April 3, 2006 | WebMemo on Regulation, Internet And Technology

Good News, Bad News: Telecom Reform in the House

After several false starts, telecommunications reform is once again moving in Congress. As soon as this week, the House Commerce Committee will vote on a proposal released last Monday by committee chair Joe Barton (R-TX) and House Speaker Dennis Hastert (R-IL). The bill would allow cable-television operators to be franchised at the national level, increasing competition in cable-television market.


Unfortunately, the bill would also provide the Federal Communications Commission (FCC) with the authority to enforce so-called "network neutrality" rules on Internet providers. While more limited than what some have proposed, this would be a dangerous step towards complete federal regulation of the Internet. Policymakers should reject this approach.


Cable Franchising and Competition

Thanks to advances in digital technology, companies that once provided only telephone service, such as Verizon and AT&T, are now able to provide television over their wires. In recent months, both companies have begun to offer television service in communities around the country, providing competition and choice to consumers. The results have been strikingly positive. In Keller, Texas, for instance, the incumbent cable provider announced a rate cut soon after Verizon entered the market. Criterion Economics estimates that this kind of competitive pressure, if widespread, would cause rate to drop 15 percent nationwide, saving consumers over $5 billion.[1]


However, regulation has slowed the spread of this competition. Under current law, firms must obtain a franchise from local authorities before they can provide cable- television service. With some 8,000 local authorities nationwide, gaining approval nationwide would be long and cumbersome process and take years to complete. The delays caused by these franchising authorities not only affect their own communities, but communities everywhere, as the current system makes nationwide service difficult, threatening the benefits of choice everywhere.[2]


The Barton bill would break this logjam by giving providers the choice to obtain a national franchise instead of a local one. These franchises would be granted by the FCC no more than 30 days after an application is submitted. Importantly, national franchises would be available not only to new competitors, but to all cable-television firms (as long as they are not the only firms in a locality). The newly franchised competitors would not be subject to mandatory build-out requirements, which specify where and when a provider must provide service. Instead, these decisions would be left to the marketplace, not government regulators.


But the bill does impose several unnecessary burdens on national franchisees. For example, franchisees would have to pay 5 percent of revenues to local franchise authorities and provide channels for public, educational, and government use. These are, in effect, taxes on cable television. They are a vestige of the time when franchisees were monopolies and firms were charged for that privilege. Mandates and taxes of this kind have no place in a competitive market. These requirements should be eliminated.


Net Neutrality

"Network neutrality" is the principle that Internet network providers, such as telephone and cable- television companies, should not discriminate between types of Internet traffic transmitted over their networks. The exact definition of neutrality, however, varies substantially.[3] Last August, the FCC adopted a policy statement on the issue, spelling out what providers should offer their customers:


  1. Consumers are entitled to access the lawful Internet content of their choice;
  2. Consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement;
  3. Consumers are entitled to connect their choice of legal devices that do not harm the network; and
  4. Consumers are entitled to competition among network providers, application and service providers, and content providers.[4]


This was a non-binding statement of principles because the FCC has no legal authority to enforce such rules on Internet access. The House bill, however, would give the FCC this authority and direct it to enforce these principles.


The grant of authority is limited. The FCC would not be authorized to write rules but only to respond to specific complaints. This is intended to keep the commission from imposing a comprehensive regulatory scheme on Internet access and instead to focus on specific disputes.


The bill's authors specifically declined to give the FCC that kind of comprehensive power. For instance, a recent bill by Sen. Ron Wyden (D-OR) states that network operators shall not "interfere with, degrade, alter, modify, impair or change" any content. The bill also bans discrimination in the carriage of traffic or charging service providers any fees. This language would prohibit "hot lanes" for priority transmissions and require all Internet traffic to be provided on a first-come, first-served basis.[5] The House bill rightly rejects this approach.


However, there still is room for mischief in the House's language, due to vagueness and ambiguity. What does it mean, for example, to say that consumers are "entitled to competition"? Does that give the FCC authority to review business practices that may injure competitors? If so, does that mean the FCC can review pricing?


In effect, this provision gives the FCC a vaguely-defined mandate to regulate Internet service providers. How that mandate would be used is unclear.


The network neutrality provision should be eliminated. If that is not possible, the commission's authority should be constrained and more specifically defined. For example, Congress could require the commission to apply standard "unfair competition," or antitrust, rules when investigating complaints. These rules, while not perfect, have long been used by the Federal Trade Commission to evaluate market conduct and incorporate factors such as the amount of competition in the marketplace. Using such a relatively well-tested standard would be far better than leaving the FCC create its own rules from scratch.[6]



The Barton bill would significantly reform cable television rules, knocking down barriers to entry that today block competition. The result would be better service, lower prices, and more choice for consumers. But this welcome change is coupled with unwelcome new regulations. Policymakers should reconsider and ideally eliminate the provision that would grant the FCC authority to regulate the Internet. Consumers would benefit most from reform that sweeps away unnecessary and harmful regulations without imposing new ones.

James Gattuso is a Senior Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

[1] Robert W. Crandall, J. Gregory Sidak, and Hal J. Singer, "The Competitive Effects of Telephone Entry into Video Markets," Criterion Economics, November 9, 2005, at http://www.criterioneconomics.com/docs/effect.pdf.

[2] See James L. Gattuso, "Cheaper Cable and Controlled Content," Washington Times, March 29, 2006.

[3] See James L. Gattuso, "Net Neutrality Regulation," Heritage Foundation Regulation-in-Brief No. 26, March 13, 2006, at http://www.heritage.org/Research/Regulation/
. See also Christopher S. Woo, "The Economics of Net Neutrality: Why the Physical Layer of the Internet Should Not Be Regulated," Progress On Point Release 11.11, Progress and Freedom Foundation, July 2004, at http://www.pff.org/issues-pubs/pops/pop11.11yoonetneutrality.pdf.

[4] Federal Communications Commission, "Policy Statement", CC Dkts. 02-33, 01-337, 95-20, 98-10, GN Dkt. 00-185, CS Dkt. 02-52, adopted August 5, 2005, released Sept. 23, 2005, at http://www.cdt.org/speech/net-neutrality/20050923fcc-appropriate-framework-nprm.pdf.

[5]See James L. Gattuso, "Wyden on Net Neutrality: If You Build It, We Will Regulate," Techliberation.org, March 3, 2006, at http://www.techliberation.com/archives/037089.php

[6]See "The Digital Age Communication Act's Regulatory Framework and Net Neutrality: A Statement of The DACA Regulatory Framework Working Group," March 2006, at http://www.pff.org/issues-pubs/communications/other/031707dacastmt.pdf.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies