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Testimony Before the Indiana Senate Regarding Telecom Deregulation

Witness: Tom Giovanetti
Testimony Date 02/17/2006
Body of Congress: State Senate of Indiana
Committee: Regulated Industries Committee
At the Request of: Senator Brandt Hershman
Bill: SB245

Testimony Subject:
In Favor of Telecom Deregulation in Indiana


Members of the Committee, my name is Tom Giovanetti, and I am the president of the Institute for Policy Innovation, in Dallas, Texas. I appreciate this invitation to return to Indianapolis and offer my thoughts as you work through making significant updates to Indiana’s telecom laws.

About the Institute for Policy Innovation (IPI)
The Institute for Policy Innovation (IPI) is a nineteen year old free-market public policy research organization. IPI researches and promotes sound policy solutions that feature lower taxes, fewer regulations, and a smaller, less-intrusive government.

IPI does not lobby. We do not represent companies, or industries, and we do not advocate the passage of any particular piece of legislation. We do, however, advocate policies that stimulate economic growth, and we are firmly convinced that telecom reform will spur increased economic growth in Indiana, as well as providing Indiana consumers with increased availability of products and services that they will find valuable.

I’m going to focus my comments on the video franchise issue, since it’s my understanding that this is the area of greatest controversy, though I’ll be happy to address other aspects of the reform before you if you have questions.

What is Driving Telecom Reform?
Most of the time when I speak to lawmakers on telecom deregulation, I find that they see the issue as a fight between companies or between industries, and they see their job as that of a referee in this fight. The idea is that companies and their battle for market share is what is driving the call for telecom reform.

This is a completely wrong view, though I understand why you might think that. You are heavily lobbied by companies and trade associations, and you know that both have a huge stake in the outcome. But you should not be tailoring your reform for any particular company or industry. You should be tailoring your reform for some new technology that you can’t even anticipate, because in fact ten years from now I assure you that people will be communicating and transmitting content in ways we can’t possibly anticipate.

In fact, what is driving reform is the fact that there are now multiple technologies for the distribution of content. It is changes in technology that is confronting you with the need to update your telecom laws.

Your telecom regulatory and tax structure is out of date. But don’t feel bad, just about everyone else’s is, too. The technology has simply moved beyond your policy.

When the federal Telecom Act of 1996 was passed, most people weren’t using email. Instant messaging hadn’t been invented yet, and people didn’t see cell phones as competition for wireline phones. Today, people are dropping their wireline phones and are going with only cell phones as their primary means of communication. And soon, they’ll be able to get video on their cell phones as well. Will people soon start dropping cable and satellite and choose to get their TV over their cell phones? Will you be able to have as your only video subscription your cell phone subscription, and then when you’re home, stream your video content from your cell phone through a wireless router to your HDTV plasma screen, without ever needing to subscribe to any other video provider?

If you buy an Xbox 360, you don’t need to buy a DVD player—it’s built in. Know what else is built in? A voice over IP phone. Will people who buy an Xbox 360 cancel their wireline phones? Will we subject the Xbox to universal service obligations, to 911 obligations, to CALEA obligations? Will we require Microsoft to build-out requirements? Will Microsoft have to pay franchise fees to municipalities where Xboxs are in use?

There are any number of ways we could illustrate that the development of technology has outstripped your regulations. This is why you must update your policies: because they are out-of-date. What Indiana must decide is whether it is going to update its policies to reflect technological change, or make a lame attempt to forestall the inevitable. To lead or to follow.

What are the Main Goals of Deregulation?
There are three basic goals of any effort to deregulate any industry:

  1. Lower barriers to entry and exit. It should be as easy as possible for a new competitor to enter a market. I should also point out that it is equally important for a competitor to be able to exit a market. Normally all anyone wants to talk about is lowering barriers to entry, but it’s just as important for a company to be able to leave a market when they decide it no longer works for them.
  2. Allow markets to set prices. Normally, when we deregulate a market, we are dealing with a situation where prices have been artificially set or capped or otherwise established by governments, rather than by the free right of contract between customers and vendors. Just as a sign of a healthy organism is movement, the sign of a healthy market is prices that move as the information changes. Prices are information about a market. When the market changes, the information changes, and the change in price communicates that change in information to the consumer. In a healthy market, prices move.
  3. End anticipatory regulation. Much of regulation is anticipatory in nature, assuming that companies will behave badly unless we regulate the daylights out of them. This is what I call anticipatory regulation, where government anticipates problems that may never exist, and places all kinds of burdens on companies when there isn’t even a track record of misbehavior. Let’s remember that when we deregulate an industry, government doesn’t go away. Antitrust law doesn’t go away. When you deregulate an industry, you do not give them immunity from prosecution. You simply make it much easier for them to get to their customers. Government steps out of the way, and stops functioning as a gatekeeper, and a rent-extractor.

Now, these three goals should be the goals of your telecom deregulation in Indiana. Reducing barriers to entry and exit, allowing prices to move, and ending anticipatory regulation. Notice what I didn’t say. The goal of deregulation should not be to “get the cable industry.” The goal should not be to lower cable rates. You could lower cable rates by regulatory mandate if you wanted to, and some consumer groups would think that was just ducky, but that would represent

What Principles Should Guide You?

Above all, there should be no discrimination between different ways of doing the same thing. If there are two or three or four different modes of delivering video to consumers, they ought to be taxed and regulated exactly the same way. Public policy should be neutral and non-discriminatory, and should not pick winners and losers.

Government should not serve as a gatekeeper. It’s offensive that a company must obtain the permission of a government before entering a perfectly legal business.

One of the most despicable things government does is insert itself as a middleman between consumers and producers in order to extract revenue. In my estimation, this is one of the reasons why the entire system of video franchises should be tossed out the window. Franchise fees are pass-through taxes on consumers, and have little to do with accessing the municipal rights-of-way. Companies that provide video content are already taxed. The companies pay corporate income taxes, their shareholders pay dividend and capital gains taxes, and their employees pay income and sales taxes. There is no justification for additional taxes in the form of franchise fees. The reason all the players in this debate have so easily agreed on the new franchise fee formula in the reform is that none of them are actually paying it. They’re just passing it through to consumers. There is no justification for this continued regime.

Price Should Move. It is absurd that, for so long, prices in the telecom industries have been largely determined by appointed or elected regulators. In every other industry, prices are free to move. That includes trucking and airlines and railroads, industries that we deregulated years ago. Now it’s time to bring the same pricing freedom to telecom.

Property rights should be respected. Remember, it’s their network, not yours. It does not belong to the government, or to the “people.” These are private networks, built with private capital, and the owners of the networks should be free to direct their deployment and use with a minimum of interference.

These aren’t your fathers cable companies or telecom companies. Forget everything you think you know about communications companies. Today, these companies are aggressive, competitive risk-takers. They are making enormous investments and offering new products and services. They should be free to try new things, to test a new service in a particular test market without being required to deploy it everywhere. Let them experiment. Let them expand where opportunity presents itself and contract where opportunity no longer exists.

How Do These Principles Apply to the Indiana Debate?

  1. There shouldn’t be a two-tiered video regulatory system. If new entrants are not subject to any particular requirement, then the legacy provider should be released from that obligation as well. It should be clear in the legislation, and in a statement of legislative intent, that legacy video providers will not be subject to any requirement that is not required of all providers of video service in the state. This principle should apply to every obligation, including PEG channels, build-out or deployment requirements, institutional networks, etc. On the other hand, if you are going to make build-out or deployment demands of new entrants to parallel the requirements of the existing franchise holders, you should make these reasonable, and you should take into account factors such as how long it took the existing franchise holder
  2. Reform is going to look different in every state. State constitutions differ, as do the political and economic situations. What is done in Indiana will probably be unique to Indiana.
  3. Reconsider the decision to drop restrictions on municipal broadband networks. I am most disappointed at this decision. If it is wrong for governments to heavily tax and regulate private network companies, why is it okay for government to actually go into business and compete directly with private companies? And I can’t wait to see the government networks engage in the very same practices that they worry about with private companies. Is it redlining if a municipal network does it? If the municipal network first targets upscale neighborhoods, where they can count on a higher uptake, and only several years later get around to poorer, lower-update neighborhoods, is that redlining? If taxpayers are subsidizing a portion of the actual cost of broadband, in order to derive an artificially-low price, is that predatory pricing? Is that anti-competitive?
  4. It only makes sense that a single statewide franchise authority is a lower barrier to entry then is a system with dozens and dozens of separate franchise authorities. Could the franchise system be streamlined while still retaining local franchise authorities? Yes, but more authorities means more risk and uncertainty, including more exposure to unreasonable requests, which have been a hallmark of the franchise process. According to a recent article in the Wall Street Journal, budget-strapped local officials, who have the final say over granting cable-TV-service franchises, are greeting [Verizon] with expensive and detailed demands. In New York State, Verizon faces requests for seed money for wildflowers and a video hookup for Christmas celebrations. Arlington County, Va., wants fiber strung to all its traffic lights so it can remotely monitor traffic flow. Holliston, Mass., is seeking free television for every house of worship and a 10% video discount for all senior citizens. Others want high-speed Internet for sewage facilities and junk yards, flower baskets for light poles, cameras mounted on stop lights and Internet connections for poor elementary students. It’s time to put an end to this foolishness.

In conclusion, two wrongs do not make a right. The local franchise system was never the best way to deal with the issues of a company offering video service to its customers. Rather than perpetuating this flawed system and subjecting new competitors to its vagaries, this is instead an opportunity to get rid of as much of it as possible, freeing the existing franchise holders in the process, and getting on with the business of rolling out new products and services to the people of Indiana.