Communications Commission
Ms. Abernathy began by outlining her principles concerning regulation: first, the FCC must adhere closely to congressional mandates; second, the FCC should be reluctant to intervene in the marketplace through prescriptive regulation; third, the FCC should ensure that its rules are clear and can be vigorously enforced; fourth, the FCC should reach out to other organizations to maximize the amount and quality of information available to make decisions; and finally, the FCC should act in a timely and fully responsive way.
Ms. Abernathy highlighted that the wireless industry, and in particular the mobile wireless sector, illustrates what a properly functioning market can achieve when not hindered by unnecessary regulation. She attributed the tremendous success of wireless growth, declining mobile prices, and improved service to the FCC's decision to allow the wireless marketplace to develop freely. Moreover, she emphasized that in light of intense competition in the wireless industry, imposing regulation of service quality in the commercial mobile sector would risk freezing technology and diminishing the benefits of head-to-head competition. She argued that the best way that regulators can foster consumer welfare is by focusing on education, not prescriptive regulation.
Question and Answer Session
The questions reflected concerns about regulating wireless and how the FCC should resolve competing claims to spectrum. One audience member wondered whether the FCC could eliminate the universal service fund that subsidizes wireline firms. Ms. Abernathy responded by suggesting that this proposal was not politically feasible, and that the FCC should instead encourage all carriers to be more efficient by increasing competition and making it more difficult to qualify as a wireline carrier. Another audience member was concerned about interference in the public safety spectrum. Ms. Abernathy suggested that in most cases, you can correct interference after it occurs, but not with public safety. One solution is to relocate companies and find additional spectrum. She maintained, "This is a difficult problem without an elegant solution."
Rohit Malik, a researcher at the AEI-Brookings Joint Center for Regulatory Studies, prepared this conference summary.
