The Federal Communications Commission (FCC) voted last week to classify internet access as telecommunications subject to public The Federal Communications Commission (FCC) voted last week to classify Internet access as telecommunications subject to public utility regulation. The move will allow the FCC to issue regulations to preserve net neutrality, and reclassify internet access from information services to telecommunications. The latter will I think prove quite detrimental to consumers.

Net neutrality refers to the ability of all content providers to supply content on an equal footing, which sounds reasonable enough. Yet few violations of net neutrality have occurred to date, so the FCC is fixing a nonexistent problem, as Commissioner Ajit Pai said recently. Many observers expect that the initial net neutrality regulations will be mild, but even if so, the door is now open for heavier-handed regulation later.

My concern stems from the history of regulation under the public utilities doctrine. The concept was devised by Progressive Era economists in the early 20th Century, who viewed competition as wasteful and believed that they could manage businesses more effectively than either their owners or markets. Public utilities were common carriers, meaning that they were required to serve all customers. Regulators could set prices and other terms of service, and the firm owners were to receive a reasonable return on their investment. Telephone, electric, and natural gas utilities often involved granting one firm an exclusive monopoly to serve a community.

The net neutrality debate has noted the barrier posed by cable companies’ control over high speed internet. But nationwide local monopolies resulted from treating cable as a public utility. Do we expect additional public utilities regulation to solve these problems?

Overall I think that public utilities regulation has been a poor deal for Americans. I would not call it a disaster, since we have had electric, gas, phone and other services, but regulatory economists have demonstrated little ability to control costs effectively or make companies innovate.

Consider television, regulated by the same FCC which now wishes to govern internet access. For over 40 years America had three broadcast TV networks because the FCC limited the number of stations in each market. The FCC tried to block cable TV (but lost in the Federal courts), and restricted satellite television services.

FCC regulation of the phone industry sustained the Bell system monopoly for decades. One part of the cost of the phone monopoly was required use of phones built by AT&T’s Western Electric, on the spurious grounds that other phones might crash the system. Old-style phone designs were boring, to say the least. The FCC tried to quash competition in long distance, but lost on the legal challenges by MCI and ultimately the Department of Justice’s antitrust action against AT&T. The great innovations in cellular telephones occurred after the FCC began allocating spectrum using auctions and markets instead of regulation.

Economists’ regulation of electric utilities also cost Americans. Regulators routinely accepted utilities’ self-reported operating costs, focusing on the rate of return allowed on invested capital (only 15% of costs), and still agreed to excessive rates of return. The price of electricity has fallen steadily over the last twenty years, since we have moved to competition. And deregulation in the 1990s revealed billions of dollars of uneconomic investments dutifully approved by regulatory economists.

Regulation of internet access will likely unleash a torrent of crony capitalism, which is when politically favored businesses use government laws and regulations to boost their profits. Firms will always seek to make profits, but competition from rivals in an unregulated market quickly eliminates excess profits. Manipulation of government rules creates opportunities for truly enduring profits.

The internet has been one of the most dynamic and innovative segments of our economy. Now instead of seeking to serve Americans better, big players like Comcast, Verizon, Netflix and Google can now seek advantage through FCC regulation. Competition, not regulation, is the source of dynamic innovation, and FCC regulation will inevitably slow the pace of innovation for the internet.

 

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at dsutter@troy.edu. and like the Johnson Center on Facebook.