Regulatory Uncertainty and Investment Incentives

            According to sponsored researchers, FCC Chairman Ajit Pai and some incumbent telecommunications carriers, uncertainty about the future nature and scope of government regulation has a BIG TIME toxic affect.  Recently, the list has grown to include threats to national security and global leadership in wireless technology and ecommerce.  Earlier, we heard the relentless, but empirically unproveable claim that the regulatory uncertainty has a direct and negative affect on incentives to make new capital expenditures.

            Let’s consider the regulatory uncertainty created by the FCC’s on-again, off again embrace of network neutrality as well as the constant stream of court appeals and different holdings.  When the Democrats had an FCC majority, the minority railed against the network neutrality as triggering a certain, severe and immediate disincentive for carriers to invest in plant subject to open access requirements.  With a Republican majority, regulatory uncertainty apparent has become a non-issue as capex allegedly has increased thanks to a restoration of Internet freedom.

            Here’s my bottom line: stakeholders accept regulatory uncertainty as relatively minor, ongoing factor in doing business.  Regulatory theories, economic philosophies and political party majorities come and go.  What drives capital expenditure is business necessity and the real, or perceived opportunity to acquire greater market share and profits. 

            Just now, Verizon and other wireless carriers are accelerating their fifth-generation wireless network investments.  See, e.g., https://www.theverge.com/2018/9/11/17847640/verizon-5g-first-home-broadband-internet-service-installations-october-1.  We might even reach a point where wireless subscribers do not bother switching from their data plan to “free” Wi-Fi because the cost and technical performance have reached parity.  If that occurs true inter-modal competition between wired and wireless broadband will have occurred.

            Expediting the rollout of next generation networks has little—if anything—to do with the state of network neutrality regulation.  Carriers made 4G investments in the thick of more certain open Internet regulation.  If a downturn in capex actually occurred, we can largely attribute it to the fact that there are peaks and valleys in investment based on the life cycle of the technology.  After installation of 4G facilities, carriers can pull back on the investment throttle until the competitive need and business plans support ramping up and installing the next generation.  Whether network neutrality regulation exists has little impact, particularly in light of the fact that court appeals were filed after the onset of regulation and later the onset of deregulation.

            Uncertainty whether the regulatory status quo will persist is a recurring challenge to telecommunications ventures.  Lucky for us, they know how to deal with it, despite the breathless angst of certain government officials and sponsored researchers.

Results-Driven Federalism Part 2

            Consider the following assertion:

            “Our Constitution establishes a system of dual sovereignty between the States and the federal government, such that sovereignty rests concurrently with both the federal government and the States. Specifically, the Tenth Amendment reserves all powers not specifically delegated to the federal government by the Constitution to the States or to the people.  Thus, States are not creations of the central government. They are separate sovereigns. This distribution of sovereignty, otherwise known as federalism, is the defining feature of the relationship between the federal and state governments.

            In taking this step [preempting states from limiting the geographical reach of municipal broadband networks] the FCC usurps fundamental aspects of state sovereignty. And it disrupts the balance of power between the federal government and state governments that lies at the core of our constitutional system of government.”

            Now, compare it with the following:

“The broader problem is that California’s micromanagement poses a risk to the rest of the country.  After all, broadband is an interstate service; Internet traffic doesn’t recognize state lines.  It follows that only the federal government can set regulatory policy in this area.  For if individual states like California regulate the Internet, this will directly impact citizens in other states.

            Among other reasons, this is why efforts like California’s are illegal.” 

            Would you be surprised if I reported that the same person wrote both declarations?  Any dismay at the apparent inconsistency if I reported that the author is FCC Chairman Ajit Pai?  Compare file:///C:/Users/rmf5/Downloads/FCC-15-25A5.pdf with https://www.fcc.gov/document/chairman-pai-remarks-maine-policy-heritage-center.

            Chairman Pai is a quite knowledgeable and talented guy.  However, I believe his partisanship creates inconsistency on a fundamental principal—what he terms  “Constitutional Law 101.”

            Chairman Pai railed against the Democratic majority at the FCC which sought to preempt state governments from imposing geographical restrictions on municipal government broadband networks.  For this matter, the Chairman invoked federalism as sacrosanct: states are sovereign entities free to determine whether and how subordinate governmental units can pursue broadband service initiatives. 

            Chairman Pai had supporting case precedent including a Supreme Court case validating the right of states to prohibit any municipal telecommunications service.  See Nixon v. Missouri Mun. League, 541 U.S. 125 (2004).  The Sixth Circuit Court of Appeals validated his legal interpretation ruling that the Telecommunications Act of 1996 did not explicitly authorize the FCC to elevate the goal of ubiquitous and affordable broadband over state sovereignty, even the sovereign election to foreclose municipal efforts to rollout broadband where commercial ventures had refused to serve. See Tennessee v. FCC, 832 F.3d 597 (6^th Cir. 2016)available at: http://www.opn.ca6.uscourts.gov/opinions.pdf/16a0189p-06.pdf.

            With all this support for state’s rights, how does Chairman Pai reverse course and invoke much maligned federal preemption to thwart states like California from enacting network neutrality laws? 

            Results-driven rationales now support the view that anything and everything about broadband is interstate in nature, and fair game for FCC preemption, except of course legislated service limitations.  I cannot square this view with what Chairman Pai has previously stated. 

            California enacts a law, which I consider quite flawed, but clearly representative of a sovereign state keen on imposing consumer safeguards for the origination and termination of Internet traffic within the state.  Internet Service Providers may import content from other states, but the delivery medium surely lies within a single state.

            Note that in the case of California network neutrality legislation, a sovereign state has opted to impose safeguards that the FCC considers unnecessary and potentially harmful.  Can the FCC preempt states on grounds that they cannot lawfully act when the Commission determines that regulatory oversight is not needed?

            How did humility and respect for states’ rights evaporate?