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January 10, 2006

Testimony Before Indiana Senate Regarding Telecom Deregulation

 

Witness: Tom Giovanetti
Testimony Date 01/10/2006
Body of Congress: Indiana Senate
Committee: Homeland Security, Utilities, and Public Policy Committee
Subcommittee:
At the Request of:
Bill:

Testimony Subject:
Indiana Telecom Deregulation Legislation

 

Testimony:
Mr. Chairman and Members of the Committee:

I appreciate this opportunity to comment on Indiana’s proposed telecom deregulation efforts, but more specifically to share with you what we’ve similarly done in Texas.

Let me first tell you that I am the president of the Institute for Policy Innovation (IPI), a free-market public policy think tank based in Dallas, Texas. Now in our nineteenth year, IPI specializes in issues of economic policy and technology policy. IPI is also the publisher of the State Legislator’s Guide to Telecom Policy, with which you may be familiar. I have brought with me copies of the Guide, as well as some copies of some recent op/eds we’ve published on the topic of telecom deregulation.

I am impressed with what has been recently done in Texas, and I am impressed with what the Committee is trying to do in Indiana. I would like to focus my comments in particular on the video franchise reform provisions, and the municipal broadband provisions.

ON VIDEO FRANCHISE REFORM

I live in a fairly upscale rural neighborhood in Copper Canyon, Texas, about 22 miles north of DFW airport.

Cable has never been offered in my town, despite the fact that my town is full of people who are interested in the service. Over many years our town has pleaded with local cable companies to serve our town, but the answer has always been “no.” Apparently the cable companies have made the decision that it wasn’t worth their investment to bring cable to Copper Canyon.

I respect that decision, because I believe in the rights of individuals and companies to deploy their capital however they see fit. I don’t have a right to cable service; cable is a consumer good, after all, not a right, and I don’t believe that Copper Canyon is being unfairly discriminated against. It’s important to note that no local, state or federal regulations discouraged cable from being offered to Copper Canyon. It was simply a business decision.

Fortunately, there is another video competitor in the marketplace, so I finally obtained Dish Network satellite service for my home.

Two years ago my Institute moved its offices to a different office building. After we moved we found that cable was not offered to our office building, though it was available in the building next door. Now, it is important for a public policy think tank to have access to CSPAN to monitor developments on Capitol Hill. We contacted the local cable company to see if we could get cable service to our building, but were told that it wasn’t, because the cable company didn’t think they’d get enough customers to make it worthwhile. So we turned to satellite for our office as well.

Two video alternatives certainly qualifies as competition, as my experience demonstrates. But a third competitor would be welcome, and today that competition is a reality. Today, telecom companies are able to offer video over broadband, and this third competitor has the potential to revolutionize the video market, for the benefit of consumers.

But one of the obstacles in the way of this new video competition is the archaic system of local video franchises, which the cable industry itself has complained about for years. Municipalities have frankly become experts at extortion when negotiating or renegotiating these franchise agreements. City and county buildings all over the nation are full of dark fiber and unused circuitry that cable companies were forced to install in those buildings in order to obtain or renew a local franchise.

The only justification for the franchise system was the awarding of monopolies. But with new competition from telecom companies, we are no longer in the era of video monopolies, so it makes sense for the local franchise system to bite the dust, and to allow fierce and aggressive competition and speedy rollout of broadband technology.

In my state of Texas, the legislature wisely recognized this opportunity, and recently passed video franchise reform legislation, which allows any video provider, not just telecom companies, to obtain a statewide franchise, rather than having to negotiate franchises jurisdiction-by-jurisdiction. The revenue formula remains untouched, so municipalities cannot complain that their revenues are being harmed.

The result has been immediate. All over my area, there are signs up explaining that the reason the sidewalk is under construction is that Verizon is rolling out its fiber-to-the-home network. The broadband rollout is happening, right now, in Texas, and it is uncanny how quickly things accelerated after Texas deregulated the video franchise business.

And all this work is simply the visible evidence of a critical economic commodity: new investment. New capital is flowing into Texas, and it is creating new jobs. This new investment will also result in new tax revenue being paid into the state’s coffers. This is the right kind of revenue increase: not simply raising the burden on existing entities, but actually raising new revenue through economic growth.

Companies do not do things without a good reason. Companies do not invest in rolling out broadband without a reason to do so. Up to this point, companies have had every reason not to do it, because of ridiculous regulations. Now, the opportunity to compete with cable for video customers gives the telecoms the reason to aggressively rollout and price broadband.

I am not surprised that some entrenched interests are opposing reform of the local franchise system. That is to be expected, though it is clear that they themselves will benefit from having this relic swept away.

I find it ironic, however, given my experience in trying to obtain cable both for my home and my office, that cable companies are demanding that the telecom companies be required to offer their services everywhere, and to not roll out their new offerings in a strategic manner.

Cable companies are charging that the phone companies are “redlining,” which implies that companies are discriminating in the way their rollout their new offerings. As someone who was repeatedly refused service by cable companies for both my home and office, I find this charge to be hypocritical at best.

In fact, the real reason for the opposition to reform in Texas is already clear: cable prices began falling immediately after the passage of video franchise reform. And while there is competing and conflicting data about just how much prices have fallen, the trend is clear: for the first time in memory, the prices of video to consumers is falling, and it’s the result of new competition entering the marketplace. So consumers get new product offerings and lower prices. Isn’t that what competition is all about? Such competition has come to Texas. Isn’t it about time that these benefits came to Indiana?

It’s important to note that opponents of reform claimed that consumer prices would increase as a result of deregulation. But, isn’t that what consumer groups always do? Come to think of it, have consumer groups ever thought any change would be good consumers? It seems that every time policy makers try to do anything, consumer groups claim that prices will go up. I’m thinking it’s about time that consumer groups tried to come up with some new rhetoric, as the falsehood of their current rhetoric is becoming increasingly apparent.

But what about those who are truly needy? Frankly, that’s easy. In Texas we made it easier for people to qualify for lifeline rates, and this is the way such problems should be dealt with. Don’t regulate an entire industry to protect a small subset of the population. Instead, protect the target population and free the rest of the market.

It’s also important to point out that cable companies got a leg up in their competition with telecom. From a legal and regulatory standpoint, it was very easy for cable companies to get into the voice business, but they selectively rolled out new voice service to markets where they thought the uptake would be high.

But for phone companies to get into the video business, there are these enormous regulatory hurdles to overcome, only one of which is the archaic local franchise system. It is time to eliminate it to allow new competition to sweep into the video marketplace as efficiently as possible.

The communications industry has changed. It’s no longer the phone companies who are the entrenched monopolies using regulation to protect their business. Today, the digital revolution has forced telecom companies to become competitors, and ironically, today the phone companies represent new competition.

Today, we have before us an opportunity to provide consumers with enhanced choices and options in the video business, and at the same time an opportunity to rid ourselves of outdated regulations, including local franchise authority.

I understand that your Regulatory Commission doesn’t think the time is right for them to surrender their authority to micromanage the telecom industry in Indiana. This does not surprise me; my horse didn’t think it was the right time to be gelded, either.

Regulators make poor deregulators. But, after all, the job of policymaking rightly falls to the elected representatives of the people, not to appointed regulators. Deregulation of an entire industry is the kind of big-time policymaking that gives the legislature the opportunity to assert itself over the regulatory body.


ON MUNICIPAL BROADBAND

The municipal broadband issue presents us with two quandaries. First, what are we to do about communities where there appears to be market failure; i.e., where no private company has sufficient incentive to roll out broadband?

But second, how do we prevent local government officials from succumbing to the temptation to engage in neoMarxism; i.e., government ownership of the means of production? How do we keep aggressive local governments from getting into “business,” competing with local companies and shutting out private companies from the broadband business?

To the issue of market failure, I am always skeptical about markets failing. You’re probably tired of hearing of my home in Copper Canyon, Texas, but I beg your indulgence. As I told you, neither cable server nor DSL have been offered in my town. Is that market failure? Some would say so, but not the entrepreneur who has supplied my town with affordable and abundant broadband.

Residents of Copper Canyon and surrounding towns have access to wireless broadband provided by a company called Partnership Wireless. This entrepreneur saw the opportunity presented by the big guys failing to serve this market, and he has put wireless transmitters on the tops of water towers, cell phone towers, and even barns. I get my broadband from a shoebox-sized antenna on the top of my house. I get faster-than-DSL data rates at below-DSL prices.


The market did not fail.

Which is a better scenario? A private, taxpaying entrepreneur creating a new business and creating new jobs, providing broadband to neglected markets, or my town going into the broadband business, with taxpayer dollars, and putting taxpayers at risk? I think the answer is obvious.

Most of the time, when someone thinks a market has failed, what is really happening is that the market is still processing the information. Can a commodity be offered in a particular market for a price acceptable to consumers?

The solution to most perceived market failures is just a little time. The market solves most of its own problems. It’s part of why we believe in markets in this country, and not in government solutions. And, in the case of my local wireless provider, if he runs his business poorly, he simply goes out of business. But if my town runs its broadband business poorly, all the taxpayers, even those who don’t subscribe to the service, will end up paying higher taxes and not getting their potholes filled, because of their government’s foray into the risky world of the broadband business.

Governments should not get into the business of broadband, and the country is littered with failed or failing municipal broadband systems. I support state and federal legislation to make sure that municipalities are forced to jump through hoops and over hurdles to restrain their broadband delusions, and my analysis of the municipal broadband provisions in this bill is that the bill contains just about the right amounts of hurdles for a municipality to jump over, yet enough assurances to please those who believe there are scattered instances of market failure.

In conclusion, I appreciate the invitation to comment before this committee, and appreciate your indulgence. I would be happy to take any questions that the committee might have, and to make available written copies of my prepared testimony.


 

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