Earlier this week, long-time broadband industry critic Susan Crawford published a New York Times op-ed (0) renewing her call for public utility regulation of internet providers. Crawford has long suggested that (1) broadband access should be regulated like electricity: subject to public obligations and government oversight to assure all Americans access to service at low rates. But a closer look at the modern electricity industry shows just how poorly a dynamic infrastructure industry fares under the public utility model.
One major goal of broadband policy should be encouraging construction of new lines. But it turns out that under the public utility model, the modern electricity industry has failed to make similar infrastructure investments. Although electricity demand grew 25 percent between 1996 and 2008, construction of new transmission lines — the high-capacity power lines that carry electricity from power plants to local distributors — actually fell 30 percent. In fact, from 2000 through 2008, only 668 total miles of new interstate transmission lines were constructed nationwide. This shortfall in new transmission capacity causes brownouts and blackouts during periods of peak demand. Analysts estimate that our transmission line gap costs the economy $150 billion annually.
There are many potential drivers of this infrastructure shortfall. Some cite the Federal Energy Regulatory Commission’s open access rules, which require electricity utilities to make their transmission lines available to competitors in the electricity generation market at regulated rates. The goal is to assure that vertically integrated providers do not use their control of transmission lines to get an unfair advantage in upstream generation markets — which sounds similar to the calls by net neutrality advocates for robust nondiscrimination rules over broadband providers. But the result was to discourage infrastructure investment: In the decade after the Federal Energy Regulatory Commission mandated open access for transmission lines in 1996, investment in new interstate transmission lines fell nearly 50 percent. Hal Singer argues persuasively (2) that a similar decline in broadband investment followed the 2015 decision to reclassify broadband providers as common carriers.
Onerous state and federal regulatory hurdles also contribute to this deficiency. The American Society of Civil Engineers (3) cites “overly stringent permitting requirements, lawsuits, and other regulatory culprits” as stumbling blocks to new transmission-line construction. Such projects are also hindered by complex cost accounting rules and regulatory reviews designed to assure that only “prudent” construction costs are passed along into retail electricity rates — which is justified as safeguarding the affordability of the service. The result is a lengthy and cumbersome regulatory approval process that allows multiple actors to halt or delay a transmission construction project. If, as Crawford argues, our problem is too little competition among broadband providers, it seems foolish to adopt a model that allows so many opportunities for incumbents to capture the regulatory process and insulate themselves from competition.
Another major goal of broadband policy should be the ability to allow regulated entities to respond quickly to dynamic market developments. But again, the modern electricity industry fails. The electricity industry was built around the 20th century model of a vertically integrated, largely intrastate electricity provider powered primarily by fossil fuel, nuclear, or hydroelectric power — and the regulatory apparatus developed to support that business model. Arguably the greatest innovation in electricity generation in recent years has been the advent of renewable energy such as wind and solar power. But the ossified regulatory structure has proven unable to take advantage of these developments. Unlike traditional power plants that can be built near cities, renewable power is generated in deserts and wind-swept prairies, far away from eastern seaboard and west coast population centers. Construction of all new transmission lines is necessary to bring this new electricity to consumers — construction that is hindered not only by the factors cited above, but also by the need for cooperation among state regulators, which was unanticipated by the traditional intrastate regulatory model. In one famous case, Arizona regulators rejected a transmission line that would have brought significant solar power to Los Angeles, stating flatly that California cannot “drop a 230-mile extension cord into Arizona” because they didn’t “want Arizona to become an energy farm for California.” Similarly, rooftop solar holds the potential to disrupt the traditional electricity distribution model but is bogged down by battles about cost allocation waged by incumbent utilities in public utility commissions and statehouses.
The takeaway is that the public utility model sometimes works well to discipline natural monopolies in stodgy, unchanging fields such as water, where regulation is needed to displace dysfunctional market forces. In dynamic, competitive industries such as telecommunications, public utility regulation is not only misplaced but also affirmatively harmful to consumers. It is rigid and inflexible, precluding industry players from responding to new technological developments in ways that help consumers. Perhaps more problematically, the public utility model allows politics to replace economics as the primary driver of decision-making, market development, and capital allocation. And this too often permits the process to be captured by incumbents that then insulate themselves from competition — something the electricity industry and old telecommunications hands, know all too well.