The Federal Communications Commission (FCC) has long been regarded as being the expert agency for communications issues. However, its recent conclusion that imposing public utility-style regulations on Internet Service Providers (ISPs) would work to increase broadband investment casts serious doubt on its expertise and independence.
Last February, the FCC issued its Open Internet Order, which put ISPs under regulations befitting of a 1930s public utility service, and it declared that these regulations would produce $100 million in new benefits. Building on its newly expanded regulatory authority (self-imposed without Congressional approval), the FCC more recently proposed new rules that would delay and affect the ability of telecommunications providers to discontinue old copper-based services and replace them with advanced IP-based services that consumers demand.
The question is – when faced with increased regulatory costs and risk, would ISPs really increase network investment? This is an empirically testable hypothesis.
With the second quarter SEC filings in, Hal Singer reports some interesting findings. After collecting capital expenditure data for the major ISPs, he calculates that industry investments are decreasing and for some as high as 29%. He estimates the “capital flight” to be roughly $3.3 billion for the largest ISP, which could threaten 66,000 jobs in the U.S.
His findings should not be of any surprise to students of economics and finance, and the FCC was clearly warned (and warned again) before it issued its regulatory order that investments would decline. I predicted this would happen and did so long before the FCC released its order. It is almost like the FCC already knew what it wanted to do and the facts be damned. It is like the FCC made up its own facts to justify its regulatory order, or so it seems.
Decisions about “where” to invest and “how much” have been a staple of undergraduate financial management textbooks for a very long time. For a firm, the goal of investing is to maximize shareholder value, which is influenced by risk, including regulatory changes that cannot reasonably be forecasted or estimated at the present.
The regulatory risks are obvious. Because capital expenditures on plant and equipment have long lives, their value rests on the present value of future cash flows. These cash flows are dependent on, and may be changed by, future regulatory changes. These regulatory changes can add delay, create ambiguity, take opportunities of value, lack transparency, lead to rent-seeking and gaming by stakeholders and competitors, and others risks. One can easily find for each of these sources of risk in most FCC Notices of Rulemaking, including the Open Internet Order and the more recent Technology Transition Order.
Skeptics about the existence of regulatory uncertainty and the effects of financial risk should consider the glacial pace of regulatory decision-making in the context of the rapid pace of technological and market circumstances. For wireless services, it is likely that the time lag for a single regulatory decision can span two, three or more generations of handsets. Administrative procedures requirements dictate fairly long pleading cycles, while the resulting long records contribute to delays in review and analysis.
Even more important are regulatory decision lags. Regulatory history establishes clearly that the greater the economic stakes and the greater the financial or political strength of stakeholders, the slower will be regulatory processes, and the less definitive will be any particular regulatory outcome.
Capital budgeters and investment managers within firms, and financial market investors alike, will regard all of this regulatory uncertainty as undermining efforts to forecast operating costs and revenues, increasing investment risks, and raising capital costs. When costs increase, simple microeconomics show that production costs increase, quantity (or quality) produced decreases and consumer prices increase. In this case, higher regulatory costs and risk will mean that ISPs will invest less, and it means that consumers will pay more for less.
That is exactly what Hal Singer’s analysis showed and it is also precisely what students of economics and finance are taught. But, it seems to have been something that the expert agency, that is supposed to work for the public’s interest, failed to understand or simply ignored. With less investment into the very technologies that consumers want and with fewer jobs being created, the negative consequences of the FCC’s regulatory decisions are clear.
This article was published in Forbes at http://www.forbes.com/sites/stevepociask/2015/09/15/is-the-fcc-a-partisan-or-expert-agency/