Cable Regulations May Be Ripe for Renovation

Is it time to completely replace cable regulation -- rules as dated as black and white televisions? That's the argument being made by economists before the Federal Communications Commission (FCC).

The comments to the FCC -- based on a study by the Mercatus Center at George Mason University in Fairfax, Va. -- identify US$8.4 billion in annual costs passed directly to consumers in the form of higher rates for service, as well as fees, and equipment, because of stale video franchise regulations.

The study also pinpoints $1.7 billion in "loss of value" that consumers incur annually, due to higher prices induce some consumers to go without cable.

Natural Monopoly

Researchers also found that the "natural monopoly" rationale that the government advocates for preventing competition is contradicted by twenty years of data collected by federal agencies and independent scholars. This data consistently finds that cable TV rates are lower with wireline video competition.

According to a Government Accountability Office (GAO) study, cable rates in markets with wireline video competition are nearly 17 percent lower than they would be without this competition. It's clear that competition favors consumers, said Jerry Ellig, a co-author of the report for George Mason.

This argument that "entry regulation" lowers rates by reducing the cable operators' risks and costs is also unconvincing, experts said. When cable debuted in urban and suburban areas, jurisdictions with competing cable companies had rates equal to or lower than rates in monopoly jurisdictions, the study shows.

Ellig said local governments' need to manage public rights-of-way may justify some regulation of construction and a cost-based fee to prevent congestion and reimburse the public for inconvenience when video providers use the public rights-of-way.

Promoting Competition

Rights-of-way management, however, does not justify monopolization, and there is no evidence that a 5 percent franchise fee reflects costs actually imposed on the public when video providers use the rights of way, said Ellig.

Ellig and Jerry Brito the study's other co-author recommend that the FCC promote competition by implementing the following recommendations:

• Declaring "unreasonable" any refusal to grant a franchise justified on the grounds of natural monopoly, reduced investment risk, or rights-of-way management;
• Compelling local franchise authorities to explain in writing any refusal to grant a franchise;
• Rewrting aspects of state "level playing field laws" that force entrants to make the same capital expenditures or cover the same service area as the incumbents;
• Declaring "unreasonable" any state or local requirement that would force a new entrant to build out its network faster than the incumbent actually and originally built out its network.
• Labeling as unpalatable any non-price related concessions in franchise agreements that are not directly related to setup or operation of a cable system.

Congressional Considerations

Congress is considering changes in cable rules. A top U.S. House committee reportedly is supporting national cable franchise legislation that would get rid of the need for Bells to negotiate municipal agreements, on a city-by-city basis.

Telecom companies also may not be compelled to offer video services throughout a community, just like cable companies.

The draft bill has not been released by leaders of the House Energy and Commerce Committee. However, the bill apparently has bipartisan support and may be introduced this month.

The cable industry views the legislation as a threat -- and criticized it during a news conference this month.

"If what we understand is being considered, this is a huge step -- in the wrong direction," said Kyle McSlarrow, president of the National Cable and Telecommunications Association. "Essentially, you have the government picking winners and losers by giving the Bell monopolies a special break."