Subject: [NEXTEL-1] Is Federal Preemption Efficient in Cellular Phone Regulation?

From: Marcelrf <[email-masked]>
Date: Tue, 30 Mar 2004 03:12:20 -0500

Is Federal Preemption Efficient in Cellular Phone Regulation?

Thomas W. Hazlett*

* Senior Fellow, Manhattan Institute for Policy Research, and Senior
Research Associate,
Columbia Institute for Tele-Information. The author has served as
Professor and Director of
the Program on Telecommunications Policy at the University of
California, Davis, and as
Chief Economist, Federal Communications Commission. He is a columnist
for the
Financial Times’ New Economy Policy Forum , and a Senior
Advisor to Analysis Group, which has consulted to Verizon Wireless. He
thanks Coleman
Bazelon, David Sosa, and Martin Morse Wooster for assistance.

I. INTRODUCTION

Some states are considering new regulations for wireless telephone
service.2 Alternatively, federal legislation has recently been
introduced to achieve similar objectives.3 Proposed rules would
potentially change marketing practices, alter the information conveyed
in newspaper, radio, or TV ads, and stretch the “free trial” periods
before “early termination fees” would kick-in (Table 1). The effect on
consumers of such measures has been analyzed in previous research.4 This
paper discusses the policy arguments for determining such service rules
on a state-by-state basis versus imposing federal regulatory standards.
Portions of this question have been decided in favor of federal
jurisdiction, while other responsibilities have been given to state law.

Cellular phone service fundamentally depends on spectrum policies
enacted by the federal government. The basic market structure
questions—how many firms compete, what technologies they use, how much
bandwidth they access, and how they interconnect with other networks—are
consequently determined by the Federal Communications Commission
(“FCC”). Moreover, the Omnibus Budget Reconciliation Act of 1993
established that “no State or local government shall have any authority
to regulate the entry of or the rates charged by any commercial mobile
service or any private mobile service.”5 This effectively preempted
state regulation of cellular rates with a one-year phase-in, meaning
that there has been no federal or state regulation of wireless telephone
charges since August, 1994.

In the 1993 federal preemption statute, however, states were left with
jurisdiction over “other terms and conditions of commercial mobile
services.”6 How much regulatory authority this cedes to the states is
legally uncertain.7 In equilibrium, it appears clear that there will be
some shared responsibilities, with federal jurisdiction for key economic
regulations including spectrum-related issues, and state authority over
matters that are traditionally decentralized, such as the resolution of
contractual disputes in municipal and state courts.

The question addressed in this paper is where, as a matter of public
policy, to draw the line regarding the consumer protection regulations
currently under consideration. From the perspective of consumer welfare,
and assuming a possible role for regulatory standards, would the
standards be most efficiently evaluated and applied by the several
states or at the federal government level?

Two broad sets of marketplace evidence help to answer this question, and
both suggest that federal jurisdiction is relatively efficient. The
first concerns the efficiency of national scope in wireless networks.
The economics of wireless telephony suggest that regardless of the
jurisdiction selected for rulemaking, diverse local rules will not
effectively determine standards. Rather, nationally integrated network
operators will choose to conform to those regulations that allow them
the best opportunity to offer nationwide service.

This undermines incentives for states to create efficent rules. Either
such rules will have little practical impact, or they will create large
external effects, meaning that they impact consumers and suppliers
outside the political jurisdiction where policies are crafted. Such
effects are typically discounted in the decisions of policymakers,
resulting in rules that are relatively inefficient. The second set of
data is derived from a natural experiment involving a 1994 federal
preemption of cellular rate regulation by the states. State controls
demonstrably failed to lower rates for customers. Nonetheless, strenuous
arguments were made at the time by several state regulatory commissions
that such controls were efficient and should be permitted to continue.
This speaks directly to the effectiveness of state regulation of
wireless telephone service.

This paper proceeds as follows: Section II sketches a very brief history
of the wireless telephone industry. Section III summarizes the general
arguments for and against federal preemption in economic regulation.
These include examples from other sectors where diverse state rules are
efficient and from where uniform federal standards have proven
efficient. Section IV investigates the economics of wireless telephone
service, producing the key finding that consolidation of an atomistic
licensing grid through mergers and operating agreements has produced
efficient national networks. This is the service that consumers have
demonstrated a keen interest in purchasing. Section V discusses the
importance of national wireless network economies in light of the
tradeoffs generally associated with regulatory federalism. Section VI
examines results from a natural experiment wherein state regulation of
cellular telephone rates was preempted in 1994. Section VII concludes
that the weight of the evidence argues in favor of substantial federal
preemption in wireless telephone regulation.

Full Report: See Attachment
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