A public utility is regulated for what it provides, not for how it provides it.

FPL, known to us old heads as Florida Power & Light, is a public utility under Florida law.  Section 366.02, Florida Statutes, defines a public utility as ” … every person, corporation, partnership, association, or other legal entity and their lessees, trustees, or receivers supplying electricity or gas (natural, manufactured, or similar gaseous substance) to or for the public within this state …”   In declaring its rationale for regulating public utilities, the Florida Legislature, in section 366.01, F.S., states that:

“The regulation of public utilities as defined herein is declared to be in the public interest and this chapter shall be deemed to be an exercise of the police power of the state for the protection of the public welfare and all the provisions hereof shall be liberally construed for the accomplishment of that purpose.”

In other words, Florida believes that because the products provided by utilities; electricity, water, natural gas, are of such necessity to its citizens, that regulating how they are provided and the rates they are provided at is essential to the well being of the states’s citizens.  Imagine the levels of disease or hunger that would emanate from a prolonged loss of electricity, water, or natural gas.  Commerce would come to a grinding halt without the electricity needed for energizing transportation facilities and the transfer of financial assets.

The economic reasons for regulating public utilities stem from their roles as natural monopolies.  Richard A. Posner wrote in his text, Economic Analysis of the Law, that natural monopoly presents three problems that warrant regulation in some form or the other.  One is monopoly pricing.  The second is inefficient market entry resulting from the natural monopoly’s reaction to potential entrants.  The third is the difficulty of devising an efficient pricing structure.

Judge Posner’s answer to the natural monopoly dilemma is public utility regulation, an approach to regulating a natural monopoly based on three elements: profit control, entry control via some license or certificate of necessity and convenience, and control over price structure.

At this point every investor should be sucking air in great pause  were this type of framework be applied to broadband access providers.  The framework introduces another level of uncertainty for broadband providers especially where regulation may lessen rates of return on capital or equity.

What I also find curious is why net neutrality proponents do not get this granular in their advocacy for common carrier or public utility regulation, preferring to stick to the narrative that broadband providers should be regulated because they might do something wrong that negatively impacts the consumer’s ability to get to a website.

I’m equally curious as to why net neutrality advocates never bother explaining why communications or broadband companies are not included in the statutory definition of a public utility.  Some academics have tried.  For example, Fordham University professor Rick Geddes includes communications firms in the definition of public utilities.  He cites as a common thread between telecoms, electrics, and natural gas firms three components: production, transmission, and distribution.  The problem with his analysis is that telecommunications firms don’t produce anything.

Whereas an electric company generates electricity, a secondary form of energy, and transmits and distributes the energy over its facilities, all a broadband or telecommunications firm does is transmits the messages or data that I request it to send.  My original message gets to its recipient in the same form that I send it in; in the form I generated it in.

From a social perspective, while I am basically shy, I can warm up a bit and be pretty sociable.  However, while I do need to eat properly cooked food and take a bath everyday, I don’t need to talk to anyone everyday.  Broadband adds efficiency to my ability to gather, process, and disseminate information, but I don’t need it in order to collect or send information.  It’s not a necessity.

Yes, that runs completely counter to the narrative pushed by the net neutrality types; that without broadband the whole world will come to an end and for that reason we should regulate the crap out of Comcast and Verizon, but that narrative is not steeped in law or the common view, not when you have fifteen to twenty percent of the American population getting along just fine without broadband.

The net neutrality narrative that broadband should be regulated like a public utility exposes another fatal flaw.  If the true product being generated is information then in order to apply the public utility model the information generators i.e. end-users and edge providers, will have to be dragged into the regulatory eco-system.  Privacy concerns and law may keep the hands of the Federal Communications Commission off of end-users, but edge providers such as Amazon, Facebook, and Google would be fair game, especially given their market dominance in publishing, online advertising, and search.

It’s no wonder they have been sitting on the fence during the net neutrality debate.  Hopefully for them the wire is not barbed.

Bottom-line, broadband providers are not public utilities.  They lack the generation component typically associated with a public utility.  They are, for the most part, connectivity providers.  One could argue that their portals provide news and information, but until they declare themselves media companies, providing a portal does not make you an information generator.  If anything they are merely aggregating information from other sources that you can go directly to yourself.

 

My NARUC Takeaway on Broadband

What kind of action should state policymakers take in order to encourage investment in deploying broadband or developing edge services?  This is the policy question I expected to see addressed at the NARUC Summer meetings but instead I heard more of the same silo approach to regulation that we have been hearing on the national level.

While commissioners, panelists, and other participants acknowledged the convergence of video distribution and broadband access during a number of sessions discussing broadband and net neutrality, the conversations continued to harp on competition among platforms and whether broadband providers such as AT&T, Comcast, and Verizon were getting too big for their market britches.

It doesn’t help that on the national level the conversation on broadband is still being summarized as a struggle between the mythical David and Goliath of content providers and broadband access firms.  Today’s hearing before the U.S. Senate Committee on Commerce, Science, and Transportation provided another example of focusing on the silos where senators voiced their concerns that increased consolidation of media and broadband providers would silence the voices of smaller content providers.  Policymakers and elected officials with a progressive bent are all but saying that competition is something that is best created by policy.

We have seen that script played out before back in the 1990s when upstart local and long distance telecommunications providers hoped to break into the telecommunications markets by reselling services provided by facilities-based local and long distance carriers.  The Davids put away their slingshots and decided to hang on to Goliath’s spear.

Unfortunately for the Davids, and with a touch of irony, the 1996 amendment to the Communications Act of 1934 helped lead to their quick demise as the strongest of the Davids, the cable companies, were able to leverage their own facilities to bundle services and in a ten-year time span provide long distance, local service, and video distribution.  Technology and innovation won.  The promise of better value of service attracted consumers to the cable companies and the incumbent phone companies had to step up their game.  As Comcast’s David Cohen said in today’s hearing, when we innovate, everyone else innovates, too.

If history of communications on the state and national level provides any lessons, it’s that encouraging technological know how and abandoning short-term fixes like unbundled network elements and issuing certificates of service to a couple telephone marketers and aggregators is the best approach to getting quality services to consumers.

Broadband providers and investors should not overlook that the net neutrality narrative has been festering on the local level for a decade; a virus ready to go full blown.  I first heard about net neutrality as an analyst in Fairfax County’s cable division when I received a complaint from a consumer that Comcast was blocking access to his preferred e-mail provider.  I later determined that the problem was due to a server issue with the consumer’s preferred e-mail provider.

Broadband providers should not assume that local and state regulators won’t stay abreast of whatever authority they can exercise under section 706 of the Telecommunications Act.  A few commissioners may be willing to express their need to promote consumer protections using this section of the Act making compliance and regulatory affairs a more expensive activity.

Net neutrality advocates. It’s not too late to give equity and markets a chance

Ask immigrants to the United States and most will tell you is that what they admire about the United States is the ability to actualize economic expectations through the application of entrepreneurship, will power, networks, and capital.  When I hear net neutrality advocates express fear that broadband companies penultimate goal is to block their access to the latest useless app or YouTube video of a cat staring into space (with the end game being domination of the known universe), my thought is, “If you are that afraid of Goliath, why don’t you start your own shit?” (I’m not an edge provider but I like to keep it edgy.)

As much as these Silicon Valley types like reminding us of their tech shortages due to immigration laws that keep good talent away from America, maybe it’s time these tech loving Goliath haters start acting like we immigrants.

As Scott Cleland reminded us in a recent piece for The Daily Caller, the Internet was commercialized back in 1995.  That meant that access providers could sell access at a profit; that content providers could sell content at a profit; and that app developers could sell there programs at a profit should they ever decide to stop giving away their damned intellectual property for free.

In short, net neutrality advocates should expect all of us in this Internet eco-system to go out and make a buck.  Maybe they should try that to.  Instead of using the administrative state as a hammer to squash a little profit making, these so called advocates should use their Apple iPads and Macs to network, develop business plans, raise capital, and compete.  Instead of urging the Federal Communications Commission to apply a failed Title II, regulated common carrier regime in a dynamic economic eco-system, net neutrality scions should create real competition.  Stop using government as a false source of capital.

I have read some of your backgrounds.  Some of you are very bright and well connected.  If you sincerely believe that broadband access has been monopolized, put your energies into writing a business model, raising capital, getting the rights-of-way permits, buying the plant and facilities, hiring employees, and deploying broadband access yourself.

Private entity is doing this everyday and provides a model for you net neutrality types to follow.  Take for example Pamlico Capital.  They announced last month that they were purchasing rural broadband assets in South Dakota from Clarity Telecom.  Imagine if these alleged millions of net neutrality advocates diverted the tithes and offerings they reserve for the great god called government to creating an investment fund for the purpose of buying broadband assets and leveraging them to purchase more assets every year.  Capital would follow and competition, real competition, would be created.

Take it from this immigrant Led Zeppelin fan.  ”Crying won’t help you.  Praying won’t do you no good.”  If the levees are breaking as you so vehemently argue, isn’t  it time to take real action to create sustainable competition, growth, and employment?

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The FCC is still opaque on commercially unreasonable standards

Recently Federal Communications Commission general counsel Jon Sallet introduced the concept of “jurisprudence of innovation” at a Federal Communications Bar Association function.  Jurisprudence and innovation doesn’t come off at first glance as two concepts that should mix.  Jurisprudence is defined as the philosophy or science of law while innovation is defined as the process of introducing new devices or methods.

I hear jurisprudence and I think of intellectual meandering locked within a mental ward.  When I hear innovation, I think of entrepreneurial freedom meeting the needs of an expansion of consumer welfare.  Bottom line, Mr. Sallet’s remarks were an attempt to put fresh paint on a regulatory prison cell the FCC seems so desperately eager to keep building with entrepreneurs as unwilling guests.

Here is the framework laid out by Mr. Sallet for jurisprudence of innovation.  The mandate for a jurisprudence of innovation framework is that entrepreneurship, competition, innovation, and consumer benefits are to be maximized with the goal of permitting the creation of new markets while subjecting old markets to the challenge of creative destruction.  Public policy tools for achieving this social policy include the certainty emanating from balancing potential public interest benefits against potential public interest harms; development of flexible standards for assessing the public interest; and access to resources.

The problem with Mr. Sallet’s model is that it still assumes that the FCC has a crystal ball that it can use to determine what innovation will look like in the future and whether this future will be disturbed by an acquisition applicant’s actions today.

Yes, the markets thrive on certainty, flexibility, and access to resources because these are the ingredients that entrepreneurs need to succeed.  The consensus held by entrepreneurs and producers is that they need clear rules of the regulatory road so that they can do business and best gauge the flexibility they have in developing and deploying new products and services.  The model Mr. Sallet presents adds no clarity as to how far the FCC would intervene on the front end of the innovative process.

Either the FCC will wait for a substantiated complaint to be filed (versus one based on a consumer’s feelings) so that it can weigh actual facts before crafting a resolution or it will step in along certain points or milestones during the innovation, marketing, and deployment process and hinder the very innovation it professes to want.

If the latter course is the one the FCC plans to take, I have a hard time seeing why an investor would be confident in leveraging capital in the broadband or Internet space.

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Good content and capital’s search for returns will slay the net neutrality dragon

No amount of net neutrality regulation is going to slow down the convergence we are seeing in broadband and media.  That’s my takeaway from remarks made by Federal Communications Commission member Michael O’Rielly’s speech made before the Media Institute last Thursday.  Mr. O’Rielly argued that content is king and that given the proliferation of multi-video distribution and online video platforms coupled with edge providers such as Google, Amazon, and Netflix, innovators who can provide relevant content will continue to drive the market place for ideas, experience, and products.

To set themselves apart, content providers will focus on delivering high-quality content, said Mr. O’Rielly, citing shows such as Netflix’s “House of Cards” and HBO’s “Game of Thrones.”  (I just started watching “Game of Thrones” myself and I’m hooked.)  The future success of content, Mr. O’Rielly observed, will be tied to high-quality and cable, satellite, phone, and online companies are increasingly becoming both distributors and producers of content.

Nielsen, the television ratings company, provides some backup to Mr. O’Rielly’s argument.  Last May, Nielsen released a report finding that in 2013 out of an average of 189 cable channels available to cable subscribers for viewing, the average channels viewed totaled 17.5.  In 2008, the average number of channels available to subscribers was 129 with the average number of channels actually viewed totaling 17.3.  Nielsen summarized their findings by saying:

“This data is significant in that it substantiates the notion that more content does not necessarily equate to more channel consumption. And that means quality is imperative—for both content creators and advertisers. So the best way to reach consumers in a world with myriad options is to be the best option.”

I think it’s safe to apply the cable video distribution model to what’s happening online.  Cisco reported two weeks ago that in 2013, video traffic would account for 66% of all traffic on the Internet and by 2018 video traffic would account for 79% of all Internet traffic.

Netflix accounts for 34% of all North American Internet traffic during the busiest hours of the day.  They have built their “house of cards” on quality content and show no signs of moving away from this model.   Google, a company that wants to be at the hub of the “Internet of Things” has over 60% of Internet end devices/users sending traffic to its servers.

Internet traffic is flowing to and from the big players on the Internet and no amount of FCC ex-ante net neutrality regulation is going to slow down this traffic juggernaut.  Capital will flow to where it finds the highest returns and on the Internet it’s about video content flowing from trusted sources.  When content producers spend millions on high-quality productions, they want their product moving quickly to the consumers driving demand for it.

If the FCC really wants to impress markets with its knowledge of the Internet, then pursuing rules that negate a broadband provider’s good judgment in managing their networks, including providing content providers with alternative methods for high-speed access to their subscribers, is not the way to transmit confidence to the markets that government acknowledges the private sector as fully capable of stimulating innovation.