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March 22, 2004

Testimony Before the Texas Legislature Regarding Deregulation of Wireline Communications


Witness: Barry M. Aarons
Testimony Date 03/22/2004
Body of Congress: Texas House
Committee: Committee on Regulated Industries
At the Request of: Chairman Phil King

Testimony Subject:
Time to Deregulate Wireline Communications in Texas


Remarks of Barry M. Aarons, Research Fellow, Institute for Policy Innovation
Before the Texas House Committee on Regulated Industries - March 22, 2004
Page 7 of 7

Remarks of Barry M. Aarons, Research Fellow, Institute for Policy Innovation
Before the Texas House Committee on Regulated Industries
March 22, 2004

Chairman King and members of the Committee. Thank you for allowing me to appear before you today. For the record my name is Barry Aarons and I am a research fellow for the Institute for Policy Innovation.

The Institute for Policy Innovation (IPI) is a non-profit, non-partisan public policy "think tank" based in Lewisville, Texas to research, develop and promote innovative and non-partisan solutions to today's public policy problems. Though IPI is a non-partisan organization, we approach policy issues from a consistent philosophical viewpoint of individual liberty and responsibility, free markets, and limited government. IPI is engaged in an extensive publication program of policy studies, issue briefs, newsletters and books on public policy issues.

I have been in and around the communications industry for 31 years having been on the staff of the Arizona Corporation Commission for five years (my home state’s PUC), having worked for Mountain Bell and USWest for almost 20 years in the public policy organizations there and having done government relations consulting work for a wireless carrier and for Qwest prior to their merger with USWest. Currently the only communications related client my firm represents is EchoStar, Dish TV and that in Arizona and is solely related to questions of taxation and tax application.

In my 33 years in public policy I have observed and participated in sunset and, for that matter sunrise, proceedings for a variety of regulated businesses, professions and occupations. I have found one consistent thread throughout all of them. There is a perception at the beginning of the proceedings that sunset is only a determination of how the existing level of regulation is to be maintained, but that regulation will in and of itself continue.

In many states the focus is on the agency and the findings of whatever authority has conducted a “sunset review”. Frequently those findings center on the administrative procedures of the regulatory agency. In many cases issues relating to procurement and financial controls are the focal point. All are appropriately cause for legislative oversight and review. But they circumscribe the real issues.

What I am most pleased about with this committee’s goals is that the actual regulatory authority and purview of oversight is open for consideration. Mr. Chairman, members of the committee I suggest that you begin with the concept that from a date certain forward the regulatory function of the PUC over communications in all ways shapes and forms be sunset – do away with them – completely, totally and finally. Radical you say? Not so – maybe bold but not radical.

Bold action like this is unusual in today’s halls of government. Republicans and Democrats alike fear the repercussions of what this kind of bold action would result in. I contend, however, that the worry is about perception in the public and angst among the assembled special interests. True, government action is the interaction of, as James Madison said in Federalist 10, factions – or as we know them today, special interests. Now I remind you that special interests as with revolutions are always good in the first person such as our special interest and our revolution and bad in the third person such as their special interest and their revolution. But my point is that you have an opportunity to take bold action to determine whether any regulation is really necessary. To do that I suggest that you consider the following.

In order for regulation to be established for an industry, a profession or an occupation there are three questions that need to be answered. The first is whether the public health and safety requires it. The second is whether consumer protection with regard to pricing and product availability calls for it. The third is whether competitive balance mandates it and whether there is open entry and exit into the markets.

First let us look at public health and safety. The two things I hear that deserve attention are universal service and life line rates. With the latter I guess you first have to accept the idea that local basic service is a right or at least a minimal amenity of life. We don’t guaranty a lot of things that are daily essentials. But for some reason basic local voice service seems to be one of them.Presently service penetration availability sits at roughly 95%. Of the remaining 5% a significant portion is in areas where the need hasn’t been demonstrated. Another portion consists of people who for whatever reason do not want to be universally enveloped into the communications system.

Frankly universal service has been achieved. In the future the maintenance of universal service will continue but new technology will take the place of the traditional universal service idea. Cellular technology, satellite technology, broadband advances and personal communications networks will, in fact, be universally available. Whether and which, not if, will be the consumers choice. And I would also add that we have assumed for decades that the responsibility of universal service rests with the wire line carrier. That is because that was for a long time it was the only carrier and up until a few years ago it was the predominant carrier. But this not true any longer and further it is drifting further and further from the truth.

During divestiture, which I suffered through as an RBOC employee, people worried about huge numbers of people being pushed off the national network. The national network doesn’t look the same as it did then. And despite the fact that it is more expensive, wireless cellular service in our instant gratification society is becoming more and more the basic mode of communications. And in some case it is to the exclusion of wire line. More about that in a moment.

What about lifeline service or lifeline rates? If we decide as the social policy of the state (not the regulatory policy of the state) that a means tested group of citizens deserve to have a level of communications service at a reduced or subsidized rate the legislature has the tools to make that happen without a regulatory entity. The real question then is what kind of service will constitute that level of communications. The state, right now, today, could legislate the purchase of service from a select group of communications carriers whether wire line or cellular or other and give that to the means tested participants. Legislatures make those decisions all the time – regulators should not.

Now, I hasten to add that governments have a history of overestimating how many in the means tested group would actually be interested in the reduced or subsidized service offering. In Arizona in the mid 80’s a lifeline telephone service that the state estimated would attract 77,000 households never had more than 2,900 participants. I helped craft that program. But again the decision is a social policy that the state can make and implement without a regulatory structure if it deems it to be in the best interest of the health and safety of the state. That is a very different discussion. The value of the discussion in this context is that you do not need regulation to provide it.

So let’s talk about the second question. Let’s see the practical reality of the consumer protection applications of regulation. When a person moves into a new residence obtaining communications services is certainly important. But the what, who and why has taken on a different composition. “Let’s call the local phone company” is no longer the normal thing to do. In some places the housing complex has pre determined opportunities. My condominium community has satellite service included with our homeowner’s association package. I could get local cable but why would I if it is already included and more importantly paid for. But in any event I wouldn’t need a PUC to help me with that nor does it have any bearing on that arrangement.

Take the broadcaster in Butte, Montana (true story – he is my youngest son) who upon moving to that community and renting a house decided that having cellular service was enough and having a hard wire residential local service was a waste of money. So his choice for basic voice grade service was his cellular provider.

Next was the decision for television entertainment. Did he check with a regulatory body on the service availability, transmission and distribution or rate filings? No, he checked the price difference between cable and satellite and then made his decision. (He had to have ESPN and Fox Sports – he is after all a sports broadcaster.) He chose satellite grade television service.

What about Internet? Since the television studio where he works is only mile away he decided that having WI-FI broadband service through the station would suffice for his Internet and email needs. In other words the local phone company, Qwest, was never under consideration because he determined that competitors in the three communications functions that he needed would supply the necessary levels of service at the most reasonable service levels and prices. He has, needs and uses no connection to wire-line until it occurs potentially at the other end of the pipe! This is a decision that is being made more and more every single day by more and more Americans.

That is about as competitive and free market based as could exist in any industry. Why continue to regulate it? The lack of regulation would not have affected his decision, the provision or quality of service or the pricing at all. That is unless, of course the wire-line carrier, Qwest, could have been in a better position to compete for his business. Perhaps they could have if they had been under less regulatory authority.

I recently had a radio news commentator ask, if we sunset the PUC in communications what would happen to consumer protection. That makes the assumption that the PUC practically exists to protect the consumer. I am not sure that it does. It may look like it does. But the PUC’s in today’s world protect the regulated service provider from competitive service provider, protect the competitive service provider from the regulated service provider and protect both of them from the consumer! Because decisions of regulated entities in a regulated environment are being made to please the regulators and curry favor with them regulation ultimately exists for its own sake.

Incredibly regulatory entities in and of themselves take on a personified right to exist. Legislators and regulators are enticed to protect the existence of the regulatory agency not the regulatory authority that they possess.

Let’s take a moment to look at the third of my questions.

The system in communications with its myriad of component parts is working exceptionally well at the present time when observed from 30,000 feet. Technology fathers new diverse products and services on virtually a daily basis. Whether it is a phone that is a PDA or one that also takes digital photos (or one that does all three for that matter) entry and exit of products to the market isn’t being helped by regulation. If anything those privileged enough to be regulated are being held back from product deployment. And in today’s world where the shelf life the current technology is 16 months to three years that takes on even more important meaning.

The same is true of pricing. Competition is adjusting prices and virtually all of that price adjustment is downward. Some might argue that the downward slope would be faster if the privileged regulated were freed from regulation. The whole system will continue to work well whether regulated or not without perceptible difference. Taking it apart piece by piece and regulating each component piece becomes counter productive.

Another true case in point example is worth mentioning. The legislature of Arizona recently converted its own communications system to a computer-based configuration where their basic phone service is voice over internet protocol (VoIP). Yes, at some point they likely connect to a network point of presence. But I suggest that if being out from under regulation became incentive for the formerly regulated to engage in bad behavior like bottlenecking a network connection I suspect that the anti trust laws of the states and the state Attorney General would be quick to respond. The competitive special interests would make sure it was so.

Entry and exit into markets, transmission and distribution of services and pricing are all being governed right now whether we want to admit it or not by market forces that even the most pervasive regulation cannot stop or slow down – nor should it. And technological advancements can only be hampered or slowed by regulatory purview. It is in the best interest of the competitors, ILEC’s, CLEC’s, cellular providers and the rest to provide quality service, technological innovation and competitive pricing to their customers for return on equity to their investors and satisfying jobs for their employees.

For most of the 20th century the PUC’s have regulated the entry and exit, the transmission and distribution and the pricing of communications products and services in varying levels from pervasive to limited, but regulated they have. And, arguably for the first 80 to 90 years that regulatory authority was, to varied extents, justified. Those justifications no longer exists. The days of “transmitting messages over two way voice grade distribution systems” (that language actually still exists in some jurisdictions) is as antiquated as the slide rule.

Technology, competition and consumer choice have replaced those types of definitions. Worrying about a network bottleneck by a dominant carrier is a way to protect market share not to protect competitive balance and certainly not to protect the consumer. Bottlenecks are routinely gone over, under and around by advances in technology. The local exchange bottleneck over access has gone the way of the French Maginot Line. Digital signals and broadband routinely find ways to go around any bottleneck, real or perceived. No, more likely special interests from both sides seek regulatory relief in these areas in order to protect market share. The Texas Legislature needs to resist allowing that to continue. Government should not legislate market share.

Oh we could go into the high minded philosophical rationale for eliminating regulations and we could articulate the open market justification for removing regulation but in fact the reason for doing so is quite simple indeed. It is likely no longer necessary or advisable. Period.

Mr. Chairman, members of the committee I commend what you are doing today and for what you will be engaged in during the months to come. So as you sift through today’s testimony and the records of the deliberations that are yet to come I urge you to look for reasons not to regulate.

Look for answers to my three questions that drive you not to reauthorize regulation. You have the tools for public health and safety as a matter of legislative policy. And with regard to consumer protection and competitive relationships you can actually decide whether, with regard to communications oversight, circumstances and relationships in the market place in entry and exit, transmission and distribution and in rates you will find that they no longer require continued pervasive regulation.

And if you look at the totality of the communications industry from 30,000 feet you decide that bold sun setting of that PUC authority is the right thing to do.

On behalf of IPI I thank you for the opportunity to offer these comments with you today and do hope that you will fell free to call on us if you feel that our independent views can provide further assistance.


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