Divining a Regulator’s Intent

Hal Singer —  17 January 2012

Regulated firms and their Washington lawyers study agency reports and public statements carefully to figure out the rules of the road; the clearer the rules, the easier it is for regulated firms to understand how the rules affect their businesses and to plan accordingly. So long as the regulator and the regulated firm are on the same page, resources will be put to the most valuable use allowed under the regulations.

When a regulator’s signals get blurry, resources may be squandered. For starters, take the FCC’s annual wireless competition report and the Commission’s pronouncements on spectrum policy. For several years, the competition report cited a trend of falling prices and increasing entry as evidence of robust competition while at the same time noting that industry concentration was slowly rising.

In an abrupt turnaround, the FCC’s 2010 competition report cited the slow but steady increase in concentration as evidence of a lack of competition despite the continued decline in prices and increase in new-firm entry. In other words, in the face of the same industry trends, the agency’s conclusion on competition reversed. The increased weight placed on concentration also seemed at odds with the DOJ’s revised Merger Guidelines, which deemphasized concentration in favor of direct evidence of market power.

At last week’s Consumer Electronics tradeshow, the FCC chairman suggested that the competition report’s objective was not to provide guidance on Commission policy but instead “to lay out data around the degrees of competition in the different sectors.” So much for clearing up the ambiguity. Industry participants expect more than a Wikipedia entry on something so weighty as an annual report to Congress regarding one of the economy’s most critical sectors.

The agency’s signals on spectrum policy are even murkier. On one hand, during the last few years, the current FCC has been calling for more frequencies to be made available to support and grow wireless broadband networks. The FCC has also been publicly supporting voluntary incentive auctions—a market-based tool to compensate existing spectrum licensees for returning their licenses—as the best way to reallocate unused broadcast spectrum to wireless broadband. However, in a confusing set of remarks at the same tradeshow, the FCC now seems to be saying that it only wants to see more spectrum made available if the agency can dictate who gets the spectrum and how they can use it. The very discretion that the FCC now seeks will invite rent-seeking behavior among auction contestants, who will lobby the agency to slant the rules in a way that limits competition and advances their narrow interests; better to immunize the FCC from this lobbying barrage by limiting its discretion.

The agency’s inconsistent and confusing analysis and statements in these two critical policy arenas—wireless competition and spectrum policy—created the perfect storm last year when AT&T sought to acquire T-Mobile. AT&T argued that it wanted to purchase T-Mobile and use its spectrum to augment existing spectrum and infrastructure resources, consistent with the agency’s acknowledgement that wireless carriers needed more spectrum to support surging demand for bandwidth-intensive wireless services such as streaming video. Had AT&T understood the FCC’s intentions, it would not have offered a four-billion-dollar breakup fee to T-Mobile’s parent; these resources could have been put to better use.

The singular objective that should drive the Commission in all matters wireless is getting spectrum into the hands of firms that value it the most. The last 20 years of wireless-industry growth has proven that those who value spectrum the most put it to use most quickly. To commit to this course of action, the agency needs to more clearly and consistently signal its regulatory intentions. If the agency wants to spur competition, it should support Congressional efforts to authorize incentive auctions without restrictions. It also needs to let the evidence of lower prices, growing adoption, and increasing innovation inform its understanding of the state of competition.

2 responses to Divining a Regulator’s Intent

  1. 

    Picking winners only increases the likelihood of a ripple effect of inefficiency running through the wireless industry. This will likely be the result of the FCC trying to replace price as the mechanism for distributing capital and resources with the agency’s determination as to which carrier should get spectrum. This is not how you increase social welfare.

  2. 
    Gerry Faulhaber 17 January 2012 at 8:26 am

    Nice point, but the historical record suggests that Congress will “fiddle” with the auction. Recall the past auctions in which Congress required that Designated Entities (minority owned) got special discounts; results were silly and embarrassing to the gov’t. Lest we forget the NextWave auction, designed by Congress to let “little guys” bid for spectrum. This was a full-scale debacle, ensuring that the spectrum iin question didn’t reach the market for gfive years.

    On the other hand, if Congress gives them discretion, the FCC has done some fiddling on its own. Recall the net neutrality conditions. Recall the C-block 700 Mhz “open access” conditions of 2008, which led to that spectrum being sold at a very deep discount relative to the A&B block.

    Wouldn’t it be nice if both Congress and the FCC announced the next auctions would be “fiddle-free”? Straight-up auction in which the people who value that spectrum the most win? Do we have a government that can keep its hands off? Past behavior suggests not, but hope springs eternal.