How Congress lost control of the regulators

Regulation has its tentacles in almost every aspect of our lives and our economy. With few exceptions, the everyday business decisions of American companies and entrepreneurs, small and large, must adhere to an ever growing body of regulations. In many cases, permission must be obtained from the government to conduct business. When a business wants some regulatory relief or needs approval to acquire or merge with another, it is reasonable to expect that a regulator would dispassionately view such a request on the merits and, assuming all is well, ultimately grant permission. Unfortunately, it doesn’t always work this way. Instead, regulation “as practiced” often means that if a business needs permission from a regulator, then it is going to have to bargain with the government by offering up some concessions to grease the proverbial skids. American regulation has gone “third world.”

{mosads}The dangers to the U.S. economy — if not its democracy — of this growing trend of regulatory bargains are profound. Advanced economies are “advanced” largely because of the rule of law. Yet, in a new paper by the Phoenix Center for Advanced Legal and Economic Policy Studies, “Eroding the Rule of Law: Regulation as Cooperative Bargaining at the FCC,” the authors conclude that regulation in the U.S. is “mov[ing] away from the rule of law and due process” so that deals may be cut to satisfy the whims and caprices of bureaucrats. To illustrate this growing and troubling phenomenon, the Phoenix Center uses the Federal Communications Commission (FCC) as a case study (although the analysis can easily be applied to other regulatory agencies as well). While the Phoenix Center’s analysis is more scholarly than the vast majority of policy work — including a mix of game theory and empirics — the implications of the analysis are as unmistakable as they are consequential.

At the center of the analysis is the identification of a growing phenomenon that the Phoenix Center labels as “issue bundling.” As the Phoenix Center explains, issue bundling occurs when the regulator and the regulated make a deal to combine a variety of unrelated issues in exchange for regulatory relief.

For example, in 26 of the largest telecommunications mergers and acquisitions reviewed by the FCC over the past 10 years, the Phoenix Center found that in three-fourths of these transactions, one or more of the merging firms was made a party to a settlement with the commission on an enforcement issue during (or within two months of) the merger review window. Thus, rather than contest these alleged violations, the evidence suggests that the merging entities were willing to settle with the agency in order to smooth the approval process for their deal. The industry even has a term for such actions: “clearing the decks.”

The evidence also shows that over the last 20 years, the FCC has increasingly exploited its authority to review mergers and acquisitions (among other regulatory actions) to extract “voluntary” commitments and conditions that the agency could not otherwise have legitimately obtained through generic, industry-wide rule-makings. These commitments and conditions are almost always politically motivated and, often by admission, they have no discernible nexus to any merger-related harm and involve actions well outside the bounds of the agency’s authority. These “voluntary” commitments have ranged the full gamut from providing subsidized broadband to the poor (over and above the FCC’s bloated Universal Service Program) to employment commitments and even agreements to comply with particular FCC rules even if such rules are eventually thrown out in court.

Needless to say, this rise of issue bundling raises troubling concerns about the nature of the modern regulatory state.

Regulation is law, and law relies upon precedent. Firms require some sense of what to expect in particular proceedings, and precedent of prior commission decision-making provides exactly such a guide. However, the use of issue bundling sharply attenuates the value of precedent because every outcome is a result of a bargain under the facts of each particular case. Each regulatory action is unique. And, if a regulatory agency believes that it is not bound by its prior precedent in cases involving bargains over bundles, then that agency will inevitably (and, in the case of the FCC, I submit already has) become comfortable abandoning precedent altogether (and, by extension, become less inclined to be constrained by case law and statutory language) even in cases which do not involve any bundling of issues. (See, for example, the FCC’s recent attempt to impose net neutrality rules; to preempt state laws which restrict municipal broadband; and its handling of the recent AWS auction.)

Issue bundling also allows a regulatory agency to greatly expand its power beyond its statutory mandate and evade the wishes of Congress. In fact, issue bundling is arguably an explicit attempt by regulators to reach beyond statutory authority. Indeed, because issue bundling ostensibly occurs on a “voluntary” basis, such bargains cannot be challenged in court.

The increasing use of issue bundling will also have a negative effect on investment. Of all the myriad ways that regulation can fail, the lack of credibility of the regulator — i.e., its inability to keep its word and follow its own precedent — is perhaps the most important. As such, regulatory credibility is key to a firm’s investment decisions. With neither precedent nor statutory boundaries to guide policy, regulated firms will face great uncertainty. The damage done by unshackling the regulator from precedent and its governing statutes is particularly acute in telecommunications. Participating in the provision of communications services requires large fixed and sunk investments whose returns are realized only sporadically over long periods. If firms and investors fear expropriation of returns by a regulator unable to commit to its policies, then investment will be severely curtailed. Given the commission’s mandate under Section 706 of the Telecommunications Act of 1996 to “encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans,” the FCC must guard what credibility it has left to maintain investor confidence.

Yet, but perhaps most crucially, the rise of issue bundling erodes the public’s confidence in the integrity of its government’s institutions. Without regulatory credibility, the concepts such as the “rule of law” and “due process” are simply empty vessels. If the institutions of government won’t act ethically, then we should not be so surprised that the average American is completely disgusted with the way Washington operates.

Unfortunately, given the complexity of the problem, quick solutions to regulatory issue bundling are not immediately available. However, we can at least take some small comfort by the fact that the phenomenon is now identified. Hopefully, Congress will take note and give regulatory issue bundling the attention it deserves when conducting its oversight role.

Spiwak is the President of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a nonprofit 501(c)(3) research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age.