Consumer Welfare as the New Cornerstone for Communications Policy:

The FCC Should Focus on Efficient Market Processes That

Benefit Consumers

by

Seth L. Cooper *

A government agency's regulatory policy should reflect the overall competitive conditions of the market it is addressing. Given the increasingly competitive and dynamic conditions in the communications marketplace, it is time for the Federal Communications Commission to adopt a new regulatory approach with a consumer welfare standard at its cornerstone.

From a consumer welfare standpoint, the advanced communications market is a successful, competitive market. The market is now characterized by intermodal competition between voice, video, and data service providers. Investment-backed innovation and new technology deployments have led to significantly improved as well as entirely new product and service functionalities. In areas not subject to unnecessary or unduly costly regulation, a cursory glance at today's advanced communications market reveals a consistent upwards trajectory of increasing consumer choice at market-driven prices.

A properly conceived consumer welfare-based policy is ideally suited to this innovative and competitive market. Such a consumer welfare-based policy is premised on the idea that well-functioning markets are the best conduits for investment in innovations that enhance consumer welfare. Its purpose is to ensure that the efficiency-enhancing economic processes of the market work to serve consumers.

The Antitrust Paradox (1978) - that the single object of antitrust is consumer welfare. Antitrust's mission is to improve and reinforce efficiency-enhancing economic mechanisms that compel providers to respond to consumers. As Bork explained, productive efficiency consists in offering products and services consumers are willing to pay for. We see the manifestations of consumer welfare-enhancing efficiency when prices for goods or services are market-driven, when supplies of products or services are abundant, when competitive choices or differentiation among products or services are present, and when multiple pricing options are available.

Antitrust or antitrust-like jurisprudence offers a particular set of rules regarding the burden that must be met before marketplace freedom may be replaced by regulatory intervention. It classifies varieties of profit-maximizing behavior according to their likely effects on consumer welfare. In addition, antitrust lends itself to simple rules of substantive law, makes changes in the law predictable, and is, therefore, less likely to produce instances of unfairness.

Also, antitrust insights as well as the antitrust litigation process have been adapted to the administrative context before. For example, the Federal Trade Commission's (FTC) "unfair competition" standard draws on consumer welfare insights. The FTC is equipped with both adjudicatory and rulemaking powers to address unfair competition.

For its part, Federal Communication (FCC) regulatory powers were modeled on the regulatory approach adopted in the late 19th Century for railroads. The 1934 Communications Act, following the original Interstate Commerce Act of 1887 model, was designed so that the FCC could closely control the then-incumbent telephone monopolists. The 1996 Telecommunications Act includes mechanisms for removing regulatory barriers and restrictions as competition emerges. But the burden is invariably placed on incumbent providers to demonstrate, to the FCC's satisfaction, that competitive conditions justify deregulatory treatment.

Central to the FCC's exercise of monopoly-style regulatory powers in the face of rapid innovation and competition in the advanced communications market is the Commission's indeterminate and open-ended "public interest" standard. Coupled with the placement of the burden on any provider seeking deregulation, the malleability of the public interest standard has played a significant analytical role in maintaining legacy regulations premised on monopoly-like conditions despite the growing presence of market competition. Regrettably, it has also supplied the basis for new swaths of regulatory mandates, most notably the FCC's network neutrality regulations.

The public interest standard is especially prone to function as a competitor welfare standard. Rather than favor competition that benefits consumers, a competitor welfare standard protects certain competitors from more efficient rivals whose products and services consumers might value more highly.

The innovative and competitive conditions of the advanced communications market call for an FCC regulatory policy based on consumer welfare. Replacement of the FCC's public interest standard with a consumer welfare standard means adopting a deregulatory starting point. And its operating presumption would be that advanced communications providers can deliver products and services according to their best judgment, without regulatory intervention. Economic analysis could supply the criterion for determining whether contested market practices are detrimental to consumer welfare. Such practices could be restricted where there is actual evidence of anticompetitive conduct and existing or likely consumer harm.

If clear and convincing evidence exists that anticompetitive conduct and consumer harm is taking place or is likely, the FCC could establish rules to address such conduct. For provider conduct that isn't so cut-and-dry, administrative adjudication could allow the agency to address disputes in a case-by-case manner while offering a more expeditious route than traditional courtroom litigation.

Absent reform legislation, the FCC still has it within its discretion under the public interest standard to make consumer welfare its operating standard in specific areas where new regulation is being considered. With a new Chairman and new Commissioner now installed at the FCC, hopefully such proposals will meet with more receptiveness.  Successful implementation of such an approach, even on a limited scale, could have the added benefit of making Congress more receptive to broader reforms that could roll back outdated regulation and make federal communications policy fit the 21st Century.

* Seth L. Cooper is an Adjunct Senior Fellow of the Free State Foundation, an independent, nonpartisan free market-oriented think tank located in Rockville, Maryland.