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The Winds of Change

1/25/2008 7:00 PM Eastern

The House Energy and Commerce Committee is shining a spotlight on FCC chairman Kevin Martin’s management of the agency. (See “Watching the Martin Watch,” page 18, Jan. 21, 2008).

But it hasn’t been made clear to him precisely why.

The basis of the investigation has been stated only in vague terms. And there could be something of a public payback involved: Committee chairman John Dingell (D-Mich.) is evidently upset that Martin gave the public just 28 days to review the FCC plan to relax the newspaper-TV station cross-ownership ban.

But there is always more than meets the public eye when the winds of change blow in. Privately, Dingell has heard repeatedly from regulated industries — including cable operators and programmers — that Martin has failed to state proposed rules in clear terms, producing a process that lacks transparency and due process.

“I think time is overdue for a serious look at the reform of how the FCC conducts itself,” National Cable & Telecommunications Association president Kyle McSlarrow told reporters in December. “I think everybody recognizes that there is something different about how the [Martin] FCC conducts its business.”

In 2007, an annus horribilis for cable at the FCC, Martin at least twice demonstrated his fondness for hide-the-ball tactics. He gave no indication in June that he planned to slash rates that programmers pay cable operators to lease time, and he gave no indication that he supported allowing the NFL Network and other independent programmers to haul cable operators before an FCC-authorized arbitrator to settle their disputes without even a finding of discrimination by cable operators.

Now, Martin is trying to impose wholesale a la carte regulations on cable programmers, forcing The Walt Disney Co. and Viacom to sell their channels at individual prices. That could mean price regulation by the FCC, if Heritage Foundation analyst James Gattuso is right that wholesale a la carte mandates can’t work without government price controls. Since that’s the case, programmers are wondering if Martin plans to regulate wholesale a la carte prices but, as he’s done in the past, hasn’t told anybody.

Cable’s frustration with Martin has made an issue of how the agency is run. From Dingell to Sen. John D. (Jay) Rockefeller (W.Va.) on the Democratic side to Rep. Joe Barton of Texas on the Republican side, attention is now focused on how much power does and should accrue to an FCC chairman, an unelected bureaucrat with the ability to inflict pain on selected opponents, almost with impunity.

NCTA’s McSlarrow goes so far as to call for the FCC to be turned into a forum that adjudicates complaints, with its rulemaking authority taken away in five years.

Rockefeller has indicated support for structural reform, perhaps reducing the five-year terms of commissioners and refocusing its mission toward consumer protection.

But, as the following examples illustrate, reforming the FCC is not a simple task.

SETTING DEADLINES

Communications law does not impose consistent deadlines on the FCC to act on issues before it.

When a telephone company seeks deregulation from the agency, the request is granted automatically in 15 months, if the FCC fails to reject it. When it’s a cable company seeking the same relief, the FCC can — and often does — let such applications, in the words of Republican commissioner Robert McDowell, “rot in some lost crypt.”

A good illustration of McDowell’s point happened on Jan. 17. The FCC that day ruled that a cable system may not include vacant homes in a franchise area, when calculating its penetration of the market.

A cable system is not subject to any price controls, if it serves fewer than 30% of subscribers in a franchise area. The ruling to exclude vacant homes made it mathematically more difficult for a cable company to price the basic tier without input from the local government. Importantly, the system operator pushing for relief did not just ask for the ruling a few months or years ago. It did so 12 years ago, when Democrat Reed Hundt was chairman.

“The notion of giving the FCC some kind of shot-clock type deadline for action on routine things is very attractive to me,” said Andrew Jay Schwartzman, president of the Media Access Project, a public-interest law firm.

Schwartzman’s plea is understandable because he is in the middle of another FCC deadline horror story. Last year, the agency announced it would reconsider whether TV stations primarily dedicated to providing home-shopping services should continue to enjoy mandatory cable-carriage rights. Schwartzman’s client — the Center for the Study of Commercialism — urged the FCC to lift the must-carry rights in a filing now 15 years old.

“We have been griping and bitching and complaining about this for 13 years,” Schwartzman said.

OUTLOOK: Deadlines to act don’t sit well with people who run the FCC because they reduce their leverage, especially if requests are deemed approved when not denied. But deadlines can be gamed. For instance, FCC officials can put pressure on parties to withdraw applications on the eve of one.

REVIEWING MERGERS

The FCC’s power to review media and telecommunications mergers is closely related to the issue of whether to force the agency to act within certain time constraints.

Criticism of the FCC’s merger authority usually erupts when the agency has taken an inordinately long time to conclude action on a big deal.

The FCC reviews mergers under a 180-day shot clock, but the deadline is self-imposed and non-binding.

Firm deadlines tend to impose discipline on the agency while allowing parties awaiting action to plan their futures and mollify investors who get the jitters about the opaque deliberations of a bureaucracy.

Concern about the FCC’s inability to act on mergers in timely and predictable ways was a hot issue a decade ago, when SBC Communications sought approval to merge with Ameritech in July 1998. The proposed merger called for uniting two major telecommunications carriers that the FCC hoped would one day compete for long-distance customers, if not for local dial tone subscribers.

The FCC, at the time headed by Democratic chairman William Kennard, let the merger stew for 439 days, forcing the companies to turn to allies on Capitol Hill to pressure the agency to get moving.

Sens. Mike DeWine (R-Oh.) and Herb Kohl (D-Wisc.), representing states where Ameritech was the dominant Baby Bell, pushed the Senate Judiciary Committee to pass their bill (S-467) requiring the FCC to act on phone company mergers within 180 days.

A House bill (HR 4019) sought to impose a 90-day limit. The delay at the FCC got so bad that Rep. Billy Tauzin (R-La.) accused Kennard of holding up the deal so opponents could shake down SBC for all kinds of consideration in exchange for withdrawing their opposition.

Neither bill even came close to becoming law. And 180 days has become meaningless.

Under Martin, Liberty Media’s bid to acquire News Corp.’s 38.4% interest in DirecTV has not come to a vote in 335 days (as of Jan. 22). Nor has the proposed merger between XM Satellite Radio Holdings and Sirius Satellite Radio in 229 days. Comcast and Time Warner had to wait 404 days to take control of Adelphia Communications in 2006.

Martin says he’s running the FCC no differently than how his Republican and Democratic predecessors did —which is another way of saying that mergers get approved or rejected whenever the agency gets around to it.

OUTLOOK: Congress could force the FCC to obey the 180-day shot clock. But if the agency has the power to stop the clock for flimsy reasons, the law will be easy to evade.

RESTRUCTURING THE AGENCY

Rockefeller has floated several ideas for reforming the FCC. In general terms, he’s talked about changing the agency’s structure and mission, with a stronger focus on consumer protection. He’s also hinted at interest in shortening the five-year terms that FCC members currently have.

But abolition of the agency wasn’t on Rockefeller’s list.

In 1995, eliminating the FCC or downsizing it into irrelevance seemed like a distinct possibility when Progress & Freedom Foundation president Jeffrey Eisenach proposed a massive agency overhaul in a new book. Because the PFF was closely associated with new House Speaker Newt Gingrich (R-Ga.) — who had visions of sweeping change in Washington — the idea that the FCC could be on the chopping block was not dismissed as hyperbole.

“We thought … it was a bad idea for the country and … given the political climate at the time, the power of Gingrich, and the closeness of the think tank to Gingrich, it was a proposal that would be taken seriously by key policy makers,” Blair Levin, FCC chief of staff at the time, recalled.

Ideas about reforming the FCC quickly took a backseat to a more urgent task of the new GOP majority on Capitol Hill: Passing a new telecom law, which happened in February 1996.

“Once there was a serious effort to get the 1996 telecom act passed, no one took the idea seriously, as it became clear Congress was about to ask the FCC to undertake a whole lot of work,” Levin said.

Eisenach, a Ph.D economist who left PFF in 2003 and is chairman of Criterion Economics today, is still committed to FCC reform. After noting that he never called for totally abolishing the agency, Eisenach said he would eliminate the agency’s power to review mergers and transfer its policy-making functions to the Commerce Department. Spectrum allocation would be the primary purpose of a stripped-down FCC.

“I think it was the right thing to do then. I think it would be the right thing to do now,” Eisenach said.

Gattuso said the creators of the FCC didn’t expect the agency to command such a vast portfolio of decision-making affecting the communications industry, as now highlighted by its neverending effort to create new rules and refine existing ones.

“No one envisioned that it would be setting any broad economic policy. It was just seen as a court,” Gattuso said.

One change he would make is to transfer any role the FCC has in promoting market competition to the Federal Trade Commission, which enforces antitrust and consumer protection laws.

“The things that the FCC has been spending the vast majority of its time on — looking at competition in the Internet, looking at competition in the cable industry, looking at competition in broadcasting, looking at mergers — are all precisely in the expertise of the FTC,” Gattuso said.

Eisenach and Gattuso agreed that the FCC’s rule-writing functions should fall within the executive branch. For many years, the White House has exercised power at the FCC, an independent agency, though few dare to admit it.

Moving the FCC’s functions, including spectrum allocation, to the White House or a Cabinet-level department would allow the public to hold the president, rather than five unelected bureaucrats, accountable for telecommunications policy, proponents claim.

“It fits the constitution much more faithfully to have these jobs within the executive branch,” Gattuso said.

OUTLOOK: There probably isn’t a consensus to strip the FCC of most of its parts and move them to other branches of the federal government. If anything were to happen, the most likely effort would center on eliminating duplicative review of media and telecommunications mergers by the FCC and Department of Justice.

CONSISTENCY AND OPENNESS

Reforming the FCC would likely involve requirements that the agency act with more consistency.

For many years, FCC Democrats Michael Copps and Jonathan Adelstein have been complaining that the agency has relied almost exclusively on cable industry-supplied data in preparing the annual report to Congress on the status of video competition.

In 2004, the pair urged the FCC to do its own research by undertaking “a more pro-active and comprehensive information gathering effort.” Last November, Adelstein put that history aside in his fight with Martin over whether cable operators had achieved 70% market penetration under the so-called 70/70 test in federal law.

In a compromise, Martin backed away from his claim that the test had been met in exchange for a rule that gave operators 60 days to produce the relevant data. The dispute, so it seems, will be resolved by FCC reliance on cable-supplied data — the exact thing that Adelstein and Copps said the FCC should stop doing.

Transparency is another problem. Martin has teed up several regulatory proposals that have come nowhere near the rules adopted or proposed. He gave no hint that the FCC would vote to slash cable’s leased-access rates by 75% or that he supported giving independent programmers a right to take operators to compulsory arbitration without a finding of discrimination.

“How long will it be before cable operators can take programmers to arbitration?” a worried cable programming executive said, asking not to be named.

Last September, the FCC extended the cable program access rules until October 2012. When the agency’s report came out a month later, the cable industry learned that the agency’s justification for retention rested in part on an FCC staff economic study examining Comcast SportsNet Philadelphia, which DirecTV and Dish Network are unable to distribute.

No one involved in the program-access debate was given an opportunity to vet the staff report, contained in an appendix, because Martin kept it a secret. In a court brief challenging the program-access ruling, Comcast indicated that it will seek a reversal based on the secret appendix.

OUTLOOK: Since so many of Martin’s cable-hostile regulations are, and will, be litigated, the courts will probably chime in first on whether the FCC under Martin has run afoul of the Administrative Procedure Act, a 1946 law design to impose due-process obligations on independent agencies.

 

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